ADB prioritises poverty

The Asian Development Bank is proud of its record in China. Its loan portfolio is good and it has managed to avoid controversy of the sort that the World Bank was recently mired in after its involvement in a project to resettle thou-sands of Han Chinese to a predominantly Tibetan area of western Qinghai province.

The ADB was founded in 1966 but it was not until Deng Xiaoping's economic reforms were well established 20 years later that China became a member of the development institution. It has quickly made up for lost time. In 1994 China overtook Indonesia to become the Bank's largest borrower. The Bank now lends China about LJS$ lbn a year, or one-fifth of its total annual funding. Cumulative lending to China by the end of 2000 exceeded US$ l0bn.

Late opening
A resident mission in Beijing was established in June 2000, and with 27 staff this is now one of the Bank's largest overseas offices. Mr Bruce Murray, the ADB's resident representative in China, admits that the Bank was late to establish a physical presence in the country. He says this was because, under a previous policy, the ADB only set up an office in those countries that were experiencing portfolio management problems, such as Bangladesh or Indonesia. Boasting the Bank's best performing portfolio, China apparently had no need for a resident mission.

However, Mr. Bill Thomson, a former vice president of the ADB who was involved in China's entry into the organisation, remembers things differently. He says there was a technical dispute between the two sides, based on the Ministry of Finance's refusal to release local currency contributions. The ministry became the lead domestic agency for the ADB in 1998. "They didn't want to play by the rules," he says, adding that the ADB wouldn't change its rules simply to accommodate the Chinese.

Whatever the reason, a resident mission was established in Beijing just over a year ago, shortly after the Bank announced a shift in its objectives. under its new president Tadao Chino. The main goal is now poverty reduction for China, this means halving the incidence of poverty by 2015. Even though the number of Chinese living in poverty has plunged from 131m in 1986, there are still 20m in poverty according to government statistics – and many more living on less than a dollar a day, the yardstick advocated by the World Bank. The ADB's other main goals – promoting economic growth, supporting human development, protecting the environment and improving the status of women – are now being pursued in ways that con-tribute to reducing poverty.

In China, the ADB has shifted its focus in recent years by taking on a greater number of smaller-scale projects designed to lift people out of poverty. For example, it is involved in a variety of agricultural development programmes designed to lift farmers out of poverty in non-coastal provinces such as Yunnan and Henan.

However, there are relatively few of these schemes up and running. One reason is Beijing's unwillingness to borrow money to sup-port projects that will not generate revenue. "China takes very seriously the fact that, as a borrower, it is responsible for repayment," explains Murray. "It is difficult to make health and education [commercially] viable."

Fundamental shift in policy?
Critics say that the new emphasis does not amount to a fundamental shift in policy and instead is little more than a re-labelling of traditional infrastructure loans. "It's old wine in new bottles," says Mr. Nick Young, the Beijing-based editor of China Development Briefing, a bi-monthly publication for inter-national development agencies. He believes it will be difficult to make poverty reduction the overarching objective of the Bank's operations but he does concede that it is paying more attention to the details in ensuring that projects reach poor areas.

Thomson is also critical of the new policy, describing it as little more than window dressing. He argues that, as a bank, the ADB's primary business should not be poverty reduction. He is adamant that there was little wrong with the old system when the emphasis was almost exclusively on infrastructure projects.

"A few years ago [the ADB helped build] a railway in Guangdong province that had an incredible impact on poverty in that it opened up huge areas of farmland," Thomson recalls. "We also built a couple of bridges from Puxi to Pudong in Shanghai, when Pudong was just wasteland."

Some two-thirds of all lending is still directed to infrastructure projects and utilities. From the Bank's perspective, it is some-what easier to structure projects in infrastructure rather than smaller-scale schemes designed to provide sustainable solutions that will benefit the rural poor.

Only three percent of lending goes on social issues, a proportion that Murray would like to see grow. The fact that the ADB's lending rate is very close to the market rate prevents more loans going to social areas. China does not qualify for ADB soft loans, which are reserved for poorer countries.

With China receiving so much foreign direct investment, the Bank shuns manufacturing industry, leaving this to the private sector. Within infrastructure the emphasis is on `demonstration' schemes, such as greenfield projects that foreign investors had previously shunned because they were considered too risky. For example, the Bank is funding five wind-power stations that are intended to demonstrate the viability of renewable forms of energy.

It was also involved in China's first competitive bid for a build-operate-transfer (BOT) water supply project in Chengdu, Sichuan province. The contract, won by Marubeni and Vivendi, will start next year. Murray is particularly pleased with this project, which was arranged at a time of general investor uncertainty in the wake of the Asian financial crisis. "If the risks are mitigated, commercial companies will come in," he says.

About five percent of ADB lending is directed to the financial sector. It has taken a US$20m equity position in Everbright Bank and Xiamen International Bank. The Chinese government has classified the ADB as a foreign financial institution, which allows it to get around the prohibition on foreign banks owning equity in Chinese banks. The ADB has a seat on the board of these banks and is looking to introduce best inter-national practice. Although it is sometimes outvoted in board meetings – for example when it took a stand against what it regarded as a `high' dividend – the Bank is at least able to get its message across.

Focus on transport
Reducing transport bottlenecks remains a major part of the Bank's project work. "Good infrastructure is a necessary condition for reducing poverty," argues Murray. How-ever, it can be difficult to structure deals in this area. For example, it decided to with-draw from a BOT road project in 1997 because of the complex land acquisition issues and the long time it often takes for traffic levels to grow and therefore revenue to be generated.

The aim is to select infrastructure projects that bring real improvements to the poor, particularly in rural areas. For example, an expressway must link with rural roads to help farmers bring their produce to market and give them better access to schools and social 'services. Likewise, rail projects will include branch lines and power transmission projects will be expected to bring power to rural areas.

With most of China's poor living in central and western regions, 70 percent of the ADB's projects are now located here. It is committed to directing all, or nearly all, of its infrastructure lending over the next three years to central and western regions. This is in sharp contrast to the 1987-96 period when 60 percent of its lending was directed to coastal areas. This shift chimes with the government's western development strategy, but it does not mean that the Bank has been passively following Beijing's lead. Concerned about widening income disparities, it has been trying to persuade the central government to do more for the interior and open it up to inward investment.

In the area of the environment, the ADB is working to support sustainable growth and to cut urban air and water pollution. It has also started work on programmes to stem land degradation and halt the march of desertification in arid western regions such as Gansu. A soil conservation project in Fujian provinceand an agriculture development project in Henan are examples of the bank trying to achieve the twin goals of benefiting the rural poor and improving the environment.

In future, more lending is likely to be directed towards building pipelines and water supply and wastewater treatment projects. It is also likely to build on its air pollution control initiatives, by encouraging the use of clean coal technology and promoting energy efficiency among industrial companies, which are responsible for most pollutants in the atmosphere.

To achieve its new objectives and ensure that resources are used efficiently, resident missions have been tasked to work more closely with the host government, non-government organisations (NGOs) and other donors. As part of an outreach strategy in China, the ADB has instigated quarterly meetings for international and some domes-tic NGOs to exchange information. Murray says the ADB wants to learn more about NGOs, which he says are now emerging in China in the true sense, and to explore ways of getting them involved in project design.

However, one person who attended a quarterly meeting complained of a patronising attitude by Bank officials towards NGO participants. He says the ADB appeared to be more interested in reporting NGO participation to its head office than in actually listening to what they had to say.

Thomson is also skeptical about growing contact with these groups. "The ADB would like to work with these people, but it's still a bank," says Thomson. "The NGOs don't have all the answers, although they may have some of them."

While the ADB is best known as a project lender, it has also played an important behind-the-scenes role in shaping law and policy decisions in China. This is certainly an area where the Bank believes it can make a real difference to the poor and disadvantaged. For example, it made amendments to the Land Administration Law, which became effective in 1999 and covers the resettlement of people. It states that all resettlement plans should be made public and affected residents must be consulted. It also provides an appeals process to hear grievances.

In other areas, the Bank been helping draft social security, securities and bankruptcy laws and is providing technical assistance to help strengthen the China Insurance Regulatory Commission and China Securities Regulatory Commission. It has also helped to draft a trust law to manage pension funds. The law, which was passed on April 30, begins to develop a legal framework to harness the private sector.

"Over the next 20 years, the private sector will grow very rapidly and China will have completed its transition to a market economy," says Murray. More lending will be directed to private companies in the next three years, and more resources will be devoted to improve the legal environment for the private sector.

Last October, the ADB put US$25m into a closed venture capital fund for small and medium-sized Chinese enterprises in partnership with New World Group of Hong Kong and Liberty Financial Group of the US. This was the first time the ADB had contributed to a fund with a specific focus on China's private sector. While professional fund managers identify the companies to invest in, the ADB's aim is to bring in best international practice into management, such as good governance and financial reporting.