AFRICAN DEVELOPMENT FUND

FINANCIAL ASPECTS OF ADF-12 IMPLEMENTATION

AND APPROVAL OF THE ADVANCE COMMITMENT CAPACITY

January 2011

TABLE OF CONTENTS

Pages

Abbreviations and Acronyms .......................................................................................................... i

Executive Summary ........................................................................................................................ ii

1. Introduction ........................................................................................................................... 1

2. Carry-over Resources from Previous ADF Replenishments ................................................. 1

3. The Advance Commitment Authority Scheme and Implementation .................................... 2

4. Contingencies and Upfront Allocations ................................................................................ 2

5. Financing Terms, Grants and Volume Discount ................................................................... 4

6. The ADF-12 Resource Allocation Framework ..................................................................... 5

7. Monitoring and Reporting of Operational and Financial Implementation of ADF-12 ......... 6

8. Recommendations ................................................................................................................. 7

Annex 1: ADF-12 Resource Allocation Framework ................................................................. 8

Annex 2: Qualified and outstanding ADF subscriptions as of 22 December 2010 ................ 11

Annex 3: Methodology and key assumptions used in the ACA .............................................. 12

Annex 4: Members of Working Group on Financial Aspects of ADF-12 Implementation and

Approval of the Advance Commitment Capacity ................................................... 16

Tables :

Table 1: African Development Bank Group Country Classification as of 1 January 2011 ............ 4

i

ABBREVIATIONS AND ACRONYMS

ACA Advance Commitment Authority

ACC Advance Commitment Capacity

ADB African Development Bank

ADF African Development Fund

ADF-10 Tenth General Replenishment of the African Development Fund

ADF-11 Eleventh General Replenishment of the African Development Fund

ADF-12 Twelfth General Replenishment of the African Development Fund

CPIA Country Policy and Institutional Assessment

DSA Debt Sustainability Analysis

DSF Debt Sustainability Framework

FSF Fragile State Facility

MVA Modified Volume Approach

PBA Performance Based Allocation

PBL Policy-Based Loan

PPF Project Preparation Facility

OPsCom Operations Committee

RMC Regional Member Country

ROs Regional Operations

ii

FINANCIAL ASPECTS OF ADF-12 IMPLEMENTATION

AND APPROVAL OF THE ADVANCE COMMITMENT CAPACITY

EXECUTIVE SUMMARY

1. This note outlines the financial issues relating to the implementation of the ADF-12 Resolution, and is

intended to ensure that the ADF-12 Report and the ADF-12 Resolution, including the implementation of the

commitment capacity under the Advance Commitment Authority (ACA) are properly interpreted and

monitored.

2. The total ADF-12 net resources for allocation are UA 5,750.54 million. Uses of Funds cover the

contingencies, upfront allocations to set-asides, and country allocations by the PBA methodology. Three

contingencies are netted out, namely contingencies for accelerated subscriptions, for exchange rate risk, and for

unsubscribed and qualified subscriptions, which together amount to UA 463.61 million. Two upfront allocations

have been made for the Fragile States Facility (UA 764 million) and the Regional Operations envelope (UA

1,150.11 million). After reducing the total allocable ADF-12 resources by these upfront allocations, UA

3,836.43 million is left for country allocations through the PBA system.

3. The Sources of Funds for ADF-12 comprise carry-over resources from previous replenishments and

ADF-12 resources. The carry-overs are of two types: (i) usable resources and (ii) other resources, which prior to

ADF-12 were referred to as restricted resources. The usable resources include qualified subscriptions and

available commitment capacity as at end December 2010. The resources formerly restricted consist of ADF-8

special resources for the Project Preparation Facility (PPF). Under an omnibus clause in paragraph 10(e) of the

ADF-12 Resolution, all resources, including carry-over resources, are to be available for commitment under

ADF-12 in accordance with the terms and conditions of the ADF-12 Resolution. However, Management is of

the view that for ease of administration, PPF resources should be excluded from the application of the omnibus

clause as was the case during ADF-11. This would in effect mean that an amount of UA 419.89 million of

carry-over resources would be added to the total ADF-12 replenishment resources of UA 5,794.26 million

which comprise (i) donor contributions in the amount of UA 3,786.92 million and (ii) an advance commitment

capacity from the Bank Group of UA 2,007.34 million. Accordingly, the total resources expected over the ADF-

12 period amount to UA 6,214.15 million.

4. Based on 2010 grant levels, the Modified Volume Approach (MVA), under which a 20 percent volume

discount is applied to grants, for ADF-12 is broken down as follows: 5.43% is the “incentive–related” portion

and 14.57% is the “charges-related” portion (grant surcharge). The amount of the surcharge is estimated on total

grants for national and regional operations. The estimates of the amount of grant surcharge will change annually

as the share of grants varies with each annual PBA exercise.

5. Monitoring of the operational and financial implementation of ADF-12 will be undertaken by ORMU in

collaboration with FFCO, ORPC, OSFU, SEGL, GECL, FFMA, and FTRY. ORMU and FFCO will verify the

consistency of the reports the basis of the ADF-12 Resource Allocation Framework, the annual country

allocations, and the periodic statements on commitment capacity. The ORMU will issue quarterly reports to the

Operations Committee (OpsCom) on the status of available ADF resources and their utilization. ORMU will

also be responsible for preparing Board papers on the status of available resources and utilization as, and when,

needed.

6. Members of the ADF Board of Directors are invited to: (i) Consider this report on “Financial aspects of

ADF-12 implementation and approval of the Advance Commitment Capacity”; and (ii) approve the Advance

Commitment Capacity from internally generated resources for the ADF-12 period totaling UA 2,007.34 million,

which will be made available for use upon the approval of the Board of Directors and the adoption of the ADF-

12 Resolution by the Board of Governors.

1

FINANCIAL ASPECTS OF ADF-12 IMPLEMENTATION

AND APPROVAL OF THE ADVANCE COMMITMENT CAPACITY

1. INTRODUCTION

1.1. This note outlines the financial issues relating to the implementation of the ADF-12 Resolution, and is

intended to ensure that the ADF-12 Report and the ADF-12 Resolution, including the implementation of

the commitment capacity under the Advance Commitment Authority (ACA), are properly interpreted and

monitored. Members of the ADF Board of Directors are invited to: (i) consider this report on the

“Financial aspects of ADF-12 implementation and approval of the Advance Commitment Capacity”; and

(ii) approve the Advance Commitment Capacity from internally generated resources for the ADF-12

period totaling UA 2,007.34 million, which will be made available for use upon the approval of the Board

of Directors and the adoption of the ADF-12 Resolution by the Board of Governors.

1.2. This note covers the actions and measures required to coordinate the financial and operational aspects of

ADF-12 implementation, including implementation of the commitment capacity under the Advance

Commitment Authority (ACA) scheme. This includes harmonisation of the various commitment capacity

monitoring reports by the concerned organizational units, notably ORMU and FFCO. It proposes the

distribution of remaining commitment capacity resources among the various components, viz., national

and regional operations, fragile states facility, and project loans and grants.

1.3. The note proceeds as follows: Section 2 examines carry-over resources from previous ADF

replenishments. Section 3 presents the advance commitment capacity scheme and its implementation.

Section 4 reviews contingencies and upfront allocations. Section 5 discusses the financing terms that will

apply under ADF-12, grant eligibility and volume discounts. Section 6 presents the ADF-12 resource

allocation framework linking commitment capacity with country allocations. Section 7 examines the

monitoring and reporting of ADF-12 implementation, highlighting both the financial and operational

aspects. In the final section, Management requests the ADF Board of Directors to approve the Advance

Commitment Capacity generated from internal resources.

2. CARRY-OVER RESOURCES FROM PREVIOUS ADF REPLENISHMENTS

2.1. ADF Usable Resources: Total carry-over resources for operational commitments under ADF-12

(excluding special and earmarked resources which are discussed below) amount to UA 419.89 million.

This amount consists of the commitment capacity of usable resources from previous replenishments

expected at 31 December 2010, which amounts to UA 89.37 million (see Annex 1 for more details), plus

the amount of outstanding contributions of UA 330.52 million representing qualified and outstanding

subscriptions from certain State Participants from previous replenishments which are expected during

the ADF-12 period1 as detailed in Annex 2.

1 Qualified and unsubscribed contributions have in the past made it difficult for the Fund to plan resource allocation optimally, leading either to a

risk of over-commitment of resources (when contributions were not subscribed or unqualified when expected), or to large amount of

uncommitted resources. Similar to ADF-11, the financing framework for ADF-12 introduces a contingency to address this issue (see section

4.1.4).

2

2.2. ADF Restricted Resources (ADF-8 Special Resources): The Project Preparation Facility (PPF) 2

is a

component of the ADF-8 special resources that has been carried forward in subsequent ADF cycles. At

the end of ADF-11 the balance of PPF was UA 12.8 million. It may be recalled that the PPF was

designed as a revolving fund, replenished by the project beneficiaries as they pay back loans. In the

opinion of Management it should remain that way going forward into ADF-12, in the same way as in

ADF-11. The PPF resources will therefore not be carried over into the ADF-12 pool of resources under

the omnibus clause provision, but will be carried over as earmarked resources.

2.3. Total Resources Carried-over to the ADF-12 period: As a consequence of the foregoing, the total carry-

over resources from previous replenishments, including ADF usable resources (UA 419.89 million) and

ADF restricted resources from the PPF (UA 12.8 million), amount to UA 432.79 million (see Annex 1).

3. THE ADVANCE COMMITMENT AUTHORITY SCHEME AND IMPLEMENTATION

3.1. Within the framework of the ACA scheme, the amount of the Advance Commitment Capacity (ACC)

from internally generated resources is fixed for each replenishment period. To estimate the Fund’s long-

term sustainable level of advance commitment capacity, the ACA model assumes donor subscriptions of

UA 3,756.81 million3 and supplementary donor contributions of UA 30.11 million for ADF-12. At this

replenishment level, the Fund would be able to commit up to UA 2,007.34 million during each

replenishment period from internally generated resources while remaining comfortably in compliance

with its liquidity policy. The methodology and key assumptions used in the ACA model are presented in

Annex 3.

3.2. This level of the ACC remains fixed over the ADF-12 period, and differences between the actual and

projected amounts of the key elements in the ACC (i.e. reflows, cancellations, net income, etc.) will not

lead to revisions during the replenishment period, but will be captured when the ACC is computed for

the next replenishment.

3.3. Upon adoption of the ADF-12 Resolution by the Board of Governors of the Fund and approval of the

ACC by the Board of Directors, the full amount of the ACC will be available for commitment. The Fund

will then be able to start its operational commitments on the basis of the ACC while awaiting the two

triggers, 20 percent and 30 percent, for initiating the commitment of the subscriptions of State

Participants to set in.

4. CONTINGENCIES AND UPFRONT ALLOCATIONS

4.1. Contingencies: In line with standard practice, the total amount of available ADF-12 resources for

allocation will be net of contingency allowances. Similar to ADF-11, three contingencies are taken into

account in ADF-12. These are: (i) the exchange rate contingency; (ii) the contingency for accelerated

subscriptions; and (iii) the contingency for qualified and unsubscribed contributions.

Subscriptions Exchange Rate Contingency: A contingency for exchange rate adjustments on

subscriptions at 1 percent (of the total subscriptions) is applied, which would be equivalent to UA 37.87

million. This contingency is intended to cover possible net adverse exchange rate differences between

the agreed upon replenishment rates for the subscriptions and the spot rates on the dates the

subscriptions are actually paid. Such differences are captured in the ADF financial statements as

Cumulative Exchange Adjustments on Subscriptions (CEAS). Since this contingency relates only to

2 The PPF is a flexible financial instrument and revolving fund, set aside under the ADF-8 replenishment, to provide resources for promoting

project quality at entry. The PPF is used for financing feasibility studies and detailed design, environmental impact assessments (EIAs), gender,

and cross cutting issues/studies at the Appraisal phase of priority projects and programs. 3 The ACA model does not take in account the technical gap of UA 302.46 million representing 7.4 percent of ADF-12 resources.

3

donor contributions, the ACC will not be included in the base for the calculation of the contingency. The

adequacy of this contingency will be reviewed from time to time, taking into consideration the actual

amounts received in respect of paid subscriptions and the outstanding unpaid subscriptions.

Contingency for Accelerated Encashment of Subscriptions: Given that some State participants have

opted for the accelerated encashment of their subscription, the use of the final subscription amount for

commitment purposes may lead to shortfalls. As a result, and similar to ADF-11, a contingency for

accelerated encashment will be applied. It represents the income that is expected to be earned from

investing the extra liquidity received from State Participants and not needed for immediate disbursement

(accelerated encashment credit). A contingency level of 2 percent is therefore applied initially to manage

the risk of over-commitment ADF-12 resources. The total contingency for Accelerated Encashment of

Subscription is UA 75.74 million. This level will be revised annually, to take account of (i) substantial

changes in accelerated encashment profiles and (ii) the full completion of the accelerated encashment

process.

Contingency for Unsubscribed and Qualified Subscriptions: As an exceptional case, where an

unqualified commitment to replenish cannot be given by a State Participant in view of its legislative

process, the Fund accepts a qualified subscription, indicating that the State Participant will make best

efforts to seek and obtain budgetary appropriation within the year the payments are due. While State

Participants have been able to unqualify the bulk of their subscriptions during the relevant replenishment

period, a portion can remain qualified and has to be carried over to the next period. In view of the

foregoing, and based on the subscriptions payment patterns of previous ADF replenishments, a

contingency of UA 350 million for both late and qualified subscriptions is applied to ensure that only the

resources available during the replenishment period are allocated. This amount will be regularly

monitored and revised as need arises. At the end of the third year of the ADF-12 replenishment, these

resources, if still unsubscribed or qualified, will be carried over to the next replenishment and the

amount of the contingency will be revised accordingly.

4.2. Upfront Allocations

Fragile States Facility (FSF): The amount of resources agreed for allocation to the FSF under ADF-12

is fixed at UA 764 million (see Annex 1). The resources are allocated upfront, and distributed among

three pillars as follows:

- Pillar I (Supplemental Support): UA 404.9 million is set aside to supplement the PBA-

determined country allocations of eligible post-crisis/transition countries;

- Pillar II (Arrears Clearance): UA 359.1 million is set aside for arrears clearance; this amount will

be earmarked but not transferred to the FSF until it becomes clear that these resources are needed

for their stated purpose; and

- Pillar III (Targeted Support): While this pillar will not be allocated new resources from ADF-12,

the remaining balance of unused Pillar III resources from ADF-11 will be rolled over into ADF-

12.

Resources for Regional Operations: A designated envelope of 20 percent of the ADF-12 resources, net

of contingencies and carryovers4, is set aside to support regional operations. This is estimated at UA

1,150.11 million (see Annex 1).

4 See para 3.19 of the ADF-12 Report, ref.: ADF/BD/WP/2010/116, dated 22 October 2010

4

5. FINANCING TERMS, GRANTS AND VOLUME DISCOUNT

5.1. Country classification: The Bank Group’s Credit Policy5, which was adopted in 1995 and is aligned to

the International Bank for Reconstruction and Development (IBRD)’s Credit Policy, determines which

countries are eligible for ADF resources only (Category A), which are eligible for ADB resources only

(Category C), and which are eligible for a blend of resources from the two windows (Category B, blend

countries). This eligibility is determined on the basis of two criteria: (i) per capita income6 and (ii)

creditworthiness to sustain IBRD financing.7 As of 1 January 2011, the country classification will be

further refined to distinguish countries whose income levels are above the operational cut-off8 but which

are deemed not creditworthy for non-concessional financing (gap countries), and countries who are

graduating to ADB status.

Table 1: African Development Bank Group Country Classification as of 1 January 2011

Creditworthiness to Sustain IBRD Financing

No Yes

Per capita income

above the ADF / IDA

operational cut-off

for more than 2

consecutive years

No

Countries below cut-off and not

creditworthy: ADF-only countries

on regular ADF terms

Countries below cut-off and

creditworthy: Eligible for ADB

resources and for ADF resources

subject to a cap and blend terms

Yes

Countries above cut-off but not

creditworthy: Gap countries not

eligible for ADB resources but

eligible for ADF resources on

blend terms

Countries above cut-off and

creditworthy: Only eligible for ADB

resources. Exceptionally, graduating

countries are eligible for ADF

resources on blend terms during a 2 to

5-year phasing-out period

Notes: The ADB’s Credit Policy prescribes that World Bank country classifications be followed: hence the references to IBRD

financing and the IDA’s operational cut-off. IDA=International Development Association; IBRD=International Bank for

Reconstruction and Development

5.2. Financing terms: In ADF-12, differentiated financing terms will be introduced for different country

categories, which are more commensurate with countries’ circumstances in terms of income and

development level, economic prospects and access to financial markets. The existing regular ADF

financing terms will continue to be applied to ADF-only countries. For blend, gap and graduating

countries, different lending terms (“blend terms”) will be applied, namely 30 years’ maturity, a grace

period of 8 years, and an interest rate of 1 percent, in addition to the existing standard 0.5% commitment

fee and 0.75% service charge.

5.3. Grant Eligibility: Eligibility for grants during the ADF-12 cycle, including for supplemental financing

under the FSF, will continue to be determined by countries’ risk of debt distress under the Debt

Sustainability Framework (DSF), as it was under the ADF-11 cycle. The annual PBA calculations will

be based on the last established DSF rankings of each operational year, specifying which ADF-eligible

RMCs will receive their PBA allocations in loans only, grants only, or in loan/grant combinations.

5 ADB/BD/WP/95/79 and ADB/BD/WP/98/33 6 This is determined on the basis of an operational cut-off for IDA eligibility, which for FY 2010 (July 2009 to June 2010) was a 2008 per capita

gross national income of US$1,135, calculated using the Atlas methodology, and for FY 2011 (July 2010 to June 2011) a 2009 per capita gross

national income of US$1,165. 7 Individual country creditworthiness (risk) ratings are derived on the basis of both quantitative and qualitative analysis, against the background of

a particular global outlook and a set of macroeconomic projections. 8 See note 6 above.

5

5.4. Modified Volume Approach: The Fund will also continue to apply the Modified Volume Approach,

under which a 20 percent volume discount is applied on grants. The Volume discount is sub-divided

into: (i) an incentives related portion of 5.43 percent to help maintain the strength of the Fund’s

incentive system as reflected in its PBA, and (ii) a charges-related portion (or grant surcharge) of 14.57

percent, to cover foregone income on ADF-12 grants9. Fragile states will only be subject to the charges-

related volume discount. The incentives-related portion is reallocated by the PBA methodology to all

ADF-only RMCs during the annual country allocation exercise. The Modified Volume Approach will

not apply to FSF financing.

5.5. In estimating the charges-related portion of the volume discounts on grants applicable throughout the

ADF-12 cycle, the overall grant level in the 2010 country allocation exercise was used to project the

share of grants in the ADF-12 replenishment. Based on ADF countries’ classification of risk of debt

distress under the Debt Sustainability Framework (DSF), this grant level was estimated at 30.65 percent

for the ADF-12 replenishment.

6. THE ADF-12 RESOURCE ALLOCATION FRAMEWORK

6.1. Annex 1 presents the table for the ADF-12 Resource Allocation Framework which shows the linkages

between the statements of available commitment capacity and the resource allocations for national and

regional operations under the ADF-12 period. The table incorporates proposals regarding the ADF-12

resources available and their allocation, and also ensures that there is internal consistency between this

table and the monthly Commitment Capacity reports prepared by FFCO.

6.2. Sources of Funds: There are two main line items: carry-over resources, and ADF-12 resources. The

carry-overs are of two types: (i) usable resources and restricted resources. First, the usable resources

from previous replenishments include qualified subscriptions and available commitment capacity as at

end September 2010, the sum of which amount to UA 419.89 million, nd (ii) the restricted resources

comprising ADF-8 special resources for the PPF, amounting to 12.8 million. Taking into account the

omnibus clause under ADF-12 Resolution, as well as other considerations, the total carryover resources

to be merged as part of ADF-12 resources for allocation will exclude the UA 12.8 million.

6.3. The main source of funds, namely, the total ADF-12 replenishment resources (UA 5,794.26 million), is

made up of the two components: donor contributions (UA 3,786.92 million) and the advance

commitment capacity (UA 2,007.34 million). By adding this to the UA 419.89 million carry-over

resources from previous replenishments, the total resources expected over the ADF-12 period amounts

to UA 6,214.15 million.

6.4. Uses of Funds: First, the sum of the three contingencies for acceleration, exchange rate and qualified

subscriptions (UA 463.61 million) are netted out of the total ADF-12 resources (UA 6,214.15 million).

This translates into ADF-12 resources available for allocation, net of contingencies, and adjusted for

carryovers, which amounts to UA 5,750.54 million. Based on this amount, the upfront allocations are

determined for the Fragile States Facility (UA 764 million) and Regional Operations (20 percent: UA

1,150.11 million). The available net resources (UA 3,836.43 million) is then determined for PBA

allocations.

6.5. Country PBA allocations to the 40 ADF-eligible RMCs are determined on the basis of the UA 3,836.43

million resources available for the PBA allocations. Based on the PBA formula for ADF-12, and the

available 2010 CPIA and CPPR data series, the total country allocations by PBA (before surcharge on

grants) are calculated. The total PBA resources (UA 3,836.43 million) are estimated to be allocated to

loans (UA 2,660.57 million) and grants (UA 1,175.86 million) before the surcharge on grants.

9 Ibid para. 5.9

6

6.6. As noted above (para 6.2), under the Modified Volume Approach, there is a 14.57% surcharge on grants

to compensate the Fund for the foregone income reflows10

. The total surcharge on grants committed is

estimated including the grants committed from the Regional Operations envelope.

6.7. The information on total grants and loans, including the surcharge on grants, reflects the expected

overall share of grants in the ADF-12 replenishment. This share is estimated at 30.65%, based on the

recent 2010 PBA exercise and applying the Debt Sustainability Framework. See line 30 of the

Framework table in Annex 1. The estimates of the amount of grant surcharge will change annually as

the share of grants varies with each annual PBA exercise11

. The Framework table in Annex 1 therefore

needs to be revised each year following the annual PBA exercise to update the estimate of the grants

surcharge.

7. MONITORING AND REPORTING OF OPERATIONAL AND FINANCIAL

IMPLEMENTATION OF ADF-12

7.1. Regular monitoring and management of the ADF-12 resources will comprise the following actions:

Monitoring Operational and Financial Implementation of ADF 12 will be undertaken by ORMU in

collaboration with FFCO, ORPC, OSFU, SEGL, GECL, FFMA, and FTRY. Reporting will cover

commitments for regional operations, the fragile states facility, and country allocations, and will be

undertaken on a regular basis. ORMU and FFCO will verify the consistency of the reports on the ADF-

12 Resource Allocation Framework, the annual country allocations, and the periodic statements of

commitment capacity. The ORMU will issue quarterly reports to OpsCom on the status of available

ADF resources and utilization. ORMU will also be responsible for preparing Board papers on the status

of available resources and utilization as, and when, needed.

FFCO will continue to produce and provide to the Board the statement of use of resources and resources

available for commitment (statement of commitment capacity) initially on a quarterly basis and more

frequently towards the end of the replenishment cycle.

FTRY will continue to (i) provide to FFCO the details of subscriptions and payments received from

State participants; (ii) provide to FFCO the updated estimate of the contingency for accelerated

encashment; and (iii) prepare, on an annual basis, an information note to the Board on the status of

subscriptions and payments received on the ADF-12 replenishment from State Participants.

ORMU will continue to prepare the detailed performance-based country allocations on an annual basis,

and update the ADF-12 Resource Allocation Framework table. The country allocations will be based on

the PBA formula for ADF-12, endorsed by ADF Deputies, and the annual country performance ratings,

viz., the Country Policy and Institutional Assessments (CPIA), and the Country Portfolio Performance

Ratings (CPPR). OSFU will continue to provide quarterly reports on the use of FSF resources.

10 It should be noted that, as indicated in section 5, no discount is applied to FSF resources (UA 764 million), although they will be provided as

grants. 11

The 14.57 percent rate of the surcharge on grants is fixed throughout the ADF-12 period.

7

8. RECOMMENDATIONS

8.1. The Board of Directors is invited to:

i) Consider this report on “Financial aspects of ADF-12 implementation and approval of the Advance

Commitment Capacity”;

ii) Approve the Advance Commitment Capacity generated from internal resources for the ADF-12

period totaling UA 2,007.34 million, which will be made available upon the approval of the Board of

Directors and the adoption of the ADF-12 Resolution by the Board of Governors.

Annex 1: ADF-12 Resource Allocation Framework

(UA millions)

ADF-12 Resource Allocation Framework (UA millions)

Source Total Loans Grants Grants (%)

Carryover from previous replenishments:

Qualified or unsubscribed amount from previous replenishments1 330.52

Projected ADF Commitment Capacity at December 20102

89.37

Sub-total (Usable resources) 419.89

ADF-8 Special Grant Resources: PPF 12.80

Sub-total (Restricted resources) 12.80

Total carryover at January 1, 2011 432.69

Total carryover into ADF-12 funds at January 1, 2011 (excluding PPF, which remains separate) 419.89

ADF-12 Resources

Donor Contributions:

Replenishment amount from Current Contributions3

3756.81

Supplemental Contribution from Current Replenishment4

30.11

Total Donor Contributions 3786.92

Internally Generated Resources: Advance Commitment Capacity (ACC)5

2007.34

Total Sources: Resources Expected over the ADF-12 Period 2011-2013 6214.15

Uses

Contingency for acceleration6

75.74

Subscription Exchange Rate Contingency7 37.87

Contingency for qualified or unsubscribed contributions8

350.00

Total Contingencies 463.61

ADF resources available for allocation (i.e. Total resources – total contingencies) 5750.54

ADF-12 Net Resources Allocated as follows:

Fragile States Facility (FSF) 764

Regional Operations Envelope (including indicative surcharge on grants)9

1150.11 688.91 461.19 40.10

Estimated surcharge on grants for Regional Operations 67.19

Country PBA allocations (under Pure Volume Approach) & Share of Grants10

3836.43 2,660.57 1175.86 30.65

Estimated surcharge on grants for Country PBAs 171.32

Total Uses (Total resources available minus contingencies and surcharges on grants) 5512.02

Difference (Source minus Uses)

Surcharge on grants 238.51

Contingency for acceleration 75.74

Subscription Exchange rate contingency 37.87

Contingency for qualified or unsubscribed donor contributions 350.00

Total Difference 702.12

Annex 1: ADF-12 Resource Allocation Framework (continued)

1) Carry-over from previous ADF replenishments composed of the following: (i) Brazil –

qualified ADF-11 subscription (UA 6.56m); (ii) USA - qualified portion of third installments

under ADF-8, ADF-9 and ADF-10 (UA 25.99m); (iii) USA - qualified ADF-11 subscription

from residual third tranche (UA 89.68m); and Italy - pledged but unsubscribed ADF-10 and

ADF-11 contributions (UA 208.28m)..

2) This represents ADF Commitment Capacity as of December 22nd

, 2010.

3) Actual Donor Contributions valued at ADF-12 replenishment specific exchange rates -,

draft Resolution to ADF-12 Deputies Report, ref.: ADF/BD/WP/2010/116, dated 22 October

2010.

4) Corresponds to supplemental subscriptions to reduce the structural gap, draft Resolution

to ADF-12 Deputies Report, ref.: ADF/BD/2010/116, dated22 October 2010.

5) See ADF-12 Deputies Report, ref.: ADF/BD/WP/2010/116, dated 22 October 2010, para.

6.3. The ACC is based on predictable internally generated resources, and includes loan

repayments and cancellations, operating ADF surplus/deficits, ADB net income allocations, and

MDRI donor compensation. The assumptions for the calculation of the Advanced Commitment

Capacity are among others: (i) assumed grant funding level of 30.65% and grant fee of 14.57%

for ADF-12; (ii) ADB transfers of UA 105 million over the period 2011-2013; (iii) 90%

Compensation for MDRI (see Annex 3).

6) This contingency for accelerated encashment of subscriptions is currently estimated at 2

percent of total donor subscriptions.

7) The contingency allocation for foreign exchange fluctuations on payment of subscriptions

is estimated at 1 percent of total donor subscriptions.

8) The contingency for qualified or unsubscribed donor contributions is estimated by the

amount of UA 350 million. This is a conservative estimate based on the subscription observed

over the past replenishment cycles.

9) This is equivalent to 20 percent of the ADF-12 replenishment as adjusted by the sum of

three contingencies and net carry-over resources from previous replenishments. See para 3.19 of

ADF-12 Deputies Report, ref.: ADF/BD/WP/2010/116, dated 22 October 2010.

10) Allocation for Country PBA allocations is equivalent to 72 percent of Net Resources for

Allocation. The total loans and grants (before surcharge on grants) are derived from the 2010

Country Allocations based on the latest performance (CPIA, and CPPR) ratings. The share of

grants under the Pure Volume Approach is 30.65%.

Annex 2: Qualified and outstanding ADF subscriptions as of 22 December 2010

Amount in UA ADF-8 ADF-9 ADF-10 ADF-11 Total

Qualified subscriptions

Brazil 6,557,936.09 6,557,936.09

USA 162,337.09 23,276,286.01 2,548,032.18 89,683,054.95 115,669,710.23

Pledged but unsubscribed contributions

Italy 13,641,895.62 194,642,996.39 208,284,892.01

Total outstanding ADF resources 330,512,538.33

Annex 3: Methodology and key assumptions used in the ACA

The Board approved in Resolution F/BD/2005/06 adopted on 22 April 2005, the adoption of an

advance commitment authority scheme for the Fund as the basis for determining the commitment

capacity from internally generated resources. In particular, the Advanced Commitment Capacity

(ACC) assumptions, technical provisions for subscription procedures, and the terms and

conditions for the ADF-12 Replenishment Financial Framework are as follows:

I. The Advance Commitment Capacity

Table 3-I: Core Assumptions Underlying the ADF-12 Advance Commitment Capacity

C Core Assumptions ADF-12

Donor Contributions in

Future Replenishments

To establish the baseline scenario, donor subscriptions for future

replenishments are conservatively assumed to remain unchanged

in real terms. I.e., the nominal amounts are assumed to increase

by the assumed cumulative rate of inflation over the previous

replenishment period.

4.49%

Timeliness of receipt of

MDRI Compensation

In addition to regular contributions, donors pledged to cover 100

percent of MDRI costs for all heavily indebted poor countries (on

forgone principal and interest) by making additional

contributions to future replenishments on a pay-as-you-go basis

without leaving a financing gap.

90%

Grant Share in

Replenishment

The grant level for the replenishment is determined as per the

debt sustainability analysis. 30.65%

Compensation for Grants

In addition to regular contributions, donors would finance the

foregone principal reflows that result from grant extensions by

making additional contributions on a pay-as-you-go basis.

Foregone charges income would be offset by an upfront grant

charge.

14.57%

Administrative Expenses

These expenses are based on the relevant budget program and are

set to increase annually thereafter. The ADF share of

administrative expense is based on the revised cost sharing

formula, under consideration by the Board.

3%

ADB Transfers Per Year Constant annual transfer from ADB net income, in UA millions 35

Repayment Sensitivity

Factor

To account for delayed repayments by countries in arrears to the

Fund, repayment flows are maintained constant as a percentage

of expected loan repayments.

90%

Disbursement Sensitivity

Factor

To account for grant compensation and loan cancellations,

reductions in disbursement flows are maintained constant at a

percentage of signed loans.

95.18%

Investment Return Rate The rate of return of the investment portfolio Forward

curve

Minimum Prudential

Level of Annual Liquidity

As a percentage of the 3-year moving average of net

disbursements 75%

Loan Cancellations Constant annual cancellations in nominal terms, in UA millions 100

Accelerated Encashment Proportion of total donor subscriptions assumed to be encashed

under the 3-year accelerated mechanism at 95.87% of face value 20%

II. Subscription Procedure

Exchange rates: ADF-12 subscriptions may be denominated in (i) Special Drawing Rights

(SDRs), (ii) an SDR component currency (the US dollar, the euro, the Japanese yen or the pound

sterling), or (iii) Donors’ own national currency, provided that this currency is freely convertible

and that the average domestic inflation rate has not surpassed 10 percent in the preceding 3

years. Deputies also agreed to use as the ADF-12 replenishment exchange rates, the average of

the SDR/foreign exchange rates, from 1 December 2009 to 31 May 2010.

Payment: The payment date of ADF-12 subscription shall be changed from 30 April to 15

January. This will mitigate disruptions in operations by ensuring adequate commitment capacity

in the first months of the year, particularly in years when frontloading might occur. The Fund

recognizes that some Donors due to internal legislative process will not be in a position to pay

their subscription before 30 April.

Encashment: The standard encashment schedule for ADF-12 will mirror the projected

disbursement profile of loan and grant commitments funded by the replenishment, while

ensuring that the level of the Fund’s liquid resources that results from the encashment of

promissory notes respects the Fund’s liquidity policy.

Table 3-II: Standard Encashment Schedule for ADF-12

Encashment Year Encashment

Percentage

2011 5.03%

2012 10.34%

2013 14.76%

2014 15.07%

2015 12.98%

2016 11.17%

2017 10.14%

2018 9.13%

2019 8.33%

2020 3.04%

Accelerated Encashment: Donors have the option of accelerating the rate of encashment of their

subscriptions by selecting a customized encashment schedule. The currency-specific discount

rates will be based on the Commercial Interest Reference Rate (CIRR), for credits up to 5 years,

adjusted downwards by 100 basis points, applicable as of April 2010 to determine the amount to

be credited to State participants who opt to accelerate the encashment of their subscriptions. The

accelerated encashment model, used by the Fund to compute the discount or the credit applicable

to encashments paid in advance, has been revised to better reflect the size and the timing of the

cash flows received.

III. Terms and Conditions for Effectiveness and Subscription

After consideration of the issues for which provisions have been made in the ADF-12

Resolution, Deputies established the following terms and conditions for subscriptions in respect

of the Twelfth Replenishment:

The Replenishment will come into effect when the Fund has received the Instruments of

Subscription representing an aggregate amount equivalent to at least 30 per cent of total

Subscriptions (the ―Effective Date‖). It is expected that this level of subscription will be

attained by a date that is no later than 1 January 2011 or any other later date that the

Board of Directors may determine;

In order to enable the Fund to meet operational commitments before the entry into effect

of the Twelfth Replenishment, the Fund, in addition to the ability to commit ACC

resources after the ADF-12 Resolution and the ACC have been approved, is authorized,

when the level of subscriptions received aggregates 20 per cent of total pledges, to use for

operational commitment an amount equivalent to the first commitment tranche of each

Instrument of Subscription received before the Effective Date, unless the subscribing

State Participant specifies otherwise when depositing its Instrument of Subscription. This

Advance Subscription Scheme will be implemented without prejudice to the Advance

Facility Scheme under which any State Participant may authorize the use of any portion

of its subscription for commitment purposes before the entry into effect of the Twelfth

Replenishment;

Subscriptions may, in exceptional cases, be qualified and State Participants intending to

do so will notify the Fund to that effect. Such qualified subscriptions shall be subject to

the conditions specified in the Resolution;

Subscription pledges listed in the Annex to the Resolution on the Twelfth Replenishment

have been determined in Units of Account (UA) and have been converted into Units of

Obligation of the individual State Participants on the basis of daily average exchange

rates, expressed in terms of Currency Units per SDR as given by the IMF for the six-

month period commencing 1 December 2009 and ending on and including 31 May 2010.

Subscriptions shall be denominated in (a) SDR of the IMF, (b) a currency used for the

valuation of the SDR, or (c) the currency of the individual State Participant. In the later

case, however, if the economy of a State Participant has experienced a rate of inflation in

excess of 10 per cent per annum in the period 1 January 2008 - 31 December 2010, as

determined by the Fund, the State Participant’s Subscription will be denominated in

SDRs or, at the option of the State Participant, in a currency used for the valuation of the

SDR;

Subscriptions will carry voting power in the manner specified in the Resolution on the

Twelfth Replenishment to the extent that they have been paid for. However, if the

Twelfth Replenishment has not entered into effect by 1 January 2011, Advance

Subscriptions will carry voting power to the extent of payment;

Terms of payment have been determined such that the Fund will have the resources it

needs to operate satisfactorily and to reflect the multilateral character of the Twelfth

Replenishment. Payment in respect of each subscription will be made in three equal

annual installments, of which the first installment will be made on or before 15 January

2011 or 30 days after the Effective Date, whichever is earlier, with the second and third

installments falling due respectively on or before 15 January 2012 and 15 January 2013.

Any State participant may, by a written declaration, indicate to the Fund that it intends to

make payment at earlier dates or in fewer installments or different proportions not less

favorable to the Fund than those specified in this or in the next paragraph.

As an exceptional case when a State Participant cannot, due to its legislative procedures,

make payment in respect of the first installment by the stated date, payment in respect of

that installment should be made within 30 days of the deposit of its Instrument of

Subscription. Subsequent payments in respect of qualified subscriptions shall be made

within 30 days as and to the extent that the relevant installment becomes unqualified and

subject to the annual 2 payment dates specified for unqualified subscriptions. A State

Participant which has deposited a Qualified Instrument of Subscription shall inform the

Fund of the status of its subscription (i.e., whether legislative approval has been received

or not) not later than 30 days after the annual payment dates specified for unqualified

subscriptions;

At the time of depositing its Instrument of Subscription, each State Participant shall

indicate to the Fund its proposed program of installment payments;

Encashment of notes shall be in accordance with the replenishment specific (fixed

schedule) encashment system, adopted by the Board of Directors in March 2000. The

encashment schedule shall cover a period of 10 years from 2011 to 2020. A standard

encashment schedule shall be prepared for each State Participant in its currency of

obligation, using the profile indicated in Schedule I hereto. Should a State Participant

wish to adopt an encashment schedule other than the standard, the Fund shall agree with

the State Participant on a revised encashment schedule for its unqualified subscription

that yields at least an equivalent value to the Fund in present value terms;

The size of each commitment tranche will be equal to one-third of the amount of total

subscriptions;

The rules governing the commitment of each of the three tranches have been formulated

in such a way that the first tranche will be committed from the Effective Date (or before

that date, if it is an Advance Subscription); the second tranche from 1 January 2012, or

the Effective Date, whichever is later; and the third tranche from 1 January 2013 or the

Effective Date whichever is later.

Annex 4: Members of Working Group on Financial Aspects of ADF-12 Implementation

and Approval of the Advance Commitment Capacity

Name Title Dept. Ext.

Mr. P. KEI-BOGUINARD Division Manager FFMA.1 Ext. 2136

Mrs. H. N’SELE Division Manager FTRY.1 Ext. 2656

Mr. G. PENN Lead Counsel GECL.0 Ext. 2318

Mr. M. SALAWOU Assistant to the Secretary General SEGL.1 Ext. 3077

Mr. N. LAFHEL Principal Treasury Officer FTRY.1 Ext. 3586

Mr. M. TARAWALLY Financial Accountant FFCO.1 Ext. 3055

Mr. B. CHERVALIER Unit Head ORMU Ext. 3278

Mrs. K ROT-MUNSTERMANN Chief Resource Mobilization Officer ORMU Ext. 3457

Ms. S. ASSEFA Principal Resource Mobilization Officer ORMU Ext. 3048

Mr. R. SCHIERE Principal Resource Mobilization Officer ORMU Ext. 2751