ADB Annual Report 2005

8/7/2019 ADB Annual Report 2005

1/273

1

2005 ANNUAL REPORT


2/273

2

The Record(amounts in $ million)

19662005 2002 2003 2004 2005

OPERATIONAL ACTIVITIESLENDING (amount) 116,040 a 5,658 a 6,085 5,239 b 5,797

Number of Projects c 1,940 70 66 63 64Ordinary Capital Resources (OCR) Loans (amount) 84,630 b 4,008 4,706 3,997 b 4,421

Number of Loans 1,093 35 37 32 32

Disbursements (amount) 56,377 3,067 2,688 2,508 3,498Asian Development Fund (ADF) Loans (amount) 31,411 1,650 1,379 1,242 1,376Number of Loans 1,105 53 47 47 40Disbursements (amount) 22,118 1,136 1,128 1,055 1,247

A. Government and Government-guaranteed Loans (amount) 113,648 5,548 5,918 4,947 5,261Number of Projects c 1,846 67 62 58 58

OCR Loans (amount) 82,252 3,898 4,539 3,705 3,885Number of Loans 1,000 32 33 27 25Disbursements (amount) 54,945 3,011 2,575 2,399 3,294

ADF Loans (amount) 31,396 1,650 1,379 1,242 1,376Number of Loans 1,100 53 47 47 40Disbursements (amount) 22,103 1,136 1,128 1,055 1,247

B. Private Sector Loans (amount) 2,392 110 167 293 536Number of Projects 94 3 4 5 7

OCR Loans (amount) 2,378 b 110 167 293 b 536Number of Loans 93 b 3 4 5 b 7Disbursements (amount) 1,432 55 113 109 204

ADF Loans (amount) 14 Number of Loans 5 Disbursements (amount) 14

EQUITY INVESTMENT (amount) 1,121 b 36 36 164 b 217Number of Investments 137 b 4 3 11 b 10

EQUITY UNDERWRITING (amount) 40 Number of Commitments 6

GUARANTEES 3,166 882 240 10 68Number of Projects 25 4 3 1 2Political Risk Guarantee (amount) 763 382 70 10 50

Number of Projects 9 3 1 1 1Partial Credit Guarantee ( amount ) 2,403 b 500 170 0 b 18

Number of Projects 16 b 1 2 0 b 1

GRANTS (amount) 2,065 178 454 104 1,151Number of Projects 151 27 12 27 51

TECHNICAL ASSISTANCE (amount) 2,782 b 179 175 195 b 199

Number of Projects 5,923 b 323 312 b 321 b 299MULTITRANCHE FINANCING FACILITIESd (amount) 1,520 0 0 0 1,520

Number of Facilities 2 0 0 0 2

COFINANCING e (amount) 49,492 2,713 2,563 2,437 7,385Number of Projects 692 33 28 32 34

RESOURCESOrdinary Capital Resources

Authorized Capital (at end of period) 50,163 47,288 51,997 54,162 50,163Subscribed Capital (at end of period) 50,163 47,234 51,997 54,162 50,163Borrowings (gross) 59,553 6,145 4,141 1,629 4,230Outstanding Debt (at end of period) 24,454 26,324 26,359 24,212 24,454Ordinary Reserve (at end of period) 8,957 8,470 8,892 8,865 8,957

Special Reserve (at end of period) 194 184 186 190 194Gross Revenue 34,010 1,979 1,657 1,313 1,432Net Income after Appropriation of Commissions/ 11,478 978 436 427 105

Guarantee Fees to Special Reserve

Special Funds ResourcesAsian Development Fund Total Resources (at end of period) 27,605 22,853 26,759 29,571 27,605

Technical Assistance Special Fund Total Resources (at end of period) 1,257 920 1,006 1,062 1,257

Japan Special FundRegular and Supplementary Contributions ( at end of period ) 904 836 853 877 904Asian Currency Crisis Support Facility 241 241 241 241 241

ADB Institute Special Fund Total Resources ( at end of period ) 110 71 83 96 110

Asian Tsunami Fund Total Resources 565 565

Pakistan Earthquake Fund Total Resources 85 85

Nil .a Totals may not add due to rounding.b Adjusted to exclude terminated loans/guarantees/equity investments/technical assistance.c Projects with multiple loans are counted once. Cumulative number of projects excludes supplementary loans.d Multitranche financing facilities are facilities that will give rise to loans. Loans arising from the facilities are included under loans when they are approved by ADB.e These are non-ADB funds generated by ADBs cofinancing operations for ADB projects.


3/273

3

Asian Development Bank 2005 Annual Report

Contents

VOLUME 1

Chairmans Message 2

Board of Directors Report 4

Operations 30

East and Central Asia 46

Mekong 60

Pacific 72

South Asia 82

Southeast Asia 94

Appendixes 104

Contact Addresses 114


4/273

4

ADB: Relevant, Responsive,and Results-Focused

Tragedy on a staggering scale was arecurrent theme in Asia during 2005.The year started with the internationalcommunity rushing to help survivors

of the Indian Ocean tsunami and ended withthe huge humanitarian task of shelteringthe millions whose homes were destroyedin October by the South Asia earthquake.

Both catastrophes and the threat of avianflu throughout the year illustrated Asia and thePacific's vulnerability to events that cannot becontained within national borders.

At the same time, even as the region asa whole has become a formidable player in theglobal economy, large numbers of poor peopleand growing inequality make evident thatnot all are benefiting from strong economicgrowth. Many countries are unlikely to reachthe non-income Millennium DevelopmentGoals by 2015. Clearly, poverty reductionremains the regions key challenge.

The Asian Development Bank faces theseand other emerging issues in its developingmember countries with hardened resolve.We must pursue our vision of an Asia andPacific region free of poverty amidst a new eraof development in which nations, economies,and societies are becoming more interdepen-dent, more integrated. We will strive to helpthe region and the countries become moreinclusive, with the benefits of dynamic growthspread more equitably.

ADB sees regional cooperation andintegration as a powerful tool that cancomplement national-level efforts aimed atpoverty reduction and shaping a better future.In 2005, our efforts were rewarded as theCentral Asian nations and the countries that

share the Mekong River started to benefit fromcoordinated cross-border transport and energyinfrastructure plans. Recently too, with ADBshelp, these countries began to work togetherto address issues that transcend borders,such as environmental and health threats.

In 2005, ADB established the Officeof Regional Economic Integration to furtherstrengthen regional cooperation andintegration initiatives and to ensure thatthey are coherent and strategically focused.

Cooperation with other developmentpartners also deepened over the course of theyear, in keeping with the commitment made inMarch at the high-level forum at which morethan 100 countries and major internationalagencies endorsed the Paris Declaration on AidEffectiveness. The international community alsoreaffirmed its commitment to poverty reductionand the Millennium Development Goals at theUnited Nations Millennium+5 Summit inSeptember in New York. ADB contributed toand participated in both these processes.

We must pursue our visionof an Asia and Pacific regionfree of poverty amidst a newera of development in whichnations, economies, andsocieties are becomingmore interdependent,more integrated

ChairmansMessage

2

President Kuroda visits women's hospital in Jaipur,India, refurbished with ADB assistance


5/273

5

ADB collaborated with development partnersto deliver quick recovery and reconstructionassistance to communities devastated by thetsunami and the earthquake, and joined theWorld Health Organization and the Food andAgriculture Organization in the fight to stopthe spread of avian flu.

A series of internal changes and realign-ments over the year reshaped ADB to becomemore relevant, responsive, and results-focusedin its operations. Under our Reform Agenda,we are improving policies and strategies,seeking to manage for development results,refining business processes, expandingknowledge management, and putting in placenew procedures to improve human resources.

Better systems for planning, monitoring,and evaluation are being designed to track ADB performance at every level: the country level,the institutional level, and globally as part ofa network of development institutions. Results-based country strategies and programs have beenintroduced for all developing member countries.And a new Public Communications Policypromises much more transparency andaccountability to ADBs stakeholders.

An array of financing instruments offeredunder the Innovation andEfficiency Initiative, mean-while, aims at givingdeveloping membercountries greater flexibilityin meeting their investmentneeds. A sharper focus onportfolio management andproject implementation has

produced an increase inpublic sector loan disburse-ment, while projects at risk decline steadily.

To manage the risksinherent in developmentwork, ADB moved last yearto a centralized risk manage-ment structure through thenew Risk Management Unit.

ADB will continue toplay a major role in the fightagainst poverty in the Asiaand Pacific region. ADB has

made a clear commitmentto raise the standards of itsoperations in keeping withdynamic forces at work inthe region.

Armed with its clearerstrategic priorities, criticalfocus on results, a moreselective approach to

ADB has made a clearcommitment to raise the

standards of its operationsin keeping with dynamicforces at work in the region

Large numbers of poor people and growing inequality make clear that not all are benefitingfrom strong economic growth

assistance and even more collaboration withdevelopment partners the Medium-TermStrategy II, which will be launched soon, shouldimprove the effectiveness of operations overthe coming years. As ADB moves toward its5 th decade as the regions development partner,it does so with the confidence that it isincreasingly well placed to meet the emergingchallenges of its developing members, strivingto ensure that all have the opportunity toparticipate in, contribute to, and benefit fromsustained economic growth. With the supportand commitment of the staff and all our membersand partners, it is my privilege to continue toserve ADB and to support its role in fosteringpeace and prosperity in Asia and the Pacific.

3


6/273

4

BOARDOF

DIRECTORS REPORT Board of

DirectorsReportImproving ADBs Effectiveness

BOARDOF

DIRECTORS REPORT

Economic growth was strong in large parts of theregion in 2005 despite the tsunami andearthquake disasters, avian flu threat, andhigher oil prices. Many countries are no longermerely aspiring to be part of the global

economy but have moved to its center.Judged by purchasing power parity, Asia and the Pacific

now makes up 30% of global gross domestic product (GDP),while the proportion of population surviving on $1 a day orless has come down from about 34% in 1990 to 19% in 2003,or some 620 million people.

But Asia and the Pacific is still home to fully two thirdsof the worlds poor more than any other region. Thoseliving on less than $2 a day still number about 1.9 billion, ornearly a third of the worlds population. Clearly, reducingpoverty must continue to be the guiding priority of the AsianDevelopment Bank (ADB) in the years ahead.

ADB remains firmly committed to helping itsdeveloping member countries (DMCs) and the entireregion achieve the Millennium Development Goals(MDGs). Meeting all these goals by 2015 will be achallenge and depends on the actions of the developingcountries themselves, as well as those of all development

partners. ADB will play its part to strengthen thesepartnerships, and actively monitors progress.While the region as a whole is making good progress

toward meeting the income poverty target of the first goal(to eradicate extreme poverty and hunger), several countriesmay fall short. The region is also at considerable risk of failing to reach the non-income goals, with available dataindicating that 27 of ADBs DMCs are at risk of notachieving 25% or more of the indicators.

More action is needed in the region toachieve womens empowerment andgender equality in tertiary education

4


7/273

5

caption goes here


8/273

6

BOARDOF

DIRECTORS REPORT The greatest concerns are in the health, water supply

and sanitation, primary education, and environmentsectors. Additionally, more action is needed to achievegender equality in tertiary education and womensempowerment.

Throughout the region, ADB must ensure that all itswork is aimed at reducing poverty its overriding purpose.

This means intervening either directly by includingstrong, pro-poor elements in all programs and projectsor indirectly, by fostering pro-poor sustainable economicgrowth in its DMCs.

In his speech at the 2005 Annual Meeting inIstanbul, ADB President Haruhiko Kuroda called on ADBto be more relevant, more responsive, and more focused onresults so it can meet the challenges and demands of theborrowing members in achieving the MDGs.

The following presents some steps ADB is taking toensure it is more effective and efficient in carrying out itswork. Subsequent chapters of this report look at the work

ADB continued or launched in 2005 to help meet thegoals in each of its operational subregions.

Improving ADBs EffectivenessPORTFOLIO PERFORMANCE AND RESULTSThe Annual Report on Loan and Technical Assistance PortfolioPerformance for 2004 from the Operations EvaluationDepartment was well received by the ADB Board, whichfound that the report provided hard evidence and numbersto identify several important strategic challenges.

These findings were generally consistent with those

of other efforts, including the consultation missions for thepartnership framework for middle-income ordinary capitalresources (OCR) countries, and the independent assess-ment of the effectiveness of the reorganization of ADBand the Innovation and Efficiency Initiative (see page 11).

Among the findings, the analyses indicated thatwhen the increased lending of 19971998 in response tothe Asian financial crisis was factored out, the annualOCR and Asian Development Fund (ADF) loan approvalshad stagnated at about $5.2 billion a year in the pastdecade, and OCR disbursements had declined steadily.

Income from OCR lending fell by 43% from 2001 to2004, resulting in a 38% drop in ADBs gross annualincome.

Some 86% of loan projects in the past 10 yearsexperienced delays that required at least one extensionof the loan closing date; 60% required extensions of morethan 1 year, with the average overall extension about2 years.

Many borrowers struggled to meet conditions forsecond and subsequent program loan releases, resultingin a carryover of about $1.25 billion in delayed tranchereleases at the end of 2005. In addition, lending was

ADB President Haruhiko Kurodacalled on ADB to be more relevant,more responsive, and more focusedon results


9/273

7

heavily concentrated, with 8 DMCs receiving 83% of thetotal, while the 23 smallest borrowers received only 9%.

These broad trends supported the contention thatADBs traditional products were no longer meeting many of the needs of its key clients, and that new products andless arduous procedures were needed to improve theeffectiveness of its development activities.

During 19982004, the total number of ongoingtechnical assistance grants in ADBs portfolio increasedby 53%, while the net amount of the technical assistanceportfolio increased by just 42%. There are indications thatthe technical assistance portfolio growth has exceededADBs capacity to manage it effectively. The proportion of technical assistance activities visited by a review missionhas fallen steadily each year from a high of 66% in 1998 toa low of 25% in 2004. And despite the significant growthin the technical assistance portfolio, the average annualnumber of staff days on technical assistance reviewmissions remained about the same during 19982004.

These issues are being addressed under ADBs

Reform Agenda, through the Innovation and Efficiency Initiative and other programs. New products, such as themultitranche financing facility, subsovereign andnonsovereign public sector financing facility, local currency lending, refinancing and retrofinancing facility, andfinancing syndications and risk-sharing agreements, arebeing introduced, and the administration of more projects

is being delegated to ADBs country offices to improveoversight and reduce response times.The reports direct impacts are largely internal to

ADB. For the first time, the Development EffectivenessCommittee requested Management to prepare an actionplan to address the findings of an Operations EvaluationDepartment report. Management formed a task force toprepare an action plan to address the issues identified inthe report at the corporate level. The larger and moreimportant indirect impacts of this report will be to stimu-late improvements in ADBs performance in administeringthe portfolio, and better project delivery for ADBs DMCs.

ASSESSING PROJECT QUALITY The reforms under way throughout ADBs operations areequally important in its Operations Evaluation Department,where changes have started to eventually turn the 2005Annual Evaluation Review into a review of developmentresults, rather than a review of evaluation activities.

In comparison with its predecessors, the 2005 reviewdiffered in structure, content, and analytical depth. Inparticular, it undertook a retrospective evaluation of ADBspublic sector projects, which account for 84% of cumulativelending, and its conclusions should help ADB improveproject quality and portfolio performance in the future.

In general, the analysis of 968 projects showed thatproject success deteriorated during the 1970s, bottomed

These broad trends supported thecontention that ADBs traditionalproducts were no longer meetingmany of the needs of its key clients,and that new products and lessarduous procedures were neededto improve the effectiveness ofADBs development activities


10/273


11/273

9

ADB must make sure all its programs and projects contain pro-poorelements

Effectiveness Committee recommended further work toimprove sector selectivity and focus on country strategies,

strengthen core technical skills, increase delegation to theresident missions, and strengthen loan and technicalassistance project implementation. The committee notedthat, while past performance in a sector is an importantfactor, other considerations also need to be taken intoaccount, including the borrowers requirements and thepotential impact on poverty reduction.

SPOTLIGHT ON THE ENERGY SECTORThe Operations Evaluation Department chose to put theenergy sector under the spotlight in its 2005 report,because it accounts for 19.7% of cumulative lending and

is going through structural changes in many countries.Overall, energy is one of ADBs best-performing

sectors. Although delays in implementation are the norm,of the 94 evaluated power projects, 76 were rated assuccessful or better, 16 as partly successful, and only 2 as unsuccessful.

ADB assistance has contributed to economicdevelopment by increasing access to electricity and makingthe energy sector more efficient. ADB should continue tosupport power sector reform, sound regulation, tariff reformand cost recovery; development of an enabling environmentfor private sector investment; and finance for both publicand private sector investments in infrastructure.

New and Revised Policiesand ProceduresREFORMING TO REMAIN RELEVANTThe year 2005 was very much a year of transition for ADB:a new president in February, the final year of the currentmedium-term strategy, and many changes implementedthrough its Reform Agenda.

To remain responsive and relevant in the complex

and fast-changing environment and to help ensure thateconomic growth lifts as many lives as possible, ADB hasbeen reforming its processes, policies, and programs. Many changes are being put in place under the plan known asthe Reform Agenda, adopted in 2004, which is makingADB more effective in delivering country-leveldevelopment outcomes and its goal of poverty reduction.

The agenda consists of 19 ADB-wide reform initiativesto deliver five broad outcomes related to internal changes

Of the 94 evaluated power projects,76 were rated as successful or better

and realignment: improving operational policies, strategies,and approaches; mainstreaming Managing for DevelopmentResults; refining organizational process and structure;reinforcing knowledge management; and improvinghuman resources management and staff incentives.

Major milestones were reached on many of theReform Agendas 19 initiatives in 2005, including

adoption of three change proposals under the Innovationand Efficiency Initiative on new financing instrumentsand modalities, local currency loan product, and costsharing and expenditure eligibility; adoption of a reviseddesign and monitoring framework for the projectperformance management systems; establishment of an independent Risk Management Unit and the Officeof Regional Economic Integration; adoption of a newPublic Communications Policy; and adoption of a newperformance management system under the humanresources strategy.

Running like a thread through the organization, ADB

is deepening its application of results-based systems forplanning, monitoring, reporting, and evaluating its actionsto better manage for development results.

MANAGING FOR DEVELOPMENT RESULTSManaging for Development Results at ADB is focused onimproved learning and decision making at the DMC level,within its own institutional framework, and globally aspart of an emerging network of Managing forDevelopment Results institutions and practitioners.

During 2005, for example, ADB produced the firstresults-based annual report on its poverty reductionstrategy. The report assesses progress in advancing the


12/273

10

BOARDOF

DIRECTORS REPORT

strategy, and introduces a results-based monitoring andevaluation framework with clear indicators.

The ADB Board of Directors also endorsed results-based country strategies and programs in Bangladesh,Bhutan, Mongolia, and Philippines, the first batch to jointhe 2004 debut of Nepals pilot results-based country strategy and program. The country strategies and programsfor Fiji Islands, Indonesia, Papua New Guinea, Uzbekistan,and Viet Nam are being developed to include tools toenable those programs to be managed for developmentresults. All are being put together after extensiveconsultations with a broad spectrum of stakeholders inthose countries, making the strategies and programs moreinclusive and reflective than ever before of the needs of the poor.

RESULTS IN COUNTRY STRATEGIESAND PROGRAMSResults-based country strategies and programs put in placea matrix of objectives and clear indicators for monitoringprogress, and provide the flexibility to zero in on thedevelopmental constraints of the member country. Forexample, the Philippine country strategy and programfocuses on the fiscal deficit, the Bangladesh and Nepalcountry strategies and programs deal closely withgovernance, and regional imbalances are important in theViet Nam country strategy and program.

Some countries have more capacity to adopt resultsorientation than others such as large, middle-incomeeconomies more so than smaller, fragile states. As a key action under Managing for Development Results, ADBwill work with its DMCs to help develop their capacity and strengthen country systems for the strategy.

Regionally, the new Pacific Regional Economic

Cooperation Strategy and Program (Pacific Strategy) is alsodesigned to be managed for results and was put togetherafter consultations and extensive workshops withstakeholders concerned.

The Pacific Strategy is a unique document in ADB.It will guide the preparation of all country strategies andprograms in the region and all regional activities. Througha matrix of three objectives and seven key result areas, thestrategy is based on monitoring, reporting, and assessingwork across the region, and, importantly, learning fromthis process for future decision making.

PROJECT PERFORMANCE MANAGEMENT SYSTEMSInadequate planning and insufficient involvement of stakeholders in project preparation are among the mainreasons for project failure. The results-based approach isalso working at the project level, under the ProjectPerformance Management Systems, which centers aroundthe development of improved design and monitoringframeworks for ADB projects, programs, and technicalassistance.

The new frameworks are results-based participatory

Women in Bangladesh learn the basics of microfinance, a key stepto improving their lives (left); ADB must clearly and consistentlydemonstrate effectiveness in its operations (above)

Results-based country strategiesand programs provide theflexibility to zero in on thedevelopmental constraints ofthe member country


13/273

11

instruments that help in conceptualizing, designing,implementing, monitoring, and evaluating projects.The improved use of better frameworks is expected toprovide a consistent structure for all lending and non-lendingoperations; clarify outcomes by harmonizing better withother aid agencies; describe the results chain of a project;and improve the formulation of expected development

outcomes by identifying performance indicators.

GLOBAL AGENDAADB has also played a key role in discussions among themultilateral development banks to mainstream Managingfor Development Results. For example, it initiated jointdevelopment of the multilateral development banksCommon Performance Assessment System, which willcollectively assess each year how five banks are progressingin mainstreaming the Managing for Development Resultsagenda.

Indeed, at the Second High-Level Forum on Aid

Effectiveness in March 2005, delegates from more than100 developed and developing countries and majorinternational agencies endorsed the Paris Declaration onAid Effectiveness. They resolved to take far-reaching andmonitorable actions to reform the ways aid is managed.

ADB and other multilateral development banks alsocommitted to harmonizing operational policies,procedures, and approaches to reduce transaction costs fordonors and developing countries. ADB collaborates withpartners on key economic, sector, and thematic works andincreasingly uses harmonized approaches in developingresults-based country strategies and programs.

INNOVATION AND EFFICIENCY INITIATIVEADB provides both finance and expertise to its clients.Finance includes debt, equity, and guarantees. Expertisecovers sector and thematic areas and is channeled mainly via technical assistance grants. Besides its proximity to themarket and sector/thematic knowledge, ADB also maintainsa close working relationship with countries in the region.

To package these assets for greater developmenteffectiveness, ADB is streamlining some of its businessprocesses and developing new financing instruments andmodalities. The Innovation and Efficiency Initiative hasbeen established for this purpose. It aims to make ADBmore client- and results-oriented, and efficient. Theinitiative covers seven change areas: new financialinstruments, including local currency; better country strategies; simplified business processes; improvedprocurement policies; simplified consulting services;enhanced cost-sharing and expenditure eligibility criteria;and improved safeguard policies.

NEW INSTRUMENTS AND MODALITIESADB is testing five new financing instruments andmodalities to meet client needs in a more efficient andcost-effective manner. The new instruments will beimplemented on a pilot basis for an initial period of 3 years,after which performance, suitability, and outcome will beevaluated. If found to be sound, relevant, and effective,they will be mainstreamed into ADBs operational toolkit.

The new financing instruments are meant to beclient-driven and easy to use. They follow ADBs strategicframework, comply with ADBs Charter, and are aligned

with existing policies and procedures.They are also designed to preserve the institutions

triple A credit rating. An independent Risk ManagementUnit was created in 2005 as a precondition for the pilotinstruments, and to evaluate nonrecourse financing ornonsovereign finance transactions. This unit will coverpublic and private sector operations processed by regionaldepartments, by the Private Sector OperationsDepartment, or by joint teams.

The financing instruments include the following. A multitranche financing facility A multitranche financing facility A multitranche financing facility A multitranche financing facility A multitranche financing facility , similar to, similar to, similar to, similar to, similar to

aaaaa standby and noncontingent line of credit,standby and noncontingent line of credit,standby and noncontingent line of credit,standby and noncontingent line of credit,standby and noncontingent line of credit,relevant for both debt equity and guaranteerelevant for both debt equity and guaranteerelevant for both debt equity and guaranteerelevant for both debt equity and guaranteerelevant for both debt equity and guaranteefinance.finance.finance.finance.finance. The facility targets mainly investmentprograms, large projects, and credit lines. Pilottesting began in 2005 with two transactions,one in India and another in Pakistan.

Direct financing to subsovereign, quasi-Direct financing to subsovereign, quasi-Direct financing to subsovereign, quasi-Direct financing to subsovereign, quasi-Direct financing to subsovereign, quasi-sovereign, and state-owned enterprises.sovereign, and state-owned enterprises.sovereign, and state-owned enterprises.sovereign, and state-owned enterprises.sovereign, and state-owned enterprises. Thisnew instrument responds to the decentralizationprocess taking place in the region and allows ADBto service a new set of clients.

Local currency financing.Local currency financing.Local currency financing.Local currency financing.Local currency financing. This is nowapplicable to both public and private transactions.It addresses the potential mismatch betweenborrowing in foreign currency and having incomestreams in local currency. This is especially relevantin the case of public services, utilities, andinfrastructure projects.

R R R R R efinancing facility efinancing facility efinancing facility efinancing facility efinancing facility ..... This allows ADB to helpwith the restructuring and/or expansion of existingprojects with inappropriate financing plans.

The Innovation and EfficiencyInitiative aims to make ADB moreclient- and results-oriented,and efficient


14/273

12

BOARDOF

DIRECTORS REPORT

New forms of cofinancing.New forms of cofinancing.New forms of cofinancing.New forms of cofinancing.New forms of cofinancing. ADB has seenincreased interest from commercial financialinstitutions in both the private and public sectors

to enter into risk-sharing agreements cofinancingthrough active financial syndications and risk sharing with commercial financing partners. Thenew arrangements will expand cofinancing andpartnership opportunities for all parties involved.

OTHER POLICIES AND STRATEGIESADB has been reviewing and improving its policies,strategies, and approaches to ensure that they are focusedon results and are relevant. In 2005, ADB reviewed itsexisting Private Sector Development Strategy and startedpreparing a new strategy for regional cooperation andintegration. Following the review of its Private SectorDevelopment Strategy, ADB prepared and submitted tothe Board of Directors a new strategic framework. Thisfocuses on enabling environment intervention to create alevel playing field for instruments, mobilization of finance for private sector development, and new ways of financing public goods and services. The framework isaccompanied by an action plan.

Setting the tone for policy review, meanwhile, thePublic Communications Policy was approved. Afterextensive and transparent consultations with interestedgroups around the world, working drafts were posted onthe internet, and extensive comments were publicizedon the ADB intranet. ADB closely considered allcontributions in the final product, which is now settinga progressive tone for the organizations dissemination of knowledge and information (see page 13).

Similar wide-ranging consultations were held as partof the review of the implementation of ADBs governanceand anticorruption policies. ADB circulated the review

conclusions in the draft paper Improving Governance andFighting Corruption: Implementing the Governance andAnticorruption Policies, which was made publicly available for comment in December 2005.

The review finds that ADB has succeeded in raisingthe profile of governance in the region and significantly increased assistance between 2000 and 2004. However,the review concludes that there is a long way to go towardembedding implementation of the governance andanticorruption policies in the mainstream of ADB

operations. The sheer scope of the governance policy andits action plan has resulted in too many small projects of short duration and thinly spread staff resources.

The review also concludes that ADB has achievedsome success in dealing with fraud and corruption inprocurement and in increasing awareness of theAnticorruption Policy. But less progress has been madein assessing the impact of corruption on a country'sability to meet its development goals.

The review also finds that service delivery in many DMCs is plagued by inefficiency and corruption, forexample, in health, education, water, licensing, revenue,and land titles. It says that higher priority should begiven to supporting investments in local transparency,participation, and complaint mechanisms; and strongpreventive measures against corruption must be built intoproject design and followed up with effective oversightand corruption risk mitigation management duringimplementation.

ADB also continued implementation of itsPerformance-Based Allocation Policy, which governs theallocation of grants and loans to borrowers from the ADF(see below).

And the year included work to prepare ADBs secondMedium-Term Strategy, which will introduce somestrategic measures as the first steps to a morecomprehensive longer-term ADB response to the rapid andfar-reaching changes in the region is experiencing. Thedocument will be made available in 2006 (www.adb.org/ Documents/Policies/MTS/2006/). A review of ADBsLong-term Strategic Framework is also to progress,beginning in 2006.

New country strategies and programs are being put together afterextensive consultations, making them more inclusive and pro-poor

ADB has been reviewing andimproving its policies, strategies,and approaches to ensure thatthey are focused on results andare relevant


15/273

13

A DBs new Public Commu-nications Policy heraldsan ambitious shifttoward sharing knowl-

edge. ADB commits to a refined andmore focused approach to externalrelations, with clear positions onissues of importance, betterinformation products to explainthem, and wider distribution. Thepolicy's new rules regarding thedisclosure of information about itsoperations put ADB ahead of otherinternational finance institutions.

The policy forthrightly supportsthe right of people to seek, receive,and impart information and ideasabout ADBs activities. Among itsunique features, it will proactivelymake information publicly availableby posting it on the web, and notonly after a request. People shouldbe able to find the information theywant, rather than having ADBpresuppose what they need.

If the information ADB holds isnot subject to clear confidentialitycriteria, it must be publicly disclosed.The policy even favors disclosure ofsensitive information if the public'sinterest in receiving the informationoutweighs the harm that may becaused to ADB. By leapfroggingother international developmentorganizations, the new policy putsADB apace with a global movementtoward greater transparency anddisclosure. The organization believesthat greater awareness and under-standing of its objectives will helpgenerate public trust.

Disclosure EnablesParticipationOverall, the more transparentapproach under the policy ensures

that much more information will beavailable to the public in the earlystages of policies, country strategies,or projects before decisions aremade and members of the publiccan no longer influence thedevelopment initiatives that affectthem. By sharing information,people can better participate indecision making.

ADB also recognizes that thosewho need information do notnecessarily have access to the internet.Early in the design of projects thataffect local residents, informationwill be made available to the peoplelikely to be affected, and ADB willwork closely with the borrower orproject sponsor to ensure informa-tion is provided and feedback sought. A focal point will also bedesignated for regular contact.

Organizations such as national-level civil society groups increasinglywant to be involved in their country'sdevelopment strategy. ADB enablesthis involvement by requiring that draftcountry strategies and programs bedisclosed to in-country stakeholders.

ADB regularly consults a widerange of groups before adopting orrevising new operational policies andstrategies, and now requires draftpolicy and strategy papers to beposted routinely on its website.

Disclosure Enables AccountabilityFrom the beginning of open andbroad-based consultations witha huge spectrum of interests inpreparing the policy a process onemajor nongovernment organization(NGO) called the best policy reviewto date among multilateral develop-ment banks ADB has signaled anew direction under this policy. As apublic finance institution, it wants tobe held publicly accountable.

ADB-supported developmentactivities are paid for by citizens of itsmember countries, so the organiza-tion recognizes that it needs to betransparent with the public. ADBreviewed all the documentation itregularly produces and asked thequestion: What is the harm in

releasing this document? This puts

the onus on ADB staff to defendwhy information cannot be released.

The policy also favors redactionrather than withholding of informa-tion; that is, ADB will remove theconfidential part of a document inorder for the bulk of it to bereleased. And ADB will not withholdinformation simply because it isnegative. It will report failures anddisappointments, as well as suc-cesses.

ADB now has strict time limits forresponding to requests for informa-tion, and regularly monitors thepolicy to ensure that it operates inaccordance with its principles andrules. Reports on the policy'simplementation will be producedand disclosed annually.

Public Communications Policy: Making Information Available

Disclosure of sensitive information is favoredif the publics interest in receiving theinformation outweighs the harm that maybe caused to ADB

The policy supports the rights of peopleto seek, receive, and impart information

and ideas about ADBs activities

ADB will not withholdinformation simplybecause it is negative


16/273

14

BOARDOF

DIRECTORS REPORT PERFORMANCE-BASED ALLOCATION POLICY

ADBs Performance-Based Allocation Policy governs theallocation of resources under the ADF, which providesloans and grants to poorer countries on highly concessionalterms. The policy and its implementation was a centraltheme of ADF IX negotiations. ADB beganimplementation of its revised Performance-Based

Allocation Policy after Board approval in December 2004.In 2005, ADB took a number of steps to strengthenimplementation and increase transparency of the policy,and to further harmonize performance-based operationswith those of development partners.

A focal point was established in ADBs Strategy andPolicy Department. The First Multilateral DevelopmentBanks Technical Meeting on Performance-BasedAllocation, jointly planned by the African DevelopmentBank, ADB, and the International DevelopmentAssociation of the World Bank Group, was hosted inManila in January 2005.

In April, ADB organized regional technical workshopsin Suva, Fiji Islands, and in Bangkok, Thailand, to explainthe objectives of the new policy to officials from DMCsand civil society organizations.

In line with the revised policy, the World BanksCountry Policy and Institutional Assessmentquestionnaire was adopted to conduct the 2005 country performance assessments, and the two organizationscoordinated to ensure consistency in the conduct of assessments exercises.

The first country performance assessments under therevised policy were carried out in 2005 to determine ADFallocations for 20072008. The assessments covered fiveareas: macroeconomic management, structural policies,social inclusion/equity, governance, and portfoliomanagement.

Recently, ADB reached an important milestone inimplementing the revised Performance-Based AllocationPolicy, with numerical ratings being released for the firsttime in the public domain.

Internal InitiativesHUMAN RESOURCESHuman Resources StrategyThe Human Resources Strategy, approved in 2004, is acritical component of ADBs Reform Agenda. ADB madesignificant progress implementing several initiativesunder the strategy in 2005. The initiatives, by improvingmanagement of human resources, help ADB work towardachieving results.

The ADB-wide competency framework was

implemented through the new performance managementsystem and learning and development programs.Subsequent implementation of the ADB-wide competency framework will continue in 2006 through enhancements tothe recruitment, selection, and promotion systems.

Among the initiatives, the new performancemanagement system clearly defines individual staff

responsibilities and accountabilities in annual work plansagreed between staff and managers. The Performance andDevelopment Plan provides better alignment between anindividual staff member's work plan and the organizationskey results. It is a framework that provides the neededstructure to manage performance on a daily basis throughtimely, continuous, and constructive feedback as well asmore objective performance distinctions and recognition.The Performance and Development Plan will allow ADBto efficiently manage staff development and personneldecisions. Improvements will continue to be made to theperformance management system during the 2006 cycle.

Recruitment and selection initiatives were improvedthrough the delegation of some oversight functions to theVice President (Finance and Administration) and throughthe use of external specialized recruitment firms for seniorpositions in the Private Sector Operations Departmentand the new Risk Management Unit. Panel interviews forprofessional staff and greater participation of the hiringdivisions were sought to screen and interview externalcandidates.

To facilitate implementation of the strategy, ADBwas required to first attain the flexibility to adjust thecomposition of its workforce to ensure that staff possessthe appropriate competencies, motivation, and potentialto perform. Implementation of the Enhanced SeparationProgram started in 2005 and will be completed in 2006.The program encourages selected staff members whohave reached a plateau in their careers to take theopportunity to separate from ADB earlier than theirnormal retirement date.

New Unit Formed to Focus on LearningThe Learning and Development Unit was established in2005 to optimize the use of learning and developmentresources, support a more efficient approach to learningand development, and adopt a more strategic approachtoward identifying learning needs within the business

The Human Resources Strategyis a critical component of ADBsReform Agenda


17/273

15

environment. The focus is primarily on promotinginstitutional efficiency and effectiveness, redesigningleadership programs, and improving technical programs.To determine ADBs learning needs, an ADB-widetraining needs assessment was implemented as part of thenew performance management system. Several newworkshops were introduced in 2005, and broad training

programs on technical and operations skills developmentas well as leadership coaching to strengthen leadershipand accountability were conducted. A job rotation pilotwas implemented for resident mission national officers.

Initiatives that continue to support the objective of creating an inclusive and women-friendly environmentwere implemented, including diversity and gendersensitivity sessions.

StaffingAt the end of 2005, ADB had a staff of 2,456 coming from53 of its 64 member countries. The total comprised

887 professional staff members and 1,569 local staff members, of whom 342 or about 17.2% are located infield offices. During the year, there were 95 appointmentsand 68 departures of professional staff members, while137 local staff joined ADB, and 102 left. Womenprofessional staff members increased in number butdecreased as a percentage of total professional staff.Women professional staff members totaled 255 (29.8% of total professional staff) at the end of 2004 and 259(29.3% of total professional staff) at the end of 2005.

COMPENSATIONConsistent with ADBs market-driven compensationsystem, the Board approved a 3.4% weighted averagesalary increase for professional staff and a 0.9% salary budget for nonrecurring, non-pensionable bonus for 2006.It also approved a weighted average salary increase of 10.9% for national officers and administrative staff atheadquarters for 2006, while an overall weighted averagesalary increase of 10.8% for the national officers andadministrative staff in 25 field offices was implementedfor 2006.

The Board discussed the Comprehensive Review of Compensation and Benefits for professional staff inNovember 2005. It approved a change in the methodology for setting professional staff salaries. The European Bank for Reconstruction and Development has been added as acomparator, in addition to the World Bank. The salary budget increase has been split into two components: asalary increase to be distributed based on performance;and a nonrecurring, non-pensionable bonus to be given tostaff rated exceptional under the Performance and

Development Plan. Some benefit changes that werediscussed with the Board and approved by Managementincluded changes to the Staff Retirement Plan and theGroup Medical Insurance Plan for pensioners, as well asminor changes to the expatriate benefits on housing,home country travel, and education assistance.

INTERNAL ADMINISTRATIVE EXPENSE BUDGETInternal administrative expenses for 2005 totaled$294.3 million, a saving of $5.5 million against theoriginal budget of $299.8 million, resulting mainly fromlower-than-expected staff costs, business travel, andadministrative expenses, despite emergency assistance tothe earthquake- and tsunami-affected areas. Savings wereoffset by a higher requirement for consultants and staff relocation. About $0.7 million was transferred from thegeneral contingency to meet the unexpected increase instaff-related expenses of the Operations EvaluationDepartment and higher relocation expenses of the officesof the directors.

For 2006, the internal administrative expense budgetis $312.9 million, including a general contingency of 1%(summarized in Appendix 10), and net of $3.8 million

At the end of 2005, ADB hada staff of 2,456 coming from 53 ofits 64 member countries

The new performance development plan provides better alignmentbetween staff work plans and ADBs key results


18/273

16

BOARDOF

DIRECTORS REPORT estimated to be recoverable from administering trust

funds of multilateral and bilateral institutions. The 2006budget has been prepared under a zero real growthscenario, with no professional staff increases. The nominalbudget increase over the 2005 budget estimate is 5.3%,which is fully attributable to price increases. To achievethis flat real growth budget and to ensure that resources

are available to fund priority work programs for 2006,an across-the-board sequestration of 5% of the authorizedprofessional staff complement and selected discretionary expenses was applied.

Budgetary resources in 2006 will fund a prioritizedwork program, including the following major initiatives:expansion of OCR lending to meet the priority needs of DMCs, including lending to subsovereign and nonsovereignentities; expanded private sector operations to reachunserved DMCs; enhanced portfolio management withincreased delegation of project implementation and otherfunctions to resident missions; strengthened credit risk

assessment and management; enhanced regional andsubregional cooperation and integration; Managing forDevelopment Results and the Human Resources Strategy under the Reform Agenda; the Committee of SponsoringOrganizations of the Treadway Commission framework;knowledge management action plan; and implementationof the Public Communications Policy. Increases inbudgetary resources to support these initiatives are to bemet through sequestration of resources, trade-offs,productivity gains, and various efficiency measures.

In addition to internal administrative expenses,the 2006 budget also includes an annual capital budget of $4.1 million, mainly to fund cyclical capital expendituresfor headquarters facilities and information technology equipment, and to meet replacement and acquisitionrequirements of field offices.

ADMINISTRATIVE SERVICESThe Office of Administrative Services worked to maintaina safer and better work environment through several major

initiatives in 2005. Under the Enhanced Security Access Control Project one of the projects under theSpecial Capital Budget Projects, which was approved inApril 2004 by the Board of Directors all six entrancesto the headquarters building were improved and theSecurity Operations Center that operates 24/7 to providetimely information was established. It also led to the

development of the ADB Business Continuity Strategy,approved in February 2005. The strategy, which aims tomitigate the probability of a risk occurrence and reducethe impact of a risk event, focuses on the timely responseto a disruption affecting ADBs business processes.

In November 2005, ADB passed its second yearsurveillance and maintained its ISO 14001 and OHSAS18001 certification, confirming that ADBs environment,health, and safety management systems comply withinternational standards.

The office also launched and managed ADBs i-travelself-booking tool to enable personnel to make online

travel reservations anytime they require. Last yearsprojects also included the improvement of procurementprocedures and outsourcing opportunities, and the latestprinting technology upgrade.

All these bank-wide initiatives were anchored on theBalanced Scorecard and Six Sigma, which are now beingused in the office as tools to measure quality for businessprocess management improvement.

INFORMATION SYSTEMS AND TECHNOLOGY The Office of Information Systems and Technology provides access to knowledge and information as required,in support of ADB goals in three major areas: informationsystems, technology infrastructure, and informationtechnology governance.

Under information technology governance, the officerecently completed a realignment, putting in place fourbusiness units: Technology Division, Solution Delivery Division, Infrastructure Unit, and Business ProcessSupport Unit.

As part of the Information Systems and Technology Strategy Phase II, several initiatives have started toincrease efficiency in information and technology areas.Foremost is the infrastructure optimization initiative tosimplify and consolidate existing technology. This isexpected to streamline ADBs information and technology environment toward the desired enterprise architecturelaid out against the defined business direction and toensure greater cost-effectiveness.

In the area of information systems, the office is workingclosely with the Knowledge Management Center and theRegional and Sustainable Development Department to

The 2006 budget has been

prepared under a zero real growthscenario, with no professional staffincreases. The nominal budgetincrease over the 2005 budgetestimate is 5.3%, which is fullyattributable to price increases


19/273

17

identify requirements for better information sharing insupport of decision making and knowledge management.

Governing StructureBOARD OF GOVERNORS ANDBOARD OF DIRECTORS

ADBs highest policy-making body is its Board of Governors,which is composed of one representative from each ADBmember. The Governors meet annually and elect the12 members of the Board of Directors, who serve 2-year

T he 38th annual meeting of

the Board of Governors washeld in Istanbul, Turkey,from 4 to 6 May 2005, with

activities and events commencing on2 May 2005.

ADBs Board of Governorsrecognized that developing Asia hadentered a new era of developmentcharacterized by dynamic growth,increased interdependence, and anunprecedented prominence in theglobal economy. The Governors alsorecognized that the generallybuoyant economic profile was notuniform, that significant disparitiesin economic and social developmentpersist within countries and acrossthe region, and that reducing non-income poverty has been slowin many countries.

The Governors expressed firmcommitment to reducing povertyand achieving the MDGs in the Asiaand Pacific region, and reaffirmedtheir vision of a region free ofpoverty.

The Governors also expressed their strong apprecia-

tion to ADB for its leadership roleand quick response in addressing

the aftermath of the tsunami inlate 2004; reaffirmed the importance of

Managing for DevelopmentResults;

noted ADBs strong commitmentto a more proactive role inregional cooperation andintegration, and welcomed thecreation of the Office of Regional

38 th Annual Meeting

The Governors expressed firm commitmentto reducing poverty and achieving the MDGsfor a poverty-free Asia and Pacific region

terms. Each Director appoints an Alternate. The Presidentis elected by the Board of Governors for a 5-year term andserves as Chairperson of the Board of Directors. ThePresident manages ADB, assisted by four Vice Presidentsand a Managing Director General. (For the current list of Governors and Directors, see appendixes 4 and 5.)

Haruhiko Kuroda assumed office as ADB President on

1 February 2005 after being unanimously elected by theBoard of Governors in November 2004.Vice President Joseph Eichenberger completed

his assignment on 31 December 2005. C. Lawrence

Economic Integration; shared ADBs concern with the

negative net transfer of resourcesto DMCs, and welcomed ADB'splan to streamline policies andprocedures, develop new lendinginstruments, sharpen the focus ofits operations, and ensure costcompetitiveness, within a well-defined medium-term strategicframework;

urged ADB to work with govern-ments, development partners,and the private sector to meet thelarge infrastructure challenges in

the region; and commended ADB on the

introduction of grants in ADF IX,and noted that the use of ADF IXgrant resources must beconsistent with ADB's overallcommitment to developmenteffectiveness.About 2,500 participants

attended the annual meeting,including representatives frommultilateral and bilateral institutions,the global financial community, andcivil society. The 39 th annual meetingwill be held in Hyderabad, India.

About 2,500 participants attended the annual meeting, including representatives frommultilateral and bilateral institutions, the global financial community, and civil society


20/273

18

BOARDOF

DIRECTORS REPORT Greenwood, Jr. was elected by the Governors to replace

Mr. Eichenberger. Mr. Greenwood assumed office on28 February 2006.

The Board of Directors met formally on 49 occasionsand held 38 informal meetings in 2005 includingbriefings, discussion seminars, and presentations.Members of the Board of Directors made official visits to

India, Maldives, and three Central Asian republics.The Annual Meeting was held on 46 May 2005 inIstanbul, Turkey (see page 17).

BOARD COMMITTEESThe Board of Directors has four standing committees.Membership is shown in Appendix 6.

Audit CommitteeThe Audit Committee identified and reviewed acomprehensive range of audit issues within its mandate,representing a broad cross-section of ADB operations and

activities, including the quarterly financial statements,which are analyzed closely to review the financialsoundness of ADB, and to keep track of the net incomeposition. It continued to monitor implementation of theFinancial Accounting Standard, FAS 133, coveringaccounting principles and practices in relation toderivative instruments; the effectiveness and efficiency of control procedures, including backup procedures as part of the Business Continuity Plan; and measures being takento prevent fraud and corruption.

The committee, together with relevant ADBdepartments, finalized a review of its terms of reference,bringing them in line with those of other multilateraldevelopment banks. The role of the committee was mademore specific with the inclusion of risk management, andprocurement policies and procedures as part of the reviewof internal controls. The committee supported theinitiative of the President at the Istanbul Annual Meetingof establishing an independent Risk Management Unit.

Budget Review CommitteeThe Budget Review Committee discussed the EnhancedSeparation Program, later approved by the Board. It clarifiedhow the program will provide flexibility to adjust humanresources in line with the Human Resources Strategy.

The committee also discussed and amended itsterms of reference to reflect the participation of VicePresidents in committee meetings as necessary, allowingthe discussion of strategic directions before thefinalization of the work program and budget framework.The committee also looked at efforts and progress toimprove cost information. It noted that the work program

and budget framework should be viewed as an ADBbusiness plan to enhance effectiveness, with inclusion of astronger results framework.

The committee reviewed the special capitalexpenditure proposal on a business continuity facility,later approved by the Board, to serve as a backup work facility during business interruptions at headquarters.

It also recommended approval of ADBs 2006 budgetsfor internal administrative expenses and annual capitalexpenditures. The guiding principle of the budgetformulation was zero real growth.

During the deliberations on the 2006 budgets, thecommittee requested a review of the overall lendingprogram projections in the draft budget document, andthese were subsequently revised upward. In response,the committee was provided with an update of theprojected programs on regular operations, ADF grants,multitranche financing facility, and emergency assistance. The committee expressed concern about the

impact of a zero real growth budget on the scaling up of operations, implementation of new initiatives, and themedium-term strategy. The committee was informedthat this would not restrict work program objectivesand targets, which are fully resourced.

The committee reviewed the work program of theADB Institute, proposed a 2006 budget of $14.2 million,and recommended its approval.

Compliance Review CommitteeThe Compliance Review Committee, set up under theAccountability Mechanism (see page 19), clears theCompliance Review Panels proposed terms of reference andtime frame for conducting compliance reviews, and reviewsthe panels draft monitoring reports on implementation of remedial actions approved by the Board before the panelfinalizes them. In 2005, the committee discussed thepanels proposed terms of reference for conducting acompliance review of the request under the SouthernTransport Development Project in Sri Lanka and three draftmonitoring reports on the implementation of remedialactions on the inspection request on the Chashma RightBank Irrigation Project (Stage III). The terms of referenceand monitoring reports are posted on the panels website(www.compliance.adb.org).

Development Effectiveness CommitteeTo ensure the independence of ADBs operationsevaluation process and reports, on 1 January 2004,the Operations Evaluation Department began reportingdirectly to the Board of Directors through itsDevelopment Effectiveness Committee.


21/273

19

Evolving areas of concern to the committee includehow evaluation recommendations that Managementaccepts are turned into action, with an eye to makingimprovements. They also include how impact is monitored,and how the department could play a more strategic role.

All evaluation reports are posted on ADBs websiteupon circulation to the Board and Management, in

accordance with the Public Communications Policy.Managements responses to the reports andrecommendations, and the chairs summaries of committee discussions of the departments major reportsare also posted when available.

The committee has changed the focus of its reviewsand discussions from individual project evaluations tobroader evaluations at the country, sector, thematic,and policy levels. Accordingly, in 2005, the committeemeeting agenda included only such broader studies,none at the project level. For the first time, thecommittee recommended that Management formulate

a comprehensive action plan to address key strategicissues identified in the annual report on portfolioperformance. Management responded positively to therecommendation and committed to monitoring andreporting to the Board on such an action plan.

A DBs AccountabilityMechanism aims toimprove developmenteffectiveness, project

quality, and transparency in opera-tions. Its two functions consulta-tion and compliance review helpsolve problems and investigatealleged violations of ADBs opera-tional policies and procedures.

Through the mechanism, peopleadversely affected by an ADB-assisted project can file a complaintwith the Office of the Special ProjectFacilitator (www.adb.org/SPF), whichreports directly to the ADB President.

Through the consultationfunction, the mechanism seeksagreement among all parties. Avenue and a process for problemsolving that can include fact-findingreviews, meetings, roundtablediscussions, stakeholder consulta-tions, and other means appropriateto the situation are provided.

Separately, affectees may also filea request for compliance review withthe Compliance Review Panel (http:// compliance.adb.org) if they believethey have been adversely affected by

Accountability Mechanism

Through the mechanism, people adverselyaffected by an ADB-assisted project canfile a complaint

a project because ADB has failed tocomply with its operational policiesand procedures. The panel willassess eligibility and will conductcompliance reviews agreed to by theBoard of Directors. The ComplianceReview Panel reports directly to theADB Board of Directors for suchmatters.

The Office of the Special ProjectFacilitator received a complaint fromfive villages in South Kalimantanabout the Community Empower-ment for Rural Development Projectin Indonesia and declared it eligiblein March 2005. The agreed course ofaction consisted of preparatorymeetings with all parties involved,joint fact-finding activities, andmulti-stakeholder consultations.

At the end of September 2005,the parties signed village agree-ments for all five villages, and theconsultation phase was concluded.Three Indonesian NGOs played animportant role as intermediaries. Theparties were to submit a progressreport on the implementation of theagreements by the end of January2006.

In December 2004, the Compli-ance Review Panel received a requestfor compliance review of theSouthern Transport DevelopmentProject in Sri Lanka. The ComplianceReview Panel found the project tohave lapses of compliance withseveral ADB operational policies andprocedures, including involuntaryresettlement; and environmentalconsiderations, gender and develop-ment, and incorporation of socialdimensions in ADB operations. TheBoard approved the recommenda-tions in the Panels Final Report in July2005. The Panel is presently monitor-ing ADB Managements implementa-tion of the remedial actions.

The Panel also monitored ADBManagements implementation ofthe Board-approved remedial actionsunder the inspection request of theChashma Right Bank IrrigationProject (Stage III) in Pakistan.

The Office of the Special ProjectFacilitator and the Office of theCompliance Review Panel intensifiedtheir outreach activities withgovernment representatives, civilsociety, private sector, academe, andADB personnel in nine countries.

The Office of the ComplianceReview Panel hosted the 2 nd Meetingof Accountability Mechanisms,which was attended by 18 represen-tatives from various accountabilitymechanisms in developmentinstitutions.


22/273

20

BOARDOF

DIRECTORS REPORT

Financing Operations in 2005FINANCIAL RESOURCESAuthorized and subscribed capital stock amountedto $50.2 billion. ADB raised long-term funds totaling$4.2 billion, of which $1.0 billion was raised througha global public offering.

Gross income, which includes revenue and netrealized gains, amounted to $1.4 billion, $1.0 billion of which was generated from the loan portfolio,

$375.3 million from the investment portfolio, and$36.3 million from other sources, of which $24.5 millioncame from equity investment operations.

ADBs Special Funds are the ADF 1 with 2005committed resources amounting to $2.6 billion,Technical Assistance Special Fund of $195.5 million,Japan Special Fund totaling $34.3 million, ADB InstituteSpecial Fund of $13.9 million, Asian Tsunami Fund of $578.6 million, and Pakistan Earthquake Fund of $85.5 million.

FUNDINGAbout 72.9% of cumulative lending is from OCR.Funding from OCR comes from three distinct sources:private placements and capital markets in the form of borrowing; paid-in capital provided by shareholders; andaccumulated retained income (reserves), which providesa buffer for risks.

The main instruments for providing help to ADBsDMCs are policy dialogue, loans, equity investments,guarantees, grants, and technical assistance.

ADB offers a range of modalities and terms for loansaimed at improving performance.

Loans are also provided from Special Funds.The ADF offers loans on concessional terms to memberswith low per capita gross national product and weak debt-repayment capacity. It is the only multilateraldevelopment bank concessional fund dedicatedexclusively to economic and social development in theregion. The ADF is financed by periodic voluntary contributions from donors. The current ADF IX programis $7 billion for 1 January 200531 December 2008.

ADF IX grants are assisting countries in reducingthe debt burden of development finance, making thetransition from conflict to peace and stability, andcombating HIV/AIDS and other infectious diseases.

ADB also manages and administers additional funds:Japan Scholarship Program, Japan Fund for Poverty Reduction, and Japan Fund for Information and

Communication Technology, including those grantsprovided by bilateral and multilateral donors to supporttechnical assistance and soft components of loans.In recent years, thematic trust funds focusing on genderand development, governance, poverty reduction, water,energy, and the environment were established to supporttechnical assistance operations and selected componentsof loan projects (see page 41).

Technical assistance funded through grants or loanshelps maximize ADBs development impact. Technicalassistance grants are used for preparing projects, and forsupporting advisory and regional activities in areas such

as law and policy reform, strengthening fiscal policies andprocedures, good governance, capacity building, andnatural resource management.

ADB has a triple-A credit rating and actively mobilizes financial resources through its cofinancingoperations, tapping official, commercial, and export creditsources. Assistance to its DMCs creates an enablingenvironment for private sector development. ADB alsodirectly finances private sector projects to assistcommercial investors and lenders (www.adb.org/about/ fnncemgt.asp).

OVERVIEW OF OPERATIONSIn 2005, ADB approved 72 loans (64 projects) for$5.8 billion, 10 equity investments for $217.1 million,2 guarantees for $68.4 million, 51 grant-financed projectsfor $1.2 billion, and 299 technical assistance operationsfor $198.7 million for ADB operations of $7.4 billion(see page 24). In addition, ADB approved 2 multitranchefinancing facilities totaling $1.5 billion.

LOANSLending with government guarantee accounted for 65 loansfor $5.3 billion (58 projects and programs), comprising25 loans from ADBs OCR for $3.9 billion and 40 loansfrom the ADF for $1.4 billion. 1 This is a 6% increase overthe almost $5 billion in 2004 (an increase of 4.9% for OCR lending and 11% for ADF lending). Lending withoutgovernment guarantee to the private sector accounted forseven loans for $536.0 million (seven projects) infinancial terms, this is an increase of 83.2% over the fiveloans for $292.5 million (five projects) in 2004.

The main instruments for providinghelp to ADBs DMCs are policydialogue, loans, equityinvestments, guarantees, grants,and technical assistance


23/273

21

Of the 64 public and private sector projects andprograms approved in 2005, 16 (25%) were categorizedas targeted interventions and 48 (75%) as generalinterventions. By theme, sustainable economic growthwas most prevalent and was associated with 53 projects.By sector, transport and communications received thelargest share of lending (30%).

The 54 public and private sector projects representeda total investment of approximately $19.7 billion, of which $5.1 billion (26%) will be financed by ADB;$4.4 billion (23%) by governments and borrowers;$10.1 billion (51%) by cofinanciers, equity sponsors,and local finance institutions; and $50.7 million (0.3%)by project beneficiaries. Eight projects, amounting to$1.0 billion, were financed under the sector lendingmodality, compared with seven projects amounting to$1.3 billion in 2004.

The 10 policy-based programs 2 approved in 2005were valued at $1.14 billion, compared with 14 programsfor $1.12 billion in 2004. Two program loans approved in2005 were coupled with an investment project loan or atechnical assistance loan.

EQUITY OPERATIONSTen equity investments totaling $217.1 million wereapproved in 2005, compared with 11 for $164 millionin 2004.

COFINANCING AND GUARANTEE OPERATIONSADB actively promotes cofinancing to complement itsassistance to its developing member countries with fundsfrom bilateral partners and multilateral financialinstitutions, export credit agencies, as well as commercialfinancial institutions. As of 31 December 2005, non-ADBfunds generated by ADBs cofinancing operationsamounted to $7.4 billion, including $5.2 billion of commercial cofinancing from international and domesticbanks and export credit agencies, $1.8 billion of officialloan cofinancing, and $352.6 million of grant cofinancingfrom bilateral and multilateral development partners.Of this, cofinancing raised through ADBs provision of financial administration or credit enhancement servicesamounted to $322.9 million, including $68.4 million incredit enhancements (guarantees) for commercial loans,$30.5 million with partial administration services for

By theme, sustainable economicgrowth was most prevalent andwas associated with 53 projects;by sector, transport andcommunications received thelargest share of lending (30%)

In discussions with borrowers during 2005, countries highlighted the need for ADB to expand support for poverty reduction programs


24/273


25/273

23

Endnotes1 Total ADF operations loans and grants amounted to $1.62 billion.2 Policy-based programs include program loans and policy loan components of sector development program facilities.3 In 2005, there were four projects with project cost in excess of $1 billion each. In 2004, there were no projects of this size.

ADBs private sector loan and equity investments mobilized fundingfrom other sources, leveraging ADBs own funds by almost 10 times

191 projects with cumulativeassistance of about $5 billion

have been approved sinceADB commenced private sectoroperations in 1983

funding from other sources, leveraging ADBs own fundsby almost 10 times. In 2005, ADBs private sectoroperations also embarked on technical assistance forcapacity building in areas such as water, trade, finance,small business and microfinance banks, development of the asset-backed securities market, and workerremittances.

ADB has undertaken strategic interventions throughpublic-private partnerships in projects that boost aDMCs domestic capacity to finance private sector andeconomic growth, an indispensable ingredient in poverty reduction. The projects improve the delivery of essentialservices and extend them to the poor. Although privatesector operations are still and will remain in the largerDMCs, ADB continues to look at opportunities in thesmaller borrowing DMCs, following the prioritiesidentified in various regional and country strategies andprograms. For example, the first and largest private sectorproject in the Lao Peoples Democratic Republic (Lao

PDR) was approved for the Nam Theun 2 PowerCompany Limited in 2005.

One hundred ninety-one projects with cumulativeassistance of about $5 billion (inclusive of all types of interventions) have been approved since ADBcommenced private sector operations in 1983. ADBscumulative equity and loan approvals of $3.5 billion have

catalyzed a total of about $31.6 billion in funding forprivate sector projects, leveraging ADBs investments by aratio of 5.4 times. Cumulative disbursements for privatesector projects have thus far amounted to $2.1 billion.

As of 31 December 2005, the overall private sectorexposure amounted to about $1.7 billion, consisting of $598.2 million in equity investments, loans of $732.2 million, and guarantees of $361.7 million.ADBs private sector exposure is largest in theinfrastructure sector with a total of $820.9 million inexposure, followed by investment funds and financialinstitutions at $742.3 million, with exposure in all other

sectors at $128.9 million.The total private sector exposures are largely in India

(17.1%), PRC (15.6%), Sri Lanka (11.5%), andBangladesh (11.2%). Regional projects account for roughly 8.9% of the total.

Capital was freed up for new investments in theamount of $53.4 million as ADBs equity shareholdingsin 15 private companies were fully or partly divestedin 2005. Loan repayments for the year, includingprepayments, amounted to $54.7 million, while totaldisbursements amounted to $336.2 million.

While ADB constantly explores ways to improve risk management in its private sector operations, a lossprovision is recorded for equity investments and loans.The loss provision, which includes impairment loss, wasabout $116.6 million as of 31 December 2005. The lossreserve ratio as a percentage of total outstanding portfoliowas 10.8%.


26/273

24

BOARDOF

DIRECTORS REPORT

24


27/273

25


28/273

26

BOARDOF

DIRECTORS REPORT

26


29/273

2727


30/273

28

BOARDOF

DIRECTORS REPORT Management

Jeremy HovlandThe Secretary

Haruhiko KurodaPresident

Liqun JinVice President

Geert van derLindenVice President

KhemphengPholsenaVice President

C. LawrenceGreenwood, Jr.Vice President

Young-Hoi LeeManaging DirectorGeneral

28


31/273

29

Board of Directors

Volker DucklauDirector

Emile GauvreauDirector

Sibtain FazalHalimDirector

Agus HaryantoDirector

Chol-Hwi LeeDirector

Masaki OmuraDirector

Patrick PillonDirector

Ashok SaikiaDirector

Stephen Sedgwick Director

Paul W. SpeltzDirector

ChaiyuthSudthitanakornDirector

Xiaosong ZhengDirector

Austria, Germany, Luxembourg, Turkey, UnitedKingdom

David TaylorAlternate Director

Canada, Denmark, Finland, The Netherlands,Norway, Sweden

Pasi HellmanAlternate Director

Kazakhstan, Maldives, Marshall Islands, Mongolia,Pakistan, Philippines, Timor-Leste

Marita Magpili-JimenezAlternate Director

Cook Islands, Fiji Islands, Indonesia, KyrgyzRepublic, New Zealand, Samoa, Tonga

Richard StanleyAlternate Director

Batir MirbabayevAlternate Director

Republic of Korea; Papua New Guinea; Sri Lanka;Taipei,China; Uzbekistan; Vanuatu; Viet Nam

Japan

Atsushi MizunoAlternate Director

Belgium, France, Italy, Portugal, Spain, Switzerland

Niklaus ZinggAlternate Director

Afghanistan, Bangladesh, Bhutan, India, LaoPeoples Democratic Republic, Tajikistan

Nima WangdiAlternate Director

Australia; Azerbaijan; Cambodia; Federated States ofMicronesia; Hong Kong, China; Kiribati; Nauru;Palau; Solomon Islands; Tuvalu

Richard MooreAlternate Director

Paul W. CurryAlternate Director

United States Malaysia, Myanmar, Nepal, Singapore, Thailand

Sein TinAlternate Director

Peoples Republic of China

Xiaolong MoAlternate Director

29


32/273

30

OPERATIONS IN

2005

Operationsin 2005

The year 2005 was, in part, one of tragedy in Asiaand the Pacific. It opened as survivors of theIndian Ocean tsunami picked through theremnants of lives ruined by giant waves andclosed as the homeless victims of the crushing

earthquake in South Asia struggled to find shelter from theHimalayan winter.

ADB responded with speed and flexibility to bothnatural disasters, providing over $850 million for thecountries hit by the tidal waves and a package of $1 billionfor Pakistan. Early disbursements, although slow in someareas, were concentrated on reestablishing roads, powerfacilities, and other major infrastructure. ADB worked tofocus its efforts to ensure speedy implementation of projects and close cooperation with developmentpartners in response to the disasters (see page 34) as wellas to control the spread of the avian flu virus (see page 38).

Overall operations during the year, meanwhile, focusedon the physical infrastructure needed to remove barriers tofaster economic growth, an important factor in efforts toreduce poverty when linked with complementary servicesand activities that support the broadening of livelihoodopportunities for the poor.

ADB also found new ways to draw in private sectorsupport for development projects one of five thematic areasof its programs including through risk mitigation productsthat can overcome investor hesitancy. Most developingcountries hold enormous untapped potential for greaterinvolvement from private markets, both international anddomestic, and multilateral development banks can helpunlock this potential and bring it to bear on the massivefunding gap for infrastructure projects.

OPERATIONS IN 2005

ADBs infrastructure projects,particularly roads, are encouragingprivate firms to invest

30

Promoting Growth, Fighting Poverty


33/273

31


34/273

32

OPERATIONS IN

2005

Similarly, ADB continued to build soft infrastruc-ture under the second of its main development themes,capacity development. Ensuring strong economic growthmeans encouraging laws and strategies that protectproperty rights, promote openness, improve financialgovernance, and strengthen capital markets.

The other thematic areas include regional

cooperation and integration, gender and development,and environment (see pages 3743).The most advanced of ADBs regional programs,

for example, the Greater Mekong Subregion EconomicCooperation Program (GMS Program), has helped builda sense of community in the Mekong subregion, makingsolid progress in establishing a sound infrastructural base,and has begun to move into other areas (see page 63).Realizing the power of partnership, ADB has forgedan alliance comprising eight countries and six multi-lateral institutions to further regional cooperation

under the Central Asia Regional Economic CooperationProgram. As a result, the program has become a modelfor cooperation and enhancing development effectiveness.Collectively, about $1.05 billion has been mobilized forregional cooperation projects under the program for thenext 2 years alone in addition to assembling a vast poolof knowledge to increase cooperation in Central Asia.

Through such efforts, ADB is helping countriesachieve stronger economic growth and make progress intheir commitment to internationally agreed MDGs onpoverty reduction by 2015.

However, the region has more people withinadequate nutrition, more living in slum conditions,and more without access to water and sanitationthan any other developing region. To help relieve theproblems faced by the poor, ADBs lending programsalso concentrate on several sectors, including education,governance, energy, environment, water, finance, socialdevelopment, and health.

Public-private sector partnerships, for example,have had great success in improving health services inBangladesh and Cambodia. In both cases, nongovernmentorganizations (NGOs) have been engaged to improvehealth service delivery in government clinics (see pages68, 8990).

Hundreds of inventive projects have also beencarried out under the ADB-administered poverty fundsover the years (see page 41). One standout project isthe Strategic Private Sector Partnerships for UrbanPoverty Reduction financed by the Japan Fund forPoverty Reduction and implemented with the corporate-led NGO, Philippine Business for Social Progress.The NGO has recorded a number of great successes inupgrading slums and improving the livelihoods of theurban poor in Metro Manila (see page 101).

There are other funds to accelerate ADBs effortson poverty reduction such as the Poverty ReductionCooperation Fund, with financing from the UnitedKingdom (see page 41) and the Cooperation Fund inSupport of the Formulation and Implementation of National Poverty Reduction Strategies financed by the Netherlands government.

Throughout its lending operations, ADB strivesto ensure that environmental issues are central, andthat there is a sharp focus on issues affecting womenand other disadvantaged groups, two of five thematicpriorities in lending operations. Environmentalconcerns are reflected in every loan, but several inparticular were designed to square environmentalconcerns with the demands of high economic growthin places such as the PRC (see pages 5657).

A power station access tunnel at Nam Theun 2 in the Lao PDR; theGMS is making solid progress toward a sound infrastructure base

ADB continued to build softinfrastructure under the secondof its main development themes,capacity development


35/273

33

INFRASTRUCTUREInvestment in infrastructure accounted for the bulk of ADB lending in 2005, as it has for several years. Itcomprises about 60% of ADBs overall lending portfolio.The biggest portion of these loans in 2005 was fortransportation and telecommunications projects at closeto 30%. Loans for energy-related projects amounted to

about 18% of the total, while water supply, sanitation,and waste management accounted for 11%.

One highlight of the year was the Nam Theun 2Hydroelectric Project in the Lao PDR. It underscored theimportance to development not only of infrastructure butalso of the private sector, regional cooperation, stakeholderconsultations, and close collaboration among develop-ment and finance institutions. Eventually, it will providemuch-needed power to Thailand and much-neededdevelopment funds for the Lao PDR (see page 69).

However, in developing Asia and the Pacific, fundsfor infrastructure still fall far short of the estimated need.Private sector investment generally cooled off in EastAsia after the 19971998 financial crisis, particularly for countries like Indonesia and the Philippines.Poorer countries in the region continue to attract littleor no private infrastructure funds.

Financing needs for energy, transport, information andcommunication technology, and water and sanitationsystems are expected to exceed $250 billion per year overthe next 10 years. East Asia alone will require $1 trillionin infrastructure investment over the next 5 years tosustain fast growth and create jobs for its young popula-tion, according to a joint study published in March 2005by ADB, World Bank, and Japan Bank for InternationalCooperation. The PRC still accounts for the lions share,at some 80%, of East Asian investment.

In ADBs 4 decades, more than half of the$113 billion invested in Asia and the Pacific has gone toimprovements in transportation and communications,energy, and water supply and sanitation. Commercecannot thrive and the poor cannot improve their livesusing potholed roads, archaic phone systems, weak irrigation, and distant sources of drinking water.

The experience of the PRC shows how large invest-ments in such infrastructure support stronger economicgrowth and reduce poverty. Transport projects, in particu-lar, open up bottlenecks and clear the way to new mar-kets. ADB approved a large loan in September to helpdevelop a modern railway connecting the provinces of Henan and Shaanxi (see page 55).

At the other end of the scale, an infrastructure loan inIndonesia (approved in late 2005) illustrates ADBs work to lift living standards in poor and often isolated villages.ADB is providing $50 million over 3 years to supportgovernment efforts in some 1,800 communities to cushionthe effect of a 186% rise in the price of kerosene caused by the oil price spike and an end to government subsidies.The loan will finance construction and repair of roads,bridges, irrigation systems, water pipes, and drainageworks with the help of community organizations. About2 million people stand to benefit (see pages 101102).

For more on ADBs infrastructural and other lendingprograms, see the subregional chapters.

PRIVATE SECTOR DEVELOPMENTRaising development funds for infrastructure and otherprograms is a formidable challenge, and meeting itrequires broad commitment of private sector fundingand expertise. However, getting that support requiresinnovation.

The rebuilding of Afghanistan is a case in point.When the Taliban was pushed from power in 2001, therewas little left of infrastructure. The roads, phone system,and financial system were shattered. Without such basicstructure, many private sector investors were lukewarm

Building infrastructure is clearin

ADB Annual Report 2005

Documents

Transcript of ADB Annual Report 2005