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I

J: AFRTCAN DEVELOPMENI BÀNK

ADB/BD/r, /P 189 / 66AFRICAN DEVELOPMENI

A D F / B D / W P I 8 9 I 5 425 N1ay, 19890 r i g i n a l : F r e n c hT r a n s l a c e d b y : E . P .

FLIND

ALEXAI\DER

MEI,ORÀNDUM

ro THE BOARÉ OF DIRECTORS

SUBJECT :

B. NDIAYEPresident

POLICY AND ARREARS ON LOANS

1. INIRODUCTION

1.1 During its December f988 meeting, the Boards considered documents(ADB/BDI\{P/88/24 ADF/BD/vW/88/30 and (FaB/BD/rtW/88/L76) - aor/nD/vrP/BB/L2I)on loans arrears and the sanctions policy of Ehe Bank Group. Following this,the Boards requested l,lanagement to revise the said docunents by incorgrratingnew aE)ecbs therein in line with their observations.

r . 2 The Boards will recall that procedures for the recovery of arrears onIoans granted by the Bank Group were last updated in 1985. The new proceduresthen adopted became operational and cane into efiect retroactively from IJanuary 1985. The present merprandum contains.ts-he draft update of thoseguidelines. It takes into consideration the ADB Grouprs four yearslexperience in their applicat.ion, the recommendations made during the December1988 Boardsr meeting, the sanctions policy of obher MDBs, and Èhe variousconstraints of the other parties involved in the irçlementation of projectsand progranmes financed by the ÀDB Group.

1.3 By explaining its objectives, this document glves reasons for thesanctions policy and lhe setting up of a warning system for inproving therecovery of arrears.

2. 1985 DTRECTT\ÆS

objectives

2.I The Directives approved in 1985 were mainly ainred at speeding up debtrecovery. In other words, the irçlementation of this system should have ledto the reduction in the amount of arrears in the Bank Grouprs portfolio.

2.2 The introduction of this system $ras to be accorq>anied withorganizational and adrninistrative measures aimed, afipng other things, at:

a) strengthening efficiency, monitoring and follow-up by theDisbursements Department (presently FDIS department) as well asloan administration and the billing system;

b) irrproving coordination between various departments involved indisbursement and recoveryi

c) naking Executive Directors participate actj-vely;

d) intensi-fying dialogue with borrowing countries.

FROM ;f a L

2

Principles of bhe mechanism

The sanctions mechanism revolves around the following rnai-n ideas:

a) debtor: The sanction affects Ehe Borror^rer or the Guarantor indefault of. payment of maturibies. Every Borrower suffers rheeffect of sanctions alone without extension to any otherBorrower.

b) gradual character: The sanctions are gradual:

firstly, prohibition from signing any new loan agreement;

secondly, suspension of disbursement in respect of aspecific loan;

thirdly, total suspension of disbursements and granting ofnew loans.

maLurity of payrents: The different tlpes of sanctions areapplied following the maturity of paynrents due

arrears of npre than 3 nronths: prohibition from signing any newagreementsi

arrears of flrcre than 6 rpnths: suspension of disbursementsin respect of the loan in quest.!-on - or total suspension ifone of the loans to the borrower has been ful1y disbursed;

arrears of iltcre than 9 months: total suspension ofdisbursements and granting of new loans.

cross-default: When one of Èhe three institutions of the ADBffiup

-ÏffiqED,F,/ltTF) totally suq>ends its disbursements, the

cross-default rule automatically comes into effect ondisbrrsements from the other two institutions.

cost overruns: @nera1ly, the ADB Group does not finance costôveffiffiru-rti.ng from- the application of sanctions. However,in exceptional cases, the Board of Directors could study and[ake into consideration recommendations from Management forfinancing of cost overruns.

exeru>tion: Suspension of disbursements does not affectmultinational projects. Loans for preinvestment studiesfinanced from the resourees of the Technical Assistance Fund arealso exerpt from sanctions.

information: The ADB Group should inform the borrower ofsanctloriffihich shatl be (or are) inposed due to default inpayment. In case of suspension of disbursements, it should alsoinform the cofinanciers as well as all the suppliers of goodsand services concerned.

2.4 U.le to the various inplications both for the ADB Group and others,the satisfactory irçIementation of such a system is a very conplicated and,quali tat ively speaking, exacting operabion.

c )

d )

e )

f )

s )

':;.:.

3 .

3 . 1

These two measures rrtry only be abrogated whenthe eve of either the goard of Directorslcontract.

3

PRACTICES OF OIHER I'ULTILMERAL DEVELOPMENI BANKS I'DB )

Sanctions policy is practised by al l Mllt i lateral Development FinanceBanks and Insti tut ions. Management contacted them for necessary information^n fhair nnl ir. iss and prOcedureS. The InterAmerican Development Bank whichrecently (I5/9/88) revised ibs policy and procedures for col lecting loansarrears sent detai led information. Its policy and procedures ere summarizedhereunder,

Pavment

3.2 The only acceptable form of payment is the confirmation that i . \)3'saccount had been credited. The previous practice of accept.ing Ehe wril-F-ennotice of fund transfers from bhe Central Bank was abolished, since bhat hadled to much misunderstanding.

3.3 A Borrower is considered to be in arrears i f , at the date when bhearrears is due, no payment had been made into IADBTS account (the FinanceDepartment (FD) determines whether the borrower has arrears to setble ornot). For this purpose, the FD publishes a weekly re[rcrt on the I'Status ofarrears on loans" for reference purposes. This report which is widelycirculated within the IADB, is published every Friday and l ists al l arrearsoutstanding as at Wednesday of the previous week, taking into account allpaymenLs made up to the eve of the publication.

Application of arrears recoverv procedures

3.4 From Ehe first listing in the report of a loan in arrears, the FDnotifies the Borrower concerned by telex that the Bank had not received agiven payment due and that if the said payment is not made, suspensionmeasures in line with the general conditions stipulated in the loan Agreementsha11 come into effect. The FD also informs the Guarantor of the borrowerrsarrears.

As soon as the Borrower is listed in the report;

a) no loan proposal from Ehe borrowing member country shall bepresented to Lhe Board of Directors for approval;

b) the Bank shall sign no loan agreement with a Borror,,/er from thecountry in question.

3 . 5

all the arrears are sett ledff isigning of

bythe

Àrrears of 30 days or more

3,6 Thirty days after arrears are due, the FD prepares for thePres ident 's s ignature:

a) a not.ice of inrnediate suspension of disbursements toBorrower of bhe said loan or of al l other loans;

b) a notice to the Guarantor requesting pronpt payrent ofaccunrnulated arrears on the loans.

3.7 The FD may nnke few exceptions when,

Vice

the

all

4

a) the Payrnents are due in currencies generally not available inthe international f inance markets at the t ime the arrears aredue (h:t not when the problem is merely routine); or

b) the arpunt due does not exceed 301000 dollars; or

c) i t is sal isf ied, based on information from financialinstitutions involved in the transfer of funds, tha[ thepayments are underway.

Àrrears of 120 or nxrre days

3.8 Às soon as there are accumulated arrears of rnore than 120 days, theFD notifies the Coordinating Conunittee in writing. the laLter decides to,

a) suryend al1 disbursenrents to the Guarantor of loans granted toft;

b) suryend the subrnission of loan proposals from the country inquestion to the Loans Conrnittee or to [he Board of Directors.

Arrears of 180 or more days

3.9 When the arrears are flpre than 180 days, the FD no longer conputesinterests on all loans to the Borrower and on all other loans to the countryin question. The Vice-President sends a notice by telex to the countryrsAuthorit ies stating that:

a) its loans arrears are rûf,re than 180 days;

b) all Bank missions to the country in relation to loansprogramming, preparation and advice are suq>ended;

c) the Bankrs regional office would not accept new disbr.rrsementapplications from the Borrower or its Guarantor on any loan.

3.10 As long as the interests on a loan are not colçuted, the legalDepartrnent makes no amendnent whatever to any loan agreemenÈ of Èhe affectedMember Countries.

Waiver of the Suspension of disbursements

3.11 Disbursements are normally not suspended in the case of:

a) special cornrnitrents - particularly disbr:rsement guarantees;

b) non-refundable and conditional technical assistance expenses;

c) operations undertaken as part of the fÀDB's programme forfinancing sma1l pro jects;

d) direct payrrents to IADB from loan amounts.

3.12 fn all !1D8, applications received by regional offices or theheadquartersr as the case may be, after the date of suspension ofdisbursements, are not considered. However, it would seem that Lhe World Bankintends bo introduce the clause of paying for works undertaken and suppliesmade before the date of sanctions in the next revision of its policv.

- , ; : 1 . À

3.13 The measures considered inprocedures on the recovery of arrearsthe ADB Group.

4. PERFORMANCE

5

t.his section show thaL the policies andin other !{DBs are str icter than t.hose cf

4.I The performance of the sanctions system is analyzed l:hrorrgh thechanges, volume structure and age of arrears, their recovery rate as,uell , tJiBorrowers' behaviour during the perj-od 1985-1988.

4.2 Àccording to Table I hereunder, arrears in the three i-nst j-cuti , . .ns(ADB/ADF,/NIF) grew considerably between 1985 and 1988. During this periorl,their growth rate stood at I25Z for the ADB, l00S for the ADF and 29.42 forthe lffF. HovJever, correE)ondent banks were sometimes slow in forwardingrepayments. The non-mastery of this situation partly weighs heavily on thevolume of arrears as reflected i-n the foregoing analysis.

4.3 However, if bhe volume of arrears is 'corpared with loans granted(disbursed un-refunded loans), the ADB and the ADF appear to have kept theirar rears wi th in reasonable l imibs: for the ADB, 3.2t in 1985,3.7t in 1987 and3 .6 t i n 1988 , and fo r t he ADF, 0 .16 t i n 1985 , 0 .13 t i n 1987 and 0 .16% in1988. On the other hand, for the lùIF, a much higher arrears rate could not beavoided. (See detai ls in Annex Page 1).

Table I

Evolution of Arrears as at 31 December

( in BUe mil l ion)

198s 1986 1987 1988

ÀDBADFNIF

32.4r1 . 4 12 . 5 L

37 .081 . 6 42 . 0 L

57 .8 r1 . 9 02 , 9 4

7 3 . 3 52 . 8 23 . 2 5

Conposition of arrears according to their age

4.4 C'eneral1y, the age of arrears in the three institutions ranges from 6to 9 months or nrcre as at 31 December of each year. In Table 2 (Annex page2), thoughr bhe conposit ion and evolution of arrears according to their agediffer from one institution to another. There is a general trend in theincrease in the number of the oldest arrears in the loans portfolio.

4.5 Arrears of 9 or ntcre npnths are in the majority in NIF loansportfolio; such arrears also progressively increased in ADB loans portfoliofrom 40t in 1985 to 558 in 1988. For ADF - TAA loans, arrears of the same agerepresent one third of the total volume in 1988, bub their share has beenincreasing steadily.

Recovery

4.6 The recovery rate (repayment/bi[ing) in the three institutionspresents erratic curves but with a tendency towards stabilizing at about 79,8tfor the ADB7 85.2* for the ADF and 67.3t for the IvIF. In considering thegrowth in the anpunts due during this period (Ànnex page 2), the stabil i ty off-lra rà1(1\',âr\t 'ate portrays that the Bank Group had redoubled its effort atarrears recovery.

6

Table 2

Evolution of the Recovery Rate

1985 1985

ÀDB 79 .72 82 .8 rÀDF 85 .21 84 .7 tNrF 56 .5 t 76 .12

Change in Borrowerst behaviour

1987

7 7 . 7 28 6 . 5 ?o o . v Ë

1988

7 9 . 0 *34 .727 i ) . 0 2

4.7 The grouping of BorrovJers according to age of arrears pernits anassessment of Borrowersr behaviour in relation b.o the dif ferent t'/.ces ofsanctions. Borrov/ers mayr therefore, be classified under two extremes, namely:

those who pay their arrears before the coming into force of thefirst sanction (arrears of 3 rnonbhs) are considered as beinovery sensitive to the sanctions system;

on the contrary, those who wait ti1l the application of t.hethird sanction before sebtl ing their arrears are identif ied asbeing indifferent to the system.

Table 3

Nunber of eountries according to the maturiby of payments

6 months 9 months

I98s

1988

27 countries +multinationals

26 countries +multinationals

13 countries + multinationals

9 countries + mult inationals

4 . 8 For Ehe ADB Group as a whole, the number of countries affected bysanctions for arrears of 6 nronths remained unchanged between 1985 and 1988whil-e the number of those affected by the third sanction (9 ncnths or npre)fe1l from 13 countries in 1985 to 9 countries in 1988. The reduction in uhenumber of countries affected by the third sanction equally applies to the ADF(8 countries in 1985 as corpared with 3 in 1988) and the IvTF (7 countries in1985 as against I in 19BB). For the ÀDB, the number fel l from 9 to 7count,ries during the same period.

Table 4

Concentration of countries in arrears of 9 or more months

198s r988

ADBADFNIF

6 countr ies (86t) + countr ies (94t)spread out among I countries 3 countries (100t)3 countr ies (82t) 1 country ( f00t)

4 . 9 The strong inpact of theconcentration of arrears of 9 or nprecountries accounted for 94t of arrearsin 1985, 6 countries accounted forconcentration is even higher, with 13

third sanction can be seen in themonths on a few countries, In 1988, 4of 9 or rûf,re rnonths on the ÀDB loans;

86t. For the ADF and the NIF, thiscountries accounting for 1009 of the

7

arrears in the forrner, and I country accounting for 100t of t.he arrears i.n thelatter, in 1988. On the contrary, the first and second sancti-ons seem not toproduce the same effect on Borrowers. There is a tendency toward an increasein the number of countries affected by these two tlpes of sanctions in al-l t-hethree institutions (Ànnex page 4).

4.10 The differences observed in the change in the total amount of arrearsand in the distribution according to bheir age may lead to a controversialinterpretation of the irçact of the sanctions system. Hov/ever, thestabilizing of the recovery rate and Ehe obvious irçrovement in Borrowers'behaviour in regard to the 3rd sanction show that these are aware of theqgstem's role and of its positive inpact. This system may rightly be seen asthe instrument which puts a halt to the npst negative behaviour by mostborrowing countries confronted with economic and financial difficulties.

5. IIV1PACT AND PROBLEMS OF THE 1985 GUTDELINES

5.I The inpact of the sanctions system will be analyzed purely inrelation to the various parties involved in ÀDB Group's lending operations,namely, the fund donor (the ADB Group), the Borrower (the State or other legalentity), where necessary, other cofinanciers, as well as the third parties(enterprises, suppliers, conzultants... ) involved in the inplementation ofdevelopmenL projects and prograrunes.

Jnpact of sanctions on the ÀDB Group

5.2 The inpact of the sanctions system is nostly felt in Bank Groupfinances, lending operations and administration. An unfavourable change inarrears automatically has direct negative irçact on such financial aggregatesas net income, liquidity and financial credibility.

5.3 Although the loans incone from ADF and NfF overall income remainsrelatively 1ow (24? and 18t respectively in 1987), the presence of arrears onthe financial charges over a long period should normally lead to a reductionin income from loans.

5.4 The liq'ridity policy of the 3 institutions takes into eonsiderationthe annunt of dishrrsement independent of their age; a net. difference betweenestimates and receipts creates financial tension.

5.5 ADBrs financial credibility depends on its position as a choicecreditor to borrowing nrember countries. However, increase in arrearscontributes to eroding this position by creating doubts in the financialmarket as to ADBrs management capacity. This would togically weaken theInstitutionrs financial credibiliLy, leading to increase in borrowing cosLsandr consequently, in j.nterest rates payable on ]oans. Such unfortunatesituation would lead to reservations on bhe part of State participants andfund donors during the replenishment of concessional resources (ADf , I'i.IF).

5.6 Since it contributes to decreasing the volume of arrears, thesanctions system has a positive effect on the three institutions. Thecreation of a specific mechanism for each institution is not borne out sincebhe end result wil l be similar, and the mutuali ty of the three insti tut ions isundeniable.

5.7 The operational prograrunes suffer the negative inpact of sanctj-ons inthe approval, signature and disbrrsement of loans. However, beginning withthe 1985 guidelines' the negative irçact of sanctions on the annual lendingprogranme has been minimized by shifting the suspension of granting

I

new loans Eo the third sanction (arrears of 9 or rnore nxrnths). However, iE ismostJ.y in its disbursement targets t.hat bhe ÀDB Group greaLly suffers from thenegative ilçact of sanctions.

5.8 Operational perforrnances (number of approved and signed loans anddisLursements) show that over the past four years, the ADB Group has succeededin containing the negative effects of this system.

A satisfactory application of the sanctions system brings positive5 . 9results on organization and administration. ft enables the drawing up ofc1ear, consistent and hannonious administrative procedures wherein the role ofeach organizational unit is defined. It encourages the evaluation andintroduction of staff and rnaterials necessary for enzuring Ehe follow-up,rxrnitorj-ng and making estimates of billing, repayments and arrears.

5.10 Management is of the view that the sanctions system is an instrurnentwith

'many positive aspects which should be rnaintained all tLre while updatingit in order to keep its secondary negative effects at the minimum.

On the Elorrovrer

5.11 fn regard to the irçact on the Borrower, Management noted that thesanctions policy had a negative irpact on the development planning process ofborrowing countries, since count,ries in arrears and under full sanctions cenno longer view the loans earlier approved for them by the Bank Group as asource of resources to be used for planning purposes.

5 . L 2 Sanctions can also disturb the irplementation of, and expectedbenefits from, projects. Wlrile under sanctions, cost overruns occur whichforce the country to apply for supplementary loans in order to fully irçlementits projects after sanctions would have been rerncved.

5.13 fn some cases, sanctions are due almost entirely to a project's lateiqrlementation. Consequently, diskursements of a given loan go hand in handwith its repalnent. This rnakes debt servicing heavier on the Borrower who,for that reason, merits special consideration.

5.14 Though borrowers have had to bear the negative effects of sanctions,it should be pointed out that, the net resources flow has renained generallypositive in the ADB Group as a whole (annex page 6). ManagemenÈ is of theview that the inclusion of such an indicator per country has become necessaryas trnrt. of the otrnrational prograrrning.

Table 5

Evolution of net resources flows of the ÀDB Group(in BUA mil l ion)

1985 1986 1987 1988

DishlrsementRepaynent

Total net flows

483,5266 r32

re549,40

87,L4

%

6 6 6 , 2 09 5 r 5 3

w8 6 7 , 1 3L 2 7 , 2 9

w

9

On the third party

5.15 Sanctions have an unfavourable irçact on enterprises and individualsthat handle Ehe irçlenentaLion of a pro ject or prograrrurre whose loandisbursement is under suspension. The inability of the borrower to honour hiscontractual conrnitments to enterprises could put some of them in a difficultand delicate situation.

5.16 To save themselves from the risks of being financially grounded,enterprises tend to inflate their bids for contracts financed by bhe ADBGroup. Management is of the view thab this situation and its effects shouldbe taken into consideration when updating the sanctions system.

On Cofinanciers

5.17 The sanctions system can slow down the approval of all lqans to aproject financed by nnny fund donors. It can also slow down the projectirçlementation as a result of the suq>ension of disbursements by one of thefund donors.

5.18 In the absence of a system for coordinating sanctions applied by allthe fund donors to a given project, Managenent is of Èhe view that thesanctions system of the ADB Group should continue to be in force, alt thewhile searching for a case by case harmonization with other fund donors.

6. PROBLEMS AND PROPOSÀLS

6.1 Dur ingidentif ication of

Borro\^Ier

the 1985 to 1988 period, experience has led to thecertain weaknesses in the arrears recovery policy.

6.2 Though the 1985 Guidelines had made a distinction between a countryand a Borro$/er' the application of the guidelines has sometimes made no suchdistinction by applying sanctions against the governmenl even though theBorrower in arrears was, for exalçle, a development bank, and vice versa,Though such confusion has been considerably minimized, steps should be takento avoid such errors altogether.

Proposal I

6.3 To eliminate the confusion described in 6.2 above, rrthe status ofarrears on loans" shall clearly indicate the arrears per borrower and perloan. Notification of arrears and sanctions Eo each borrower should beclearly spelt out.

Guarantor

6.4 In the present guidelines, the application of sanctionssimultaneously affects the Borrower and the Guarantor. This situation hasalso been one of the reasons for the confusion described earlier.

6.5 Proposal 2: The Guarantor shall be informed at the same time as theBorrovûer of the latterrs arrears, However, notifj-cation of the application ofa sanctj-on against the Guarantor due bo default of payment on the part of theBorrower shall only be sent after a specified period.

IO

Payment

6.6 The payrnent of arrears due is acknowledged by confirmation of paynrentinto an ÀDB Grouprs account. The ability of the ADB Group to establish thestatus of arrears is the result of deadlines and administrative proceduresestablished by correE>ondent banks on the one hand, and the efficiency andrapidity of its own administration on the obher hand.

6.7 Management has noticed the late confirmation of some paynrentsannounced by Borrowers and Executive Directors. This seems to be due, amongrother things, to:

i) payment orders gitæn by the Borrower but not executed by theCentral Bank's correspondent bank due to insufficient funds;

ii ) irçrecise paynent orders given by the Borro\^ier makes their

1 : application diff icult;

iii) administratiile delays sometimes from officers of correspondentbanks.

5,8 Proposal 3: The proof of paynent shall be the eonfirmation ofpayment into an ADB Group account.

6.9 Proposal 4: Based on information supplied by a reputable bank to theBorrovrer's Central bank, FDIS shal1 recorrnend to Fwp to take intoconsideration an unconfirmed payrent.

6.10 Proposal 5: Àfter giving a go-ahead order to pay the ADB Group, lheBorrower shall inform ADB Management by telex stating the payment references,the amount and its purpose, the executing bank and the effective date of theoperation.

6.11 Proposal 6: The ÀDB Group shall establish with correspondent banks arystem for fixing the effective date for payments made and the penalty ratepayable in case of failure to respect deadlines. The penalty shall be paidinto the Borrower's loan account.

Stabus of arrears on loans

6.12 The document 'rStaÈus of arrears on loansn issued ronthly by FDIS tothe Board is an information note without direct reference to sanctions. Theapplication and renpval of sanctions are contained in the mennranda publishedby FDIS. Such procedure necessitates practically daily revisions whosecirculation within the Bank remains relatively restricted. Consequently, asinpler system should be established through a bi-npnthly publication of thestatus of arrears on loans.

6.13 The status of arrears on loans presents the situation of arrears asit was a fortnight previously. Management therefore has fifteen days toverify the confirmation of paynent orders given by Borrowers before theoff icial publication of the status of arrears.

6.14 Proposal 7: Management shall regularly publish on a binpnthly basisa status of arrears on loans, indicating the Borrowers and loans in arrears,and paynent maturity thereof. Às soon as a l-oan appears for the first time inthe document, Management sha1l notify the Borrower and the Guarantor about thesituation of arrears and sanctions applicable in case of default in paynent.

I I

APplication of Sanctions

5.15 The ÀDB Group'S sanctions are not as harsh as those of other ItDBs.The third sanction whose inpact is nost telling on the Borrower is onlyapplied after 9 npnths, As for Ehe first sanction, its applicat,ion afterthree rcnths has a very minimal dissuasive effect; i t is not surprisi.ng,therefore, to see an accumulation of arrears of less than 3 npnths and anincreasing number of borrowers with arrears of 3 to 6 rnonths. Managernentproposes to make sanctions rpre strict in order Eo inprove the recoveri/ rateand limil lhe anount of arrears that reach bhe 9 month maturity period.

6.16 Proposal 8: Arrears of 30 or more days (sanction No.l)Fifteen (15) days after the due date, ADB Management sha1l notify bhe

Borrorder and the Guarantor of the risk of sanctions should the paynent of thearrears not be made before a given date (30 days from the due dabe). I f thearrears attain a rnaturity of 30 or rûore days, the Borrower shall be 1iab1e tosuspension of signature of all new loan Àgreements. ADB l4anagenent shal1inrnediately inform the Borrower and the Guarantor of bhêse measures. Iflfifteen (I5) days later there is still no payment, the suspension of signingof all new loan Agreements shall be extended to the Guarantor. ÀDB Managementshall inrnediately inform the Guarantor accordingly.

6.L7 Proposal 9: Arrears of 90 or more days (sanction no. 2)At the expiration of 60 days from the due date, I'tanagement shal1

inform the Borrower and the Guarantor of sanctions which they will suffershould the arrears not be settled 90 days from the due date. If, at thisdate, the arrears have not been settled, the Borrov;er and the Guarantor shallbe l iable to:

a) suspension of the subnnission of new loans for the Boards ofDirectorsr approval;

b) suspension of further disbursemenÈ of the loan in arrears.

6.18 Proposal l0: Arrears of 120 or more davs (sanction no.3)As soon as the arrears attain a maturiLy period of I2A days,

Management shall inforn the Borrower and the Guarantor of sanctions applicableif no settlement is made 180 days after the due date. If the arrears attain amaturity period of 180 days, the Borrower and the Guarantor shall be liab1e to:

the suspension of all dish:rsement of loans granted by the ADBGrouP.

Cross-Default

6.19 Proposal 11: The cross-default rule existing between the three ADBGroup institutions shall only come into effect on the application of sanctionno.3: total suspension of all disbursement of loans granted by one of theinst i tu t ions.

Suspension of Disbursements

6.20 Up to the end of 1988, Management did not authorize the receipt ofapplications reaching ADB headquarters or one of its regional offices afterthe sanction on the suspension of disbursements had come into effect. fn arecent Board decision, however, Management was requested to consiCer, not t.hedate of receipt of the application but the date that it was dispatched. Inview of the postal constraints in Africa, the average effect of this neasureis to give the Borrower about one nonthts advantage. However, this measurel -eads to : -

T2

a) an increase in administrative dubies since the registering of anew reference date is no longer automatic. A new kind ofnxrnitoring is required.

b) difficulty in defining the date of dispatch since that could be:

postal for applications sent by posL;

:|;'ff;"il ;X" "i:#ffJ i".i""i"1":'i::T::i:" not arlalso the date on the disbursement application.

Added to this confusion is the possibility of irregularities arising Eronletters post-dated to avoid the suspension of disbursements.

6.2I Whatever the reference date maintained for the srspension ofdisbursements, this sanction without doubt puts enterprises in a difficultsituation and creates tension between the various participants in bheirplementation of projects and programmes financed by the Bank Group.Management is of the view that a solution that would enable the acceleratiànof disbursements by reducing the period between the procurement of goods andservices and palment should be found.

6.22 Proposal 12: In order to perfectly master the suspension system,Managernent proposes that the non-authorization of applications received aftersanctions might have come into effect should be reinstituted, subject toconditions subsequently enunerated and protrrcsal no.i3 hereunder.

6.23 Proposal 13: Management proposes that payment should be authorizedfor works carried out and services rendered as well as for supplies made orordered before the date that the suqpension of disbursements. However,applications for such payment shall reach the ADB within 60 days of the cominginto effect of sanctions.

Lifting of Sanctions

6.24 Proposal 14: Sanctions sha1l be automatically lifted on the dayfollowing confirmation of the full payment of arrears.

Multinational Loans

6.25 Proposal 15: The exetçtion notwithstanding, arrears on multinationalloans shall res.rlt in the application of sanctions to Borrowers and Guarantors.

ExenpEions

6.26 The Board of Directors recently approved the exenption from sanctionsof technical assistance services which include training fees and fellowshipssince their interruption would be unpleasant to individuals; TAF loans sfraltbe exenpt from the effect of sanctions.

6.27 C;enerally, the effect on people on fellowship or undergoing trainingfinanced by the ADB Group is essentially individual in nature. Management iitherefore of the view that paynent of all training fees and fellowships sha1lcontinue uninterrupted.

6,28 fn regard topre-investment studies,procurement of goods and

loans intended nainly for carrying out ofinsti tut ional support, etc., and for which the

services from other enterprises is not st ipulated as

1 3

a condiLion for irçlementating technical assistance activities andconsultancies, Managenent is of the view thaL for loans financed from TAVTRFresources, exenption shall be made on such erpenses by adding thereto minorprocurements of suptrrcrt equiprnent (vehicles, corçuters) .

6.29 On the other hand, for technical assistance staff whose activit iescentre almost entirely on the irplementation of works or Ehe procurerneng cfcerlain supplies, Management is of the view bhat in such cases proposal Lzhereabove concerning works and services inplenrented sha11 apply sincetechnical assistance activities and those concerning other enterprises are infact joint goods and services. The non-inplementation of works by otherenterprises logically follows the non-irçlemenLation of works by technicalassistance services.

6.30 Proposal 16: Exerption from sanctj.ons: Generally, sanctions shalinot be applied in the case of:

a) special commitrnents (repayrent guaranties or others) enteredinto by the ADB Group. However, the ADB Group shall make noamendments whatever to the special commitments after the cominginto effect of the sanction on the suq>ension of disbursements;

b) technical assistance services and consultancy for pre-investmentstudies, institutionar suptrnrt financed v/ith TAVTAF, ADF cr ÀDBnon-refundable or conditionally refundable resourcesi

c) rultinational projects and proÇtafihes;

d) training fees and fellowships;

e) expenses refundable to the ADB Grorrp from bilateral or otherresources after the confirmation of disbursement or onapplication from the ADB Group;

f) when a Borrowerfs arrears shall be eq:al to or less than BUA2 5 , 0 0 0 .

cost overruns

6.31 Generally, the ADB Groupfrom Ehe application of sanctions.exceptional cases study andreconnnendations for bhe financinq of

does not finance cost overruns resultingHowever, the Board of Directors could in

take into consideration Managementrscost overruns,

7. CONCLUSION AND RECOMII{ENDATIONS

7.I The 1985 Directives enabled the ADB Group to stem the deteriorationof its portfolio and to reduce the volume of arrears. However, theseDirectives are not enough to turn the si[uation around appreciably.Experience has revealed certain loopholes that should be filled Èhrough theupdating of the policy and procedures on bhe recovery of arrears.

7.2 The new policy should safeguard the financial credibility of the ADBGroup while at the same time naintaining a positive resourCe flows toborrowing countries. It should also reduce the negative effects borne byenterprises inplementing projects and prograrrunes financed by the ADB croup.Through IIlf,re systematic information, it should help boriowers to betterprogralnme their repayments. Consequently, Management recommends that bheBoards of Directors approve the new policy and procedures on the recovery ofarrears attached hereto which contain the proposal.s rade in this document.

I 4

Hov/ever, Management is of the view that this policy will zubseqr:ently befoll-owed wit,h a report and proposals on countries in substantial arrears overa very long period (rpre than 12 npnths) - liberia, the Cornoros, Sierra Leone,Congo, Benin, etc. with a view to helping resolve this problem bycontrih-tting to Ehe introduction of debt-service management and better Ioansprograrrning in these countries in order to reduce the financial and economicrisks associated with certain interventions.

1 5

Table I

Table I.1

ADBÀDFNIF

Table 1.2

Table 1.3

32.4L1 . 4 12 . 5 I

37 .081 . 6 42 . 0 1

1987

q 7 R ]

1 . 9 02 , 9 4

1987

Page.1

r988

73 .3s2 . 8 23 . 2 5

1988

2 .0131 . 7 s 0

6 3

1988

3 . 6 t0 . t6 r3 . 2 Ë

Evolution of Arrears as at 3I/I2

1985 1986

Evolution of loans outstanding as at 3

(in BUA mil l ion)

198s 1986

ADBADFNIF

1 . 0 2 589850

198s

3 . 2 Z0 . 1 6 t5 . 0 r

1 . 5 4 91 . 4 4 1

s9

1 . 2 5 51 . 1 4 5

54

Arrears Rate as at 3L/I2( a )

(in BUA mill ion)

1986

3 . 0 t0 . 1 4 r3 . 7 \

1987

ADBADFNIF

3 . 7 r0 .13t5 . 0 r

t6

Table 2

Paqe 2

1 3 . 0 0 ( 4 0 r ) 3 2 . 6 0 ( r 0 o r )4 0 . 1 6 ( s 5 r ) 7 3 . 3 s ( 1 0 0 E )

1 . 3 6 ( 5 4 r ) 2 . 5 L ( r 0 0 r )1 . 7 0 ( 5 2 t ) 3 . 2 5 ( r 0 0 t )

Distr ibrrt ion of ar!?ar?, as ?!= 3l l12 qccording to paynent maturiEies(in BUA million and percentagil

Table 2.1 : ÀDB

5 nnnths 9 or more npnths TotaL

19851988

1 9 . 6 0 ( 6 0 r )3 3 . 1 9 ( 4 s r )

1 . 1 s ( 4 6 r )1 . s 5 ( 4 8 8 )

TAbIE 2.2 : ADF

6 months 9 or more npn[hs Totâl

1 9 8 5 0 . 9 8 ( 7 0 r ) 0 . 4 3 ( 3 0 t ) 1 . 4 1 ( 1 0 0 r )1 9 8 8 1 . 8 8 ( 6 7 r ) 0 . e 3 ( 3 3 r ) 2 . 8 2 ( 1 0 0 r )

Table 2.3 : NIF 6 months 9 or more rpnths Total

198s1988

L7

Table 3

Table 3.1

Table 3.2 :

Àrrears at thebeginning of the yearFigure for theyear

Total dueMinus paymentArrears end ofyear

1985

7 9 . 7 z85.2 z5 6 . 5 r

198s

1986

8 2 . 9 t84 .7 z7 6 . 1 r

(in eUe mill ion)

1986

32.4I

193 .73

216 .L4I 7 9 . 0 63 7 . 0 8

g 2 . g g=======

7 7 . 7é b . 5

66 .9

3 7 . 0 9

2 2 2 . 4 4

259.52'20L.7I

5 7 . 9 1

7 7 . 7 *=======

Page.3

r 9 8 8

7 9 . 0é + . I7 0 . 0

1988

s 7 . 8 1

293.56

3s1 .372 7 7 . 9 4

73 .35

-

7 9 . 0 z=======

1987

ÀDBADFNTF

IIB

II?

ADB

19.73

1 4 0 . 1 9

r5g.g2I 2 7 . 5 I32.4r

Recovery Rate 7 9 . 7 z=======

{:+

::?'�'.:;:,+

1987

1 8

Table 3.3 :

Arrears at thebeginning of yearFigures for Èheyear

Total dueMinus PaymentArrears at Eheend of year

Recovery rate

Table 3.4

Arrears at theend of yearFigures for theyear

Total dueMinus palzmentArrears at theend of year

Recovery rate

ADFPage 3 b

1988198s

1 . 5 6

8 . 0 1

(in BUÀ mill ion)

1986

1 . 4 1

9 . 3 6

r0.77 _.9 . 1 3L . 6 4

84 .7 Z

(in gUe mil l ion)

1986

2 . 5 I

5 . 9 0

8 . 4 16 . 4 02 . 0 L

7 6 . 1 t

1987

I . 6 4

L 2 . 4 5

I . 9 0

1 6 . 5 5

1 8 . 4 51 5 . 6 3

2 . 8 2

84.7 *

r988

2 . 9 4

7 . 9 0

1 0 . 8 47 . 5 93 . 2 5

7 0 . 0 r

9 . 5 78 . 1 61 . 4 1

1 4 . 0 9L 2 . L 9r . 9 0

8 5 . 2 t

: NIF

8 6 . 5 t

1987

2 . 0 1

6 . 8 9

8 . 9 05 . 9 62 . 9 4

6 5 . 9 t

1985

1 . 1 6

4 . 6 9

3 . 2 53 . 2 52 . 5 L

5 6 . 5 t

19

Paqe 4Table 4

Table 4.1

19851988

r9851988

Distribution of countries as at 3I/tZ accordi

6 months27 countries + Multinationals26 countries + I'lultinationals

Table 4.2 : ADB

6 mtnths

matur i t ies

9 or rnore rnonthscountries + Mult inationalscountries + l"lultinationals

9 or more nronths

countries + lrlultinationalscountries + Mult inationals

9 or more npnths%

countriescountries

NIF

countries ( 82country (100

139

97

83

++

* )s )

31-L

6+

272 3

countriescountries

+ Multinationals+ Mult inationals

Table 4.3 : ADF

6 nxrnths

1 615

19851988

Table 4.4 : NIF

ADB

countr ies (86 t )countr ies (94 g)

MultinationalsMultinationals

ADF

widely q>read3 countr ies (100t)

countriescountries

L2l 0

198s1988

5 months 9 or more rpnths

countries + MulLinationals 7 countries + IrtulÈinationalscountries + Multinationals 1 country + Multinationals

Table 4.5

Concentration of the longest arrears (9 or more npnths)

19851988

a ^zv

Evolution of the number of counfries under sanctions accordingto malurity dat.e

Number of sanctionADB

lsffil 3rdADF

lF-zrfr 3rd

11T4I1l 6

NIFIs t 2nd 3rd

I22nd maturityIst maturity2nd maturitylst maturityZnd maturity

19861987198719881988

31z o313 029

L4I

1010

T21 3l 31 5L4

1818201 0

23

8 74 37 28 1

10

136R

9

22252926