ASIAN DEVELOPMENT BANK Operations Evaluation Department

COUNTRY ASSISTANCE PROGRAM EVALUATION

FOR THE

PEOPLES REPUBLIC OF CHINA

In this electronic file, the report is followed by Managements response and the Board of Directors Development Effectiveness Committee (DEC) Chairs summary of a discussion of the report by DEC.

Evaluation Study

Reference Number: CAP: PRC 2007-03 Country Assistance Program Evaluation 26194 April 2007

Peoples Republic of China: Success Drives Demand for More Innovative and Responsive Services

Operations Evaluation Department

CURRENCY EQUIVALENTS Currency Unit yuan (CNY)

At Country Operational Strategy 1997 (April 1997) CNY1.00 = $0.121 $1.00 = CNY8.2965 At Country Assistance Program Evaluation 1998 (October 1998) CNY1.00 = $0.1208 $1.00 = CNY8.2776 At Country Strategy and Program 20042006 (October 2003) CNY1.00 = $0.1208 $1.00 = CNY8.2766 At Country Assistance Program Evaluation 2007 (March 2007) CNY1.00 = $0.1292 $1.00 = CNY7.7387

ABBREVIATIONS ADB ADTA CAPE CAR CAREC CNAO COS CPR CPS CSP CSPU PRC DFID DMC EARD EIA EPB FYP GDP GEF GMS GPL IEI IFI IMF IPDP KPIO LJVR LTSF m3 M&E MDB MDG MFF MI-DMC MIC MOF MTS NDRC NGO NTHS O&M O&S OCR Asian Development Bank advisory technical assistance country assistance program evaluation Central Asian republic Central Asia Regional Economic Cooperation China National Audit Office country operational strategy country portfolio review country partnership strategy country strategy and program country strategy and program update Peoples Republic of China Department for International Development developing member country East Asia Department environmental impact assessment Environmental Protection Bureau five-year plan gross domestic product Global Environment Facility Greater Mekong Subregion Government Procurement Law Innovation and Efficiency Initiative international financial institution International Monetary Fund indigenous peoples development plan Key Project Inspectorate Office Local Joint Venture Railways long-term strategic framework cubic meter monitoring and evaluation multilateral development bank Millennium Development Goal multitranche financing facility middle income-developing member country middle-income country Ministry of Finance medium-term strategy National Development Reform Commission nongovernment organization National Trunk Highway System operation and maintenance observation and suggestion ordinary capital resources

OED OPR PCR PMO PPTA PRCM PSD PSO PSOD RCI RCIS RCSP RCPRF RDNR RETA SAPE SARS SASEC SEIA SEPA SERC SES SGCC SME SOE SWOT TA TBL TCR TPER WTO YEPG

Operations Evaluation Department Operational Procurement Review project completion report project management office project preparatory technical assistance PRC Resident Mission private sector development private sector operation Private Sector Operations Department regional cooperation and integration Regional Cooperation and Integration Strategy regional cooperation strategy and program Regional Cooperation and Poverty Reduction Fund rural development and natural resources regional technical assistance sector assistance program evaluation severe acute respiratory syndrome South Asia Subregional Economic Cooperation summary environmental impact assessment State Environmental Protection Administration State Electricity Regulatory Commission special evaluation study State Grid Corporation of China small- and medium-sized enterprise state-owned enterprise strengths, weaknesses, opportunities, and threats technical assistance Tendering and Bidding Law technical assistance completion report technical assistance performance evaluation report World Trade Organization Yunnan Electric Power Group NOTE In this report, $ refers to US dollars. Key Words

peoples republic of china, development effectiveness, evaluation, strategy, program assessment, operations, lessons, operations evaluation department, performance evaluation, country performance, partnership, agriculture, infrastructure, transport, energy, environment, finance, private, technical assistance, poverty, country systems, policy dialogue, policy evaluation Director Team Leader Team Members R.B. Adhikari, Operations Evaluation Division 2, Operations Evaluation Department (OED) H. Hettige, Principal Evaluation Specialist, Operations Evaluation Division 2, OED R. Lumain, Senior Evaluation Officer, Operations Evaluation Division 2, OED C. Roldan, Senior Operations Evaluation Assistant, Operations Evaluation Division 2, OED Operations Evaluation Department, CE-13

TABLE OF CONTENTS Page EXECUTIVE SUMMARY I. INTRODUCTION A. B. C. D. II. Objectives of the Country Assistance Program Evaluation Scope of the Country Assistance Program Evaluation Evaluation Methodology Report Structure iii 1 1 2 3 3 4 4 6 8 10 10 13 19 19 22 27 32 36 37 37 43 45 49

THE CONTEXT: PRC-ADB PARTNERSHIP AND DEVELOPMENT PRIORITIES A. B. C. The PRC Context ADB Context Evolution of ADB-PRC Partnership

III.

STRATEGIC POSITIONING: COUNTRY STRATEGY ASSESSMENT A. B. Alignment and Relevance of the Strategy to Country and ADB Priorities Positioning of the Strategy and Program Under the Four Thematic Pillars

IV.

INSTITUTIONAL POSITIONING: ADBs PERFORMANCE A. B. C. D. E. Decentralization and Positioning the Institution Innovation through Operational Instruments and Staffing Skills Portfolio Management for Improved Client Services and Development Results Corporate Mandates Strengthening Partnerships with Other Development Partners and the PRC

V.

SECTORAL POSITIONING: PROGRAM IMPLEMENTATION IN KEY SECTORS A. B. C. Transport Sector (Roads and Railways) Urban SectorWater Supply and Sanitation Special Issues in Other Sectors

VI.

VALUE ADDED FOR DEVELOPMENT RESULTS

In accordance with the guidelines formally adopted by the Operations Evaluation Department (OED) to avoid conflict of interest in its independent evaluations, the Director General of OED was not involved in this evaluation and delegated approval to the Director of Operations Evaluation Division 2. Carmencita Balbosa, Geoffrey Crooks, Vincent David, Yukon Huang, Cheng Jiuyan, Dajun Shen, Cynthia Song, Jingzhong Ye, Rufei Zhang, and Elsa Zhao were the consultants. Nicholas Hope, Deputy Director, Stanford Center for International Development reviewed this report as an external peer reviewer and provided comments. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report.

VII.

PERFORMANCE ASSESSMENT AND RATINGS A. B. C. D. E. Strategic Positioning Institutional Assessment Ratings Value Added for Development Results Ratings Sectoral Assessment Overall Assessment

52 53 55 57 57 59 60 60 61 62 63

VIII.

CONCLUSION, ISSUES, LESSONS, AND RECOMMENDATIONS A. B. C. D. Conclusions Key Issues Lessons Recommendations

APPENDIXES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Evaluation Methodology Macroeconomic Background Poverty Reduction, Social Sector, and Gender Government and Asian Development Bank Strategies for the Peoples Republic of China Lending and Nonlending Operations (19982005) Asian Development Banks Contribution to Anticorruption and Governance-Related Work Regional Cooperation and the Peoples Republic of China Client Perceptions Technical Assistance Portfolio Analysis Assessment of Safeguard Systems Used in Asian Development Bank Operations in the Peoples Republic of China Urban Sector Rural Development and Natural Resources Asian Development Bank-Global Environment Facility Activities in the Peoples Republic of China Energy Sector Private Sector Operations Financial Sector 67 70 74 90 101 105 117 127 138 152 165 174 190 204 209 219 224

SUPPLEMENTARY APPENDIX (available on request) Private Sector Operations with Project-Specific Details Attachments: Management Response DEC Chair Summary

EXECUTIVE SUMMARY CAPE Objectives and Scope. This second country assistance program evaluation (CAPE) for the Peoples Republic of China (the PRC) covers 19982005. Its objectives are to (i) review how past lessons have been used in formulating strategies, (ii) assess the effectiveness of the Asian Development Banks (ADB) assistance program in the PRC for the period being evaluated, and (iii) identify lessons and make recommendations for the future, particularly for the preparation of a new country partnership strategy (CPS). The first CAPE, covering the period up to 1997, comprehensively assessed all the sectors and identified areas needing improvement. The PRC program has evolved since then, and ADBs operations department has understood well many of the sector operational aspects. Overall, ADBs lending program is very solid. The PRC portfolio is one of the best among client countries, rating highly compared with ADB averages and other large country programs. As such, this CAPE does not dwell much on the operational aspects in all of the sectors. Instead, it focuses on strategic and institutional aspects of ADBs operations in the PRC, and on the key operational thrusts in lending and nonlending operations. Country Background. During the past 25 years, the PRC achieved remarkable economic growth of more than 9% per year, and managed to keep inflation in check over the past decade. In 2005, the country ranked fourth in the world in terms of gross domestic product (GDP). Since 1990, investment growth has been very strong, funded mostly from domestic sources. During 20032005, gross national savings averaged 44.6% of GDP, and net foreign direct investments averaged $56.1 billion. Overall, the continued strong economic performance increased average GDP per capita from about $890 during 19982002 to about $1,485 during 20032005. Externally, official reserves rose sharply to $1 trillion by 2006. Despite this impressive performance, the PRC has several key challenges that remain in terms of sustainability of its environment and natural resources, vulnerability of its financial sector, and conduciveness of its legal and regulatory environment for private sector development. Because of sustained rapid economic growth, the PRC is ahead of schedule in achieving the Millennium Development Goals for national poverty reduction. For instance, the share of absolute poor (below $1 a day per capita income) declined to 13% of the population by 2003, compared to the goal of 16.5% by 2016. Most of the reduction took place during the first CAPE period. Unfortunately, such progress has gone hand in hand with worsening income inequality across regions, and between urban and rural areas. Most of the poor are children, elderly, disabled, and people living in remote, upland, and desert areas. New forms of poverty also have emerged, represented by migrants to urban areas who lack access to social services and are not hired due to the urban registration system, and laid-off workers from state-owned enterprises who have not found new employment. The poverty distribution indicators suggest that more targeted and innovative approaches are needed to work on (i) persistent absolute poverty, increasingly concentrated in hard-to-reach groups; (ii) the vulnerability of a large population living on the brink of poverty; and (iii) new manifestations of urban poverty. Whether ADB is institutionally ready to address the conditions that foster such poverty is unclear. The Governments external borrowing policy substantially influences ADB operations in the PRC, which began in 1986. The Government encourages borrowing for revenue-generating projects, since provincial governments bear full responsibility for repaying external loans. Early ADB operations (19861990) supported industrial and agriculture projects with a production focus, although these were dropped over time because of their variable performance. Several major Government policy initiatives shaped ADBs program during the CAPE period. ADB strategy outlined in the 1997 country operational strategy and 2003 country strategy and

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program (CSP) reflected this evolution in the Governments policies. When possible, ADB supported the Governments efforts to promote economic growth in the inland provinces and to enhance environmental protection, while recognizing the adverse impact of market failures arising from rapid growth. During the CAPE period, the lending program increasingly became concentrated in infrastructurelargely transportand urban water supply and sanitation. This composition reflects ADBs strategy to reduce infrastructure bottlenecks, especially in the inland poor provinces, and to focus on a limited number of sectors where ADB has a comparative advantage and the potential for value addition is evident. Whether the PRC will continue a borrowing relationship with ADB in the longer term depends on a variety of factors, including (i) perceived benefits and costs from ADBs loans in the form of knowledge transfer and access to services, and benefits from technical assistance (TA) grants versus financial and nonfinancial costs; (ii) reliance on ADB as a trusted partner in promoting regional economic cooperation and integration; (iii) the Governments assessment of the role that it can play as an influential borrower in multilateral development banks, such as ADB, in shaping financial and/or developmental policies toward client countries; and (iv) the potential benefits that might emerge if the PRC chooses to be seen purely as a bilateral aid agency and an important shareholding country of ADB. Currently, the PRC appears to believe that the net benefits are positive, though the value of the perceived benefits is declining while perceived costs are increasing. If this trend continues, the balance might shift. ADBs continued partnership with the PRC has two types of benefits. First, benefits accrue to global and regional development issues. For example, ADBs support can contribute to how the PRC addresses its challenges in energy, environment, and povertyproblems that are often more daunting than those faced by the rest of the Asian region together because of the PRCs size. Second, ADBs development mandate benefits from continuing the partnership with the PRC. The PRC is one of its most important clients and shareholding countries due to its (i) influence on ADBs portfolio size and quality; (ii) influence on regional economic activity through its trade, aid, lending, and other partnerships with countries in the region, as well as its contribution to regional cooperation; and (iii) ability to provide lessons from its development experiences and expertise based on its success with economic growth and poverty reduction. Past Lessons. The first CAPE identified several key lessons: (i) the country strategy should develop monitoring indicators relevant to long-term development objectives and prepare an action plan when deviations from the objectives occur; (ii) the strategy and the program were not consistent, and the range of parameters available to ADB in the PRC must be realistic; (iii) ADB should try to identify niches for itself, taking into account its limited resources and staff constraints; (iv) to contribute to a successful project, ADB should be involved early in the project formulation phase rather than at the post-feasibility stage; and (v) TA grants should be considered more fully in strategy development, and managed more efficiently and effectively. Progress on Lessons. This CAPE concludes that progress in learning from past lessons has been mixed: (i) progress in developing monitoring indicators has been limited, because of methodological issues and the focus of the program; (ii) progress has been made in aligning country and ADB strategies, as well as in developing a relevant program; (iii) ADBs lending program was concentrated excessively in transport, but became less so in recent years; (iv) ADBs success in getting involved earlier in the project cycle to help shape project designs has been limited, and more flexibility is needed from the PRC; and (v) while ADB tried to increase the effectiveness of TA, many issues remain. Assessment of ADBs Effectiveness. ADBs performance is assessed based on the following four perspectives and related subcriteria: (i) strategic positioning, (ii) institutional

positioning, (iii) value-added by ADB to development results, and (iv) sectoral program positioning. The first three constitute a top-down assessment from the country perspective, showing whether ADB has done the right thing from a strategic, institutional, and developmental results perspective. The fourth criteria, reflecting the sector level assessments, takes a bottom-up approach to show whether ADB has done things right based on the lending and nonlending operations in the key sectors. The overall assessment takes into account the top-down and bottom-up assessments. Strategy Assessment. The strategy assessment is based on the 1997 country operational strategy and the 2003 CSP, along with recent CSP updates. These documents represent a gradual and natural evolution of ADBs approach in the PRC, building on lessons from earlier strategy documents. The 2003 CSP goes further in aligning ADBs priorities with the countrys needs. Since it is also more responsive to the latest corporate thinking on strategy formulation, the 2003 CSP is used more as the reference benchmark. The two criteria used for the assessment are (i) alignment of country and ADB priorities, and (ii) positioning of the strategy and program under the thematic pillars. Given the strong Government role in shaping the programs of external agencies, an alignment between the PRCs and ADBs development strategies was inevitable. They differed early in the CAPE period, mainly in how each viewed lending for poverty reduction programs. Alignment improved with the evolution of institutional policies on poverty reduction strategy, along with ADBs efforts to locate more projects in the poorer interior provinces and enhanced efforts to address poverty issues through more focused advisory technical assistance (ADTA) grants. Thus, ADBs strategy alignment is assessed as successful to highly successful. Key considerations to assess the positioning of the strategy and program are the (i) coherence of the program; (ii) appropriateness of the strategy focus by sectoral, regional, and target groups; (iii) building of a critical mass of assistance for sustainability; and (iv) identification of strategic gaps and risks. In terms of the coherence of the assistance given the Governments borrowing strategy, ADBs operational program has evolved into a judicious mix of lending and nonlending (mainly through ADTA) services to meet ADBs strategic objectives under the four thematic pillars. By locating well-designed transport and energy projects in the interior provinces, and by diversifying the sectoral composition of the lending program, ADB has improved its ability to meet its developmental and poverty reduction objectives. However, the targeting of projects toward the interior regions might have been too rigid. With the recent emphasis on promoting innovation and knowledge transfer, coastal provinces might offer more opportunities to test new approaches that can have significant social and poverty benefits, which could be disseminated more widely. Private sector operations (PSOs) have been increasing, particularly in the last couple of years. However, the limited resources allocated and lack of strategic focus call into question whether a critical mass of expertise or activities has been established, or whether a robust strategy has been formulated. Given the strong role the PRC plays in selecting projects and identifying themes for ADTA, the identification of major strategic gaps in terms of development issues would be likely. However, with the prominence that the senior leadership has given to the increasing social and economic disparities, the extent of environment degradation, and the destructive aspects of corruption, the risks that these issues could derail the PRCs impressive achievements warranted more than the cursory attention accorded them in the strategy documents. Overall, the positioning of the strategy and the program is assessed as successful.

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Combining the two criteria, alignment and positioning, the overall strategy assessment is assessed as successful bordering on highly successful. Institutional Assessment. ADBs performance at the institutional level is based on five factors: (i) decentralization, (ii) available instruments and staffing resources, (iii) portfolio management system and indicators, (iv) corporate safeguards and standards, and (v) partnerships. Although with the establishment of the PRC Resident Mission (PRCM) in 2000, ADBs client responsiveness and visibility have improved, clients still think that ADB could have done more in this regard. ADB should have achieved a more efficient staffing structure and business processes to serve a client like the PRC given its size, rapid economic growth and transition performance and associated complexities. ADBs performance in decentralization is, therefore, rated as modest (partly satisfactory). In terms of using appropriate instruments, ADBs recent efforts to improve the quality of ADTAs in the PRC are encouraging. However, the gap between expectations and reality is still large. Excessive reliance on consultants is another concern. More effort is essential to build the technical capacity of in-house staff for focal areas in the CPS, and to reshape incentives in favor of knowledge-transfer activities. In terms of portfolio management, detailed reviews are carried out regularly. Given the strength of the portfolio, shifting its focus to developing practical and useful portfolio performance indicators that relate to development outcomes and reflect more clientoriented service standards, rather than focusing on ADBs internal needs as ADB moves closer to a more advanced partnership with the country, deserves consideration. As to ADBs corporate safeguards and standards, project preparatory TAs often have been used to revise and prepare safeguard documents (especially on environment), though they have not always been needed to the extent employed. There is now an opportunity to initiate the process for piloting country systems in environmental safeguard compliance. This also would be consistent with ADBs international commitments, such as those in the Paris Declaration, which calls for moving toward reliance on country systems as well as being responsive to middle-income country concerns. ADB helped the Government by working together in various projects and demonstrating how involuntary resettlement and indigenous peoples-related safeguards of international standards could be complied with. More is required in this regard, which would help the PRC to bring its involuntary resettlement and indigenous peoples safeguard standards up to internationally accepted levels. In other areas such as anticorruption and governance, ADB assistance has been useful. The local presence of ADB through the PRCM made it easier to develop operating relationships with the Government, as well as field-based partners such as the World Bank, World Health Organization, and United Kingdoms Department for International Development, and more recently nongovernment organizations. However, as has also been indicated above (decentralization), there is an opportunity to further enhance the role and effectiveness of the PRCM with more responsibilities and necessary resources and more client responsiveness in the future. Based on the five criteria discussed, the institutional positioning is assessed as partly successful. Assessment of Value Added to Development Results. ADB, with other development partners, has provided the PRC with a successful development experience by bringing in stateof-the-art technical, financial, and management expertise under various lending and nonlending operations. The results have been very successful given the high level of government ownership and rapid learning process. The successes of these operations are undeniable, because the capacity development has been so rapid such that continuation of business as usual in the same sectors is becoming redundant in some provinces. Nonlending operations have had mixed results in policy dialogue and capacity building in some cases. While TA

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operations have been successful individually, they have not been highly successful as a group due to the lack of strategic focus and inefficient management. Overall, ADBs value added to development results is assessed as successful. Sectoral Assessments. The overall sectoral positioning is rated successful (as indicated in Table 14 derived from the ratings validated in sector appendixes). Lending operations are assessed by sector, based on the potential outcomes of the completed and ongoing projects. The sectors are weighted according to their share of the value of lending during the CAPE period: transport (70%), urban (18%), rural development and natural resources (4%), and energy (8%). Most lending and nonlending services are highly relevant and efficient. However, rural development and natural resources, a sector with inherently complex projects spread over multiple areas, was less efficient. ADTAs are assessed as one group based on a TA effectiveness survey. Most operations are relevant, effective, and sustainable, given the strong Government ownership, although their efficiency can be improved. The potential development impacts are substantial. Overall Assessment. The ratings for each of the three perspectives (strategy, institutional performance, and value added) under the top-down assessment are given equal weight. The top-down and bottom-up (sectoral) ratings then are combined to derive the overall rating. The overall assessment rating for the PRC country assistance program is successful. ADBs program for the PRC is strong in terms of the quality of its portfolio of projects and the relevance of its strategy and sectoral programs, except for its support for the private sector. Since PSOs increased only modestly since 2004, an assessment of their performance is difficult, as it is with the regional cooperation initiatives (projects) also undertaken recently. The main weaknesses are in institutional positioning of ADB. Many of the issues are identified as systemic concerns for middle-income developing member countries (MI-DMC), and have been raised in other ADB reviews. These relate to (i) the way TA is being used; (ii) weak capacity and incentives to support knowledge transfer and innovation; and (iii) institutional structures and bureaucratic process and procedures, which weaken responsiveness to client concerns. Conclusions. ADBs relationship with the PRC is unique in many respects. The PRCs achievements over the past 2 decades have been exceptional by international standards. ADBs financial support has been minor in relation to the Governments total budget. Financial flows from three key international financial institutions, including ADB, account for less than 1% of the PRCs investment expenditures. Although the PRC would have succeeded with or without ADB, the progress has been more rapid, consistent, and sustainable because of the ADB-PRC partnership. ADB has added value as a consistent, trusted, and long-term partner, appreciated equally for providing reliable financing as for transferring knowledge and developing options. With more than 140 projects and about 500 TAs since the inception of its country program, ADB has helped to introduce many new ideas. Further, through learning-by-doing in its project management systems, ADB has promoted more procedural transparency, as well as discipline in financial and expenditure policies. Success, however, drives demand for more innovative and responsive servicesand this is the theme of this CAPE. The PRC is now an MI-DMC, and the services that worked well over the past several decades are not perceived to add comparable value for the future. At the same time, ADBs complex processes and safeguard requirements have tended to increase nonfinancial costs of borrowing. The external financial environment also has changed. MI-DMCs with good records of accomplishment increasingly are able to tap international markets for financing on attractive terms. Accessing knowledge and skills is also easier in todays globalized and information technology-linked world. As a result, ADB faces competitive pressure to improve its capacity to serve more differentiated clients. However, the relationship between the PRC and ADB is stronger today than it was a decade ago since each offers the other a package of benefits

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that is diverse and transcends pure financial considerations. This provides a solid basis for moving forward. In doing so, the following key issues and lessons have to be addressed. Key Issues and Lessons. The following key issues and lessons have been identified in the CAPE with respect to the alignment of the strategy, lending program, nonlending program, private sector operations, regional cooperation, and institutional reforms for .client responsiveness. Recommendations that follow from them are presented as needed at the end of this executive summary. Alignment of Country and ADB Strategies. Since evidence suggests that the Governments strategy and policies are working, ADB should draw on its own comparative advantages and skill mix to develop programs and provide services that can add the most value within the framework laid out by the Government. While relying on Government preferences, there is scope to provide alternative views and options that broadly fit within the country conditions, which might challenge current thinking. Diversification of the Lending Program. During the CAPE period, more than 70% of the value of the lending program was concentrated in transport (the ratio has declined in the last couple of years). A more diversified program, focused on a limited number of geographic areas or sectors, would support ADB and the PRC objectives. Given a notional lending ceiling of $1.5 billion, however, diversification must be balanced with the need to build a critical mass to ensure sustainability in a large country such as the PRC. Synergies need to be explored to avoid excessive dispersion of ADB operations. For example, a strong presence in the urban water and sanitation sector is an appropriate vehicle for ADB to address social and environmental issues confronting the growing urban population. Similarly, rural development (principally water and natural resource management, infrastructure) and energy (efficiency projects, climate change, and renewable resources) offer potential to support a range of development objectives, including inclusiveness, sustainability, and poverty reduction. Moving beyond these sectors, or getting into a broader range of activities within each sector, should be cautiously approached, taking into account available resources and managing capacity. Strong Government Ownership. Strong government ownership is the major reason for the high quality of ADBs program in the PRC. However, strong government ownership also can impede change by restricting flexibility to experiment with new approaches that ADB could offer. In principle, this should not be a serious problem since the Government historically has been keen in seeking out the best international experience. In doing so, however, the Government has been cautious in piloting new ideas before full implementation, which is a sensible approach. Differing perceptions about reforms and new approaches can be bridged. One means is to pilot new ideas more often in the government program, or as components of regular projects, before mainstreaming such concepts. Building on Beneficiary-Pay Principle. This principle might be the primary factor differentiating the PRCs strong project performance from other developing member countries (DMCs). However, this principle also restricts project selection by discouraging the use of loan financing for social and targeted poverty programs where the beneficiaries are often too poor to repay obligations or difficult to identify. Given the improvements in the PRCs financial and monitoring systems, some flexibility in this regard would be appropriate for projects that offer the potential for particularly innovative solutions to address social and/or poverty problems. Rationalizing the Use of ADTAs. Although most of the ADTAs are rated successful, many clients feel that this instrument is not being used to its full advantage. This is also an ADBwide concern and is consistent with the finding of a recent evaluation of TA performance by the

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Operations Evaluation Department. To rationalize ADTAs, several initiatives can be undertaken including developing country-level ADTA strategies, providing incentives to staff undertaking ADTAs, and facilitating more efficient management of ADTA implementation. The CAPE believes that the PRC has the capacity and commitment to gradually take on implementation responsibilities of ADTAs in selected sectors. This would mean ADB would have to provide advisory capacity and approval function at different times, as it does in projects. Moving toward a results-oriented assessment would require following up on recommendations and going beyond completion of a polished written TA product. Innovation and Knowledge Orientation. As the PRC experience has demonstrated, institutions that rely on providing services are at risk if their clients change faster than they do. Sensitive to this concern in traditional lending sectors, ADB has been developing new lending vehicles and restructuring its operations to be more responsive to the PRCs needs. However, ADBs systems have not evolved quickly enough to match the PRCs circumstances. The following changes are needed: (i) client service standards should be monitored instead of portfolio indicators, which are geared to show ADBs financial management aspects; (ii) institutional knowledge should be retained rather than depending on a consultant-based system; and (iii) an approval process should be adopted that reduces transactions cost by delegating authority downward. However, for these changes to lead to something more than the sum of its parts, a cultural change within the institution would be needed. Private Sector Operations. The current PSOs of ADB falls far short of potential for a transitional economy such as the PRC where opportunities for private sector and also for nonsovereign operations are evident. In general, restructuring of state-owned enterprises, privatization, securitization, advice on the design of public-private partnerships, and institutional reform, etc., could be emphasized more. While lack of capacity can explain part of this, a clear vision on strategic choices to follow in a vast and diverse country would also be useful. Regional Cooperation. The ADB-PRC partnership has the potential to influence the future path of regional cooperation and economic prosperity in Asia. The PRC provides a dynamic market, a new source of foreign aid, and a vehicle for skills and technology transfer. ADB can help the PRC to continue with a multilateral approach, which has served it well, while intensifying efforts in other areas of regional cooperation. These include (i) improving connectivity in Asia, (ii) facilitating trade agreements, (iii) supporting financial integration, and (iv) cooperation on regional public goods as an honest and trusted broker. Reforms at Institutional Level are Needed for Better Services. While most loan and TAs are rated as successful, concerns are widespread about the efficiency of ADBs operations due to cumbersome procedures, excessive delays, lack of value added in some areas, and excessive reliance on international consultants. Adhering to the recommendations of this CAPE is difficult in isolation of ADB institutional procedures and incentives. By restructuring managerial and staff incentives, ADB could be more responsive to client needs and provide a balanced mix of advisory and lending services. The strengthening of the resident missions staff structure would facilitate this shift in incentives, making them acutely aware of client needs. Key Recommendations. Many of the sector work that ADB has been doing in the PRC are useful and effective and, therefore, the CAPE makes minor recommendations for fine-tuning efforts in the relevant sections of the text in the main report. Also in hindsight, within the narrow scope of the PRC operations, some limitations of the strategies developed and implemented during the CAPE period are apparent. They relate to the need for appropriate monitoring indicators for results, to which country team should pay attention in terms of (i) formulating a few country level indicators and monitoring them as an integral part of the new CPS, and (ii) including

selected indicators in the portfolio performance review to monitor ADB service standards and client satisfaction because the client circumstances have changed and the market in which ADB operates is becoming more competitive. Several of these recommendations are influenced by ADB-wide business models and processes, established procedures, and resource constraints. It is clear that with rapid economic development in Asia and the increased diversity among its DMCs, it would be difficult for ADB to use a one size fits all model in terms of institutional response characteristics. For fast growing middle-income developing member country like the PRC, there is now an opportunity for ADB to respond with varying degrees of procedural flexibility. The key recommendations in the table below are put forward as directional inputs for consideration by the Management during the formulation of the 2007 CPS and its implementation (the background information for the recommendations are provided in chapter VIII of the main report).
Key Recommendations For consideration by ADB 1. To gradually diversify the lending program (i) select areas to focus based on client ownership and where the staff skills and management capabilities exist; (ii) retain a critical mass of lending activities in selected areas to make a difference and to ensure sustainability; and (iii) develop a skill base to support innovation in the selected areas and ensure competent staff members with delegated authority are available, especially in PRCM to nurture the new projects from concept to implementation. To strengthen the quality of nonlending operations (i) strengthen incentives for creating good knowledge products, and ensure that staff have the expertise to formulate and lead high-quality TA interventions; (ii) leverage ADTA output by partnering with the PRC or others to maximize impact by implementing ADTA recommendations; (iii) coordinate all ADB-related knowledge units, drawing their contributions into a more integrated demand-driven program that links with the PRC priorities; (iv) improve the efficiency of PPTA resource allocation to reflect differential costs of preparation, and change the allocations that were based on standard coefficients or amounts; and (v) create opportunities for innovation and new ideas from counterpart agencies and local think tanks by pilot funding a competitive research program at the PRCM and/or secondment arrangements with knowledge departments. To increase private sector operations (i) review the areas of focus and resource requirements (staff resources and skills) of ADBs strategy on private sector and nonsovereign operations in the PRC; (ii) define a private sector road map for the new CPS that specifies development targets and resource requirements; and (iii) equip the PRCM with more skills for private sector and nonsovereign operations, and provide greater responsibility, accountability, and leadership for proactive business development. To deepen regional cooperation initiative (i) provide a strategic framework for regional cooperation, selecting a few key areas of focus based on client ownership, ADBs familiarity with related agencies, and ADB staff capacity and experience; and (ii) intensify ADBs involvement as an honest broker in a few key areas that are of interest to the PRC and the region, such as (a) transport and trade facilitation, (b) cooperation on cross border issues, (c) trade agreements on energy and commodities based on mutual comparative advantages, and (d) dissemination of development knowledge and lessons across the region and ensure results monitoring. EARD and BPMSD Responsibility

2.

EARD

3.

EARD, PSOD, and BPMSD

4.

EARD and OREI

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Key Recommendations 5. To increase responsiveness to client concerns (i) gradually strengthen the PRCM capacity to improve client services by providing better communications, more delegation, and gradually moving from one-third staff to at least one-half the number of core staff based at the PRCM; (ii) gradually strike a balance between in-house staff expertise and consultants, such that core issues and priority focus areas are managed and undertaken by staff, and ensure that consultants are used strictly for specialized work where expertise is not needed regularly; (iii) consider gradually moving to client execution of ADTAs and shift accountability to clients with good governance mechanisms, successful ADTA track record, and are equipped to monitor and manage implementation progress and results; and (iv) move toward pilot testing of use of country systems for environmental safeguards against ADBs updated safeguards policy; and, if successful, gradually mainstream as in-country capacity is confirmed and monitor implementation and results using accreditation systems.

Responsibility ADB Management

ADB = Asian Development Bank; ADTA = advisory technical assistance; BPMSD = Budget, Personnel, and Management Systems Department; CPS = country partnership strategy; PRC = Peoples Republic of China; EARD = East Asia Department; OREI = Office of Regional Economic Integration; PPTA = project preparatory technical assistance; PRCM = PRC Resident Mission; PSOD = Private Sector Operations Department; TA = technical assistance. Source: Country assistance program evaluation team.

Ramesh B. Adhikari Director Operations Evaluation Division 2 Operations Evaluation Department

I. A.

INTRODUCTION

Objectives of the Country Assistance Program Evaluation

1. This is the second country assistance program evaluation (CAPE) for the Peoples Republic of China (PRC). Its objectives are to (i) review how the past lessons have been used in formulating strategies; (ii) assess the effectiveness of the Asian Development Banks (ADB) assistance program in the PRC from 1998 to 2005 (CAPE period); and (iii) identify lessons and make recommendations for the future, particularly for the preparation of a new country partnership strategy (CPS) and its implementation. 2. Prepared in 1998, the first CAPE (CAPE 1) for the PRC covered the period from 1986, when ADB began operations in the PRC, to 1997. CAPE 1 identified the following key lessons: (i) ADB-PRC strategy should develop monitoring indicators relevant to long-term development objectives and prepare an action plan when the deviations from the objectives occur; (ii) the strategy and the program were not consistentthe program largely reflected the borrowing policies of the PRC rather than the implementation of the strategy. In developing the strategy, the range of parameters available to ADB must be realistic, based on a frank discussion with the PRC authorities; (iii) ADB should aim to identify niches for itself, taking into account its limited resources and staff constraints, rather than trying to meet the PRCs needs over a wide spectrum; (iv) to contribute to a successful project, ADB should be involved early at the project formulation phase rather than at the post-feasibility stage; and (v) technical assistance (TA) grants are important to improve project quality, strengthen institutions, and contribute to policy reform. Advisory technical assistance (ADTAs) should be considered more fully in strategy development, and project departments should be involved more in managing TA operations. 3. This review, which covers all these issues, finds that progress in incorporating past lessons has been mixed. In short: (i) Progress in developing monitoring indicators has been limited, because of methodological issues and the focus of the program (paras. 9698); (ii) Progress has been considerable in aligning country and ADB strategies, as well as in developing a relevant program (paras. 3439); (iii) ADBs lending program was concentrated excessively in transport, but has become more diversified recently (para. 44); (iv) ADBs success in getting involved earlier in the project cycle to help shape project designs has been limited. More flexibility is needed from the PRC (para. 187); and (v) While ADB paid more attention to increasing the effectiveness of ADTA, many issues remain (paras. 7682). 4. CAPE 1 also showed that these lessons needed to be implemented by (i) classifying safety net operations under poverty classification (para. 207); (ii) extending the environmental work into green issues 1 (para. 147); (iii) conducting high-level dialogue on financial and governance sector reforms (para. 47); (iv) providing adequate due diligence by early involvement in project preparation (para. 233); (v) focusing and targeting the TA program better with the use of some cluster TAs and managing them more effectively (para. 218); and (vi) providing a better basis for results monitoring (para. 96). Box 1 in the 2003 country strategy and program (CSP) shows how and whether these implications were taken into account.2 This CAPE discussion will show how further progress has occurred in these areas as well. Substantial progress has been made with the first three implications. While the 2003 CSP has tried to adhere to the latter three implications as well, progress has been limited. The paragraphs where each of these issues is discussed are cross-referenced in parenthesis.
1 2

Green issues focus on the preservation of the living natural environment. The implication on early involvement in project preparation was not included in Table 3 of 2003 CSP.

2
Box 1: Implementation of CAPE 1a Recommendations Recommendations Actions Taken ADB should put safety net projects under the poverty Under ADBs new project classification system, such classification. Since the PRC is trying to develop a projects could be classified as poverty interventions. The market-oriented social insurance system, this area may Government does not wish to borrow OCR for social be suitable for OCR financing. security reform but continued ADTA in this area is welcome. ADB should extend its approach of addressing brown b environmental issues to cover green issues. Cofinancing with the Global Environment Facility for green projects could overcome constraints of using OCR funds for such project (e.g., cost recovery, unavailability of Asian Development Fund resources). ADB should develop a better understanding on how to help reform sensitive areas such as state-owned enterprises and the financial sector. High-level dialogue between ADB and the PRC is needed. ADB should support the work of KPIO and apply adequate due diligence in reviewing and accepting projects. PPTAs could be geared to strengthen the PRC feasibility studies. The TA program should be more focused, better targeted, and managed more effectively. Use cluster TAs to develop long-term relationships with niche agencies. The forward program includes projects to address brown and green environmental issues. The PRC-Global Environment Facility partnership on land degradation will allow ADB to be at the forefront in addressing the associated policy, legal, and institutional issues. There have been extensive discussions with the Government on how to strengthen the strategic impact of ADTAs. ADB helped strengthen KPIO. Two ADTAs have been completed and a third is in the forward program. PPTAs are designed to strengthen the PRC feasibility studies.

There are ongoing efforts to improve the strategic impact of ADTAs in line with a joint Ministry of Finance/ADB report. The forward program includes a more focused ADTA program better targeted on key strategic areas. ADB = Asian Development Bank, ADTA = advisory technical assistance, CAPE = country assistance program evaluation, PRC = Peoples Republic of China, KPIO = Key Project Inspectorate Office, OCR = ordinary capital resources, PPTA = project preparatory technical assistance, TA = technical assistance. a ADB. 1998. Country Assistance Program Evaluation in the Peoples Republic of China. Manila. b Brown issues cover air, water, and solid waste pollution, while green issues focus on the natural environment. Source: Country assistance program evaluation team.

B.

Scope of the Country Assistance Program Evaluation

5. CAPE 1 comprehensively covered all the sectors and identified areas for improvement. The PRC program has evolved since then, and the East Asia Department has understood well many of the sector operational aspects. Overall, ADBs operations are doing well (Table 1). The PRC portfolio is one of the best among client countries (para. 93), rating highly compared with ADB-wide averages and other large country programs. As such, this CAPE does not dwell much on the operational aspects in all of the sectors. Instead, it focuses more on strategic aspects of ADBs operations in the PRC, as well as the key operational thrusts in lending and nonlending operations.3 Table 1: Performance Ratings of Rated Projects by Circulation Yeara
Item 19901997 19982006 GS/HS/S PS US Total GS/HS/S PS US Total PRC 85.7 14.3 0.0 100.0 82.5 9.5 7.9 100.0 India 50.0 50.0 0.0 100.0 71.4 21.4 7.1 100.0 Indonesia 60.0 26.0 14.0 100.0 67.5 28.8 3.8 100.0 ADB-wide 51.4 33.7 14.9 100.0 67.8 27.4 4.9 100.0 ADB = Asian Development Bank, PRC = Peoples Republic of China, GS = generally successful, HS = highly successful, PS = partly successful, S = successful, US = unsuccessful. a Evaluation ratings from rated project completion and project performance evaluation reports circulated since the last country assistance program evaluation (CAPE) are reported here. The ratings presented are for projects mostly approved prior to the CAPE period (19982005), as many of the projects approved during this period have not been evaluated yet. Source: ADB Operations Evaluation Department internal database.
3

An assessment of the relevant sectors is in the appendixes. The draft CSP completion report prepared by the PRC Resident Mission provides details on program completion and implementation progress.

3 6. Given the CAPEs emphasis on the strategy aspects, it addresses the following fundamental questions: (i) how closely aligned are the PRCs and ADBs strategies and priorities; (ii) how does the program relate to the strategy; (iii) are ADBs organization structure, instruments, staff resources, and systems suitable for the countrys needs; (iv) how has ADB improved the effectiveness of partnerships between ADB and other development partners and between the PRC and ADB; (v) what were the results of ADBs sectoral programs, and were they effective, efficient, and sustainable; (vi) how effective a development partner was ADB in terms of the quality of its dialogue; advice and support; responsiveness to country needs; and consistency in following its mandate, objectives, and strategies; and (vii) what lessons are identifiable. C. Evaluation Methodology 7. The CAPE drew from a variety of recent in-depth and independent Operations Evaluation Department (OED) studies, including the transport sector (roads and railways) evaluation which covers 70% of the portfolio during the CAPE period (Appendix 1). The CAPE team also conducted rapid assessments of a sample of ongoing operations across sectors and thematic areas, using a variety of information-gathering techniques. These included project site visits; key informant interviews with the Government of the PRC (the Government), ADB staff, and consultants; literature review; and data analysis. The CAPE team conducted a desk review of the rest of loan and TA operations, using all available ADB documentation and other literature.4 The team carried out two special surveys on (i) TA effectiveness, using the same instruments as OEDs TA performance study had applied in parallel in other countries; and (ii) client perceptions of ADB. The CAPE team interacted closely with a variety of key stakeholders, seeking their views on useful areas for the CAPE to cover.5 The CAPE team provided the draft CAPE to stakeholders within ADB and the PRC in March 2007 to solicit their comments and suggestions. Their comments have been duly considered in the finalization of this report. The CAPE was also reviewed by an independent external reviewer, and his suggestions were incorporated as well. 8. Nevertheless, the CAPE has several limitations. First, given the extent of ADB operations in the PRC, covering all ongoing projects in-depth was difficult. The CAPE team visited selected project sites, and used information from back-to-office reports and project performance reports to assess the other ongoing projects. Second, 83 regional technical assistance (RETA) projects were approved during the CAPE period that included the PRC as one of the countries covered. However, determining the extent to which the RETAs involved the PRC was difficult.6 Third, because ADB provides less than 1% of the value of the PRC investment expenditure and the country is so large, comprehensively attributing or assessing the impact of the ADB program on the PRC economy, or any sector or province, was impossible. Fourth, because the schedule for the CAPE was tight to meet the CPS preparation requirements, the number and extent of field visits and surveys was kept to minimum requirements. Fifth, the CAPE guidelines were adopted in a flexible manner to suit the unique context of the PRC, and because this is the second CAPE for the country. D. Report Structure

9. Chapter II presents the PRC context and development priorities and strategies over the past decade. This provides a reference for summarizing ADBs assistance strategy and program in relation to the countrys priorities and needs. The unique aspects of the ADB-PRC relationship are given special attention. Chapter III assesses ADBs performance regarding strategic positioning, focusing on the relevance of the strategy, and the use of the four thematic pillars in
4 5

This includes the ADB. 2006. Completion Report: Country Strategy and Program (20042006). Manila (draft); and ADB. 2006. Regional Cooperation and Integration Strategy. Manila. A core team of 10 domestic and international consultants and ADB staff led by the CAPE team leader did the background work for the CAPE. The CAPE also made sure that all the standard accountability areas were covered in addition to the areas the clients felt were useful. During preparation, the CAPE team did not have an official inventory of RETAs that included the PRC.

4 shaping the program. Chapter IV assesses the key factors that underpin ADBs institutional positioning: organizational (decentralization), innovative use of operating instruments and staffing, portfolio management, safeguards and gender, and partnerships. Chapter V evaluates sectoral programs, while chapter VI provides a retrospective on development results in terms of ADBs value added. Chapter VII summarizes the performance ratings based on the CAPE assessments. Finally, chapter VIII concludes the report with issues and recommendations. Sector and thematic appendixes provide the background information for the CAPE assessments. Roads and railways sector assessments are contained in the transport sector assistance program evaluation (SAPE) for the PRC, which is available as a separate document.7 II. A. THE CONTEXT: PRC-ADB PARTNERSHIP AND DEVELOPMENT PRIORITIES The PRC Context

10. Background. Geographically, the PRC is the third largest country in the world with a land area of about 9.6 million square kilometers. It extends 5,500 kilometers (km) from north to south and about 5,000 km from east to west. However, only about 10% of the total land area is arable land. The arable lands are concentrated in the plains and river valleys of the lowlands in the east. The country is endowed with significant natural resourcesa wide variety of mineral resourcesalthough per capita reserves are small and require transportation over long distances to consumer areas. With an estimated population of 1.3 billion in 2005, the PRC is the most populous country in the world. The population is dispersed with the bulk of the population concentrated in the south and east. The second administrative tier of the country beyond the national government is organized into provinces, autonomous regions, special administrative regions, and four major municipalities. 11. During the past 25 years, the PRC achieved remarkable economic growth of more than 9% per year, and managed to keep inflation in check over the past decade. In 2005, the country ranked fourth in the world in terms of gross domestic product (GDP). Since 1990, investment growth has been very strong, funded mostly from domestic sources. During 20032005, gross national savings averaged 44.6% of GDP, and net foreign direct investments averaged $56.1 billion (Appendix 2). Overall, the continued strong economic performance increased average GDP per capita from about $890 during 19982002 to about $1,485 during 20032005. Externally, official reserves rose sharply to $1 trillion by 2006. 12. Since economic reforms started almost 3 decades ago, the growth strategy has reduced poverty dramatically. More than 400 million people have moved out of poverty by increasing agricultural productivity and creating productive employment opportunities in the service and manufacturing sectors. The country, however, still faces challenges in maintaining rapid growth and managing its resource demands given the environmental consequences. The mounting pressures on the countrys water, land, and other natural resources challenge the sustainability of the development process. The economy has become more urbanized than before with the share of urban population rising from 26.4% in 1990, to 29% in 1995, to 36.2% in 2000, and to 41.8% by 2004. This has increased the urban poor population (based on the country poverty line) to 22 million people, excluding the migrant workers. Moreover, the distribution of economic benefits among economic and social groups has not been equitable. The Gini 8 index deteriorated from 25 in the early 1980s to 40 in 1998 and is now about 45. Inequality exists in three dimensions: (i) rural-urban; (ii) east-west (geographic); and (iii) pockets of rural-urban poverty exist in various parts of the country, including the coastal regions.
7

ADB. 2007. Sector Assistance Program Evaluation of the Asian Development Bank Assistance for Roads and Railways in the Peoples Republic of China. Manila. The Gini coefficient is often used as a measure of income inequality. It is defined as a ratio with values between 0 (perfect income equality) and 1 (perfect income inequality). The Gini index is the Gini coefficient expressed as a percentage, and is equal to the Gini coefficient multiplied by 100.

5 13. Because of sustained rapid economic growth, the PRC is ahead of schedule in achieving the Millennium Development Goals for national poverty reduction (Table 2). For instance, the share of absolute poor9 declined to 13% of the population by 2003, compared with the goal of 16.5% by 2016. Most of the reduction took place during the CAPE 1 period when indicators were almost halved between 1990 and 1996a trend that has been sustained up to now. Using the official poverty line, the 2015 target of 4.7% was achieved as early as 1998 when the share of the poor fell to 4.6%. Other Millennium Development Goals targets are in Appendix 3.
Table 2: Summary of PRC's Progress Toward its Millennium Development Goals (1st and 2nd CAPE Periods)
Goal 1 2 3 5 6 7 8 9 10
Legend: Early achiever. Slow. On track. Regressing. AIDS = acquired immunodeficiency syndrome, CAPE = country assistance program evaluation, PRC = People's Republic of China, HIV = human immunodeficiency virus, PPP = purchasing power parity. Sources: Asian Development Bank (ADB). 2005. China's Progress Towards the Millennium Development Goals (MDG). Manila; ADB. 2003. MDGs: China's Progress . Manila; ADB. 2005. China Human Development Report . Manila; ADB. 2006. The MDGs: Progress in Asia and the Pacific . Manila; ADB. 2006. ADB Basic Statistics . Manila; and various PRC country strategy and program updates. Also available: http://mdgs.un.org/unsd/mdg/Data.aspx?cr=156

Indicator Share of population with income below $1 per day (PPP-values) (%) Share of population with income below the official poverty line (%) Share of children under five who are underweight (%) Share of population with inadequate caloric intake (%) Elementary school enrolment rate of school-age children (net, %) Enrolment rate in junior secondary education (gross, %) Infant mortality rate (per 1,000 live births) Under age 5 mortality rate (per 1,000 live births) Mortality rate of women in childbirth (per 100,000 births) Number positive for HIV/AIDS (in 1,000 persons) Positive rate for tuberculosis smear test (per 100,000 people) Proportion of land area covered by forest (%) Proportion of population with sustainable access to improved water (%) Share of rural population with sanitary toilets (%)

CAPE Period 1st (19901997) 2nd (19982005)

14. Unfortunately, economic progress has been characterized by worsening income inequality across regions 10 and between urban and rural areas, 11 where most of the poor are children, elderly, disabled, and people living in remote, upland, and desert areas. New forms of poverty also have emerged, represented by migrants to urban areas who are not yet covered under urban registration system, and laid-off workers from state-owned enterprises (SOEs) who have not found new employment. These poverty indicators suggest that more targeted and innovative approaches are needed to work on (i) persistent absolute poverty, increasingly concentrated in hard-to-reach groups (e.g., remote communities and the elderly and disabled); (ii) the vulnerability of a large population living on the brink of poverty; and (iii) new manifestations of urban poverty. 15. Government Development Priorities and Strategies. ADBs operations in the PRC started in 1986 under the Governments Seventh Five-Year Plan (FYP) (19861990). During this period, the PRC was moving rapidly from a centrally planned economy to a market-oriented system. The objectives of the Seventh FYP were oriented toward establishing the foundations for more rapid growth and maintaining macroeconomic stability, while using the gains from growth to upgrade
9

Those with income per capita below $1 per day. The share of the population living in the central and western regions to the total rural poor had increased from 77% in 1992 to 86% in 2003. 11 The urban-rural income ratio increased from 2.5 to 1 in 1990 to 3.2 to 1 in 2004. The largest income gaps are in Shanghai and Beijing. However, in all provinces, rural per capita income is barely one-third of the overall per capita income for the province.
10

6 productivity, improve enterprise efficiency, and acquire technology from abroad for continued social and economic development. In subsequent plans, the PRC established the basis for a more dynamic nonstate sector, and strengthened its production and trade links with the world. 16. During the CAPE period (19982005), the PRCs Ninth FYP (19962000) shifted toward more balanced and sustainable growth (Appendix 4). It noted the massive funding needed for infrastructure development, and provided incentives to attract foreign capital into the sector. The Ninth FYP also increased the emphasis on (i) mitigating environment degradation, especially in major cities; (ii) preventing further deterioration of natural ecosystems; and (iii) promoting growth in the poorer inland provinces. The 10th and 11th FYPs (20012010) embraced the concept of developing a xiaokang (all around well-off society) by maintaining steady economic growth and improving living standards in a more sustainable and balanced way through the new countryside policy. While these plans retained earlier targets of doubling per capita income by 2010, they shifted the development philosophy from a growth-centered approach to a more peoplecentered one12 by achieving five balances between (i) rural and urban development, (ii) interior and coastal development, (iii) economic and social development, (iv) people and nature, and (v) domestic and international development. B. ADB Context

17. The Governments external borrowing policy, which encourages borrowing for revenuegenerating projects since provincial government agencies bear full responsibility for repaying external loans, substantially influenced ADB operations in the PRC. In its early operations (19861990), ADB supported industrial and agriculture projects with a production focus (Box 2), though these were dropped overtime because of their variable performance. Thus, the lending program increasingly became concentrated in infrastructurelargely transportand urban water supply and sanitation. This composition reflects ADBs strategy to reduce infrastructure bottlenecks, especially in the inland poor provinces, and to focus on a limited number of sectors where ADB has a comparative advantage and the potential for value addition is evident.13
Box 2: The PRC Pre-Country Assistance Program Evaluation Operational Assistance
As of 31 December 1997, the Asian Development Bank (ADB) had approved 64 loans to the Peoples Republic of China (PRC) amounting to about $7.03 billion. Of these, 22 had been completed. The loans, which all came from ADBs ordinary capital resources, were concentrated in physical infrastructure, with the transport and communications sector accounting for 41% of total lending, and the energy sector another 22%. The agriculture, industry, finance, and urban infrastructure sectors accounted for the remainder. During this period, ADB approved 273 technical assistance (TA) totaling about $122.9 million in grants. The annual TA program increased from about $34 million per year to about $20 million in 1997. The sectoral pattern of TA operations differed significantly from lending operations to contribute to the soft sectors, such as human resource development and targeted rural poverty programs where the PRC borrowing from ADB was limited in the absence of concessional loans for the PRC and because the Government had access to other funding. Source: ADB. 1998. Country Assistance Program Evaluation in the Peoples Republic of China. Manila.

18. Several major Government policy initiatives shaped ADBs program during the CAPE period. After initially focusing on the coastal provinces, the PRC launched its Go West strategy in the second half of the 1990s. Renewed attention to the depressed Northeast provinces was added a few years later along with increased concern with environmental sustainability in line with the concept of a more harmonious and balanced development process. This shift in policies was inspired by the sharp rise in commodity and energy prices; growing political awareness of the costs of degrading land, water, and air resources of the country; and concerns
12

The approach will require a shift from the current growth pattern that encourages capital-intensive industry to one that is less resource-intensive and more knowledge-driven, with benefits better shared by the population. 13 ADB is renewing its attention to environmentally-focused projects in energy and agriculture and natural resource management.

7 brought on by increasing inequities in incomes and differential access to social services. ADB strategy, outlined in the 1997 country operational strategy (COS) and 2003 CSP, reflected this evolution in the Governments policies. When possible, ADB helped the Government to promote growth in the inland provinces and enhance environmental protection, while recognizing the adverse impact of market failures in environment arising from rapid growth (chapter III). 19. The country strategy documents were developed in line with the priorities in ADBs long-term strategic framework, approved in 2001,14 which is to be implemented through a set of three mediumterm strategies (MTS). The long-term strategic framework defines three core areas of intervention to support poverty reduction: (i) sustainable economic growth, (ii) inclusive social development, and (iii) governance for effective policies and institutions. MTS I15 also outlined a series of reforms to align the organization with the institutional priorities, and to streamline processes to become a more client-oriented and knowledge-based agency. MTS II (20062008)16 has aimed to strengthen the poverty reduction impact of ADBs assistance programs in the context of the main challenges facing the region. To achieve this objective, it has adopted five strategic priorities: catalyzing investment, strengthening inclusiveness, promoting regional cooperation and integration, managing the environment, and improving governance and preventing corruption. 20. The overall strategic objective of the 2003 CSP was pro-poor growth with assistance organized under four thematic pillars (para. 40). The Poverty Reduction Partnership Agreement between ADB and the PRC endorsed this poverty reduction focus in 2003.17 The agreement recognized that projects in transport, energy, water management, and environment can play an effective role in reducing poverty. Appropriately designed and located projects in these sectors, combined with pro-poor analytical work, could be effective in supporting poverty reduction. According to the 2003 CSP, the shift to a pro-poor orientation would be achieved mainly by allocating the dominant share of the program (averaging $1.5 billion per year) to the poor interior provinces, thereby reducing regional disparities (Appendix 5). 21. The 2003 CSP also highlighted other strategic objectives, including enhancing the business climate to encourage greater private sector investment, strengthening public sector governance, and promoting environmental sustainability. Further, it added the objective of integrating the PRC into the global and regional economies in the context of its accession to the World Trade Organization (WTO) and its emergence as one of the regions largest economies. This objective would be addressed by strengthening regional cooperation, especially between the PRC and the Greater Mekong, Central Asia, and Mongolia subregions (paras. 5253). 22. During the CAPE period, ADBs lending program declined gradually from about $1.2 billion in 1998 to about $0.8 billion by 2002, and then increased to $1.21.5 billion in recent years (Figure 1). The rise in volume of lending reflected an increase in the size of some of the infrastructure projects, especially in transport, since the number of projects has been relatively stable at 67 annually. In a departure from the pre-CAPE period, more than half of the value of the loans was programmed for transport infrastructure. This continued focus on infrastructure lending was based more on the Governments and ADBs assessment of its comparative advantage, as well as the Governments external borrowing policy and loan repayment requirements, than priorities determined by ADBs corporate mandates.
14

ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and the Pacific: The Long-Term Strategic Framework of the Asian Development Bank (20012015). Manila. 15 ADB. 2001. Medium-Term Strategy (20012005). Manila. 16 ADB. 2006. Medium-Term Strategy II 20062008. Manila. 17 Before 2003, the Government was unwilling to use ordinary capital resources loans to fund poverty reduction and nonrevenue-generating health and education projects because of concerns regarding cost and other obligations. However, during the last CSP, the Government agreed to consider utilizing ADB loans and TA in developing health and education programs, but with the understanding that some grant assistance needs to be available to soften terms of lending.

Figure 1: Loans Approved During the Year, 19982005

1,600 1,400 Loan Amount ($ Million) 1,200 1,000 800 600 400 200 0 1998 1999 2000 2001 2002 Energy Transport and Communications 2003 2004 2005 Agriculture and Natural Resources Multisector Water Supply, Sanitation, and Waste Management

Source: Asian Development Bank database.

23. Hence, nonlending activities became more critical in advancing ADBs goal of promoting inclusive growth. Thus, the 2003 CSP highlighted ADBs role as a provider of knowledge-based products and services in spending the $14 million for core nonlending services. The distribution of ADTA was spread more evenly across sectors than the loans. Of the 145 ADTAs financed since 1998 to 2005, about one-fourth was for governance and economic management, reflecting ADBs effort to encourage policy dialogue and capacity building within the Government in the absence of program loans. In addition, 18% of the ADTAs focused on the finance sector and 16% in agriculture sector. C. Evolution of ADB-PRC Partnership

24. The nature of the assistance relationship with ADB emanates from the strong role that central agencies such as the Ministry of Finance (MOF) and National Development Reform Commission (NDRC) have in shaping ADBs program. Currently, borrowing has been set at $1.5 billion, with the program based on a 3-year rolling plan. The composition of the program in terms of sector distribution and the geographical location has little leeway for change. However, the central agencies try to cater to ADB strategy and focal areas, which they know in advance. An interpretative overview on the evolution of this relationship is in Box 3. 25. As discussed in chapter III, to continue this successful partnership with the PRC, ADB needs to (i) offer more innovation in terms of knowledge transfer, (ii) apply differential procedures based on client capacity, (iii) delegate and decentralize for higher efficiency and client responsiveness, and (iv) enhance its staff skills in areas of strategic thrust. 26. The PRC, on the other hand, can assist this evolution in how ADB operates in the PRC by (i) providing more flexibility for early involvement in the design of selective projects (para. 233); (ii) promoting longer-term collaboration at the provincial and municipal level to facilitate joint efforts in developing more challenging options (para. 236); (iii) identifying projects that could pilot the use of country safeguard systems, starting with environmental safeguards (para. 235); and (iv) enhancing the impact of TA through application to domestic programs (para. 234).

Box 3: The Evolution of the ADB-PRC Partnership The first decade of the Asian Development Banks (ADB) relationship with the Peoples Republic of China (PRC) was a learning experience for both sides. On the one hand, the PRC believed strongly in the principle of country ownership of the program and establishing firm boundaries for the role of external agencies. ADB, on the other hand, was guided by its medium-term strategic frameworks, which set objectives and provided a context for individual country strategies. ADB, therefore, was interested in a broader range of involvement in line with corporate objectives and was uncomfortable with the sense of being just a taker of projects. The PRCs size also gave it a degree of influence that was atypical for a developing member country. These factors, together with the lack of any validated framework for supporting a transitional economy, led to an uneasy relationship with ADB and uncertainty on how ADB could add value to this process. The development strategy adopted by the PRC during the period 19861997 was largely growth oriented and focused on the coastal provinces where trade and industrial expansion were most feasible. This reflected a belief that the benefits of rapid growth would eventually trickle down to the poor. ADB, however, was not fully comfortable with this approach, as exemplified by its project classification at that time in which growth and poverty were mutually exclusive categories. Thus, while ADB was keen to include projects in health and education and to support targeted poverty projects in rural areas, the PRC insisted that such projects could be undertaken only with ADBs soft funds due to nonrevenue generating nature of the projects. On this and other related issues, ADB found it difficult to convince key Government counterparts of the merits of its institutional policies and strategic priorities. The PRCs planning and approval procedures for externally funded investments allow limited scope for ADB to influence ideas at an early stage of the planning process. At the same time, Government policies stipulate that for loan-financed projects, the beneficiary should repay principle should apply. Thus, the provinces usually are responsible for repaying obligations and, in many cases, this is passed on to local authorities, agencies, or even households, as appropriate. While the process constrains the role that ADB plays in project selection and formulation, it has ensured strong Government ownership and commitment to project implementation. Many of ADBs strategy and evaluation documents reflect the sensitivities between what has been seen as an overly rigid client ownership process and its compatibility with ADBs institutional mandates. Especially in the late 1980s and first half of the 1990s, differing views within the international community about the pace and nature of the PRCs reforms influenced this issue. However, by the mid-1990s, the PRC was becoming recognized as model of how rapid growth can lift massive numbers of people out of poverty, and the important role that infrastructure can play in the process. ADBs strategy has evolved in line with these developments. The PRCs and ADBs strategies and programs are now more closely aligned. The prominence that ADB has given to regional issues, at a time when the PRCs role in regional and global affairs has become significant, also has reinforced relations. In addition, international financial institutions generally have increased their support for country-driven programs, particularly when backed by a credible record of accomplishment. The PRC also recognizes that its program must be grounded on a poverty reduction framework for ADB to operate within its institutional mandates. ADB also has moved away from the view that it must address poverty objectives in a projectspecific context, and that growth and poverty reduction are mutually exclusive objectives. As is now recognized, poverty reduction can be viewed from the perspective of the country program as a whole and the role ADB can play in that process. Increasingly, assistance strategies are framed more by the concept of a partnership rather than a funding agencyrecipient relationship. This is also a motivating factor behind the willingness to introduce more flexibility in working with countries with stronger capacities and performance records. In all these issues, the PRCs impressive development record has influenced thinking within the international community. Source: Country assistance program evaluation team.

27. Since the Governments external assistance policy is based on passing repayment obligations on to the beneficiary, the case for borrowing from ADB also rests on whether the local governments and implementing agencies foresee high enough returns on projects and adequate revenue prospects to warrant borrowing. Thus, the relative attractiveness of ADBs terms compared with other sources determines whether the borrower should tap domestic or external sources. For many provinces, the demand for financing from multilateral development banks (MDBs) continues to be strong, because returns on investments are still high relative to the costs of borrowing at current rates. 28. Whether the central Government will continue a borrowing relationship with ADB in the longer term depends on a variety of issues, including (i) the Governments assessment of the role that it can play as an influential borrower in MDBs, such as ADB, in shaping financial and developmental policies toward client countries; (ii) the potential benefits that might emerge if the PRC chooses to be seen purely as a bilateral aid agency and an important shareholding country,

10 and its influence within ADB from that position; (iii) perceived benefits and costs from ADBs loans in the form of knowledge transfer and access to services, and benefits from TA grants versus financial and nonfinancial costs; and (iv) reliance on ADB as a trusted partner in promoting regional economic cooperation and integration. Currently, the PRC appears to believe that the net benefits are positive, though the value of perceived benefits is declining while perceived costs are increasing. If this trend continues, the balance might shift. 29. ADBs continued partnership with the PRC has two types of benefits. First, benefits accrue to the global and regional development issues. For example, ADBs support can contribute to how the PRC can address its challenges in energy,18 environment, and poverty19 problems that are often more daunting than those faced by the rest of the Asian region together because of the PRCs size. Second, ADBs development mandate benefits from continuing the partnership with the PRC. The PRC is one of its most important clients and shareholding countries due to its (i) influence on ADB portfolio sizeduring the CAPE period, the PRC was ADBs largest client, accounting for 29% of ordinary capital resources (OCR) lending; 13% of TA, including ADTA and project preparatory technical assistance (PPTA); and 37% of private sector operations (PSOs); (ii) influence on the portfolio qualitythe PRC has a very high success rate in postevaluation results 20 (Table 1), and its portfolio indicators on implementation are also much better than ADB average; (iii) influence on regional economic activity through its trade, lending, and partnerships with countries in the region, as well as its contribution to regional cooperation; and (iv) ability to provide lessons from experiences based on its success with economic growth and poverty reduction. III. STRATEGIC POSITIONING: COUNTRY STRATEGY ASSESSMENT

30. This chapter assesses whether ADB-PRC strategy met the countrys needs and ADBs priorities. The analysis is based on ADBs performance in (i) aligning country and ADB priorities, and (ii) positioning the strategy and program under the thematic pillars. These two basic strategy assessment criteria are divided into six subcriteria, which are discussed in sections A and B of this chapter. The discussion allows looking back analytically at ADBs strategic decisions to learn from this experience. The assessment ratings for the six subcriteria are presented in chapter VII. A. Alignment and Relevance of the Strategy to Country and ADB Priorities

31. To understand the alignment and relevance of the strategy to country and ADB priorities, the CAPE evaluates (i) the alignment between the PRCs and ADBs strategies and priorities (para. 34); (ii) whether the country strategy meets ADBs overarching poverty reduction objective and is consistent with the PRCs priorities (para. 37); and (iii) relevance and conceptual soundness of the thematic pillars, which have been used to develop the strategic framework (para. 40). 32. As discussed in the previous chapter, the PRCs successive FYPs shifted toward more balanced and sustainable growth, coupled with poverty reduction. While these FYPs continued to emphasize the massive funding needs for infrastructure development, they also stressed mitigating environment degradation and promoting development in the poor interior provinces. More recently, issues such as widening income inequality and sustainability of the growth process have received high prominence in policy discussions and planning.
18

Based on 2004 data, the PRC is the second biggest user of electricity globally, accounting for 13% of total demand. The PRC is also the second largest polluter of carbon dioxide in the world (at 18% of total), being the host for 45% of global coal production. Source: 2006 Key World Energy Statistics. 19 The PRC lifted more than 190 million people out of absolute poverty from 1990 to 2002. This is more than 90% of global poverty reduction in that period, partly because poverty in other countries increased. Source: World Bank Poverty Assessment. 20 Based on the project completion report (PCR) and project performance evaluation report data.

11 33. In turn, ADBs strategies as reflected in its MTSs increasingly recognized inclusive growth, environment, and infrastructure as part of a broader approach to poverty reduction. In 1999, ADB adopted poverty reduction as its overarching goal. According to the poverty reduction strategy (PRS), at least 40% of its public sector lending was to be devoted to poverty interventions by 2001, with substantial increases in lending for core poverty interventions by 2002. The enhanced PRS shifted the focus of poverty reduction from the project level to the country level. 21 It also highlighted the potential poverty reduction from private sector development (PSD). This complemented the PSD strategy formulated in 2000, which emphasized strengthening the capacity of clients to create an effective enabling environment for the private sector and encouraging innovative public-private partnerships. 34. Alignment of Country and ADB Priorities and Meeting Poverty Objectives. Given the major role that the Government plays in shaping the programs of external agencies, a close alignment between the strategies of the PRC and ADB was inevitable. They differed early in the period, mainly in the importance accorded to lending for poverty programs because (i) the Governments policy prohibits the use of OCR financing for such purposes, and (ii) ADB mandates that poverty reduction be addressed through targeted project-specific approaches under the PRS. 35. An assessment of ADBs strategy for the CAPE period leads to three key questions regarding its effectiveness in addressing poverty: (i) has the strategy of locating infrastructure (mainly transport) projects in the interior provinces been adequate to address poverty objectives or does ADB need to differentiate which poverty groups it can reasonably hope to assist (para. 36); (ii) what are the benefits of incorporating social and poverty components in traditional infrastructure projects to augment their pro-poor content (para. 37); and (iii) has programming more freestanding ADTAs to address poverty and social issues in the absence of lending added value, or has this produced a range of ad hoc interventions with few tangible results. 36. When poverty was widespread in the PRC, the trickle-down effects of rapid growth coupled with market reforms ensured that vast numbers of the poor would benefit. Based on the Governments definition of the absolute poor (income below $0.7 per day), the number of poor has fallen to about 22 millionlargely those in especially isolated and often environmentally degraded areas with few resources and disadvantaged groups, including the physically impaired and disabled. This group is not a feasible focus for a large organization like ADB to support given the need to implement intensive community level programs to lift these absolute poor out of poverty. By using a standard of $12 income per capita per day, the number of relative poor totals more than 400 million, a reasonable target group for ADB interventions in a middle income-developing member country (MI-DMC). Many of these groups have benefited in the past from infrastructure projects in poorer regions. This is in line with the Poverty Partnership Agreement in the PRC where the emphasis was on indirect poverty reduction through infrastructure development and PSD in poorer provinces. 37. A decade ago, the trickle-down effect was a reasonably plausible argument to justify the poverty-enhancing basis for infrastructure projects in the interior. However, such an argument might be less valid today.22 To address such concerns, some recent transport projects have
21

MTS II also elaborated on this. The enhanced PRS shows that within the framework of the three pillars, interventions for poverty reduction can be short term or long term. It acknowledges that ADBs strengths are in financing relatively large investments in the medium to long term, and supporting institutional reforms that have a widespread, indirect impact. 22 The PRCs financing of highways has depended largely on tolls. According to previous studies done by ADB and others, user fees in certain cases can improve efficiency and have positive poverty consequences. There is potential to revisit the effectivity of toll fees versus user fees. While tolls have been quite effective in securing resources for expansion and maintenance, it can discourage broader use of services particularly in less densely populated regions where the capacity of the toll road is not adequately utilized. Consideration needs to be given to the pros and cons of moving to provincial wide toll charges rather than highway specific including greater reliance on user fees (licenses and a higher fuel tax), together with the need for a well functioning decentralized fiscal system.

12 added components supporting feeder roads and health awareness activities to augment social and poverty benefits. However, OED evaluations suggest that adding such components to transport projects might not yield enough benefits to warrant the increased complexities, which have reduced project effectiveness in some cases (chapter V, section A). At this stage in the PRCs development, the poverty justification for transport projects should not be based on direct access of the poor to such services or the indirect effects of growth. Instead, the rationale for such projects should emanate more from the benefits of improving connectivity of markets and labor across regions. Thus, ADB can justify its support for infrastructure as part of its overall PRS without embellishing such projects with targeted social and poverty components. 38. Although locating projects in poorer regions is a valid approach to address poverty objectives, applying this guideline too rigidly weakens ADBs ability to address a broader development agenda. Pockets of extreme poverty exist in all provinces. Poverty and social problems are emerging issues in urban areas, often with greater impact in the megacities along the coast. Many of the urban poor, especially migrant families, lack access to normal social services because regulations in the urban registration system restrict their access to public services.23 Assisting those who are temporarily unemployed and the disadvantaged has become a pressing issue. At the same time, environmental problems reduce the likelihood of the PRCs major cities becoming globally attractive centers of excellence. With the rapid deterioration in equality within and across regions, the current leadership has elevated these social concerns to issues of national importance. If ADB intends to support the PRCs overall development priorities, a poverty-oriented strategy taking into consideration equity, inclusiveness, and sustainability needs to be applied more flexibly with regard to the geographic location of projects. 24 Such flexibility also is needed for projects with more innovative aspects as new approaches might need to be piloted in coastal areas if the lessons are to be transferred into the interior over time. 39. Given the Governments policy on borrowing for social and poverty projects, ADBs assistance strategy over the CAPE period represents a reasonable compromise in positioning the institution to address the clients priorities. Locating infrastructure projects in poor regions combined with more nonlending activities on pro-poor issues has increased the overall poverty focus of the program. However, the rationale for this approach would have been strengthened if the 1997 and 2003 strategy papers had (i) defined more clearly the target poverty groups for feasible interventions, 25 and (ii) been more persuasive about the role of connectivity in supporting poverty objectives. In addition, the institutional guidance on how poverty reduction objectives should be addressed was in a state of flux during this period, which resulted in the country team operating with uncertainties about what constituted acceptable approaches. 40. Relevance of the Thematic Strategic Pillars. The 2003 CSP was developed using four thematic pillars. Three of these are essentially the same pillars used in strategy documents over the past 15 years, although the sequence and nuances have changed to reflect subtle shifts in priorities (Table 3). After identifying a strategic gap, a fourth pillar was added in 2003 CSP to reflect the special prominence that ADB was giving to regional cooperation. PSD and PSOs were embedded as subcomponents of the pillar on making markets work better. CAPE 1 was concerned whether the pillarsas well as many of the subthemesare too general to be operationally useful. A reasonable question was whether relying on essentially the same three pillars for more than a decade was justified (para. 42).

23 24

In most cities, migrant workers and their families are not eligible for subsidized social services and housing. While 93% of transport projects during the CAPE period were in the central, western, and northeastern provinces, 78% of urban projects were in the eastern provinces. 25 Perhaps as those living on $12 income per capita per day range.

13 Table 3: Comparison of Thematic Pillars in the Peoples Republic of China Strategy Documents
1991 Operational Strategy 1. Improving efficiency of the economy 2. Poverty alleviation 1997 Country Operational Strategy 1. Improving economic efficiency 2. Promoting economic growth to reduce poverty in the inland provinces 3. Enhancing environmental protection and natural resource management 2003 Country Strategy Paper 1. Make markets work better

2. Promote equitable and inclusive growth 3. Environmental protection and 3. Promote environmental natural resource conservation sustainability 4. Foster regional cooperation Source: Asian Development Bank various strategy documents for the Peoples Republic of China.

41. This classification, however, has been useful given the countrys approach to development and its performance over the past 2 decades in moving from a centrally planned to a more marketbased socialist economy. With varying degrees of emphasis, these three thematic pillars mirrored the countrys FYPs.26 With ADBs institutional priorities and the more prominent role that the PRC is playing in regional affairs, adding the fourth pillar in 2003 made sense. As a strategy document, the 1997 COS uses the three pillars less as a conceptual basis for program formulation, instead of relying more on a sectoral approach. As such, the pillars and subthemes do not play as important a role in framing the rationale of the strategy as in the 2003 CSP. The 2003 CSP is more purposeful in developing a theme-based strategic framework. Under each pillar, 36 subthemes are specified to underpin the country program and to serve as benchmarks for assessing results and performance. The 2003 CSP gives a better sense of relative importance in providing a more vetted list of lending and nonlending priorities.27 This presentation is helpful since most strategy documents tend to convey an excessively broad range of priorities, which makes it difficult to understand the heart of the program. B. Positioning of the Strategy and Program Under the Four Thematic Pillars

42. The thematic pillars were used more extensively as a framework to shape the program of projects and TA activities in the 2003 CSP compared with the 1997 COS. How well has the program positioned ADB to support the strategic objectives underpinning the thematic pillars as well as the overall country strategy? In assessing performance, the CAPE has drawn heavily on benchmarks and specified priorities outlined in the 2003 CSP.28 Using the thematic pillars as the backdrop, four strategy assessment criteria are used: (i) coherence and composition of the program; (ii) focus on specific sectors, regions, and target groups; (iii) capacity to generate sustained results and build a critical mass; and (iv) identification of strategic gaps and risks. 43. Promoting Equitable and Inclusive Growth. Without soft funds, ADBs program in support of this pillar depends largely on (i) locating infrastructure projects (mainly transport and energy) and agriculture projects in the poorer interior regions; and (ii) undertaking advisory and TA work on pro-poor topics, largely through ADTAs augmented by resources from the United Kingdoms Department for International Development (DFID) 29 and the Global Environment Facility (GEF). The geographic focus has shifted significantly over the past decade (Figure 2). Before 1997 COS, a majority of ADBs lending was in the coastal areas. From 1998 to 2001
26

With the growing pressures on natural resources and environmental degradation, the focus has shifted gradually from rapid growth to sustainability. The poverty problem also evolved from trying to uplift massive numbers of the poor through production-oriented strategies to narrowing regional inequalities partly through Develop the West initiatives, as well as recent efforts to revitalize its distressed industrial centers in the northeast. 27 CSP 2003, page 35. 28 See ADB. 2003. Peoples Republic of China: Country Strategy and Program (20042006). Manila (Table 5, page 35), which gives the priorities and sector focus organized by the thematic pillars. Box 9 (page 39) gives performance benchmarks for the success of the strategy and program in accordance with the thematic pillars. 29 DFID is supporting ADBs poverty reduction efforts through the Poverty Reduction Cooperation Fund to enhance propoor aspects of ADBs operations. Through the end of 2005, 17 projects for a total of $9.21 million had been approved.

14 roughly the 1997 COS periodlending to the interior provinces rose to about 75% of total value and then increased to more than 90% during much of the 2003 CSP period. Judged purely against the strategic objective of shifting the location of projects, this outcome can be considered a successalthough more flexibility might have been needed (para. 38).
Figure 2: Location of Lending by Strategy Periods, 19912005
5 Loan Amount($ billion) 4 3 2 1 0 19911997 Eastern Provinces 19982001 20022005 Central and Western Provinces

Source: Asian Development Bank database.

44. Although not an explicit CSP objective, diversifying the sectoral composition of lending is seen as an important factor in positioning ADB to enhance the inclusiveness of the program in helping to address problems. These problems most often affect the poorer groups of society. The diversification largely involves reducing the share allocated for transport projects and becoming more involved in areas where the potential for adding value and addressing social and poverty issues would be greater. The program was not diversified significantly during the CAPE period (Figure 3).30 However, intensification of agriculture operations,31 coupled with growth in urban and energy projects, should create a more diversified portfolio in 20062008. In this context, several projects have emerged linking low-income farmers to enterprises and the production base. This value chain development is likely to be promoted further in the future.
Figure 3: Lending Program by Sector by Strategy Period, 19982008
6,000 Loan Amount($ Million) 5,000 4,000 3,000 2,000 1,000 0 19982001 20022005 20062008 Water Supply, Sanitation, and Waste Management Transport and Communications Energy Agriculture and Natural Resources (including Flood Control)

Source: Asian Development Bank database.

30

Seven multisector loans approved during the CAPE period were included in the sector that they are most related to. These involve five loans in agriculture and natural resources (including three in flood control); one in energy (energy sector development); and one in water supply, sanitation, and waste management. 31 Recent developments in GEF indicate that GEF will not provide funding for sustainable land management for the PRC. The Government has indicated that this will not affect the needed borrowing for land degradation projects. However, it might restrict capacity development efforts for which the Government is unlikely to borrow.

15

45. In addition to diversifying the lending program, effective advisory activities to address propoor policies more generally will increase support for poverty reduction (paras. 7778). A broad range of ADTAs examined issues such as (i) improving basic education through information communication technology, (ii) addressing HIV/AIDS on road projects, (iii) strengthening food safety regulations, (iv) encouraging participatory processes and nongovernment organization (NGO) involvement in project design, and (v) supporting initiatives in areas such as nutrition (now emphasized under the 11th FYP). While most of these specific interventions added value, some were seen as one-off activities that lacked a means for follow up or continued ADB involvement. Overall, given the constraints to lending for poverty projects, the coherence and focus (sectoral, geographic, and target group) under this pillar was largely successful. Moving toward a more diversified sectoral mix of lending has helped strengthen the inclusiveness of the program, though building a critical mass in some areas has been a challenge. 46. Making Markets Work Better. ADBs objective to strengthen governance is reflected in improving the efficiency of markets and the performance of institutions in a rapidly transforming transition economy like the PRC. Thematically, governance was not prominent in earlier strategy documentsCAPE 1 did not mention governance. However, the 2003 CSP, recognizing this strategic gap, addressed governance as one of the crosscutting themes.32 Governance issues are especially complicated for transition economies, and ADB is supporting the PRC in this effort. The CAPE exercise, which included a rapid review of the various ADTAs on governance issues, found that they tended to rate well against the standard evaluation criteria, except for efficiency issues relating to processes and the quality of consultants (Appendix 6). 47. For example, ADTAs in public administration have provided guidance to the PRC in building good governance practices into bidding processes, procurement, consultant awards, and contract implementation, as well as through monitoring and evaluation (M&E). The ADTAs in the law and economic management category have supported legal and regulatory reforms, while the PSOs have provided an opportunity for enhancing corporate governance. 48. While ADBs contribution has been successful, concerns remain regarding whether ADBs interventions have established a critical mass in this regard. Another area of concern is whether ADB is seen as a leader in improving governance, financial intermediation, and infrastructure, which leads to an enabling environment for PSD and PSOs. This concern is perhaps most important regarding ADBs agenda for PSOs, because it has not created an identity in terms of financing impact or strategic presence. The private sector program during the CAPE period fell far short of its potential for a transitional economy such as the PRC. The special evaluation study (SES) on PSOs 33 proposed that, in general, greater emphasis could be placed on restructuring of SOEs, privatization, securitization, advice on the design of publicprivate partnerships and institutional reform, etc.strategies that are highly relevant to the PRC. While lack of capacity can explain part of this shortfall in PSO in the PRC, a clear vision or strategy on priorities for the country also is missing up to now (paras. 157158 and Appendix 16). The new CPS has an opportunity to address this. 49. At a sector level, many of the transport, energy, and urban water and sanitation projects contribute directly to making markets more efficient by improving a related sector governance. This is achieved largely by improving commercialization, regulatory regimes, and transparency in policies, as well as by enhancing related sector and corporate governance. Many of these projects are improving the functioning of markets by promoting connectivity and separating, for example, the provision of services from regulatory responsibilities in critical areas, such as power markets and railways. ADTAs played a relatively smaller role in supporting infrastructure-related policies,
32 33

CSP 2003, para. 93. ADB. 2007. Special Evaluation Study on Private Sector Operations. Manila (draft).

16 although some were undertaken on issues such as traffic safety and tariff policies for transport, energy, and urban entities. Overall, ADBs performance in making markets work better and strengthening governance is considered partly successful, largely because of weaknesses in the private sector program related to building a critical mass and sectoral focus. The strategic use of public-private partnerships and PSO in general might have increased the impact. 50. Past documents (1991 COS, 1997 COS, and CAPE 1) recommended that a TA strategy for supporting the PRC reforms needed to be developed. Without such a strategy, the TAs though usefulwould seem ad hoc and opportunistic. The new CPS provides an opportunity to develop such a strategy based on the recommendations of this CAPE and others. 51. Fostering Regional Cooperation. The Regional Cooperation Policy34 adopted in 1994 was reviewed in 2006. As a result, a new regional cooperation and integration strategy (RCIS) was formulated,35 acknowledging the need to adopt a more coherent and strategic approach to regional cooperation support. The RCIS has four pillars: (i) regional and subregional economic cooperation programs on crossborder infrastructure and related policies and procedures, (ii) trade and investment cooperation and integration, (iii) monetary and financial cooperation and integration, and (iv) cooperation in regional public goods. 52. Table 4 shows the regional cooperation strategies of the PRC, Greater Mekong Subregion (GMS), and Central Asia Regional Economic Cooperation (CAREC) for overlapping years. The three strategies emphasize connectivity and trade as the basis for regional cooperation, while the CSP and the GMS regional cooperation strategy and program (RCSP) also highlight PSD. However, some of the priorities of the CSP are not aligned with the priorities of the RCSP. For example, the prioritization of regional public goods (in the shaded area of Table 4) differs. The CSP addresses public goods in the financial sector, while the GMS and CAREC RCSPs prioritize health and environment issues. Table 4: Comparison of Regional Cooperation Strategies
PRC: 20042006 CSP (i) Addressing policy and institutional barriers on regional cooperation. (ii) Removing infrastructure constraints and other barriers to crossborder trade and investment. (iii) Encouraging private investment to support regional cooperation. GMS: 20042008 RCSP (i) Strengthening connectivity and facilitating crossborder movements and tourism. (ii) Integrating national markets to promote economic efficiency and private sector development. (iii) Addressing human development through health and other social, economic, and capacity building measures. CAREC: 20052007 RCSP (i) Increasing trade and integration with large markets, globally and in the regions proximity. (ii) Improve economic cooperation within the region to reduce cost of transport and facilitate transit.

(iii) Improve supplies of energy that are required to sustain growth as well as for basic necessities in harsh climatic conditions. (iv) Strengthening regional (iv) Sharing environmental and resource (iv) Tackle negative externalities such economic surveillance and management, especially of the watershed as environmental degradation, the regional financial systems of the Mekong River to help spread of communicable diseases infrastructure. ensure sustainable development and such as tuberculosis and HIV, conservation. narcotics trade, and trafficking in humans. CAREC = Central Asia Regional Economic Cooperation, CSP = country strategy and program, PRC = Peoples Republic of China, GMS = Greater Mekong Subregion, HIV = human immunodeficiency virus, RCSP = regional cooperation strategy and program. Sources: Asian Development Bank (ADB). 2003. Peoples Republic of China Country Strategy and Program (2004 2006). Manila; ADB. 2004. The GMS Beyond Borders: Regional Cooperation Strategy and Program 2004 2008. Manila; ADB. 2004. Central Asia Regional Economic Cooperation Member Countries: Regional Cooperation Strategy and Program 20052007. Manila.
34 35

ADB. 1994. Bank Support for Regional Cooperation. Manila. ADB. 2006. Regional Cooperation and Integration Strategy. Manila.

17 53. As of September 2006, the PRC had been involved in seven of the 26 GMS projects, as well as one loan involving CAREC countries. The PRC also participated in 96 of 125 RETAs from 1992 to 2006, which focused on the GMS. ADBs involvement in regional cooperation is most evident in transport projects linking the western provinces to Central Asia and southwestern regions to neighboring Association of Southeast Asian Nations (ASEAN) as part of the GMS collaboration (Appendix 7). In trade policy, a Trade Policy Coordinating Committee was created with support from the International Monetary Fund. As the second biggest consumer of energy, the PRC is interested in the security of the supply of energy from the energy-rich Central Asian republics. While the PRC has entered into several bilateral energy agreements with neighboring Central Asian republics, trading energy has not taken off under the CAREC program. However, ADB has provided several TAs to promote regional cooperation and trade in the energy sector. Agriculture-related trading activities (i.e., cotton and livestock from Central Asia and Mongolia), which might improve rural incomes, has not been initiated. In this regard, more attention could be paid to analyzing the content of trade and related trends. Regional surveillance-related activities including country level capacity building have been conducted under the Asia Regional Integration Center and the Office of Regional Economic Cooperation and Integration. ADB-PRC partnership is also promoting infrastructure development and trade with Mongolia. In general, the PRC has been an active player in regional economic cooperation, which also underpins its other development strategies such as regional development and addressing poverty in crossborder areas. 54. An emerging priority of the PRC is ensuring environmental and social sustainability. The negative externalities created by environmental problems, such as land degradation, dust and sandstorms, air pollution, and downstream impacts of dams, etc., need to be addressed under the public goods category of regional cooperation. In this context, ADBs involvement becomes beneficial to both parties, as crossborder solutions are needed. Similarly, social concerns, such as HIV/AIDS infection and trafficking in drugs and women have become part of regional cooperation initiatives. ADB can support initiatives that systematically minimize these negative externalities, and monitor the progress achieved. 55. Transition and development lessons learned in the PRC can be disseminated to other countries and vice versa. For example, the PRCs success in rapid economic growth-led poverty reduction might provide insights to other poverty-ridden countries in Asia. ADBs experience in rural finance, small- and medium-sized enterprise finance, and financial sector governance in other countries would offer useful lessons for the PRC, given its remaining challenges in rural areas and in the financial sector.36 ADB could be more active in ensuring the exchange of such lessons as part of knowledge transfer and regional cooperation. 56. The PRC has appreciated ADBs regional cooperation initiativesthe investment opportunities they have created and the services ADB provides as a facilitator and honest broker. The Government continues to regard its involvement in GMS and CAREC as extremely important in developing good relations with the PRCs immediate neighbors. The experience with severe acute respiratory syndrome (SARS) and avian influenza underscored the need to improve cooperation in containing crossborder outbreaks of contagious diseases, while the 1997 Asian financial crisis reinforced the importance of safeguarding regional financial markets. More recently, work is under way to strengthen in-country work on topics such as financial37 and trade integration, and to develop partnerships between research institutes within the PRC and elsewhere in East Asia to collaborate on topics of regional interest.
36

Related to this, ADB is proposing a national survey of demand and supply of microfinance services in rural and urban areas, and an analysis of this information to identify constraints. 37 By supporting the ASEAN+3 Economic Review Policy and Dialogue Process, Chiang Mai Initiative and Asian Bond Market Initiative, as well as examining issues related to greater monetary and financial cooperation and integration with studies on collective exchange rates, currency indexes, institutional and regulatory impediments, closer coordination of monetary policies, etc.

18

57. The PRC has shown strong support for ADBs regional cooperation objectives. In a unique gesture, the Government provided $20 million in 2005 to set up the PRC Regional Cooperation and Poverty Reduction Fund (RCPRF). It is the first such fund set up by a developing member country (DMC) of ADB and the first financed by the PRC at any international institution. This fund is spread over 5 years, with $4 million allocated annually for research, innovation, capacity building, and dissemination. At the end of 2006, the fund had allocated $5.87 million to finance 15 projects, prioritizing GMS (47%) and CAREC (26%) subregional programs. While RCPRF approved the highest number of projects (40%) for Regional and Subregional Economic Cooperation programs, it allocated 35% of the value to Trade and Investment Cooperation and Integration. 58. The PRC has started lending and investing in other developing countries in Asia. Up to now, there has not been a regional cooperation initiatives with the PRC and South Asia. However, it has indicated an interest in expanding transport, trade, and commercial ties with India and network development in Nepal. Two emerging economic giants appear to be reaching out toward each other. In November 2006, the PRCs Ministry of Commerce announced its intention to discuss a free trade agreement with India. Subsequently, the countries signed agreements to provide a framework for bilateral investment flows, and to ensure that Indian and the PRC investors receive fair treatment and legal protection in each others countries. Although these two economies are natural competitors in many ways, Indias success in services and the PRCs success in manufacturing offer the potential for gains.38 Hence, ADB has an opportunity to play an honest broker role in regional cooperation between the PRC and South Asia. 59. Overall, ADB has positioned itself well for the regional cooperation objectives. However, as work intensifies, the major concern is how ADB can deepen its impact in the PRC on issues such as trade, finance, health, and environment. Many of these responsibilities reside in Government agencies39 that do not have long standing and substantive relations with ADB. Some topics are in areas where ADBs program in the PRC is limited and in-house skills are scarce. Thus, building a critical mass, champions, and active partners in regional cooperation will be difficult. 60. Promoting Environmental Sustainability. This theme is of critical importance to the PRCs sustainable development, as well as its influence on the rest of the world. ADBs operations relating to environmental issues cut across a wide range of lending and nonlending activities in agriculture, energy, and urban water and sanitation and is expected to continue to do so in future strategies. For agriculture, it surfaces as natural resource management, supported with the medium-term GEF-financed partnership to address land degradation and ecosystems management beginning in the CAPE period. Advisory work is financed with multimillion-dollar grants in collaboration with six western provinces with a combined population of 117 million. 61. In the energy sector, ADBs strategy during the CAPE period took the form of projects and TA for energy efficiency, clean energy, and conservation after moving away from support for power generation in the late 1990s. Key projects are designed to increase the use of natural gas relative to coal, and to encourage more innovative coal-bed methane technologies with the potential to diversify sources of energy and reduce operational risks. Projects also have supported the conversion of inefficient small boilers and reduction in system losses. Advisory work has focused more on demand management issues in pricing and restructuring how the power system is managed and operated. Activities are expanding in the development of renewable energy systems, which is potentially a popular area for future operations, given ADBs technical experience, the public good nature of the sector, and Government support.

38

Based on ADB Presidents speech on The Development of PRC and India: Prospects and Challenges, February 2007, United Kingdom. 39 Such as Ministry of Commerce and Ministry of Foreign Affairs regarding regional cooperation.

19 62. Many aspects of the urban program also addressed environmental concerns. A series of projects upgraded urban water and sanitation services and dealt with pollution problems. Advisory work covered a range of topics including the legal and regulatory framework for urban environmental management, water and wastewater tariffs, and air pollution. These initiatives were designed to improve the livability and environmental aspects of urban centers. This line of lending became more important during the CAPE period as urban environmental issues became more obvious and financing constraints more pressing in light of the huge investment costs needed. 63. Aside from infrastructure-related sustainability issues, the 2003 CSP identified support for a broad range of environment-related policy and institutional issues as a high priority. Much of the interaction took place between State Environmental Protection Agency (SEPA) and ADBs former Environment Division. However, following ADBs reorganization, the focus of interaction was dispersed. This has reduced the potential for bringing ADBs environmental concerns to the attention of senior policy makers in the PRC, particularly brown issues such as air and industrial pollution. Major analytical gaps remain. Although ADB has an opportunity to contribute, it might no longer be well positioned institutionally to respond40 because of capacity constraints and lack of institutional focus. 64. Together, the coherence and sectoral focus of ADBs environment strategy have strengthened in recent years. However, moving up to the next level will depend on the success of its work in new areas, such as land degradation and energy efficiency, and being able to address urban and environmental concerns in a more integrated fashion. Developing a critical mass in environment-related operations to achieve a sustained impact will be a concern. Although many of these issues offer the potential for higher rewards and more innovative solutions, they also carry more risks of failure and false starts. As a development institution, these risks are worth taking. However, as discussed in the next chapter, they need to be supported by institutional reforms, improved skill mix, and better use of budgetary resources to enhance the chances for success. IV. INSTITUTIONAL POSITIONING: ADBS PERFORMANCE

65. As part of the middle-income country (MIC) initiative, ADB has been reforming policies and restructuring systems to provide services that are more responsive, efficient, and competitive than before. ADB has revised its long-term strategies, approved a range of new policies and financing instruments under the Innovation and Efficiency Initiative (IEI), and reorganized regional departments to improve efficiency. At the institutional level, this involves recognizing differing capacities to implement across countries and tailoring policies to fit diverse circumstances. It also has underscored the urgency of transforming ADB into more of a knowledge bank (i.e., provide knowledge services in addition to finance). The PRC has taken the lead in bringing these concerns to the attention of Management and the Board. During its work, the CAPE team gathered the PRCs concerns on the ADB-PRC partnership, which are summarized in Box 4. Five aspects are particularly relevant for this CAPE: (i) making better use of decentralization; (ii) promoting innovation through better use of operational instruments (TAs, new lending modalities, and staffing skills); (iii) managing the portfolio for development results; (iv) addressing corporate mandates; and (v) promoting more effective partnerships and expanding relations with NGOs. These aspects are assessed as part of the evaluation of ADB performance. A. Decentralization and Positioning the Institution

66. Established in 2000, the PRC Resident Mission (PRCM) significantly improved ADBs client services and understanding of country conditions for purposes of assistance strategy and program development. However, the pace of further decentralization of staff and responsibilities to the field office has not kept pace with growing needs and the clients expectations. Under the current organizational setup, one regional department is devoted almost entirely to the PRC operations.41
40 41

ADB. 2006. Special Evaluation Study on Environmental Safeguards. Manila. The PRC and Mongolia are serviced by East Asia Department, one of the five regional departments in ADB.

20

Box 4: The PRC Governments Views on Improving the Partnership with ADB In general, the Asian Development Bank (ADB) operations in the Peoples Republic of China (PRC) have been successful. The PRC learned a lot from working with ADB, especially on advanced management skills, training of project management staff, and international conventions and practices. It also has appreciated technical assistance (TA), and learned and benefited from the investment operations in infrastructure. The relationship with ADB has been comfortable. Projects. Future work in ADB should align with the new five-year plan (FYP). Energy efficiency, environment, and rural development have scope for such alignment. While the Government is glad that ADB plans to diversify its portfolio toward softer sectors, it (especially the National Development and Reform Commission) will be willing to borrow for these sectors only if the terms of the loans are softened. Even if affluent provinces are willing to borrow for education or health at ordinary capital resources (OCR) rates, such loans are not encouraged. While the coastal areas of the PRC can raise funds on their own, the poor western and central regions need ADBs focus and funds. For a project to be considered in these poor provinces, it must have a sound analytical background, an innovative approach, and cost recovery and reduced cost of funds. Advisory TA. Advisory TAs are one of ADBs advantages, and more effort should be given to use them effectively and efficiently. In the past, many of the TAs provided valuable knowledge inputs. However, due to rapid changes in the PRC, TAs should not cover too many topics but go deeper into selected key topics. ADB should set up a new system to provide incentives to ADB staff to be more effective and innovative in using TA resources. TA implementation could be improved with some procedural adjustments and more ownership by the executing agency. The findings should be disseminated through workshops, and procedures should be developed to implement recommendations. Project Preparatory TA. Generally, ADB project preparatory TAs (PPTA) take a long time to approve and implement, even when the PRC has carried out the feasibility studies. ADB should be more selective in the coverage of PPTAs and reduce the TA implementation time, or use the PPTA to provide something unique for the project even in traditional lending areas such as infrastructure. Instead of relying heavily on consultants, ADB staff should be much more involved in early project preparation. Sector Knowledge. Before discussing lending arrangements in a sector, ADB should understand the key issues in the sector and provide suggestions to address these issues through a project. Substantial sector knowledge is required for such a dialogue. More internationally experienced sector experts should be available at the PRC Resident Mission (PRCM) to discuss sector issues with the concerned ministries. Administrative Systems. ADB should delegate more administrative procedures to the PRCM to avoid delays with centralized administrative procedures. The pilot project for country-driven TA management was a good start, but the guidelines for such procedures have to be defined clearly, and further training is needed in the application of procedures. Additional work is needed to improve the efficiency of procurement, disbursement, etc. Consultants. There should be a better balance and more flexibility in the use of national consultant experts to increase the efficiency and effectiveness of ADTAs. Geographic Focus. Geographic focus is not encouraged, given the political realities of spreading the benefits of international financial institution-financed operations. Many municipalities are interested in international financial institution projects, which bring in new knowledge. To be fair, the distribution of projects has to be balanced among the provinces. In addition, focusing on a few provinces would affect the provincial-level capacity to handle foreign debt. The National Development and Reform Commission also does not encourage subsovereign lending. Environment. This is an important focus for the future. ADB has invested significant TA funds over a long period improving the countrys capacity to undertake environmental impact assessments and related work. This has led to the development of country systems ADB can rely on. Further work on environmental improvement is encouraged. Regional Cooperation. ADB is seen to have a comparative advantage in regional cooperation as an honest broker. Substantial work has been done in the Greater Mekong Subregion. More support is needed for developing member countries institutional capacity, power trading mechanisms, fair transportation, and guarantee facilities to promote private sector investments. Private Sector Operations. ADB has not prioritized the private sector agenda in the PRC. The Government would encourage ADB to formulate an ADB-wide private sector strategy, and decide what areas the Private Sector Operations Department can support and enhance the resources available. Source: Summarized from key informant interviews during the country assistance program evaluation missions.

67. Decentralization can improve dramatically the effectiveness of client services.42 The most significant aspects include shortening response times for core operational services (e.g., procurement and disbursements); expediting preparation of priority projects; better project supervision and troubleshooting; and improving the relevance of policy advice. More generally, decentralization (i) increases the institutions visibility among important country constituents;
42

ADB. 2000. Resident Mission Policy. Manila (para. 21). Under this policy, the resident mission provides the primary operational interface between ADB and the host DMC, and strives to maximize the efficiency, effectiveness, and impact of ADB operations in DMC. OED is currently undertaking an SES of Resident Mission Effectiveness due for completion by the third quarter of 2007.

21 (ii) promotes stronger links with other development partners; and (iii) sharpens understanding of the local scene, making it easier to fine-tune operational activities and policy dialogue. Decentralization also can help in rural development and PSOs that often need more intensive support at local levels and the need to stay attuned to market developments. 68. Neither the 1997 COS nor the 2003 CSP discuss decentralization as a strategic instrument to improve ADBs effectiveness. The establishment of the PRCM in 2000 is probably the main reason that client relations have improved significantly over the past 5 years. By bringing a dedicated contingent of senior staff into direct interaction with the client, ADB developed a more responsive program consistent with institutional priorities. However, from the concerns still being expressed by counterpart agencies regarding the speed, flexibility, and quality of services, ADB can do more to improve performance.43 In this regard, rethinking the institutional strategy to provide high quality services to the client requires strengthening the PRCM in terms of better communication, more delegation, better staffing, increased role and participation of local professionals and experts, etc.44 While the country team should keep this in mind while formulating the new CPS, further consideration of this issue should await the completion of the ongoing SES on Resident Mission Effectiveness, which intends to inform the review of Resident Mission Policy by the Strategy and Policy Department due for completion in the third quarter of 2007. 69. While the PRCM is relatively young, it was the second largest in terms of staff strength and fifth largest in terms of proportion of delegated loan administration in 2006. Its operational and administrative expenses were comparable (Appendix 8) to five major ADB resident missions.45 By 2006, 41% of the PRC loans were delegated to the PRCM, compared with the delegation of 51.5% to the other five major resident missions. While many resident missions have assigned their national staff to administering delegated projects, the PRCM and Nepal Resident Mission have assigned responsibility for implementation review of all the delegated projects to their national officers. 70. The PRCM has piloted some unique initiatives to improve the effectiveness of its program, including (i) TA awards system to provide incentives to increase TA quality, (ii) multipurpose TA facility for quick policy work, (iii) proactive public relations, and (iv) the preparation of on-time occasional papers on policy issues to advise the Government. These initiatives have paved the way for more innovation and effectiveness in the future. 71. Currently, ADB is trapped midway between its Headquarters-centric approach and a more country-centric approach that would shift the gravity of the program to the field office. Many of the PRC clients have expressed the need for further decentralization.46 For example, at the World Bank, twothirds of its staff working on the PRC are based in the field and one-third is in headquarters. Coincidently ADB, which has roughly the same number of staff working on the PRC, has the opposite ratioless than one-third in Beijing and two-thirds at Headquarters (Table 5). Appendix 8, section E presents the World Bank and ADB models in terms of the resources and staffing profile of their respective offices in the PRC. The PRCM does not have the capacity to be fully responsive to the PRCs needs both in terms of staffing structure, skills mix, and delegated authority. Thus, the costs of having a field office are not being offset by potential efficiencies that could be achieved. Moving forward, the first step would involve building more rapidly the capacity to handle all procurement
43

In 2006, a procurement officer was recruited for the PRCM to review the procurement requests of delegated loans before final approval by Headquarters. This has reduced the time taken to approve requests and allowed the PRCM to make quick clarifications of clients regarding procurement-related questions. Country directors in ADB have the authority to approve procurement for goods and works up to $10 million. 44 Strengthening the PRCM is one of many issues mentioned in the draft CSP completion report (page 41) to improve effectiveness, but the topic is not given prominence. 45 Bangladesh Resident Mission (established 1982), India Resident Mission (1992), Indonesia Resident Mission (1987), Nepal Resident Mission (1989), and Pakistan Resident Mission (1989). 46 All other CAPEs completed since 2005 for Bhutan, Indonesia, Lao Peoples Democratic Republic, Pakistan (forthcoming), and Uzbekistan have also advocated moving more staff to the resident missions, as part of making ADB services more responsive and efficient than before.

22 decisions and disbursement applications in the field (except for formal clearance of large procurement contracts, which would have to be reviewed at the Headquarters). Simultaneously, staffing the PRCM adequately with senior sector specialists from the Headquarters to leverage more national professionals would allow most of the supervision responsibilities, as well as up to half of the project preparations, to be managed in the field. Staffing of the economic and policy-related unit also needs to be strong enough to manage and undertake substantive work on general country issues and provide guidance on a broader range of ADTAs, while relying on Headquarters-based staff for guidance on specialized topics and coordinating regional cooperation, knowledge activities, and project processing. Careful handling is required to balance the need for technical expertise at Headquarters and in the field, and to identify and nurture client relationship skills needed for decentralization. A more ambitious decentralization initiative would require major institutional reforms in how ADB conducts its operations, business processes, along with revamped budget and personnel policies, to maximize the benefits of having more delegated authority in the field. Without such reforms, the potential improvements in client services and cost efficiencies would be hard to realize. Table 5: Comparative Estimates of ADB and WB Staffing for the PRC Operations in 2006
IP NO/P AA Total % in Country PRCM 7 14 18 39 31 HQ Operationsa 46 7 29 82 Central Office-COSO 2 1 2 5 Total 55 22 49 126 (% of total staff) (44) (17) (39) (100) WB Beijing Missiona 16 37 32 85 67 HQ Operationsa 30 12 42 Total 46 37 44 127 (% of total staff) (36) (29) (35) (100) AA = administrative assistant, ADB = Asian Development Bank, COSO = Central Operations Services Office, PRC = Peoples Republic of China, HQ = Headquarters, IP = international professional, NO/P = national officer/professional analyst, PRCM = PRC Resident Mission, WB = World Bank. a Shows staff years spent on the PRC work having taken out 15% of staff work on Mongolia operations. Source: Country assistance program evaluation estimates based on information from ADB and WB. Item ADB

B.

Innovation through Operational Instruments and Staffing Skills

72. Use of ADTA. Promoting innovation and knowledge transfer is now the main rationale for providing assistance to the PRC due to the countrys improved financial position. For lending, incorporating more innovative design elements presents special challengesin part because ADB relies on feasibility studies prepared by local agencies and in part because of the way that PPTAs are used to prepare documents according to ADBs reporting format and safeguard policy compliance. However, the way ADTA is used is perhaps even more important, given the constraints on project selection in the PRC due to the Governments borrowing policies. No other multilateral lending institution possesses ADBs flexibility and volume of resources for ADTAs. Thus, the way it is used can be the defining aspect of its role in knowledge transfer and innovation in the PRC, as well as in other DMCs.47 73. Advisory service, especially through ADTAs, has been the major instrument in promoting innovation and assisting the country in the reform process. During the CAPE period, ADB has shown some success in combining policy advice and the demonstration effects of new approaches
47

ADB. 2006. Asian Development Bank Perceptions Survey of Opinion Leaders 2006. Manila. ADB received a score of 39.55 (against a maximum of 80) in the most admired knowledge enterprise survey that ranks organization based on eight knowledge performance indicators. These criteria are to (i) create and sustain an enterprise knowledgedriven culture; (ii) develop knowledge workers through senior management leadership; (iii) develop and deliver knowledge-based projects and services; (iv) manage and maximize the value of enterprise intellectual capital; (v) create and sustain an enterprise-wide collaborative knowledge sharing environment; (vi) create and sustain a learning organization; (vii) manage client knowledge to create value and enterprise intellectual capital; and (viii) transform ADB knowledge to reduce poverty and improve clients standard of living.

23 in its projects and TAs. Most ADTAs, individually and on a sectoral basis, are rated as successful in self-evaluation during the CAPE period. However, concerns persist about whether ADB has reaped the full benefits of this instrument in a broader strategic sense as noted in this assessment and many previous studies (Appendix 9, Table A9.1). The efficiency in the use of TAs has generated strong and consenting opinions about the regarding procedural issues, overly complex processing systems, and responsiveness to client needs. As noted in the recent SES on TA performance,48 this borders on a more general failure at the management level. The SES also identifies the allocation of staff as an issue, given the understandable tendency for a division to allocate its most able staff to loan processing rather than the preparation of TAshence PPTAs rather than ADTAs. Although these weaknesses in institutionally-mandated policies and procedures have been raised in various studies,49 they have not been acted upon at the institutional level. 74. To complement past assessments, the CAPE team did a rapid assessment of one-third of the 151 ADTAs across all non-transport sectors.50 The overall rating is satisfactory, as ADTAs scored high in all criteria except in efficiency (Appendix 9, Figure A9.5). The general findings are, therefore, consistent with the view that most ADTAs and PPTAs in the PRC are performing successfully overall. The rating was particularly high in relevance, thus reflecting close symmetry between ADTA subjects and specific Government and ADB strategies. However, the assessment found their performance was mixed concerning the efficiency of the instrument and whether its full benefits are being realized. Previous assessments have questioned the absence of a strategic framework for use of ADTAs in relation to the overall country program and across sectors. Thus, this conveys the impression that almost any topic is potentially suitable for ADTA.51 Within the many aspects highlighted in the course of the assessments, five themes persist: (i) lack of strategic focus and planning of ADTA and RETA and synergism across activities; (ii) difficulties in selecting priority topics and securing client ownership; (iii) limited financial and staffing resources to ensure adequate coverage and proper implementation; (iv) cumbersome preparation and processing procedures which reduce efficiency and responsiveness; and (v) reduced impact because of poor follow through and weak dissemination. 75. While the PRC country team, with intensive support of the PRCM, has been active in trying to address perceived weaknesses in ADTAs over the years, significant problems have not yet been fully resolved. The 2005 ADTA review 52 completed by the PRCM recommended procedural changes for (i) strengthening the strategic focus by clustering ADTAs around priority themes; (ii) creating a multi-TA financing vehicle to expedite processing of urgent and often lowcost TA activities that often feed into the policy dialogue; (iii) establishing a better system for vetting proposals to ensure relevance and ascertain strong government ownership; (iv) coordinating better TAs being managed by regional and other units; (v) programming more staff time for supervision and cutting back on the number of ADTAs to improve implementation; (vi) paying more attention to staffing expertise in choosing which ADTAs to support; (vii) focusing more on local-level operations rather than central to increase the impact on policy and institutional reforms when warranted; and (viii) improving incentives through a TA awards program. 76. Although these initiatives have helped to produce products that are more interesting and useful, the gap between expectations and reality is still wide in the minds of the client as revealed
48 49

ADB. 2007. Special Evaluation Study on the Performance of Technical Assistance. Manila. Including standalone TA reviews by the Strategy and Policy Department (1997 and 2003), as well as OED annual reviews (2004 and 2006) and a Board information paper on knowledge management (2004). 50 The transport sector projects and TAs were assessed separately in the transport SAPE done simultaneously. The 151 TAs included six small-scale TAs. 51 An attempt at prioritizing and focusing for activities was made with the production of sector road maps in the 2004 2006 CSP, which might have provided a basis for developing a strategy on the use of ADTAs. However, these road maps were too broad to form the basis for planning. 52 ADB. 2005. More Focus of ADTA Operations in the PRC Review of ADTA Operations and Recommendations. Beijing.

24 by the client consultations during the CAPE exercise. While procedural weaknesses have been recognized and addressed to a certain extent, incentives and staff oversight and feedback are issues that are more fundamental. The CAPE recognizes that fundamental solutions are needed, including shifting accountability to the clients and correcting the incentives for staff. 77. Under the PRC program, a broad range of ADTA studies have been conducted covering poverty, governance, and more technical issues. The sectoral composition of ADTAs shifted during the CAPE period (Appendix 9, Figure A9.4) in favor of social issues, especially in the health sector as SARS and avian influenza drew attention to deficiencies in rural health services, along with a decline in advisory work in industry (in line with the phasing out of lending) and some increase for transport in line with its rising share in lending. Several of the more povertyoriented activities have been considered among the most effective of the ADTAs. 78. While overall ratings are successful based on individual TA (mostly) self-evaluations, most country programs have not captured the full potential and synergies of their TA interventions. For some of the ADTAs, questions arise about the long-term impact of one-off interventions for so many disparate issues without the means of scaling up initiatives or contributing to a strategic approach. ADBs lack of instruments or in-house capacity for follow-up also has raised concerns. Reviews of recent ADTAs for social and poverty issues have highlighted several notable products. However, this work has generated fewer benefits than it could have if pilot operations had created opportunities to implement the findings. Thus, ADB might work out more formal understandings with executing agencies for major ADTAs in social and poverty areas that the findingsif mutually endorsedwould be incorporated into government programs for piloting and potential mainstreaming. For some subjects supported by ADTAs, the challenge might be the lack of inhouse expertise to help shape or extend findings into more operationally useful recommendations. For such topics, ADB could develop formal collaborative arrangements with other development partners that have more in-house expertise or can implement the concepts in a project. 79. Finally, on average about $50,000$60,000, representing 9% to 14% of the TA amount, remained unutilized for each TA that was closed from 1998 to 2003 (Appendix 9, Table A9.2). This may reflect the savings of the contingency funds. Although, many executing agencies indicated the need for additional funds to better disseminate the results of the TA and to implement the recommendations, these savings had not been used for such purposes during the CAPE period. Some cited difficulties in getting ADB approval to reallocate TA savings for such purposes during the CAPE period. In the future, the need for such outcome-enhancing activities following the TA report would have to be taken into account and saving reallocation flexibility needs to be built into the TA design to maximize the efficiency, impact, and sustainability of this valuable resource that ADB manages. 80. Policy recommendations to improve the ADTAs are in chapter VIII (paras. 217219). Other suggestions for improving the operational aspects of ADTAs include (i) relying on quick response, less costly studies (such as those financed by the ADTA financing facility) to provide quick and effective inputs to policy makers; (ii) working at the provincial level to deepen the impacts; (iii) building synergies among related interventions to serve multiple objectives related to both lending and nonlending activities; (iv) avoiding multi-year programming of ADTAs and developing thematic clusters, which can be supported over several years; and (v) getting client feedback on effectiveness of ADTAs on a systematic basis. These are elaborated in Appendix 9. 81. There is an opportunity for ADB to reduce ADTA administrative burden on its staff by selectively delegating the administration of ADTAs to experienced clients with a good track record and governance standards. By doing this, ADB can free up staff time and resources used for administration to focus on designing ADTAs together with the client to provide better knowledge products that contribute to the policy dialogue in the country. They can also focus on disseminating findings and provide operational avenues to implement recommendations either

25 through projects from ADB, or the Government or other development partners. Such delegation would improve ownership and build the capacity of the clients, which is a fundamental objective of ADB assistance. A pilot program for delegating the management of ADTAs to executing agencies was carried out in selected countries, including the PRC. Five executing agencies were selected from the PRC for this exercise. Except for the PRC, the pilot exercise was considered not successful in the other countries and in the PRC as there were some implementation issues. Some of the issues that were raised regarding the piloting of ADTA administration may be due to teething problems of the piloting exercise, and these may be worked out after a few trials.53 82. The Economics and Research Department (ERD), Regional and Sustainable Development Department (RSDD), ADB Institute, and Office of Regional Economic Integration (OREI) are important knowledge departments of ADB.54 These units have carried out much work. ADB Institute, for instance, has worked on more than 60 studies on the PRC since 2000, and ERD has about five key publications pertaining to the PRC. RSDD knowledge products on the PRC are embedded in their regional studies, and OREI has publications specifically pertaining to the PRC regional cooperation issues. However, a coordinated strategy for knowledge management or the areas in which research is being done by these different units is not evident. 83. Project Preparatory Technical Assistance. The basic issue with PPTAs is whether as currently structured, this instrument is being used cost-effectively in the PRC. As discussed in the SES on TA performance (footnote 48, para. 113), ADBs outsourced business model, which is illustrated by its TA policies, has been strained as TA activities have become more complex and client capacity has strengthened. Excessive reliance on external consultants has weakened ADBs internal capacity to become more of a knowledge-based institution and has diffused accountability. The PRC program exemplifies these issues. 84. PPTAs, by design, are not necessarily a vehicle for promoting knowledge transfer and innovation. Yet, the resources that are potentially available for this purpose are substantial.55 As detailed in chapter V, some of the project preparatory work supported by PPTAs in traditional lending sectors tended to be largely repetitive and added little value. Nevertheless, more funding has been allocated to PPTAs than ADTAs recentlythe rationale for which is unclear (except for new sectors). During the CAPE period, funding often had been based on standard coefficients, though issues relating to project complexity and innovative design varied across sectors and projects.56 Some of the funding for PPTAs went into reformatting work that the client often already had done competently57 to fit the ADB project document. The CAPE concludes that PPTA allocations can be made more cost-effective, taking into account the differential costs of preparation and experience and capacity of the client. Any savings generated through this differential allocation can be utilized for other innovative knowledge-management activities.
53

Of the five pilots (TA 4327, TA 4340, TA 4363, TA 4384, TA 4447), one had TA completion report by end 2006, which was rated highly successful owing mainly to the high degree of client ownership. The TA performance reviews for two other completed pilots deemed TA performance to be successful due to timely consultant recruitment and completion of outputs by executing agencies in transport sector. However, financial closing was delayed because of the absence of supporting documents. These executing agencies also reported that the procedures outlined in the piloting exercise took more time than the normal procedures and that they needed more training initially. The TA supporting reforms in compulsory education financing has been extended due to delays and is still undergoing restructuring. The executing agencies for the remaining two pilots had a more difficult time with consultant recruitment, resulting in slower implementation progress. 54 OED also contributes to this knowledge pool and has a database on evaluation lessons and various publications. 55 From 1986 to 1997, an average of about $386,000 was spent on 71 PPTAs. From 1998 to 2006, an average of about $655,000 was spent on 77 PPTAs. During the CAPE period, the time gap between the PPTA approvals and the loan fact-finding missions averaged about 14 months (10 months for transport sector). 56 For example, operations in rural development and natural resources projects in central and western regions are more challenging due to the capacity of the borrowers and the existence of multiple subprojects, and might need additional PPTA resources. 57 The extent of duplication differs across task managers.

26 85. New Lending Instruments. In late 2005, ADBs Board of Directors approved a range of new policies and financing instruments and modalities under the IEI including a multitranche financing facility (MFF), subsovereign and nonsovereign public sector financing facility, and local currency lending. Since access to financing is not seen as a major issue for the PRC, such reforms are viewed primarily in terms of how processes can be streamlined for facilitating transfer of ADB resources. IEI products are designed to reduce transaction costs and processing time of lending projects (Box 5). For example, the sale of CNY1 billion in Panda bonds in 2005, with the proceeds allocated for PSOs, also is expected to have an important development impact on the PRCs bond market. These include the promotion of more diversity in bond issuers and meeting the needs of other financial institutions, such as pension funds and insurance companies.58 Further reforms are expected as part of the MIC initiative.
Box 5: Innovation and Efficiency Initiative Priority Action Areas. 1. Country Partnership Strategies. Results-based country strategies with strategic clarity covering investments to create future development impact. 2. Simplified Business Processes. Approaches, procedures, practices, and operations related to developing and administering the investment pipeline. 3. Procurement and Consulting Services. Guidelines relating to consulting services and the procurement of goods and works. 4. Cost-Sharing and Expenditure Eligibility. Flexible cost-sharing arrangements and other financing parameters, and additional items eligible for ADB financing. 5. Financing Instruments and Modalities. New financing instruments, accompanied by an independent credit risk management function and improved processing and assessment procedures and practices. These are: (i) Multitranche financing facility. Flexible framework for loans and guarantees; applied to an investment program coming out of a road map; spread over time in slices or tranches; combines physical and nonphysical investment activities. (ii) Nonsovereign public sector financing facility. Loans and guarantees for development projects without central government (sovereign) guarantees. (iii) Refinancing facility. Selective support to the restructuring of existing projects that may require additional capital or that could benefit from improved financing arrangements. (iv) Local currency loans. Loans structured in the local currency of a country to help reduce the mismatch between income received in a domestic currency and debt repayments in a foreign currency. ADB = Asian Development Bank. Source: ADB. 2007. Financing Instruments and Modalities: Flexibility in Development Finance. Manila.

86. Thus far, however, the PRCs interest in some of the IEI instruments is uncertain. This stems largely from the domestic investment project approval system, which favors review and approval of fully developed individual project proposals upfront and provides limited flexibility to local authorities in use of external funds. Thus, whether more flexible multitranche instruments or programmatic loans would draw Government support is unclear. Nevertheless, it is worth pursuing.59 Meanwhile, although the international borrowing rates are more attractive to MDBs than for the domestic banks, the domestic borrowing rates for MDBs are slightly higher than those for the PRC banks. This discrepancy is likely to limit ADBs competitiveness as a source of funding in the domestic market and, therefore, the local currency financing instrument may not be that competitive. It is also noted that the local currency generated by Panda bonds is meant only for the private sector limiting its accessibility. 87. Staff Skills. Clients have strong views on the desirability of further decentralization and having policy and technical staff with proven international experience to work with in the field. A successful decentralization also requires more flexibility in terms of the special skills needed by field-based staff who often have to interact with senior officials and media and develop practical solutions to complex issues. These are not necessarily the same skills found in seasoned
58

With the uncertainties about exchange rate movements and differential borrowing costs between ADB and local banks, the usefulness of Panda bonds as a source of funding for local borrowers remains to be seen. 59 Instruments such as the MFF and sector lending are important to rural development projects, agriculture sector, and urban development sector, as multiple subprojects can ease the transactions costs.

27 Headquarter-based mission leaders and managers.60 However, the absence of senior field-based staff with such skills could jeopardize the effectiveness and credibility of a field office. Thus, an effective decentralization effort also needs to recognize the special skill mix and seniority requirements of field-based staff, as well as implications for issues such as personnel levels. 88. Executing agencies have expressed concerns that ADBs technical skills and experience have weakened over the years. These concerns mirror findings of other ADB studies and most recently OEDs 2006 Annual Evaluation Review,61 which suggest that ADB is short of technical skillsengineers, financial analysts, agriculture specialists, etc.compared with the past. The consequence is that the percentage of missions led by technical experts, such as engineers, has fallen from 29% in 1995 to 22% in 2005, and the average age of mission leaders has declined from 47.9 years to 44.9 years during this period.62 As mentioned in chapter V, the skill mix for certain activities could have been stronger during the CAPE period in the field and at Headquarters, given the size of the program in areas such as railways and urban services. Similarly shifting the lending toward rural development, water and greenside environmental management will require a skill base and awareness of the PRC-specific issues in these areas as well. That an internationally recruited private sector specialist was not appointed to the PRCM until 2006 is another example of a major failing, given the importance of this theme to the program. 89. A related issue is ADBs often cited dependence on consultants to undertake much of its work. The PRC has noted that this lowers institutional effectiveness, because it makes building the kind of close relationships needed to follow-up on issues more difficult. Another weakness of this business model is that it substitutes capacity than building it with both the client and ADB. In addition, the knowledge gained is often lost to the institution. Use of consultants for specialized topics and one-off studies is warranted as a practical matter. It would be too expensive to keep in-house experts to cover topics that might come up only occasionally. However, ADB should avoid addressing major issues that could form important aspects of its work for extended periods if it does not have in-house expertise especially in the PRCM. Although this ostensibly has been a criterion for taking on clusters of activities, it has not always been adhered to. 90. Finally, the right mix of staff skills is not enough unless incentives are aligned with objectives. With the increased emphasis on knowledge transfer, and decreased emphasis on project financing per se, the way the staff are programmed and motivated for lending and advisory work can be revamped. Typically, in sector divisions with heavy lending responsibilities, staff are preoccupied with project preparations, and advisory work is a secondary consideration. Rebalancing priorities is essentially a managerial responsibility that should be taken more seriously. C. Portfolio Management for Improved Client Services and Development Results 91. The PRCs portfolio ratings are among the best in ADB, reflecting the strength of the clients commitment and capacity. Annually, an elaborate country portfolio review (CPR) exercise is carried out to monitor portfolio performance. However, questions remain regarding the effectiveness of this exercise in terms of (i) the relevance and management of the implementation indicators, (ii) client responsiveness in terms of service standards, and (iii) ability to learn from experience. The CAPE assessment concludes that many of the traditional indicators being monitored across the institution, or in the annual CPR exercises, do not serve the interests of a more sophisticated client such as the PRCalthough they might be relevant for other borrowers, or useful for ADBs internal financial monitoring and risk
60

The PRCM-based staff must have the ability to integrate across a range of issues and develop practical solutions suitable for the local conditions. They also require a degree of diplomatic skills much more than Headquarters-based staff. More flexibility is needed regarding grades of staff in field offices to allow for selection of higher or lower graded staff with the appropriate skills when warranted. 61 See ADB. OED. 2006. Annual Evaluation Review. Manila (pages 4148). 62 See ADB. OED. 2006. Annual Evaluation Review. Manila (pages 4243).

28 assessment purposes.63 The CPRs cover some more operationally relevant issues, such as the effectiveness of project management units. However, much of the focus is on financial management and other internally centric implementation indicators, which are not particularly important for addressing development results or providing client-oriented services. 92. Portfolio Performance. The public sector portfolio of the PRC, one of the largest in terms of size (18.5% of active loans amount), is performing well. Project performance was generally satisfactory with about 92% rated as satisfactory or higher during 19982005 in terms of project monitoring indicators compared to the ADB-wide ratio of 83% (Table 6). The share of projects at risk is 7.7% for the PRC compared to 14.7% for ADB average. Improvement in portfolio performance was remarkable over the past 2 years, with the ratio of loans rated satisfactory or better rising from 89% during 19982002 to 97% from 2003 to 2005much better than ADB averages. The 2006 CPR64 attributed the consistently favorable performance to a high degree of government ownership, strong institutional capacity, and a portfolio predominantly of infrastructure projects. Appendix 10 provides a retrospective of portfolio issues since CAPE 1. Table 6: Select Portfolio Management Indicators, 19982005
Active Portfolio (project loans, number)a 418.0 43.0 88.0 Active Portfolio (project loans, $ billion)a 26.7 6.3 7.6 Average Age of Active Portfolio (years) 3.5 3.1 3.0 Average Time from Approval to Signing (months) 3.4 6.2 4.8 Average Time from Signing to Effectiveness (months) 4.1 4.0 4.2 Contract/Commitment Ratio (%) 21.6 23.1 Disbursement Ratio (%) 21.7 23.2 Net Transfer of Resources ($ billion) (0.4) 0.0 (1.4) Portfolio Performance (all loans, end of period) Project Ratings (HS + S; %) 83.3 91.5 90.2 Project at Risk (number of loans) 90.0 4.0 12.0 Problem Projects (combined IP and DO, %) 16.7 8.5 9.8 Potential Problem (%) 2.3 0.4 1.6 Problem Projects (% of active portfolio) Implementation Progress (PS and US) 14.4 6.9 7.9 Impact and Outcome (PS and US) 6.1 3.7 2.0 b 14.7 7.7 11.9 Overall Risk Ratio of Portfolio (%) Supervision Intensity (staff days per project) 21.0 20.6 24.5 = not available, ADB = Asian Development Bank, PRC = Peoples Republic of China, DO = development objective, IP = implementation progress, HS = highly satisfactory, PS = partly satisfactory, REG = Central and East Asia region, S = satisfactory, US = unsatisfactory. a Comparative data for region refers to old East and Central Asia region. b Weighted average of 12 risk ratios from the ADB project performance reports. Source: ADB Central Operations and Services Office, Portfolio Management Information System.

Item

ADB-Wide

PRC

REG

93. ADBs portfolio is also robust according to postevaluation results derived by selfassessments (project completion reports [PCR]) and independent assessments (project performance evaluation reports [PPER]). Table 1 compares the PRC project performance to those in larger member countries and ADB average. For PCRs and PPERs circulated during the 1998 2005 period, 81% of the 58 evaluation reports indicated that the loan projects were highly successful or successful compared with the ADB average of 67%.65 By sector (Table 7), transport, energy, water (urban), and multisector projects showed at least 8090% success rates, while
63

ADB. 2006. Annual Report on Loan and Technical Assistance Portfolio Performance for the Year Ending 31 December 2005. Manila. For example, besides project performance ratings, the report covers several financial performance indicators: contract awards, disbursements, loan approvals, disbursement ratios, net resource transfer, and loan service payments. 64 ADB. 2006. PRC: Country Portfolio Review. Beijing. 65 The proportion of successful projects for all sectors in the PRC improved slightly to 82.5% of rated projects during 19982006. This improvement was due to continued successes in the transport and energy sectors, which improved from 92% and 83.3% to 93.1% and 84.6%, respectively.

29 production-oriented agriculture and industrial projects were less successful (and thus similar projects are no longer in the lending program). These results are much better than ADB averages. Table 7: Evaluation Results: Performance Ratings of ADB Loans by Circulation Year, 19982005 (as of 31 December 2005)
Sector Agriculture and Natural Resources Energy Finance Industry and Trade Transport and Communications Water Supply, Sanitation, and Waste Management Multisector 4 80 1 20 0 0 5 100 81 6 10 5 9 58 100 All Sectors 47 % = percent of total sector, ADB = Asian Development Bank, GS = generally successful, HS = highly successful, no. = number of projects, PS = partly successful, S = successful, US = unsuccessful. Sources: ADB Central Operations Services Office and Operations Evaluation Department internal databases. HS/GS/S No. % 2 33 10 83 1 100 50 2 23 92 100 5 PS No. % 2 33 1 8 0 0 1 25 1 4 0 0 US No. 2 1 0 1 1 0 % 33 8 0 25 4 0 Total No. % 6 100 12 100 1 100 4 100 25 100 5 100

94. The postevaluation results for TAs are based mostly on self-assessments, as only a few TAs are independently evaluated. The results by sector are in Appendix 10, Table A10.5. Of the 134 TAs evaluated, 76% are rated successful, with the highest rates shown in law and economic management (92%), and water supply, sanitation, and waste management (91%). The lowest rates were for finance (60%) and multisector (60%) projects. 95. Other Performance and Financial Indicators. Despite the strong performance, the annual ADB surveys often note problems regarding some of the financial and processing indicators. The PRCMs 2006 CPR (footnote 64) noted several shortcomings: (i) project implementation delays, (ii) delays in establishing project management units, (iii) delays in fielding consultants, (iv) poor compliance in submission of project accounts, and (v) delays in processing disbursements. The significance of these issues in relation to development results is unclear. An ongoing concern with the PRC portfolio is that average time from approval to effectiveness or first consultant award is significantly longer than the ADB average.66 In most cases, this is related to delays in signing of loan agreements but a major reason appears to be executing agencies preference to postpone signing and effectiveness until the first contracts to be financed by ADB are ready for award to minimize commitment fees, which start 60 days after loan signing. If so, then such delays might be sensible from the clients perspective. The CAPE team analyzed the impacts of these start-up delays and calculated the average completion delay according to the time they became effective. The analysis indicates that loan closing is delayed only slightly irrespective of whether the loans became effective early or late. For more than 50% of the loans that became effective from 5 to 12 months, the loan closing delay was lowest at 13 months compared to those which became effective earlier. This might be because, when the effectiveness is delayed to ensure that the initial arrangements are in place, the implementation is smoother. On the other hand, if the loans become effective early, they might not have the appropriate arrangements in place, prolonging implementation and raising costs for the client.67 Other concerns with the PRC portfolio, which were addressed during the CAPE period are (i) contract awards, (ii) disbursements, 68 (ii) loan prepayments, 69 and (iv) audit compliance, etc. These are discussed in detail in Appendix 10.
66

Loans are not effective within the standard 5-month period, comprising about 60 days for signing and about 90 days thereafter for effectiveness. 67 For the loans that became effective before 5 months, loan closing was delayed on average by 14 months. For those that became effective after 5 months, but before 12 months, average delay was slightly lower at 13 months. Finally, the closing of loans that took more than a year to become effective was delayed on average by 16 months. 68 The cyclical pattern in commitments during the review period explains declines in annual disbursements. 69 From a PRC viewpoint, prepaymentleading to negative transfersprobably should be seen as a desirable outcome of managing its debt profile rationally. If so, then monitoring net transfers is primarily an internal concern.

30 96. Building a Better Results-Based Monitoring System. In line with the four strategic pillars, the 2003 CSP proposed a series of benchmarks for evaluation purposes. These early efforts to incorporate a results-based approach are commendable as they came before ADBs management for results initiative. These benchmarks were refined and made more precise in a results framework in subsequent country strategy and program updates (CSPU). The 2006 CSPU, however, did not include a results matrix. Although the draft CSP completion report70 intended to do a results evaluation, and this was not undertaken. In the future, there is a need to formulate a few country level indicators and monitoring them as an integral part of the new CPS. 71 The weaknesses in the results framework reflects unresolved institutional thinking on how to translate strategic themes into indicators that would provide a practical basis for assessing outcomes. That past efforts have not been acted on appropriately is not surprising given several methodological challenges. These pertain to (i) attribution due to size and fungibility,72 (ii) time lag for results to emerge (because results in a given CPS period are those of previous CSPs), and (iii) capacity development (including the need to strengthen M&E methods and data sources). The PRC is also unique in processing reforms in a nonlinear fashion. It seeks options, adapts and pilots ideas, and moves forward with implementation at an appropriate time. Thus, the link (if any) between, for example, a study or TA that ADB might have supported and its influence on Government policy might be indirect and span years, and therefore, it becomes difficult to monitor for results. An assessment of country capacity for results monitoring is a requirement in a CPS exercise.73 97. Given the uncertain state of the methodology and the complexity of the PRC issues, more work is needed in developing indicators that can be monitored, linking interventions to outputs and in turn outcomes. As a practical matter, efforts might be channeled into developing appropriate results-based indicators for a more selective list of maybe 10 outcomes, which the program would want to identify as priorities. For each outcome, a few output-related interventions could be identified, which could be seen as major contributions by ADB. These indicators then could be used as the basis for future evaluations, becoming an integral part of the annual CPR. This would shift the emphasis of CPRs away from more traditional financial indicators to more results-based development indicators. Until an accepted results-monitoring system is in place, the only other set of indicators that can be tracked covers the quality and status of the portfolio.74 98. In addition to the monitoring development impacts of projects, ADB also needs to review how it performs in terms of responding quickly and efficiently to the client. For this, ADB needs to consider developing a set of indicators that would capture its service standards. For example, ADB could track the time it takes to (i) review procurement packages; (ii) approve withdrawal applications; (iii) approve subprojects; (iv) review safeguards; and (v) approve consultants hired under projects, etc. Tracking such indicators, reporting them in a project performance report, analyzing them to find the bottlenecks, and removing the bottlenecks would enhance the partnership aspect of the relationship with the PRC and strengthen incentives for more responsive client services. Currently, such indicators are not monitored systematically in ADB although the information is available in individual project documents and has to be incorporated into a database. This can be a temporary exercise carried out only for a few years until the bottlenecks are removed.
70

Previous benchmarks and the thematic pillars also were not used as the organizing framework for the completion report for the 2003 CSP. 71 ADB. 2007. Country Partnership Strategy Guidelines. Manila. 72 Together, the international financial institutions account for less than 1% of the total investment expenditure. Meanwhile, foreign direct investment ranges from $50$60 billion per annum, or almost 20 times as much as official assistance. Given the size of the ADB program relative to the PRC expenditures and the role of other partners, ADB contribution is not easy to distinguish, except on a project-specific basis. 73 The MOF and NDRC are working on building evaluation capacity with support from the evaluation departments of ADB and the World Bank. 74 The 2003 CSP suggested that four indicators be monitored: (i) project success ratings, (ii) projects at risk, (iii) contract awards and disbursement ratios, and (iv) TA success ratings.

31 99. Assessing the PRCM Effectiveness. ADBs recent client perception survey of opinion leaders, including ADB clients and partners, provided feedback on the perceived performance of ADB in various aspects (Appendix 8). Figure 4 compares the feedback received on different regional departments within ADB. The results for the East Asia region were based on observations in the PRC only. It shows that, for the selected indicators on ways ADB helps to meet clients development goals, the perceptions were relatively low in the PRC than with the clients in other regions.
Figure 4: Perception on Ways ADB Helps in Meeting Client Country Development Goals and Objectives
100 90 80 % positive of total 70 60 50 40 30 20 10 0 Technical skills and abilities Easy to follow and understand process and procedures Efficiency and timely Effective consultations handling of projects w ith different stakeholders Range and quality of services offered by field office

East Asia Region

Central and West Region

South Asia Region

Southeast Asia Region

Pacific Region

ADB = Asian Development Bank. Note: East Asia Region observation come only from the Peoples Republic of China. Source: Country assistance program evaluation team.

100. The CAPE team developed a client responsiveness survey to collect client perceptions on the PRCMs performance.75 Such a survey has obvious limitationsprimarily the absence of any reference baseand therefore the results should be viewed cautiously. Clients gave the highest marks on average for relevance of the PRCM, while rating efficiency generally satisfactory, and providing mixed responses to questions on effectiveness. The key points are summarized below and elaborated in Appendix 8: (i) Most think that the PRCM performs better in comparison to other development agencies and more than half thought that decentralization of ADB has improved services, but most felt that more improvements still needed to be done; (ii) Overall, almost all indicated that they are satisfied with the PRCM-based services, but concerns were expressed on the following: (a) improving knowledge management products, (b) strengthening dissemination of lessons and practices from the PRC and other countries, (c) delegating authority and bringing in local expertise to operate effectively, and (d) responding faster to procurement and disbursements requests, and developing flexible solutions to issues; (iii) Most feel that the PRCM responds fast to changing conditions within the PRC; (iv) They are positive about the PRCMs formulation of CSP; and (v) They believe that the PRCM plays a relatively less visible role in policy dialogue although it involves a variety of stakeholders in policy discussions.
75

The survey has limitations, mainly the lack of a reference base and the small size of the respondents (26), and the results should be used cautiously. The survey was an initial attempt to establish some baseline impressions with a small sample, to be followed-up by more comprehensive surveys in the future.

32 D. Corporate Mandates

101. Environmental Safeguards. With a view to simplifying procedures and reducing transactions costs, ADB is undertaking a review of its safeguards policies, which is to be completed by early 2008. OED has completed evaluations of environment, 76 involuntary resettlement,77 and indigenous peoples78 safeguard policies to contribute to these reviews, and all of these evaluations included the PRC as a main case study country. The evaluation of environmental safeguards indicated that ADBs value added to environmental assessment process was generally limited in the PRC due to ADBs application of uniform procedures across DMCs. Therefore, it recommended moving toward adoption of improved country systems on environmental safeguards in the PRC and harmonization with other development partners. The PRC appears to have benefited from its collaboration with ADB and other development partners over the years performing better than average in terms of environmental assessment and management. In many aspects, the PRC has the most stringent environmental safeguards and strongest institutional capacities in environmental assessment, monitoring, and implementation compared to ADBs other client countries (Appendix 11). 102. Regarding the application of ADBs environmental safeguard policy in the PRC, typically the environmental impact assessment (EIA) is undertaken and approved by the SEPA before ADBs involvement, especially in the transport sector. The main tasks of ADBs PPTA environmental consultants are to translate the original EIA report into English and prepare it in ADBs format. As acknowledged by several executing agencies, ADB adds value to such EIAs mainly by strengthening public consultations. Otherwise, most government officials felt that ADBs PPTAs contributed little to improving environmental safeguards enhancement.79 Officials also raised some issues regarding differing procedural aspects between ADBs policies and the PRCs, which seemed to delay preparations without improving the quality of assessments. ADB staff reported that, based on reviews of EIA reports prepared in the PRC, environment management plans required by ADB as a part of the EIA were often weak, but were strengthened during the summary EIA preparation. Sector and regional variances exist in the quality of EIA, implementation, and monitoring. Therefore, OED evaluation recommended that consideration should be given to piloting the use of country systems on environmental safeguards against ADBs updated safeguards policies to understand and eliminate any weaknesses that exist. Gradual alignment with country safeguard systems and harmonization with other development partners will surely improve results on the ground, while also lowering the transaction costs for the executing agencies to meet both ADBs and country environmental safeguard procedures. 103. Looking forward, the OED evaluation on environmental safeguards recommends that ADB is in a position to progressively move away from the present one-size-fits-all approach to increasing reliance on country systems in the PRC on environmental safeguards. The piloting of country safeguard systems on environment could be conducted in a phased and concerted manner and could be extended over the years toward agencies with less capacity if supported sufficiently. Any move toward reliance on country safeguards would require progressive transition using the system of accreditation that exist to ensure that the PRC systems are consistent with the principles and objectives of ADBs updated environment policy and that there is reasonable implementation and monitoring of results achieved by the country systems. The CAPE endorses these recommendations (para. 230).
76 77

ADB. 2006. Special Evaluation Study of Environmental Safeguards. Manila. ADB. 2006. Special Evaluation Study on Involuntary Resettlement Safeguards. Manila. 78 ADB. 2007. Special Evaluation Study on Indigenous Peoples Safeguards. Manila. 79 In some projects, ADB adds value by preparing environmental management plans and environmental assessment on the components that are not covered by the Governments environmental impact assessments (e.g., local roads, bus stations, etc.).

33 104. Involuntary Resettlement Safeguards. OEDs recent evaluation study on involuntary resettlement indicates that ADBs guidelines on the involuntary resettlement policy80 have become more inclusive over time, and the policy has become more contentious among many DMCs. However, it found some evidence of a trend toward convergence of country systems with ADB standards, especially in the PRC. It suggests that ADBs updated policy should elaborate on the objective of greater reliance on country systems and should have clearer guidelines and procedures on identification of resettlement requirements, as well as on compensation and assistance. In terms of implementing the policy, the evaluation recommends (i) improving the monitoring of involuntary resettlement operations, (ii) deepening the involvement in building country systems and capacity, and (iii) complementing the updated policy with adequate resources and staff required for its implementation. 105. In the PRC, certain relevant laws and regulations (for instance, those on compensation and assistance) have improved to a point that they have come close to satisfying ADBs bar. 81 In some cases, budgets available and implementation capacity created are in line to deliver ADB standards. However, application of such ADB concepts as replacement value and restoration of livelihoods in the PRC context can be confusing. The wording of the policy may also lead to a difference of opinion regarding the needed levels of public consultation and approval before work starts. Full alignment with the PRC country system would seem difficult without agreeing with the PRC government in principle on such elements as levels of compensation for land loss, assistance for vulnerable groups, public consultation for projects cofunded by ADB, grievance redress, and information disclosure. As such, it may be useful to move toward forming prior agreements with the PRC Government on these aspects, to reduce transactions costs.82 Compliance with these prior agreements would then need to be monitored. On the ADB side, it may require updating the safeguards policy on involuntary resettlement with clearer guidelines for adoption of country systems. This may also require changes on the PRC side in terms of legislation and enforcement capacity in the land acquisition systems, defining the scope of public interest, including provisions on sustainable livelihood restoration, improving provisions on compensation standards, and valuation methods. If certain local governments are not able to enforce the agreements, they should be able to request ADB for special assistance, for instance to develop their capacity to implement social and environmental programs. ADB could also give support to the funding of local monitoring systems and to capacity development exercises in these areas or do spot checks as needed. 106. Indigenous Peoples Safeguards. OEDs recent evaluation study on indigenous peoples safeguards shows that it is often misunderstood by ADB staff and clients for different reasons: (i) the difference between indigenous peoples and ethnic minorities is not always clear, (ii) policy is ambiguous whether the definition of indigenous peoples can be guided by country legislation or is to be derived from ADB policy, (iii) there is overlap between the three safeguard policies, (iv) it is not clear what type of indigenous peoples development plans (IPDPs) need to be prepared for projects which only have significant benefits to the indigenous peoples but carry no significant risks, and (v) the required consultation appears to have been expanded to a need for full consent under the ADBs procedures developed subsequent to the adoption of the policy. The study recommendations include (i) addressing this policy drift in the updated safeguard policy; (ii) providing a results-based framework at both the country and project level; (iii) preparing IPDP only for projects that indicate clear risks on loss of land over and above the environmental and resettlement-related impacts; (iv) establishing clear criteria on the extent of
80 81

ADB. 1995. Involuntary Resettlement. Manila. In some circumstances, the PRCs resettlement policies and procedures have become more stringent than that of ADB. 82 A prior agreement may include a national framework that clarifies the contents of a resettlement plan, appropriate timing of the plan and its implementation, interpretation of replacement value, nature of additional assistance to vulnerable people, extent of consultations, disclosure rules, variations across different sectors, monitoring responsibilities and enforcement mechanisms, etc.

34 consultations needed or whether free, prior, or informed consent is needed; and (v) complementing the updated policy with an implementation plan that takes into account available organizational, budgetary, and human resources. 107. Regarding application of ADBs indigenous peoples safeguard policy, OEDs evaluation study on the subject (footnote 78) concluded that the PRC has recently been able to ensure relatively good benefits for ethnic minorities in the impact zone of ADB-supported projects.83 Over the CAPE period, legislation for autonomous areas has improved. For example, there are more funds, special budgets and programs, and implementation capacity has improved. The OED study indicates that these provide for some basic social safety for indigenous peoples when intrusive infrastructure-oriented projects enter into their areas. Overall, it concluded that there appears to be less need for standalone IPDPs in the context of individual projects that are already beneficial to indigenous peoples, such as education, health, or water supply projects, or when the main risks of more intrusive projects are related to resettlement or environmental damage, as these risks already trigger the preparation of resettlement plans and environmental management plans. Dispensing with the IPDPs in these cases would mean savings in time and reduced transaction costs for ADB and the PRC government. Ethnic minority issues could then be addressed by these other plans. Nevertheless, given that good budgets may not automatically lead to expenditure on the ground, and standard consultation and public disclosure processes may be different from those that ADB promotes through the Public Communications Policy84 and Indigenous Peoples Policy, there may yet be a need for institution of some additional safeguards in certain types of projects. These can also be agreed upon with the PRC government in a prior agreement applying to ADB operations to reduce transactions costs. 108. It is essential that concerns on safeguards are addressed for ADBs program in the PRC. Because of ADBs large transport portfolio, the dense population in the PRC, and its small landholdings, the majority of all people adversely affected by projects supported by ADB were located in that country61% of all. The case studies carried on by OED study observed some convergence between ADBs and the PRCs policies on involuntary resettlement over the years, and the PRCs gradual reintroduction of some safety net arrangements (old age allowance, urban residence rights, health insurance, etc.) is a positive development not seen in many other DMCs. However, differences persist on some issues, as has already been indicated. Other issues with which ADB is more familiar in other countries are coming up in the PRC, such as those related to informal and illegal dwellers (squatters), requiring attention from the Government. These also need to be addressed in the prior agreements. ADB has already contributed to the Governments revision of the Land Acquisition and Resettlement Policy and through its RETAs has exposed the PRC to other ways to assess how the needs of poor families can be met during resettlement. 109. More work is needed in refining ADBs internal position on the involuntary resettlement and indigenous peoples safeguards policies before considering how such policies might be better interpreted in the context of the PRC country safeguards system, which is also evolving. The CAPE endorses the sequential approach proposed by the OED study, which recommends policy development, capacity building in involuntary resettlement, and indigenous peoples safeguards prior to moving toward country systems. 110. Gender. Despite the lack of systematic data on womens share in poverty at the national level, existing data suggest a significant gender gap in the distribution of income and control of
83

The PRC does not recognize indigenous peoples, but many of its ethnic minorities or nationalities count as indigenous peoples in ADBs policy. 84 ADB. 2005. The Public Communications Policy of the Asian Development Bank: Disclosure and Exchange of Information. Manila.

35 assets. A womans estimated earned income in 2003 was only 66% that of a man, because females tend to be engaged more frequently than men in low profit and high risk agricultural activities. Of the female rural population, 82% are solely engaged in agricultural production compared to less than 65% of the male rural population. This is exacerbated by the inordinate time women spend on unpaid work (household chores and caring for children, the infirm, and the elderly) and subsistence food production. Thus, women are highly vulnerable to poverty. 111. No loan or TA was programmed specifically for gender issues under the 2003 CSP.85 However, one of its appendixes discussed gender needs and challenges, Government policy, ADB and other development partners experiences, and a proposed ADB gender strategy and monitoring. The approach was consistent with ADBs overall policy of mainstreaming issues in all aspects of ADB operations to promote equity (Appendix 3). While the ADTAs approved during the second CAPE period did not focus explicitly on gender, features of certain ADTAs tend to address some of the gender issues. For example, TA 3992 considered successful, disproportionately benefit women and children, including maternal mortality and cross-generational effects linked to malnutrition during pregnancy. In addition, the methodology proposed under TA 3610 strongly promoted womens participation in poverty reduction planning for rural communities. Similarly, TA 4580 dramatically increased the voice of women and other marginalized groups. 112. Anticorruption. While during the CAPE period the PRC had consistently scored less than 5 out of a clean corruption perceptions index of 10 (as per Transparency International), its ranking near the median meant that only about seven other Asian countries86 were perceived to be relatively less corrupt than the PRC (Appendix 6). Many of the governance- and corruptionrelated problems in the PRC were related to its transition from centrally planned to a market based economic system during which some unintended weaknesses in the legal and regulatory frameworks were experienced. The Government is committed to fight against corruption, which has potential to fetter future success of the country. The Government has pursued further concrete measures to weed out corruption based on (i) punishment, 87 by strengthening the investigation and deterrent aspects of criminal law, administrative regulations on ethical conduct, embezzlement, income disclosure and gifts, and disciplinary codes and sanctions against Party members; and (ii) prevention, 88 by reviewing the risks areas that are prone to corruption, 89 encouraging ethical conduct and making corruption more difficult to commit and easier to discover. 113. ADBs support to anticorruption and governance reform initiatives in the PRC, while successful (discussed in detail in Appendix 6), has been focused on the improvement of the legal framework, 90 increasing public awareness about corruption, and ensuring that ADBs own operations are not tainted by corrupt practices. While clear and transparent regulatory frameworks and administrative practices would minimize opportunities for discretion, the conduct of regular and effective inspection, evaluation, and audit by the oversight institutions would make enforcement more credible. ADB also sought to increase awareness of its anticorruption policy
85 86

The 1997 COS was finalized before the country briefing paper on gender was completed. Of these seven Asian countries in 2006, three are ADB DMCs: Bhutan, Malaysia, and Thailand. 87 Including harsh criminal penalties for bribery, graft, or embezzlement that exceed even the Organisation for Economic Co-operation and Development standards; administrative penalties that range from warnings, demerits, demotion, dismissal from office, reduction or loss of pension; and disciplinary sanctions against Party members that range from warnings, removal from Party posts, or probation within and expulsion from the Party. 88 Involving the closing of loopholes in public procurement and contract management and simplifying procedures on administrative licensing; promoting professionalism in human resources management and piloting specific measures for promoting integrity in selected cities; separating the collection and spending of public funds, beefing up oversight, and internal audit institutions; and using new technologies to improve accessibility to public information. 89 Construction, land use, transaction of property rights, distribution of medicine, government procurement, and development of land resources. 90 Including support for the drafting of the 1999 Tendering and Bidding Law, 2002 Government Procurement Law, 2003 Administrative Licensing Law, anti-money laundering regulations, and competition policy and laws.

36 during project processing, bidding, and implementation; and integrate monitoring measures into project implementation. Based on the Integrity Division, Office of Auditor General, the PRC scores low at about 6% in terms of number of allegations filed and investigated. E. Strengthening Partnerships with Other Development Partners and the PRC

114. The establishment of the PRCM in 2000 enhanced the effectiveness of ADBs development partnerships. This facilitated more intensive involvement with Beijing-based field offices of aid agencies and major stakeholders, increasing the understanding and value of ADBs program and role. A stronger local presence also made it easier for the PRCM to develop operating relationships with field-based partners such as DFID and World Health Organization (WHO), and to work more closely with the World Bank in sharing experiences. To increase the effectiveness of development partnerships, a more selective and targeted approach combining efforts, which benefit both partners, might be warranted. 115. What should be the priority in the future? All development partners in a country of the size and complexity of the PRC need to build a critical mass of operations to have an impact. Thus, ADB should focus collaborative efforts in the future on activities that would help each party to scale up its efforts. With the differing institutional mandates, this will not be easy. It would mean jointly addressing an issue, and combining financing and expertise in the process if possible. As a practical matter, deepening collaboration might yield tangible results in only a few instances, given the way respective development partner institutions manage their program and how the PRC handles aid coordination.91 However, collaborating with other agencies for a specific initiative where technical or institutional challenges are substantial would draw on each others relative technical strengths and availability of assistance instruments, improving the effectiveness of both parties. 116. Relations between ADB and the PRC strengthened and matured significantly over the CAPE period as strategies were harmonized and synergistic relations evolved. Knowledge sharing now goes both ways. The PRC can help ADB to improve client services and become more effective in transferring knowledge by facilitating arrangements with counterparts at the local level, and by identifying government initiatives that are suitable for piloting ADB policy recommendations coming out of advisory activities. ADB continues to be seen as a valued source of knowledge transfer with financing on attractive terms. ADB also is appreciated for providing a neutral platform for the PRC to contribute to regional and global discussions on development and financial issues. On the other hand, the PRC plays an important role as a borrower by contributing to the strength of ADBs overall portfolio and earnings, and increasingly as a source of knowledge transfer to others. The PRCs creation of an RCPRF to provide financial support and facilitate knowledge transfer across countries illustrates aspects of this unique relationship. 117. The PRC also has expressed clearly the need for ADB to improve the quality of its services and create more flexibility to assist clients with different capacities. In all these areas, ADB has opportunities to be more responsive. However, support from the Government can facilitate its success. For example, if ADB pilots the use of country systems for environmental safeguards, assistance in identifying a suitable pilot province or municipality would be essential. Similarly, if ADB needed to sharpen its geographical focus to deepen its involvement on a particular issue by linking TA with lending, support from the PRC in identifying interested counterparts also would be helpful. Use of OCR for social and poverty projects has been debated for yearsand this option might have been overdone as a prerequisite for promoting more innovative approaches. However, the same objectives might be achieved by
91

ADB, as well as World Bank and Japan Bank for International Cooperation programs, are coordinated by MOF. Most bilaterals work with the Ministry of Commerce and some like WHO, with a sector ministry like health. This makes it hard to build synergistic relationships and thus fostering partnerships that would actually yield results is even more challenging than in other countries.

37 complementary policy and management approaches that ADB could bring to the implementation of domestic programson either a pilot or more scaled-up basis. For this to happen, support from the PRC would be needed. Similarly, the PRC could facilitate use of new products and processes under ADBs IEI. However, ADB would have to show that it has the expertise to add value and the ability to work in a flexible enough manner with country systems. 118. Relations with NGOs. Through a series of ADTAs, ADB has helped define and operationalize the involvement of NGOs92 in poverty targeting and aid delivery. For instance, a TA to study ways to support rural poverty reduction projects93 supported the International Conference on NGO Poverty Reduction Policy. The Leading Group on Poverty Alleviation and Development incorporated in its PRS recommendations from the conference for increasing the participation of civil society and villagers. The TA also funded a small-scale rural infrastructure pilot project that highlighted the importance of significant beneficiary participation in planning, construction, management, and maintenance. This TA demonstrated the potential for Government-NGO-ADB cooperation. In 2000, another TA94 paved the way for the development of a new approach for identifying poor villages and households through analysis and dialogue with local governments, communities, and NGOs. A 2005 TA95 took these outputs further by formulating replicable models for NGO participation in government-financed poverty reduction efforts at the village level. V. SECTORAL POSITIONING: PROGRAM IMPLEMENTATION IN KEY SECTORS

119. During the CAPE period, ADB was active in lending in mainly two sectors, with about 70% of the portfolio in value devoted to the transport sector (roads and railways) and 1020% to urban water and sanitation. Therefore, this chapter covers extensively the transport sector and to a lesser extent urban water and sanitation. Key messages emanating from other sectors, such as energy, agriculture, and finance (largely based on ADTA), are addressed in chapter V, section C with elaborate discussion in the appendixes devoted to each of the sectors. Other related topics, such as poverty and governance, are not addressed here since these are crosscutting themes and were addressed in chapter III under the discussion of thematic pillars. The performance of TAs in terms of generic issues is discussed in chapter IV, and the sectoral performance of ADTA are covered in relevant appendixes. A. Transport Sector (Roads and Railways)96

120. Sectoral Background and Priorities. In the early 1990s, the PRC had the lowest road density in the world relative to area or population, and its railway network was experiencing severe capacity bottlenecks. Over the past 2 decades, the PRC implemented massive programs to expand and improve its road and railway transportation systems. From 1997 to 2005, the road network was expanded from 1.2 million km to 1.9 million km, including construction on the National Trunk Highway System (NTHS), a 35,000 km arterial road network mostly comprised of expressways. The rail network was expanded from 65,970 km to 75,438 km, with capacity augmented by double tracking and electrification. Although most of the financing was from domestic sources, financial, and advisory support from ADB and other MDBs played a significant role. In the road and rail subsectors, an important feature of the investment program was the
92

ADB was not seen previously as a prominent player with the NGOs as it does not provide direct grants to them, unlike some other development partners. ADB also does not have a track record for working with them extensively. 93 ADB. 1998. Technical Assistance to the Peoples Republic of China for Study on Ways to Support Rural Poverty Reduction Projects. Manila (TA 3150-PRC, for $715,000, approved on 31 December). 94 ADB. 2000. Technical Assistance to the Peoples Republic of China for Preparing a Methodology for Development Planning in Poverty Blocks under the New Poverty Strategy of PRC. Manila (TA 3610-PRC, for $150,000, approved on 21 December). 95 ADB. 2005. Technical Assistance to the Peoples Republic of China for Nongovernment Organization-Government Partnerships in Village-Level Poverty Alleviation. Manila (TA 4580-PRC, for $1 million, approved on 20 April). 96 This section derives heavily from the transport SAPE, which is available as a separate OED product (footnote 7). As such, a separate appendix is not prepared for the transport sector.

38 introduction of modern technologies and project management methods. A process of gradual but sustained reform of subsector policies and institutional arrangements, including greater commercial orientation and new approaches to cost recovery, accompanied the investment. 121. ADB Program. The transport sector assistanceroads and railwaysaccounted for 27 of the 58 loans that ADB approved for the PRC from 1997 to 2005, contributing about 66% of the $10 billion of new ADB lending to the PRC. Some 41 of the 246 TAs approved in this period were for roads and railways. These comprised 15 ADTAs and 26 PPTAs, equivalent to 15% of total TA approvals by value. At the end in 2005, roads and railways accounted for 82% of new ADB lending to the PRC and 23% of TA approvals by value, with support for roads accounting for slightly more than two-thirds of the total.97 122. The transport SAPE concluded that ADB support for roads and railways in the PRC has been successful, although some issues are worth highlighting here for their generic relevance to ADBs program in the PRC. During the CAPE period, roads and railways in the PRC underwent a remarkable transformationin terms of network expansion and upgrading, as well as modernization and reform of policies and institutions. The Governments programs in both subsectors were conceived and designed well, and were supported by a strong commitment and capacity to carry them out. By providing development finance from the early stages of these programs, along with consistent support and advice, ADB was a valuable and a trusted development partner. An important part of ADBs approach was the consistency of its support during the CAPE period. By the end of the period, however, the NTHS was nearing completion and the national railways had grown in capability and sophistication to become worthy of comparisons against international standards. Thus, this phase in ADBs support to the PRC was nearing completion. The SAPE survey of value addition showed that, with a few exceptions, the standard package of ADB lending support and project features was no longer adding much value compared with domestically financed investments. In the future, for ADB to continue to be successful in supporting roads and railways in the PRC, it will have to identify areas where there is scope for substantial value addition, and then adjust the types of activities it supports in the subsectors, the way it provides the support, and ensure that it has an appropriate mix of ADB staff expertise.98 123. Roads. Table 8 summarizes the special features of road projects during the CAPE period. The interesting aspect of the pattern is the gradual inclusion of special features with the intention of adding value. All projects followed some features consistently: (i) commercialization, corporatization, and private concessions given to expressway management and operations; (ii) pricing and cost recovery; and (iii) inclusion of local roads to increase poverty reduction impact of expressways. The first two items generally involved establishing a separate toll corporation to develop and operate the expressway along commercial lines. These were important features, especially earlier in the CAPE period when the PRC was still gaining familiarity and confidence with the use of commercial approaches. The third item was a requirement from ADB to try to maximize the poverty reduction impact of expressways by including spur links and local roads feeding into the hinterland. 124. Other special features were added incrementally during the CAPE period. These included axle load testing, road safety, and improving competition and the regulatory framework for transport services. Some of these features attempted to address sector issues at project levels. While these were consistent with ADBs subsector strategic priorities, they were often small in scope and shortlived. Hence, their effectiveness as a strategy repeated over successive projects was less obvious.
97

The lending share was 73% for roads and rails during 20012005, and in 2006, it was about 53% of the total lending value to the PRC. 98 In the last 4 years, ADB interventions in the railways sector have become smaller (815% of project cost), but the related value addition has increased. The Government is looking for continued ADB support in the PRC railway development focusing on infusion of new technologies and institutional reforms. ADB financing is well targeted for components that the Ministry of Railways seeks as value addition.

39
Table 8: Special Features Highlighted in Report and Recommendation of the President for ADB Road Projects in the PRC, 19972005
Poverty Monitoring Transport Services Vehicle Emissions Roadside Stations Axle Load Testing Link/Local Roads Pricing and Cost Recovery

Year

Project Name

Loan No.

1998 1998 1998 1999 1999 2000 2001 2001 2002 2002 2003 2003 2003 2004 2004 2004 2005 2005

Hebei Roads Development Chengdu-Nanchong Expressway Changchun-Harbin Expressway Southern Yunnan Road Development Shanxi Road Development Chongqing-Guizhou Roads Development Shaanxi Roads Development Guangxi Roads Development Southern Sichuan Roads Development Shanxi Roads Development II Ningxia Roads Development Western Yunnan Roads Development Xi'an Urban Transport Hunan Roads Development II Guangxi Roads Development II Gansu Roads Development Central Sichuan Roads Development Hunan Roads Development III

1617 1638 1641/42 1691 1701 1783/84 1838 1851 1918 1967 2004 2014 2024 2089 2094 2125 2181 2219

167.1 250.0 233.3 250.0 250.0 320.0 250.0 150.0 300.0 124.0 250.0 250.0 270.0 312.5 200.0 30.0 600.0 208.0

Road Safety

Loan Amount ($ million)

Corporatization

= significant, = minor, ADB = Asian Development Bank, PRC = People's Republic of China. Source: ADB. 2007. Sector Assistance Program Evaluation of the Asian Development Bank Assistance for Roads and Railways in the People's Republic of China . Manila.

125. The more recent inclusion of project features on competition and regulation in the transport services industry sought to address transport sector issues at the provincial level. This was an appropriate focus since provincial governments regulate transport services. It is also a useful area for ADB support since the efficiency of transport services is an important factor in determining the benefits of transport improvements to users, particularly the poor. The project features for poverty monitoring and roadside stations again reflected the influence of the PRS. Faced with the difficulty of quantifying the poverty reduction benefits of expressways, ADB built up other poverty-related features. While increasingly detailed monitoring of poverty impacts might seem worthwhile, this strategy is questionable in practice due to difficulty and costs of monitoring such impacts and the additional work it creates for the executing agencies. In the road subsector, ADTAs were used to contribute to subsector policy and planning, as well as to support capacity building. These were closely linked with ADB subsector strategic priorities. TAs at the national level covered issues such as corporatization, securitization of expressways, and road safety. 126. Railways. In the railways subsector, ADB lending focused on construction of new railways to extend the rail network to poorer regions. Initially, during the COS, ADB continued its earlier strategy of financing new rail links that Local Joint Venture Railways (LJVRs) were to build and operate on a commercial basis. From 2000, after the Ministry of Railways (MOR) decided to move ahead with institutional reforms, ADB began financing new links of the national railways and intensified its policy dialogue with MOR on national-level railways reform. The project documents for railway projects highlighted some additional features linked to ADBs subsector strategic priorities.

40 127. Table 9 summarizes the special features of railway projects. All ADB railway projects pursued four special project features: (i) use of full-cost tariffs on project railways, (ii) support for commercial practices in railway companies, (iii) new technology to improve efficiency, and (iv) development of link roads and stations to extend the impacts of railways. The first three features were directly linked to ADBs subsector priorities. By consistently requiring project railways to incorporate full-cost tariffs and improved commercial practices, ADB contributed to the gradual change in thinking by the PRC authorities, which led to railways being run increasingly along commercial lines by the end of the CAPE period. Provision of improved technology was another feature of project design, including introduction of modern signaling, communications, dispatch systems, freight yard operations, mechanized maintenance, and modern operational safety equipment. As ADB support for MOR gained momentum, two new themes emerged: (i) the development of separate passenger and freight rail corridors; and (ii) the introduction of elements of private sector participation by providing container terminals for private logistics operations, and outsourcing of ancillary services. These reflect MORs increasingly sophisticated agenda for railway development and reform under the 11th FYP. The only ADTA provided during 19972003 was approved in 1997 to support institutional strengthening of an LJVR. Use of ADTA gained momentum from 2004 to 2005, with two important TAs to assist MOR with the reform tasksone to prepare for competition in railway operations under the WTO and the other to develop reforms to strengthen the transport market position of the national railways. Through its Private Sector Operations Department (PSOD), ADB also provided an ADTA for transferring best practice models of private sector participation in urban rail projects.
Table 9: Special Features Highlighted in Report and Recommendation of the President for ADB Railway Projects in the PRC, 19972005
Separate Passenger and Freight Corridors

New Technology for Railway Operations

Year

Project Name

Loan No.

Commercialization

Full Cost Tariff

Loan Amount ($ million)

1997 1998 2000 2001 2003 2004 2005

Shenmu-Yanan Railway Guizhou-Shubai Railway Hefei-Xi'an Railway Ganzhou-Longyan Railway Yichang-Wanzhou Railway Dali-Lijiang Railway Zhengzhou-Xi'an Railway

1553 1626 1748 1850 2051 2116 2182

141.8 105.0 300.0 200.0 500.0 180.0 400.0

Private Sector Participation

Developing Area Around Railway

Link Roads

Rail Safety

= significant, = minor, ADB = Asian Development Bank, PRC = People's Republic of China. Source: ADB. 2007. Sector Assistance Program Evaluation of the Asian Development Bank Assistance for Roads and Railways in the People's Republic of China . Manila.

128. Value Added and Special Issues. Because of the size of the transport program and the length of the assessment period, the transport SAPE was able to evaluate the role that ADB played in adding value over time through its projects. Apart from civil works, road and railway projects included some additional features linked to ADBs subsector strategic priorities. 129. The preceding discussion shows that ADB-supported roads and railways in the PRC generally have been successful and included many interesting features to enhance value. However, the value added cannot be taken for granted given its limited financing. Were the

41 features of ADB-supported activities any different from purely domestically funded investments? Was the quality of investments any better? Did ADB support have a wider influence on transport programs and policies? 130. Table 10 summarizes the findings of the survey carried out by the transport SAPE. These indicate that, while ADB road and railway projects did add significant value, some of the special features of projects added less value than was expected. The extent of value added generally diminished when the same feature was included in repeated projects, because the Government was quick to assimilate good features within domestic policies and procedures. These findings are discussed in more detail in paras. 131133.
Table 10: Value Added by ADB-Assisted Transport Projects Compared with Domestic Projects
When Introduced End Study Period

ADB Project Feature 1. Roads Finance Mobilization Standard Provisions International Competitive Bidding Accounting, Auditing, Reporting Anticorruption Measures Safeguard Policies Special Features Design/Construction Standards Corporatization Pricing and Cost Recovery Link/Local Roads Axle Load Testing Road Safety Vehicle Emissions Poverty Monitoring Indicators Roadside Stations Transport Services 2. Railways Finance Mobilization Standard Provisions International Competitive Bidding Accounting, Auditing, Reporting Anticorruption Measures Safeguard Policies Special Features Full Cost Tariff Commercialization Link Roads and Stations New Technology for Operations Developing Area Around Stations Rail Safety Private Sector Participation Separate Passenger Corridors

Comment on Value Added

Mainly in poorer provinces Sound local competitive bidding is sufficient ADB procedures useful, mostly assimilated by end Already have domestic anticorruption measures Now largely duplicating domestic laws and policies Initially influential, but no longer Initially influential, scope for refinement of model Initially influential, scope for initiative on sustainability Link roads are same, local govt provides local roads Following Government resolution in 2004, testing equipment now being routinely installed and used Domestic projects now have similar features Domestic projects now have similar features Helped raise awareness but often impractical Integral way to link project area to expressway Prepare provinces for competitive conditions

Value added for local railways, not national railways By end of study period, ICB used by domestic projects ADB's procedures useful, but not mostly assimilated Already have domestic anticorruption measures Now largely duplicating domestic laws and policies This requirement initially useful, now widely adopted Some initial value, now widespread Domestic projects also have such construction roads Some ADB contribution but could add more value Introduced recently, full potential still to be realized ADB initially helped to access the latest technology Introduced recently, full potential still to be realized ADB has encouraged this useful initiative of MOR

= significant, = moderate, ADB = Asian Development Bank, ICB = international competitive bidding, MOR = Ministry of Railways. Source: ADB. 2007. Sector Assistance Program Evaluation of the Asian Development Bank Assistance for Roads and Railways in the People's Republic of China . Manila.

131. All ADB-financed roads and railway projects contained special features, and some were introduced over time (e.g., safety and axle controls). The special features often made the project

42 more complicated to implement. Sometimes, because such features were included, the responsibility for financing, implementation, or monitoring became divided among several ministries and agencies with little intercommunication. Executing agencies said that, while many of the special features covered important issues, ADB had a shortage of in-house expertise to make much contribution through its staff. 99 In many cases, executing agencies and implementing agencies said that the special features had added value at the time they were introduced but that such value added was gradually eroded as they were mainstreamed into domestic project design and implementation. Within this dynamic reform process, success in achieving mainstreaming has led to some special features becoming unnecessary, and there is need to identify new project features capable of adding value. The potential for value addition depends on the environment and the opportunity for implementing and transferring such innovations. As a conducive environment slowly develops, it is also important for strategies, programs, and procedures to be synchronized with overall government reforms. 132. In general, ADB lending and TA were responsive to emerging transport sector needs. However, ADB could have been more responsive in several areas: (i) Project design. As an example, ADB might have done more to help the Government review important issues, such as toll policies, at a subsector level and develop options. 100 Although ADB did provide useful ADTAs in 1997 and 2004, its influence on this issue was not sustained over the period. It continued to follow the model without modification in all its expressway loans. (ii) Lending and TA modalities. While using substantial PPTA funds for project preparation was appropriate in 1997, this became less appropriate over time and should have been rationalized based on specific needs. The Government has had some reservations about more flexible lending options like the MFF. 101 Finally, country systems approaches might have been explored more actively with a view to simplifying safeguard compliance. (iii) Project versus sector focus. As the PRC established the capacity to handle most project-level issues without ADB assistance, ADB could have shifted more of its staff and TA effort toward subsector-level issues rather than staying at the project level. (iv) Project components financed. ADB should consider reviewing the justification for continued financing of civil works for expressways, or enhancing its support package with greater sector and policy focus that might extend the justification for continued financing of expressway civil works. (v) Poverty Monitoring. ADBs elaborate monitoring of project benefits and poverty reduction impacts of its transport projects was an appropriate response to the strategic directions set by the PRS in 1999. However, given the growing doubts about the practical feasibility of such monitoring, ADB should have undertaken a reassessment of what it was demanding.102
99

This capacity constraint was important in railways because, amidst the complexity of railway projects, only a single expert international staff is tasked to accomplish a large and growing workload. If there had been more of such expertise in ADB project teams (international staff), ADB value added could have been further enhanced. 100 ADB. 2004. Technical Assistance to the Peoples Republic of China for Policy Reform in Road Transport. Manila. Under this TA, ADB is examining the issue of toll road corporatization. 101 ADB financing needs to be viewed in the context of the lack of flexibility to increase the ceiling on borrowing set by the PRC Government, and the procedures involved in the existing system for project approval by the NDRC. At present, the Government is open to testing the MFF on a few selected projects. 102 By 2004, the enhanced PRS formally corrected this part of ADBs strategy, indicating that project-level poverty monitoring of infrastructure products was generally not useful and would no longer be required. ADB refocused on examining the impact channels for poverty reduction at country and sector level. However, the road and railways projects in 2004 and 2005 continued to include elaborate poverty monitoring requirements. ADBs East Asia Transport Division has recently streamlined the collection of socioeconomic monitoring indicators in agreement with the Ministry of Communications and MOR.

43 (vi) Strategic use of TA. Several major policy issues could not be addressed on a project-specific basis, requiring a sectoral approach instead. As such, ADB could have allocated more ADTA for this purpose, along with appropriate staffing to facilitate the policy dialogue. By reducing the amount for PPTA where appropriate or mobilizing other TA resources, ADB could have significantly increased the ADTA it provides for roads and railways. Finally, while most road and railways ADTAs addressed important subsector issues, the ADTA program as a whole lacked thematic coherence or a road map that might have enhanced the effectiveness of this instrument.103 ADB staff capacity. During the CAPE period, ADB strengthened staffing expertise to support analysis of poverty impacts and safeguard compliance, etc., However, ADB did not do enough to strengthen, for example, staffing for the railway program. A second concern is the limited progress in transferring responsibilities and staff positions to the PRCM.

(vii)

133. The PRC has massive additional investment requirements for roads and railways. The Government also is pursuing operational, institutional, and policy improvements to strengthen this sector. In this context, ADB has the potential to continue playing a significant role under the new CPS. For ADB to continue to be successful in supporting roads and railways in the PRC, it needs to reorient its support strategy to identifying areas where its involvement can be important for success. The question of value addition needs more attention in its strategic analysis and its implications for lending modalities, use of TA, staffing skills, and decentralization of responsibilities. Also essential is a better alignment of ADB systems to be more responsive in view of the PRCs enhanced capacity. B. Urban SectorWater Supply and Sanitation

134. Sectoral Background and Priorities. Urbanization is rapidly changing the demographic and economic landscape of the PRC. More than 40% of the population is now urbandouble what it was 2 decades agoand the process is accelerating at historically unprecedented rates. The PRCs urban population in 2005 is about 560 million, more than the combined urban population of the next four largest DMCs: India, Indonesia, Pakistan, and Philippines. The Government began paying more attention to the urbanization challenge by the end of the 1990s, driven in part by the cities attraction as growth centers and their increasing social and environmental problems. 135. In addition to air and water pollution, which continue to be serious problems, traffic congestion and water shortages are major negative externalities of the urbanization process. The Ministry of Water Resources has reported that 420 of 658 cities had water shortages. Of the monitored sections of the seven key river systems in the PRC, 53% had water quality unsuitable for normal water treatment processes or irrigation. Another major concern is the pattern of urban land use, which increasingly is politicized and often a source of financial mismanagement and abuse. ADB estimates that nearly $50 billion of new annual investment are needed for water supply, wastewater treatment, solid waste, power, and roads in the PRCs urban areas. This requirement is expected to rise to $100 billion per year by 2020. Recurrent expenditure needs would add another $25 billion annually. 136. ADBs Program. Compared to other DMCs, the PRC started borrowing from ADB for urban needs relatively late. Almost all of the borrowing was for water supply, sanitation, and waste management, with some projects incorporating a few other environmental components. By the end of 2005, ADB had approved 12 loans to the water supply, sanitation, and waste sector, of which
103

ADBs 1997 TA on NTHS financing was not followed up until 2004. The 1999 road safety TA was not followed up until 2005. In both areas, a more or less continuous ADB involvement through ADTA would have been justified and could have helped raise the level of ADBs policy dialogue with the Government. In the case of railways, there was no ADTA program prior to 2003. ADTAs in railways sector from 2004 onward provided one ADTA every year. These are not one-off and are consistent with the needs of MOR.

44 nine for $1.05 billion were approved in the CAPE period. During the CAPE period, ADB provided 16 PPTAs for water supply, sanitation, and waste, amounting to about $11 million. On average, PPTAs for water supply, sanitation, and waste absorbed about twice as much funding per project compared with other sectors. ADB approved 10 ADTAs totaling $6.01 million during this period under the broad category of urban. These extended beyond water supply, sanitation, and waste issues to topics such as urban poverty, governance, finance, land management, and strategies for town-based development and sustainable urbanization. 137. Overall, the projects and TAs are rated successful with high relevance and high sustainability. However, they are rated successful in effectiveness and less so in efficiency. (Appendix 12). Of the ADTAs, almost all were highly relevant and produced worthwhile results when assessed on an individual basis. Most of the studies concentrated in two core themes: (i) tariff policy and service delivery, and (ii) urbanization strategy and policies. These TAs also provided a focused policy dialogue with core Government agencies involved with urban sector issues at the national level: Ministry of Construction, NDRC, and SEPA. This focus might have stemmed from earlier criticism that TAs were too scattered and lacked thematic coherence. Concerns tended to center on efficiency issuesprocedural and processing complexities, such as lack of executing agency involvement in consultant selection, ineffective international consultants, and the lengthy period required in preparing and conducting an ADB TA. Regarding PPTAs, the executing agencies generally see little value added over time, as they are familiar with most of the core preparatory issues. 138. Special Issues. Given the rapid urbanization process in the PRC and increasing environmental concerns, ADB support for urban-related programs became more important during the CAPE period. Executing agencies surveyed indicated that ADBs support (similar to support from other external development partners) generally helped to improve the quality of investments compared with purely domestically financed programs, and strengthened the capacity of counterpart agencies. This has helped to push forward reforms in service standards, pricing, corporate governance, and technical standards. In terms of the overall impact and effectiveness of ADBs assistance, water supply, sanitation, and waste management projects are seen as performing welland comparable to the rest of the program in the PRC. 139. Specific areas of concern involve the following: (i) the one-off nature of many interventions, e.g., sewage treatment facilities are provided without adequate attention to collection systems or water supply facilities are provided without adequate attention to future demand; (ii) absence of a broader urban approach that could bring together more components, such as transport, industrial pollution, and urban energy needs; (iii) the need to move to more sector-wide and multiclient lending instruments in dealing with smaller cities and differing needs to provide more flexible lending instruments, however, NDRC is resistant to using such modalities since it generally prefer to approve well-defined specific investments upfront; (iv) although PPTAs initially provided value with new borrowing counterparts, their value diminished substantially over time; (v) more thought is needed in focusing PPTA support on a much smaller set of issues tailored to project needs, this would free up grant resources for other more innovative work; and (vi) executing agencies also need to be more involved in the management of TAs generally. Furthermore, widespread concern was expressed about the need to strengthen the resident missions role and capacity, and to give more authority to project managers in areas such as reallocating unutilized savings. This would save time and money, and improve the effectiveness of operations. This related to sector needs as well as core services, such as procurement and disbursement arrangements. Other issues related to ADB policies that encouraged excessive loan savings, too frequent turnover of project staff, loss of continuity, and aligning better ADBs safeguard requirements with country standards (which were generally consistent with ADBs). 140. The major issue, however, is how ADB can position itself to address a wider range of urban needs, including land management and urban planning, social services, and transport.

45 ADB has not been considered capable of providing leadership, in part because urban issues do not have a natural thematic home institutionally. At various times, water supply, sanitation, and waste projects have been managed thematically as urban, environment, and social projects. Complications also arise because urban issues often lead to investments dealing with energy and transport. Ideally, ADB should be structured to offer a more integrated package of urban services and financing. Without such an approach, moving to the next level regarding policy issues and financial support that would fit the evolving situation in the PRC will be difficult.104 141. This lack of an urban focus also is reflected in the limited staffing in the resident mission to deal with urban issues. In addition, during the second half of the CAPE period, ADBs links with key agencies, such as the Ministry of Construction, seemed to have weakened, which might have further adverse effects on its capacity to move forward on the policy agenda. Overall, ADBs role in the urban sector, while expanding, could have been even larger and more diversified in content and policy impact if ADB had positioned itself better. C. Special Issues in Other Sectors 142. This section covers special issues in the sectors (other than transport and urban) not covered earlier in this chapter. The lending in these sectors have accounted for about 10% of ADBs PRC portfolio. The sectors include rural development and natural resources, energy, finance, and private sector. Due to space limitations, the sectoral background and priorities and ADB program in each of the sectors are discussed in the appendixes. 143. Rural Development and Natural Resources. The PRC faces some daunting challenges in dealing with rural development and natural resource management (RDNR). The PRC has made some impressive progress, including sustained and relatively rapid growth in rural incomes; and some success in dealing with degradation of land, water, and natural resources. However, the problems have not become any less manageable. Most of the remaining absolute poor live in isolated rural areas and have limited access to productive resources and markets. Migration seemingly is the only long-term option. In addition, rural environmental degradation is an alarming issue (land degradation, non-point source pollution, poor water resource management). 144. Agriculture projects before the CAPE period had mixed success. Their excessive complexity and focus on commercial objectives, whose viability was uncertain because of rapidly changing markets and weak credit systems, adversely affected the results (Appendix 13). During the CAPE period, ADBs strategy moved away from direct production and credit operations to supporting the transition to more sustainable RDNR management. A lack of soft funds constrained lending for agriculture, limiting the number of projects and the flexibility to focus on direct poverty reduction investments. Yet successive strategy papers tended to lay out wide-ranging and overly ambitious objectives for assistance, which never materialized and in some aspects never should have.105 145. In practice, however, 77% of the investment on RDNR has been for flood-related infrastructure projects. After 2 years of no lending in the sector, ADB approved several flood control rehabilitation projects in the northeast in 1999, followed by others on flood management in central PRC during the latter years of the CAPE period. Other projects dealt with wetlands management and using agricultural wastes more efficiently. A follow-up agriculture project in Fujian helped to address environmental issues, rural energy, and rural value chain development. In total, ADB approved nine agriculture projects in the PRC during the CAPE period, including those dealing with water and flood management.106 ADB also allocated $18.6 million to finance 28 ADTAs from 1998 to 2005, covering a wider field than those of loans.
104 105

ADB. 2006. Special Evaluation Study on Urban Sector Strategy and Operations. Manila. For example, the 1997 COS proposed ADB support for a range of rural development objectives including improving production and productivity, promoting agriculture diversification, developing rural enterprises, and increasing the availability of rural credit. Several of these aspects in hindsight were questionable objectives for ADB support. 106 Three of these are a linked package of emergency operations done in 1999 for the northeast provinces.

46 146. More recently, ADB has focused on developing a future pipeline of projects dealing with natural resource management since many of the poor reside in rural areas characterized by fragile ecosystemswetlands, forests, pastures, dryland, and desert fringes. ADB projects and TA during this period supported the transition to more sustainable management of natural resources by improving sector governance, addressing greenside environmental issues, land degradation, improving flood management, and addressing economic constraints to rural value chain developments. ADB supported these efforts by taking the lead on a major GEF-financed program to address land degradation. However, this program is still in its initial stages and is fraught with risks and uncertainties, partly due to cumbersome processing of GEF projects.107 An assessment of outcomes would be premature, but the program positioned ADB to deal (Box 6) with extremely relevant issues (Appendix 14).
Box 6: Global Environment Facility Projects in the PRC
Of the 177 participating GEF countries in the world, the PRC has the most number of GEF-financed projects. Similarly, in ADBs GEF portfolio, the PRC is the most dominant client accounting for 60% of the projects with GEF financing. During the CAPE period, six GEF-cofinanced loans were approved by ADB amounting to abut $100 million with GEF cofinancing grant of about $32 million (Appendix 14). Another five or six loans are pending approval by the GEF or ADB. In 2002, ADB supported the PRC Governments request to seek GEF funding to establish a 10-year 3-phased partnership on land degradation and ecosystem management costing $1.5 billion. By the end of the CAPE period, GEF had become an important source of cofinancing for agriculture and natural resource sector where the need for soft funds is paramount. However, with the changes in the GEF resource allocation framework, there has been uncertainty on the reliability of such grant funding. ADB = Asian Development Bank, CAPE = country assistance program evaluation, PRC = Peoples Republic of China, GEF = Global Environment Facility. Source: Country assistance program evaluation team.

147. If ADB decides to respond to the increasing focus on RDNR under the 11th FYP, it needs to recognize that it has not had a strong comparative advantage in this sector in the PRC or elsewhere. Diversifying into natural resource management offers more potential for value addition and innovation. However, it also brings new challenges in the form of more complex projects, and pressures to find innovative solutions to issues such as land degradation. Villagebased and multisector projects are often too costly to implement and manage without the support of decentralized systems.108 Whether ADBs mode of operation can provide the kind of support needed to make such operations viable remains unclear. 148. Based on past successes, there is potential for ADB to concentrate on public goods type expenditures such as flood management and dam safety, which have been identified as immediate priority areas by the Government. There is also scope for addressing poverty environment nexus in rural PRC that includes catalyzing, demonstrating, and replicating investment in sustainable natural resource use and conservation, while improving farm incomes and developing public good support services. However, for the nonrevenue generating projects, it may be necessary to partner with other development agencies to soften the cost of funds. With revenue generating projects to ensure successful implementation, it would be essential to ensure that the executing agency (ideally located at the provincial level or below) has both technical and organizational capacity to review subprojects and is well placed with links to other agencies relevant to the project. The recent project designs use a new value chain development approach based on public-private partnership principles. This approach accommodates the
107

ADB. 2006. Special Evaluation Study on the Performance of Selected Global Environment Facility Projects and ADBs Role in the Joint Process Evaluation. Manila (draft). 108 The World Bank, which has been supporting multisector poverty projects across several provinces and at the village level, was able to do so only by using International Development Association resources and working with the structures established by the PRCs Leading Group on Poverty, which has a decentralized support structure for implementing such projects.

47 need for revenue generating projects but also allows for dialogue on needed public policies to either subsidize certain technologies or provide improvements to public goods and services.109 In all these areas, it would be preferable to focus on a narrower set of objectives and a narrow geographical areas and then expand over time. Multiple subprojects are inevitable in the sector, and both ADB and the PRC need to agree on practical yet sufficiently rigorous approaches to designing and implementing such projects. Care must also be taken to provide sufficient processing time, funds, and experienced staff to prepare and implement these complicated projects. Arrangements for implementation have to be made upfront when many provincial stakeholders are involved. Another key element is to ensure that there is sufficient staff capacity at the PRCM for supervision and follow-up. 149. Energy. The PRCs energy demand is growing rapidly, and issues such as energy security and sustainability have become pressing policy concerns for the Government. The countrys growth experience has resulted in high energy intensity, excessive reliance on coal, and pricing policies that do not reflect adequately externalities and environmental considerations. ADBs strategy has focused on (i) improving energy efficiency and conservation, (ii) developing cleaner energy sources, and (iii) promoting corporatization and commercialization of energy utilities. During the CAPE period, the program shifted from lending for power generation to projects targeting conservation and diversification of energy sources and promoting regional power integration. This builds on earlier support to encourage the use of energy supplies based on cleaner gas. 150. During the CAPE period, ADB approved about half a dozen energy loans in support of these objectives. A series of innovative coal-bed methane projects, which increased the supply of clean renewable energy source, was prioritized. Two other projects focused on improving mine safety and reducing greenhouse gases. By selling carbon emission reductions, they also are achieving the aims of the Clean Development Mechanism. Under integrated environmental development projects, ADB has provided support for central heating systems to replace inefficient boilers. 151. ADB approved 14 ADTAs, of which nine dealt with institutional and efficiency issues focused largely on helping to restructure the power sector. Four ADTAs focused on issues to enhance pro-poor energy supply objectives, while one addressed coal sector restructuring. Since most of the new generation of projects are ongoing, conclusions about effectiveness and impact are premature. 152. Overall, the performance of projects and TA was more mixed than in transport and urban water supply. However, the small sample of completed projects is not reliable as a basis for generalization (Appendix 15). Several of the projects illustrate the risks that ADB faces in transitioning from traditional generation projects to more difficult issues related to efficiency and environmental objectives. Short appraisal periods, which led to frequent scope variations, hampered some power projects. Issues regarding the adequacy of tariffs and the attention given to resettlement also emerged. Not all projects were successful. A wind power project, although responsive to the Governments strategy for developing non-coal energy alternatives, had to be cancelled due to inability to resolve its relatively high cost burden. The disputes involving a major build-operate-transfer project demonstrated the risks that can arise when the assessment of shifting market conditions is inadequate and capital costs are underestimated. Most of the energy-related ADTAs rated well in terms of relevance and quality of the products. In some cases, however, the executing agencies expressed concern about the nature of the work and the lack of means to follow through on the recommendation. As in the other sectors, executing agencies and implementing agencies expressed views about the desirability of delegating more responsibilities to the PRCM and increasing the skill mix and staffing to work more effectively with the PRC.
109

These project designs try to provide soft infrastructure providing linkages between farmer groups, agro-enterprises, and the government to collaborate. This approach has worked previously in the PRC.

48 153. Lessons from the CAPE period suggest that a program based largely on energy efficiency improvements, renewable energy, and environmental concerns is appropriate in terms of adding value and contributing to the PRC priorities. However, such projects are more difficult than financing a coal-fired generation plant or putting in place a transmission grid. Thus, they introduce a significant degree of risk to the lending program. Generally, in the more advanced coastal provinces, the liquidity in the domestic financial system and improved capacity of domestic institutions to use available technologies has eroded considerably the advantage of borrowing from ADB for more traditional power projects. However, the interior provinces might have some demand for what ADBs knowledge transfer can contribute to the development of the energy sector through more traditional energy projects. 154. Private Sector Operation and Finance. The PRCs private sector now accounts for more than 40% of GDP, 60% of growth, and 75% of the new jobs being generated. Thus, the continued expansion of the private sector is vital to the PRCs prospects of pulling the remaining poor out of poverty. Despite considerable progress as the PRC transitions to a market socialist economy, many concerns remain about the institutional and policy environment that guides private sector activity including difficulties in approval procedures for private sector businesses (Appendix 16). 155. Given the availability of external and internal investors, financing of PSOs does not appear to be a key impediment to further development of its private sector. The 2003 private sector assessment of the PRC highlighted impediments to PSD and PSOs, including (i) a policy bias in favor of SOEs; (ii) weak implementation of the rule of law; (iii) constraints on financing options for domestic private enterprises; (iv) infrastructure constraints; (v) weak corporate governance; (vi) human resource constraints; and (vii) difficulties in accessing reliable information. While ADB has potential to address many of these through its public sector window through ADTAs for PSD activities, there are also ample opportunities to address the latter three impediments (vvii) through selected profitable PSOs that can have good demonstration effects. The private sector assessment recommended that ADBs private sector assistance, if combined with public-private partnerships, can provide synergistic solutions resulting in greater benefits to the country. 156. ADB is supporting the private sector largely through its PSO (i.e., PSOD operations) and ADTAs. These ADTAs are geared to strengthening the financial sector, and address a variety of PSD and governance issues. In terms of PSO, the number and volume increased during the CAPE period. From 1998 to 2005, ADB approved private sector investment facilities equivalent to $586 million, consisting of six private sector loans ($308) and 11 equity investments ($274). During this period, 19 ADTAs were conducted totaling nearly $11 million. Since most of the PSO financial transactions were approved only in the last 2 years, assessing the overall effectiveness of these operations is premature. Evaluations of many of the ADTAs follow the general pattern in other sectorsmost were highly relevant and added value, but concerns persist regarding efficiency and processing complexities. 157. Despite the recent acceleration in activity, ADB has not formulated a cogent private sector strategy to guide its work in the PRC. Strategy papers formulated during the CAPE period laid out a wide range of strategic objectives, but they lacked focus and did not conform to the realities of the resources made available. ADB is not yet considered to have a critical mass of expertise or a validated competency in any of these areas. ADBs resources available for PSOs are limited, yet the potential work in the PRC is vast and diverse. In such a situation to make a difference, ADB has to make a choice as to which areas it should focus on based on the synergies it can build with public sector operations and the staff skill mix it can mobilize.110
110

While ADBs PSOs focused on financial sector during the CAPE period, it was not clear whether it was focused on one subsector within the financial sector given the limited resources available. For example, for the future, one area of focus may be working with potentially viable small- and medium-sized enterprises in the central and western provinces building synergies with the investments made by ADBs public sector operations. The other areas from which it can select are energy efficiency, environment, and urban services working with provincial authorities and municipalities.

49

158. ADB must act quickly to sort out the extent that it should (i) develop a more focused geographic presence, (ii) identify which aspects of the private-public infrastructure partnership theme would be the most feasible for deepening engagement, and (iii) use transactions as a basis for developing more insights into private sector issues. Sorting out priorities also might benefit from identifying the synergisms between the ongoing work in the financial and governance issues, which would be most relevant for the private sector activities. As these are complex issues, at a minimum, a plan is needed for developing a coherent longer-term strategy. That ADB appears to be reacting to ad hoc requests reflect partly from lack of narrow focus and the slow response in dealing with staffing needs. Given the PRCs size and complexity, ADBs efforts in PSOs should be scaled up significantly in focused areas. This is consistent with the views of the PRC government agencies as well. 159. For the financial sector, ADB approved six loans before the CAPE period to support development finance institution-type operations and credit lines to state banks. Because such operations had mixed success and the banking sector was flushed with liquidity, lending to the financial sector justifiably ceased during the CAPE period. ADB supported financial sector objectives largely through 21 ADTAs addressing various weaknesses that still hamper the PRCs financial sector (Appendix 17). Most were designed to strengthen the supervision and operation of the financial system, and involved issues ranging from reducing nonperforming loans to designing a risk-based supervision system. Many of the topics fall under three themes: (i) building a regulatory framework, (ii) small- and medium-sized enterprise financing, and (iii) social security system reforms. The counterpart agencies rated most of these ADTAs highly. Their success is probably due to the well-defined and technical nature of the topics, reinforced by the commitment of the Government agencies to securing useful outputs. However, ADBs ability to sustain a policy dialogue on these issues is a concern, given its staffing mix in the field and Headquarters relative to the specialized nature of these topics. VI. VALUE ADDED FOR DEVELOPMENT RESULTS

160. This chapter draws on findings from the strategic positioning and sectoral analysis chapters to report on the assessment of ADBs valued added for development results in the PRC during the CAPE period. The value addition of ADB assistance can be viewed from the three key themes. First, the impact of sustained financial support in the transport and urban sectors over a long period has contributed toward strengthening the PRCs productive base and its capacity to deal with environmental concerns. Second, TA services focused on cost recovery, management, and commercialization have improved corporate governance and sustainability in the infrastructure sector. Third, advisory support has promoted inclusiveness and broadened access to better services through policy changes in how investment expenditures are managed, especially in the social sectors and in legal and regulatory areas to improve enabling environment for the private sector. Attribution of these impacts is not possible, even at a sector or provincial level, due to the relative share of ADB financial assistance in the total investment in the PRC and related fungibility issue. Thus, the rest of this chapter qualitatively illustrates value addition of ADBs lending and nonlending operations. 161. Although ADBs financial support on an annual basis represented only a very small percentage of the PRCs total investments taken over a decade, it contributed significantly to infrastructure financing needs of the poorer interior provinces. Toward the end of the CAPE period, financing became less of a constraint at the central Government level,111 and the relationship entered a new phase when support for reforms and knowledge transfer took center stage. In this regard as well, ADB has made a substantial contribution in terms of new ideas, policy advice, and TA for capacity building. More than $270 million has been allocated for TA, of which 71% was for ADTAs.
111

Financial constraints still exist in some interior provinces, as well as in subsectors such as railway.

50

162. ADBs lending and nonlending products have supported innovative approaches in project management, new modalities in project implementation, more effective local-level and sectoral strategies, and new initiatives for market-based reforms. ADB has increased public awareness of topics ranging from public health issues, such as SARS and HIV/AIDS, to road safety concerns. ADB-funded studies have developed the technical foundations for dealing with problems as diverse as water pricing, traffic management, and technological development. The country has been quick in grasping and assimilating international best practices. TAs have also contributed to institutional reforms. For example, the legal and regulatory framework for procurement was strengthened, drawing on lessons from ADB and other MDBs and TAs provided in this area. These changes resulted in the approval of Tendering and Bidding Law in 1999, as well as the formulation of the Government Procurement Law in 2002. 163. ADB played a major role in supporting the Governments plans to expand its NTHS, which was a very high priority. Given its enormous scale, the NTHS expansion required consistent support over many years. ADB recognized this and was unfaltering in its support. By the end of the CAPE period, the NTHS was approaching completionan immense accomplishment. ADB also was generally consistent in pursuing an approach, priorities, and features that met the needs of the roads subsector and ADBs overall priorities for support under the CSP. This included concentrating most of roads sector support on expressways serving the poorer central and western provinces. Over time, ADB-supported highway projects added some innovative features, which the PRC has incorporated into its own programs. 164. ADB began following a well-conceived program of supporting LJVRs, which helped in expanding the rail network and demonstrating the merits of operating railways along commercial lines. When MOR embarked on significant reforms in the late 1990s, ADB quickly responded by providing what became an extended sequence of support for national railways. ADBs subsector priorities were fully consistent with the needs of the subsector and the overall strategic priorities. This included focusing on railways investments in the poor central and western provinces. During the CSP period, ADB deepened its support for reform of national railways through ADTA. Further, ADB made an appropriate strategic shift by ceasing to finance civil worksas MOR has less need for ADB support in this areaand focusing its financing on advanced railways technology and equipment. 165. ADB-financed roads and railways projects made a valuable contribution to improving transport efficiency and connectivity, and preventing transport infrastructure from becoming an obstacle to sustained growth. The developmental role of the NTHS and railway network expansion has been crucial for the provision of energy and raw materials from inland provinces to the rapidly growing central and coastal provinces. This provided new jobs for migrants from rural areas and inland provinces with limited population carrying capacities. Further, it helped lower production costs and spur investment and growth by bringing consumer goods and production inputs to inland destinations more quickly and reliably. Since the financial viability of such investments is risky in many casesespecially for domestic banks without experience in infrastructure lendingADBs involvement has had a greater development impact than its lending volume might suggest. In addition, the program supplemented the PRCs regional cooperation efforts by facilitating closer ties between the PRC and its neighbors. 166. Contribution to poverty reduction has been broad and indirect in both income and nonincome areas. At the local level, enhanced road accessibility and increased traffic density helped ease access to and use of passenger and freight transport. These operations, especially roads, provided a boost to the local, regional, and national economy in accelerating economic growth by lowering transactions costs. This, in turn, led to increased income, generated locally and from migrant remittances. As a result, industry has become more diversified, enterprises have developed, tourism activities have increased, and income sources and employment patterns have changed. In addition, social services development has improved (access to education, health

51 services, and credit), and enhanced access for local communities has improved the quality of life. Local roads generated non-income poverty reduction impacts depending on local realities, including remoteness of location, resource endowments, and links to growth centers.112 167. The amount of loans approved for the water supply, sanitation, and waste subsector during this period increased by 220% compared to 19901997, indicating strong demand for such operations. The potential impact of increasing the quantity and quality of water supply because of reduced pollution and cleaner water is becoming discernible in completed projects. 113 The sustainability of the investments has been high in the sector compared with other DMCs, although excess capacity has been produced in some projects. 168. ADB has been deeply committed to reducing water-related infrastructure bottlenecks in selected urban centers. The Government, especially at the local level, has appreciated ADBs contribution in terms of capacity building and lower-cost financing. The main value added came from the additional knowledge transfer and capacity building to the sector through TAs and information systems and technology acquired. The knowledge assimilation was quick which has resulted in substantial reforms in the water supply, sanitation, and waste sector over the past decade in technology, service and operation and maintenance (O&M) standards, pricing, corporate governance, and regulations. ADBs recent multisector projects in urban sector are beginning to show good results. The demand for these projects is strong because of the complexity and importance of the issues being addressed and their impact on poverty reduction and capacity building. 169. In the urban sector, ADBs TAs on tariff rationalization have added value in several areas. In the early CAPE period, many water utilities in the PRC were poorly managed, had low profitability, and operated with heavy state subsidies due to insufficient tariff revenues. The 2003 CSP identified the need to increase tariffs to achieve cost recovery. ADB had been supporting the tariff reform process for water and sewerage through several ADTAs that assisted primarily the Ministry of Construction in analyzing cost issues, affordability, and private sector participation concerns. Subsequently, nine water supply, sanitation, and waste management projects complemented the policy dialogue for full cost recovery by enhancing synergies with the TAs. Project-related tariff concerns reflected in loan covenants were monitored closely. Moving beyond micro-pricing, some projects balanced financial autonomy with affordability, 114 while others encouraged financing of additional water supply infrastructure from the water tariffs and private sector participation. The internalization of the reforms by the local governments illustrated the maturity and also sustainability of the reform impacts. 170. ADB investments in the energy sector during the CAPE period not only helped to supply power for economic growth in provinces like Liaoning, Shanxi, and Hebei, but also showcased cleaner and more efficient options for doing so. These options made the national government's unilateral efforts to retire old, inefficient, and polluting coal-fired plants a bit easier, especially because the closure of these plants were made part of loan covenants forged with local governments. The projects developed after 2003 also demonstrated to national and local stakeholders how clean technology can also contribute to a project's financial sustainability through emissions trading. ADB's technical and advocacy support for the separation of the regulatory role from development functions in the transition to a liberalized electricity market had led to the creation of the State Electricity Regulatory Commission. 171. To address broader planning and expenditure issues, ADB provided TAs to support preparation of national and provincial-level development strategies. A TA supporting the preparation
112 113

A sample of postevaluated roads and railway projects in 2006 indicated no significant adverse environmental impacts. These include Loan 1636-PRC: Fuzhou Water Supply and Wastewater Treatment Project and Loan 1692-PRC: Suzhou Creek Rehabilitation Project. 114 Poor households were exempted from paying connection fees and meters, and lifeline tariffs were established.

52 of the 11th FYP115 included policy recommendations on (i) foreign capital utilization, (ii) regional cooperation, and (iii) subregional cooperation in GMS and CAREC areas. At the local levels, several TAs supported provincial development strategies, enabling a direct dialogue with provincial governments to help deepen policy impacts. The first such TA was given to Hebei Province to capitalize on its geographic advantage by strengthening market integration with Beijing, Tianjin, and the Bohai coastal area. This pilot was highly successful and was one of the five that won the ADB and the PRC annual TA award in 2005. Its outputs were used as basic reference documents in formulating an 11th FYP for social and economic development. Subsequently, two more TAs provided inputs to development strategies at the provincial level (i.e., Xinjiang and Gansu provincial strategy and Inner Mongolia energy development strategy). 172. ADB supported the PRC accession to the WTO through several TAs. The first TA on WTO membership116 was to make the PRCs foreign trade laws and regulations compatible with WTO, and to help determine the institutional set up for regulating foreign trade and investment. The second TA on enforcement of WTO rules117 aimed to address outstanding legal and institutional issues, such as lack of transparency of independent regulators and inadequate enforcement of laws on intellectual property rights. Another TA reviewed potential impacts of accession to railway. 173. To add value, ADBs TAs have targeted a variety of new concerns that reflect corporate and country priorities, and helped to build awareness and capacity building. For example, a series of ADTAs supported bringing NGOs more formally into poverty targeting and aid delivery, thereby helping to mainstream the NGOs role in addressing poverty in the PRC. This has demonstrated new approaches to enhance the development impact of the ADB-PRC partnership. An enhanced focus on the M&E concept also emanated from the ADB-PRC partnership. Since the mid-1990s, ADB has provided five TAs to gradually introducing M&E concepts and support capacity building in this area. The ongoing TA on developing a results-based national M&E system 118 is supplementing the traditional early warning M&E system design, incorporating several outcome and impact indicators. The MOF also has established its own evaluation office for MDB-funded projects and has recently approached ADB for collaboration. This illustrates that within the past decade since ADBs introduction of the concepts of M&E, the PRC has come a long way with sustained involvement from ADB (see Appendix 9 for further details). VII. PERFORMANCE ASSESSMENT AND RATINGS

174. This section provides summary assessment ratings of ADBs performance based on the four perspectives and related criteria discussed in chapters IIIVI: (i) strategic positioning, (ii) institutional positioning, (iii) ADB value-added contribution to development results, and (iv) sectoral program positioning.119 The first three are top-down assessments from the country perspective that focus on whether ADB has done the right thing in terms of strategic, institutional, and developmental results perspective. The ratings for these concepts would be weighted equally
115

ADB. 2005. Technical Assistance to the Peoples Republic of China for Support for the Preparation of the 11th Five-Year Plan. Manila (TA 4634-PRC, for $500,000, approved on 19 August). 116 ADB. 2001. Technical Assistance to the Peoples Republic of China for WTO Membership and Foreign Trade Law Reform. Manila (TA 3672-PRC, for $700,000, approved on 14 June). 117 ADB. 2002. Technical Assistance to the Peoples Republic of China for Enforcement of World Trade Organization Rules by the Judicial System. Manila (TA 3971-PRC, for $400,000, approved on 4 November). 118 ADB. 2005. Technical Assistance to the Peoples Republic of China for Developing a Result-Based National Monitoring and Evaluation System for Key Projects. Manila (TA 4581-PRC, for $400,000, approved on 21 April). The TA is ongoing and facing implementation issues. While the identification and pilot testing of the results indicators through the case studies was substantially completed by September 2006, the database integration and training components had not been started 3 months before scheduled completion in December 2006. 119 These assessment criteria are similar to the criteria indicated in the CAPE guidelines for top-down strategy assessment, ADB positioning, and bottom-up sector assessment. They have been renamed with somewhat different subcriteria relevant to a client such as the PRC, given its significant status in ADBs portfolio and the smallness of the ADBs program in the countrys overall development context.

53 to generate the top-down assessment. The fourth criteria shows whether ADB has done things right, looking at the lending and nonlending operations in the key sectors to form the bottom-up assessment. In the end, to derive the overall assessment of the CAPE, the top-down and bottomup assessments are weighted equally. For rating purposes, four values are used: highly successful (3), successful (2), partly successful (1), and unsuccessful (0). The overall rating in the CAPE is (2.1) or successful. The details of the assessment are in the following sections. A. Strategic Positioning

175. This strategy assessment is based on 1997 COS and the 2003 CSP, along with recent CSPUs. These documents represent a gradual and natural evolution of ADBs approach in the PRC and in turn build on the lessons from earlier strategy documents. The 2003 CSP goes further in aligning ADBs priorities with the countrys needs, and is more responsive to the latest corporate thinking on strategy formulation. Thus, it is used more as the reference benchmark. 176. Table 11 provides a summary assessment of how well ADB has positioned its strategy in relation to country needs. Two specific criteria are applied: (i) alignment of country and ADB priorities, and (ii) positioning of the strategy and program under the thematic pillars.
Table 11: Strategy Positioning Rating
Criteria A. Alignment of Country and ADB Priorities 1. Meeting the PRC and ADB's overall poverty objectives HS X S X PS US Comments COS/CSPs have become broadly consistent with FYPs. Country and institutional poverty reduction objectives are now better aligned but some MTSF priorities cannot be fully incorporated given the PRC borrowing policies. Thematic pillars have evolved gradually in emphasis in line with country and institutional priorities. Given the PRC borrowing strategy and ADB mandates, alignment is a reasonable compromise. Logic of poverty focus more developed in 2003 CSP than in 1997 COS. Lending and nonlending designed to support country objectives. Regional focus appropriate but may be too rigidly applied. Understanding on how target poverty groups can be effected improved over time. Sector strategies and road maps are too general. Geographical spread of projects and lack of follow-up on some nonlending issues could affect sustainability. Given country size and limited financial support, impact in any particular province or city takes time. No critical mass established for private sector support. Strategic gaps identified in collaboration with the PRC. Risks due to failed reforms and ADB's capacity to respond covered in CSP but more needed on risks due to increasing inequities, corruption, and sustainability. Blend of lending and nonlending program relevant for CSP objectives. High on alignment and relevance. Weak private sector strategy could be more flexible on location of projects and sometimes, overly defensive on poverty objectives.

2. Relevance of the thematic strategic pillars Summary Rating on Alignment B. Relevance of Program to Strategy Based on the Thematic Pillars 1. Program is coherent and translates strategy into appropriate operations 2. Appropriateness of strategic focus by sector, target group, and geographic area

X X

X X

3. Program adequate to generate sustained results and provides critical mass

4. Strategic gaps and risks are identified and addressed

Summary Rating on Relevance Overall Strategy Rating

X X

ADB = Asian Development Bank, COS = country operational strategy, CSP = country strategy and program, PRC = People's Republic of China, FYP = five-year plan, MTSF = medium-term strategic framework. Note: HS = highly successful (3), S = successful (2), PS = partly successful (1), US = unsuccessful (0). Source: Country assistance program evaluation team.

54 177. Alignment of Country and ADB Priorities. Specific aspects relate to meeting the PRCs and ADBs overall developmental objectives and the relevance of the thematic pillars as a basis for strategy formulation (chapter III, section A). Given the strong Government ownership in shaping the programs of external agencies, a close alignment between the PRCs and ADBs development strategies was inevitable. They differed early in the period, mainly in how each party viewed lending for poverty programs. Alignment improved with the evolution of institutional policies on PRS, along with ADBs efforts to locate more projects in the poorer interior provinces and enhanced efforts to address poverty issues through more focused ADTA. The 2003 CSP makes a case for the poverty reducing impact of infrastructure, agriculture, and energy projects. However, it could have improved on identifying the target group and analyzing the role of connectivity in addressing poverty objectives. In support of the overall poverty reduction efforts, the four thematic pillars provide an appropriate strategic framework to develop and monitor the program. These pillars have evolved gradually to reflect shifts in emphasis and country developments. Against this criteria, ADBs performance is rated (2.7), between successful and highly successful. 178. Positioning of the Strategy and Program Under the Thematic Pillars. As discussed in chapter III, section B, key considerations are (i) coherence of the program; (ii) appropriateness of strategic focus by sectoral, regional, and poverty targets; (iii) building a critical mass for sustainability; and (iv) identifying strategic gaps and risks. The assessment in paras. 179184 below draws largely on the analysis in chapter III but also material in chapters IV, V, and VI. 179. ADBs operational program has evolved into a judicious mix of lending and advisory services to meet ADBs strategic objectives under the four thematic pillars. While lending is most important in serving the first pillar of promoting equitable growth, it also contributes to the other three themes. Nonlending is important under making markets work better (governance), but is also a major vehicle for addressing social and poverty concerns. 180. By locating well-designed transport and urban infrastructure and energy projects in the interior provinces, and diversifying the sectoral composition of the lending program, ADB is better able to meet its and the PRCs developmental and poverty reduction objectives. However, the sectoral objectives in the strategy documents tend to be excessively broad relative to what ADB can achieve in the PRC. While the sector road maps in recent years have tried to be more focused, their formulation has been too general. Targeting projects in the interior regions might have been applied too rigidly. With the recent emphasis on promoting innovation and knowledge transfer, coastal provinces might offer more opportunities to test new approaches that can have significant social and poverty benefits that could be disseminated more widely. Lately, the sectoral mix is becoming more balanced, while the geographic focus is broadly sensible to enhance the poverty impact (subject to the caveat). The target groups being reached represent a reasonable compromise given the available lending instruments and the mix of ADTAs. 181. With the PRCs strengthened financial position and ADBs relatively limited resources, a more concentrated geographical approach might be warranted for some issues to achieve a critical mass and more sustainable solutions. While the Government understandably is keen to spread external support for equity reasons, designing more intensive and long-term involvement in one or two provinces and municipalities to address important but seemingly intractable issues should be considered. Achieving a critical mass in some sectoral programs is also uncertain. The challenges in energy efficiency and environmental management, including rural land degradation, are extremely complex, and the amount of financing applied thus far has been modest in relation to needs. Thus, determining whether a critical mass has been established is premature though the need for such support is apparent. 182. PSOs have been increasing, particularly in the past couple of years. However, the limited resources that have been allocated and the lack of focus call into question whether a critical mass of expertise or activities has been established or a robust strategy has been

55 formulated. The 1997 COS and the 2003 CSP do not address extensively the private sector agenda, nor do they provide a well-reasoned strategic context for operating. The 1997 COS, for example, characterizes as focal issues themes as broad as promoting conditions favorable to non-State sector led growth and strengthening financial management of SOEs. The 2003 CSP was more opportunistic than strategic. Given the diversity, size, and complexity of the emerging private sector in the PRC, ADB needs to rethink its role. 183. With the PRCs strong role in selecting projects and identifying themes for ADTA, major strategic gaps in development issues are unlikely. If anything, the sectoral analysis and related intentions tend to be too comprehensive, complicating ADBs efforts to establish what it should support. The 1997 COS focused on risks associated with incomplete reforms. The 2003 CSP rightly drew attention to internal risks, i.e., that ADB might be unable to respond to the PRCs request for improved servicesand this concern is the focus of chapter IV on institutional positioning. However, with the prominence that the senior leadership has given to increasing social and economic disparities, the extent of environment degradation, and the destructive aspects of corruption, the risk that these issues could derail the PRCs impressive achievements warranted more attention than accorded in the strategy documents. Overall, the positioning of the strategy and the program is rated successful (2.3). 184. Combining the two criteria, alignment and positioning, the overall strategy rating is successful bordering on highly successful (2.5). B. Institutional Assessment Ratings

185. As discussed in chapter IV, five aspects form the basis for ADBs performance at the institutional level: (i) decentralization, (ii) available instruments and staffing resources, (iii) the portfolio management system and indicators, (iv) corporate standards, and (v) partnerships. These criteria together provide the ADB performance rating as an institution. 186. Decentralization. Established during this CAPE period, the PRCM significantly improved client services and the understanding of country conditions for the purposes of program development. However, the pace of further decentralization of staff and responsibilities to the field office has not kept pace with emerging needs. As noted in the CAPE sectoral assessments and reinforced by other ADB evaluations, the case for delegating more authority and staff to the PRCM is clear. To position ADB better to serve a country of this size and complexity, the potential advantages and implications of moving the country management team to the field, along with a strong contingent of sector experts, merits serious consideration. In the current scenario, ADBs rating regarding decentralization is partly successful (1.0). 187. Using TA and Staff Resources to Promote Innovation. If ADB is to be more innovative, it needs to go well beyond just transferring sound project management expertise to executing agencies. It must find ways to work with local authorities much earlier to formulate more valueadded approaches. ADB involvement in new sectors, such as land degradation through GEF partnerships, energy efficiency, and urban social infrastructure offers more potential for piloting innovative solutions if the requisite expertise is brought to bear. Restructuring incentives to encourage innovation in lending requires fresh thinking about how PPTA resources are programmed. ADBs recent efforts to improve the quality of ADTAs (as exemplified by the TA awards program and the umbrella TA facility) are encouraging, though the gap between expectations and reality remains large. During the CAPE period, opportunities to expand and deepen ADBs involvement in areas of strategic or institutional importance, such as regional cooperation and the role of civil society were seized. However, to achieve sustained results and scale up the potential impact, more effort is needed in following up and collaborating with others. 188. In bringing all its instruments to bear on issues, ADBs often cited excessive reliance on consultants is a concern. Use of consultants for specialized topics and one-off studies is

56 warranted as a practical matter. Keeping in-house experts to cover topics that might come up only occasionally would be too expensive. Nevertheless, ADB should avoid addressing major issues that will form important aspects of the work for extended periods if it does not have inhouse expertise. This could be a criterion for taking on clusters of activities around a unified theme. Thus, ADB must try to augment the technical capacity of in-house staff and reshape incentives in favor of knowledge transfer activities. ADBs rating regarding the use of TA and staffing resources to promote innovation is partly successful (1.0). 189. Developing a Better Results-Based Portfolio Monitoring System. While the 1997 COS did not develop results indicators, the 2003 CSP proposed a series of useful benchmarks for evaluation of results even prior to the ADB-wide initiative to develop results-based CPSs. However, these results-oriented indicators were not monitored by the end of the CSP period due to the difficulties attributing ADBs results in a country like the PRC, lack of data sources and monitoring capacity, and the time lag in achieving results (para. 96). The draft CSP completion report highlighted the achievement of the CSP in a qualitative manner. Meanwhile, elaborate and high-quality portfolio reviews are regularly carried out by the PRCM to monitor indicators that either show the status of operations in terms of implementation progress or those which influence the financial position of ADB, but these do not reflect client responsiveness. ADB does not have a system that monitors service standards of the institution. While difficulties with monitoring results have to be addressed ADB-wide; in the interim, ADB should also develop more practical indicators to track its responsiveness in providing services to the client (para. 98). This is essential as ADB moves to a more advanced partnership relationship with the PRC. Based on the above mix performance, ADBs effectiveness of the results-based monitoring systems is assessed as partly successful (1.6). 190. Corporate Mandates. The ADB program in the PRC generally has performed well in adhering to ADBs safeguard and anticorruption standards. In some areas, such as environment, indigenous peoples, and involuntary resettlement systems and guidelines are generally in line or more demanding than ADBs. The use of PPTAs to revise and prepare environmental safeguard documents has not been always needed to the extent employed. There is now an opportunity to initiate the process for piloting country systems, especially in environmental safeguard compliance.120 ADBs performance in applying corporate mandates for safeguards and anticorruption is rated successful (2.0). 191. Relations with Stakeholders and Partners. The criteria used include creating more synergistic relations with stakeholders and other development partners, and strengthening the partnership between the PRC and ADB. Extensive consultations were conducted during the CAPE period to ascertain client views on the quality of ADB services as part of the MIC initiative and in preparing the 2003 CSP. The stronger local presence of the PRCM improved ADBs ability to develop operating relationships with field-based partners, such as DFID and WHO, and to work more closely with the World Bank in sharing experiences. ADB also has initiated relationships with NGOs effectively. To scale up impact and increase effectiveness, ADB might consider a more selective and targeted approach to combine efforts where both partners would benefit. 192. Relations between ADB and the PRC strengthened significantly over the CAPE period as strategies were harmonized and synergistic relations evolved. Knowledge sharing now goes both ways. The PRC can help ADB to improve client services and become more effective in transferring knowledge by facilitating arrangements with counterparts at the local level and identifying government expenditure programs suitable for piloting ADB policy recommendations generated from advisory activities. ADBs performance in positioning itself with stakeholders and partners is rated successful to highly successful (2.5).
120

This also would be consistent with ADBs international commitments, such as those in the Paris Declaration, which calls for moving toward relying on country systems as well as the MIC concerns.

57

193.

ADBs overall rating (Table 12) on institutional positioning is partly successful (1.6).
Table 12: Assessment Ratings on Institutional Positioning

Criteria

HS

PS

US

Comments

Decentralization and positioning the institution to be more responsive in providing client services Promoting innovation and better use of operational instruments

The PRCM capacity and authority enhanced but more ambitious decentralization and delegation needed. MI-DMC initiative and new products developed. Processes need further simplification. Need to promote innovation in both TA and projects. Staffing for technical needs and innovation needs review. Portfolio reviews carried out regularly but could be more selective in focusing on major issues. Need better results-based performance and portfolio indicators. Given the PRC capacity, more reliance on national systems should have been piloted or put in place. Considerable progress after decentralization but more is needed to build more strategic partnerships to enhance effectiveness and to forge consensus with the PRC. Major issues are making better use of decentralization, TA, staffing resources to promote innovation, and knowledge sharing.

Building a better results-based portfolio and performance monitoring system

Adhering to safeguards Relations with stakeholders and partners X

X X

Overall Institutional Rating

PRC = People's Republic of China, MI-DMC = middle income-developing member country, PRCM = PRC Resident Mission, TA = technical assistance. Note: HS = highly successful (3), S = successful (2), PS = partly successful (1), US = unsuccessful (0). Source: Country assistance program evaluation team.

C.

Value Added for Development Results Ratings

194. Development results are rated successful (2.0) for ADBs lending and nonlending operations. Lending operations had a substantial impact at the beginning of the CAPE period, although their importance might not be as discernible at the end of the period due to the rapid assimilation of knowledge and availability of other sources of financing. Nevertheless, ADBs geographic and sector focus, combined with sustained long-term effort, has developed a sophisticated capability in the PRC infrastructure sector. Working with other MDBs, ADB has provided a successful development experience by bringing in state-of-the-art technical, financial, and management expertise. With the Governments strong ownership and rapid learning process, these operations have been successful. The capacity development has been so rapid that a continuation of business as usual in the same sectors is becoming redundant in some provinces. The impact of nonlending operations on policy dialogue and capacity building has been mixed. While individual TA results have been very successful, they have not been highly successful as a group due to the lack of strategic focus and inefficient management. D. Sectoral Assessment

195. Following the assessment of ADBs strategy and positioning, this section presents the assessment of the program by sector, according to the standard evaluation criteria of relevance, effectiveness, efficiency, sustainability, and impact based on the discussions of the operations in the appendixes and chapter V. In a country such as the PRC, where ADB investments are less than 1% of the investment expenditure program, linking the impact of ADBs program to overall sectoral outcomes is difficult if not impossible. Instead, the contribution of ADBs work in terms of policy influence or demonstration effects are discussed in an attempt to draw lessons on how to enhance this potential contribution. In addition, because most of the lending operations are ongoing, the evaluation assessments have to be based on potential outcomes

58 and their potential sustainability rather than on actual outcomes, which will take several years more to ascertain.121 The lending assessments (including PPTAs) are separated from the ADTA assessments. The key lending sectors are in Table 13. The nonlending assessments include ADBs TA performance in various thematic and sectoral areas.
Table 13: Evaluation Ratings by Criteria by Sector
Sector Relevance Effectiveness Efficiency Sustainability Lending Operations 3 3 2 2 Transport Urban 3 2 2 2 Rural Development and Natural Resources 2 2 1 2 3 2 2 2 Energy 3 2 1 2 Nonlending Operations (includes TAs to sectors above and governance, financial, and social sectors) Sectoral Bottom-Up Assessment (50%)
3 = highly successful, 2 = successful, 1 = partly successful, 0 = unsuccessful, TA = technical assistance. Source: Country assistance program evaluation team.

Impact 2 2 2 2 2

Overall 2.2 2.4 2.1 1.9 2.1 2.0

2.2

196. The overall sectoral positioning rating is successful (2.2) as indicated in Table 13 derived from the ratings described in the sector assessment and validated in sector appendixes. The separate sectors are weighted according to their share of the value of lending during the CAPE periodtransport 70%, urban 18%, RDNR 4%, and energy 8%. Effectiveness, sustainability, and impact are weighted twice as much as relevance and efficiency. The lending operations are weighted at 75% and nonlending at 25% to obtain the overall sectoral (bottom-up) rating. 197. Transport. Transport sector operations were assessed in the transport SAPE (footnote 7) separately for closed railway and roads projects and TAs, as well as ongoing road and railway projects. The SAPE concluded that ADB support for roads and railways in the PRC was successful. Over the study period, roads and railways in the PRC underwent a remarkable transformation in terms of network expansion and upgrading, as well as in modernization and reform of policies and institutions. The Governments programs in both subsectors were conceived well, and its commitment and capacity to carry them out were strong. By providing development finance from the early stages of these programs, in conjunction with consistent support and advice, ADB played a valuable role as a trusted development partner to assist the PRC in realizing these achievements. An important part of ADBs approach was its consistent support over the CAPE period. The NTHS is nearing completion, and the national railways have grown in capability and sophistication to become worthy of comparisons against international standards. As such, this chapter in ADB support to the PRC was nearing completion by the end of the CAPE period. The SAPE survey of value addition showed that, with a few exceptions, the standard package of ADB support and most of the special project features were no longer adding much value compared with domestically financed investments. 198. Urban (Water). The 10 loans to the urban sector are assessed as highly relevant. They were very relevant to ADBs and the PRCs strategies, and fully supported ADBs water policy. The project designs also were generally consistent with the project objectives. Based mainly on the achievement of the physical outputs and the potential outcomes of the four substantially completed urban projects, ADB operations in the sector are assessed as effective. In some projects, installed capacities of the wastewater treatment plants might not be fully utilized within the first 2 years of operation. The projects are considered efficient due in part to the well121

Except for the transport sector (70% of the portfolio), which is treated separately in the transport SAPE, all the other loan projects in each sector were assessed using the methodology described in Appendix 1. Given the substantial amount of TAs in various sectors, they were assessed together using the TA effectiveness survey for the PRC. The strategic use of PPTA has been taken into account in the institutional assessment. The quality of the PPTA is reflected in the lending assessments.

59 prepared PPTAs, ADBs experience in the sector, and the good internal rates of return of completed projects. However, project implementation issues were observed in some, including start-up delays, delays in procurement, and loan savings and cancellation (Appendix 12). The closed projects are considered highly sustainable because of the (i) transfer of facilities to experienced companies; (ii) training obtained for proper O&M; and (iii) determination of water and wastewater tariffs aiming for full recovery of O&M costs, depreciation, and debt service of project facilities. The potential impacts are assessed as substantial, given the progress in achieving additional water supply and pollution control through wastewater treatment. 199. Rural Development and Natural Resources. ADB operations in the sector are assessed as relevant as they were pertinent to the sector needs, as well as Government and ADB strategies. However, weaknesses in project design delayed implementation of several projects. The interventions in the RDNR sector are considered effective, because their narrow focus on particular subsectorswater resource management and soil conservationallowed ADB to achieve more visible outcomes in projects. Due to the complexity of the sector, implementation was difficult, and hence it is assessed as less efficient. With O&M of embankments and dikes delegated to specialized agencies, the water resources projects would be likely sustainable. The other agriculture projects that are substantially implemented also appeared to be sustainable, though a credit gap might remain at closing. The potential impacts are substantial, considering short-term impacts on job creation, better public health outcomes, and reduced coal consumption with biomass pits for cooking. 200. Energy. Projects in the energy sector are assessed as highly relevant, because of the lending programs responsiveness to Government priorities, the need for added value, and appropriate designs. The projects are effective in directly lowering carbon emissions and in promoting the adoption of clean and renewable energy. Relatively higher financial and technical risks inherent in innovative projects, which were not managed productively, constrained the consumption from clean and renewable projects. Nevertheless, based on the good internal rates of return, the projects are assessed as efficient. In terms of sustainability, as the power sector transitions toward more competitive power markets, tariffs would tend to decline. Further, sustained efficiencies rather than a tariff guaranteed at appraisal would define cost recovery. The operations are assessed as potentially sustainable due to the possibilities for reinvestment of the proceeds from the sale of carbon credits by some ongoing projects. With the expected improvements in public health through reduced emissions, and growth stemming from reliable supply of electricity, the impacts are assessed as substantial. 201. Nonlending Operations. The ratings for the ADTA were based on the ADTA assessment and the assessments of ADTA operations in the sectors with a lending program, as well as in sectors without lending programs (financial sector, social sectors, and other areas covering governance, law, and economic management) (paras. 7282 and Appendix 9). The TAs are rated highly relevant and sustainable based on the strong Government ownership, and effective due to the good quality of outputs gradually leading to related outcomes. However, the TAs are considered less efficient because of the management issues described in Appendix 9, section F. E. Overall Assessment

202. Overall Rating. Table 14 weighs and combines the ratings for the three perspectives under the top-down assessment, giving each equal weight. The top-down and bottom-up ratings are combined to derive the overall rating. The overall assessment rating is successful (2.1). ADBs program for the PRC is strong in terms of the quality of its portfolio of projects and the relevance of its strategy and sectoral programs, with the notable exception of its support for the private sector. Since PSOs increased only modestly in the past 2 years, an assessment of their performance is difficult, as it is with the regional cooperation initiatives undertaken recently. Weaknesses are

60 evident largely in terms of institutional positioning. Many of the issues are identified as systemic concerns for MICs, and have been raised in other ADB reviews. These relate to (i) the way TA is used, especially PPTA; (ii) weak capacity to support knowledge transfer and innovation; and (iii) excessively complicated and bureaucratic process and procedures, which weaken responsiveness to client concerns. Table 14: Overall Assessment
Item Country top-down assessment (50%) Strategy Institutional Development impact Sectoral bottom-up assessment (50%) Overall assessment Source: Country assistance program evaluation team. Rating 2.0 2.5 1.6 2.0 2.2 2.1 Rating Description Successful Successful on the high side Partly successful Successful Successful Successful

VIII. A.

CONCLUSIONS, ISSUES, LESSONS, AND RECOMMENDATIONS

Conclusions

203. ADBs relationship with the PRC is unique in many respects. This is a country whose record of achievements over the past 2 decades has been exceptional globally. ADBs financial support has been minor relative to the Governments total budget. Together, ADB, World Bank, and Japanese bilateral assistance account for 90% of the aid flows to the PRC. However, this aid in aggregate accounts for about 5% of the external capital inflows (which now come largely from private sources) and less than 1% of the PRCs investment expenditures. Under such circumstances, how can the effectiveness of ADBs assistance program for the PRC be judged? 204. The conclusion that development assistance does not matter to the PRC is tempting, but this would be wrong. Several messages are worth reiterating: (i) The main lesson from the PRC experiencetrite but often glossed overis that assistance programs succeed if the client demonstrates strong ownership, effective capacity, and good policies. (ii) That the PRC would have succeeded with or without ADB support is undeniable. However, with assistance from ADB (and other development partners), progress has been more rapid and sustainable. ADBs value added lies in having been a consistent, trusted, and long-term partner, appreciated equally as a source of reliable financing as for transferring knowledge and developing options. Over the course of more than 140 projects and about 500 TAs since inception of its country program, ADB has helped to introduce many new ideas. Further, through learning-by-doing in its project management systems, ADB promoted more transparency and discipline in financial and expenditure policies. (iii) Success, however, drives demand for more innovative and responsive servicesand this is the theme of this CAPE. The PRC is now an MI-DMC. As such, the services that worked well over the past 2 decades are no longer perceived to be adding comparable value today. At the same time, ADBs proliferation of more complex processes 122 and safeguard requirements have increased the nonfinancial costs of borrowing. (iv) The external financial environment also has changed. MICs with good track records increasingly can tap international markets for financing on attractive terms. Accessing knowledge and skills also is easier today in a globalized and information technology-linked world. This has increased the competitive pressure on ADB to
122

Complex processes refer to loan processing and implementation requirements.

61 improve its capacity to serve the clients more effectively following their emerging needs and changing circumstances. (v) However, the relationship between the PRC and ADB is stronger today than it was a decade ago since each offers the other a package of benefits that is diverse and transcends pure financial considerations. This provides a good basis for moving forward with more innovative, responsive, and results-based approaches. Key Issues

B.

205. The overall assessment of this CAPE is that ADBs program for the PRC has been successful. While the program is moving in the right direction, more can be done to enhance service responsiveness and support more innovative approaches. These activities form the core of the recommendations section. However, views are more mixed on some issues, and reviewing these from the CAPE perspective is worthwhile. 206. Is Diversification of the Lending Program Necessary? Having over 70% of the value of the lending program concentrated in transport at various times invites strategic repositioning for sector selectivity. In a country as large and complex as the PRC, and with such a wide range of development challenges, a more diversified program focused on a limited number of geographic areas or sectors is needed to meet ADB as well as country objectives. However, given a notional lending ceiling of $1.5 billion and the need to build a critical mass to ensure sustainability in a country such as the PRC, supporting a series of one-off projects in more subsectors is not recommended. For example, a strong presence in the urban water and sanitation sector is an appropriate vehicle for ADB to address social and environmental issues confronting the growing urban population. Similarly, agriculture (principally water and natural resource management) and energy (efficiency projects, climate change, and renewable energy) offer potential to support a range of corporate objectives, including inclusiveness, sustainability, and poverty. These sectors provide opportunities for both public and PSOs and addressing environmental concerns. Moving beyond these sectors or getting into a broader range of activities within each sector, should be approached with caution, taking into account available resources, managing capacity, and replicability. 207. Should ADB Continue to Strive to Lend in the Social Sectors? Building the necessary expertise and developing appropriate project concepts to address core social sector issues would require serious efforts. Specialized policy issues deal with the quality of social services, user charges, and access, which continue to warrant advisory assistance and under some circumstances might warrant development of a project. Weaknesses in the governments social protection system in rural and urban areas also deserve more attention, since surveys show that increasingly, the poorest 10% of the populations are those who are temporarily unemployed or disadvantaged. The policy and regulatory framework for private provision of social services, notably in health and tertiary education sectors, is increasingly an issue in the PRC. Such issues need a broader approach in creating the proper mix of public-private services, which would be a challenging task within ADBs mandate. Initially, ADB could explore lending for the social sector activities within a multisector type urban operation as a component of an urban sector loan. 208. Can Strong Government Ownership Constrain Innovation? Strong Government ownership is the major reason for the quality of ADBs program in the PRC. This is illustrated by the role that the MOF and NDRC play in shaping the lending and ADTA program. However, strong Government ownership also can impede change by restricting flexibility to experiment with new approaches and products that ADB could offer. In principle, this should not be a real problem since the Government historically has been keen in seeking out the best of international experience. In doing so, however, it has been cautious in piloting new ideas before full implementationand this is a sensible approach. Differing perceptions about reforms and new approaches can be bridged. One means is to pilot new ideas more often in government programs or as components of regular projects before mainstreaming them.

62 C. Lessons

209. This CAPE confirms views that are being addressed at the institutional level regarding the MIC initiative. In dealing with MICs with strong records of economic accomplishment and a solid portfolio of projects, the challenge for ADB is responding to varying assistance needs. 210. Alignment of Country and ADB Strategies. The first lesson is recognizing that if the Governments strategy and policies seem to be working, ADB should draw on its comparative advantages and skill mix to develop programs and provide services where it can add the most value within the Governments framework. However, a delicate balance must be struck between relying excessively on client preferences and providing alternative views and options that might challenge current thinking. The PRC is looking for the latter, but within a framework that is broadly in line with country conditions. 211. Building on the Positive Aspects of Strong Client Ownership and Beneficiary-MustPay Principle. The enhanced accountability resulting from beneficiaries being responsible for repaying a portion or most of the loan has been a powerful instrument to ensure that a project is well designed and implemented. This might be the primary factor differentiating the PRCs strong project performance from other DMCs. In many other countries, repayment obligations are assumed by the central authorities, while the beneficiaries are at the local level. This separation of who benefits from who repays blurs the incentives for accountability. On the other hand, the beneficiary-must-pay principle also restricts project selection by discouraging the use of loan financing for social and targeted poverty programs where the beneficiaries are often too poor to assume repayment obligations or are difficult to identify. A decade ago, the PRCs financial position and the difficulties in controlling potential waste in external assistance meant that this external borrowing strategy was a practical position. However, the countrys financial and monitoring systems are now more developed, and some flexibility in this regard would be appropriate for projects that offer the potential for particularly innovative solutions to address social and poverty problems. 212. Regional Cooperation. The ADB-PRC partnership has the potential to determine the future path of regional cooperation and economic prosperity in Asia. Because of the rapid rise and size of its economy, the PRC presents a great opportunity for sustained growth and prosperity in Asia and throughout the world. Among others, the PRC provides a dynamic market, a new source of demand, foreign aid, investment, and a vehicle for skills and technology transfer. As an honest broker with a regional focus and expertise, ADB can support the PRC in continuing with a multilateral approach, which has served it well, while intensifying efforts in other areas of regional cooperation. In infrastructure, ADB can support the PRCs active participation to improve connectivity in Asia by investing in roads, railways, air transport, and gas and oil pipelines. In trade and investment, ADB can facilitate consolidating trade agreements (particularly free trade agreements), reduce nontariff measures, and improve trade in energy and commodities to harness neighbors comparative advantages. In money and finance, ADB can help the PRC play a notable role in developing capital markets and financial institutions, undertake regional investments, and enhance exchange rate management. Finally, in terms of regional public goods, the PRC can be an active player in developing and financing programs to mitigate natural disasters and tackle crossborder issues, such as the spread of disease and environmental concerns. If ADB and the PRC work together to exploit synergies, the gains for the PRC and Asia would certainly be greater than otherwise. 213. Overcoming the Inertia and Bureaucratic Obstacles to Providing Better Services. While individually most projects and TAs are rated as successful or better, the efficiency of ADBs operations has generated widespread concerns relating to cumbersome procedures, excessive delays, and inadequate core project-related services. More systemic issues revolve around ADBs operational reliance on consultants, with its frequently cited negative consequences. While some of the recommendations listed below might help, reforms at the institutional level are needed to achieve fundamental changes. For this to happen, ADB must restructure managerial and staff

63 incentives to be more responsive to client needs. Two observations are offered here. First, change will occur only if the system is under pressure to do so and the easiest way to make that happen is to move to a more radical model of decentralizing staff resources and authority to the field office. Placing more staff and authority closer to the client will generate strong momentum for more responsive services, and will cause ripple effects for change in the system. Second, incentives need to shift in favor of providing a more balanced mix of advisory and lending services. Promotion and grading policies, which reward technical and advisory skills as much as processing and managerial expertise, are vital to sending the right signals. 214. Rationalizing the Use of ADTAs. Although the vast majority of the ADTAs are rated as satisfactory, many clients feel that this instrument is not being used to its full advantage. This is also an ADB-wide concern. Important principles are involved here, not just procedural matters. One relates to whether ADB is willing to delegate implementation responsibility to the client. The strong sense from the CAPE is that the PRC has the capacity and commitment to take on this responsibility. Transferring responsibilities to the PRC does not mean that ADB would shirk its responsibilities in selecting topics for support, shaping the methodology, and selecting consultants. Rather, its role would be the same as for projects, which is advisory in some stages and clearance in others. Such approach may free off ADB staff resources, which could be deployed in project supervision or in any innovation initiatives and knowledge transfer. Second, the criteria for judging the success of ADTAs should be based more on its impact than the quality of the documents or the completion of a forum. Having an exit plan might be another important consideration in ADTA strategy. Moving toward a results-oriented assessment would shift incentives toward how to follow-up on recommendations and beyond just completion of a polished written product. This would require recalibrating expectations. Building capacity, providing new analytical insights, and developing feasible reform options are inevitably high-risk activities with significant failure rates. However, such endeavors also offer potentially high rewards. 215. Creating the Atmosphere for a More Innovative and Knowledge-Oriented Bank. A lesson from the PRC experience is that institutions that thrive on providing services to others are at risk if their clients change faster than they do. ADB has been sensitive to this concern in developing new lending vehicles and restructuring its operations to be more responsive to the PRCs needs. Nevertheless, ADBs systems have not evolved quickly enough to fit the PRCs circumstances. The CPR process and portfolio monitoring indicators are still based largely on the traditional project cycle rather than client service standards and achieving outcomes. The consultant-based operating system means that institutional knowledge on many issues is not retained or easily made available to other clients. Capacity gets substituted than built. Approval processes, which were fine when communications and sharing of information was slow and methodical, are no longer acceptable in a world where speed requires more delegation of authority downward. While specific actions in each of these areas can help, a culture change at the institutional level is needed for this to add up to something greater than the sum of the parts. D. Recommendations

216. Many of the sector work that ADB has been doing in the PRC are useful and effective and, therefore, the CAPE makes minor recommendations for fine-tuning efforts in the relevant sections of the text in the main report. The following key recommendations are put forward as directional inputs to the preparation of a new CPS for the PRC operations and are expected to be implemented during the CPS period. Several of these recommendations are influenced by ADBwide business models and processes, established procedures, and resource constraints. It is clear that with rapid economic development in Asia and the increased diversity among its DMCs, it would be difficult for ADB to use a one size fits all model in terms of institutional response characteristics. For fast growing MI-DMC like the PRC, there is now an opportunity for ADB to respond with varying degrees of procedural flexibility.

64 217. Strengthening the Quality of Nonlending Operations for Better Innovation and Knowledge Products. ADB should strengthen incentives for creating good knowledge products by identifying key instruments and ensuring managerial recognition of high-quality contributions. It has to ensure that the staff responsible have the expertise and experience to formulate and lead high-quality TA interventions. 218. ADB should leverage ADTA output with other instruments from the PRC or partners to maximize impact by building links between ADTA and the PRC expenditure programs or pilots to implement results. It needs to collaborate with others who have the capacity to extend or implement ADTA recommendations (para. 78). 219. Knowledge transfer also would benefit more if knowledge units of ADB (ADB Institute, ERD, OED, OREI, and RSDD) coordinated to work on a common framework as part of the CPS and country business plan and deliver their services in a more systematic and coordinated manner than on an ad hoc basis (para. 82).123 The contributions from the knowledge units need to be drawn into a more demand-driven, country perspective with key counterparts in the PRC to map out a more integrated program by combining and linking to priorities in the PRC. 220. Where possible, ADB should further change the allocations for PPTAs, especially for infrastructure sectors where the PRC has good capacity for project preparation (para. 84). Also, it needs to improve efficiency by developing a system for allocating funds across projects to reflect differential costs of preparation and complexity rather than relying on standard coefficients. Any funds saved by rationalizing the use of PPTA allocations should be allocated to promote more innovative approaches. 221. ADB needs to create new opportunities for innovation by using new ideas from counterpart units and local think-tanks by pilot funding a competitive research program at the PRCM and/or secondment arrangement with knowledge departments. 222. Diversification of the Lending Program. ADB may gradually diversify the program to meet ADB mandates and country objectives of growth and inclusiveness following the 11th FYP taking into account the associated challenges (para. 206). Depending on client ownership, useful areas to focus on to achieve the objectives of the PRC and ADB (provided staff skills and management capabilities are available) are (i) continuing transport operations, mainly in the interior provinces; (ii) addressing social sector and environment issues in growing urban areas; (iii) strengthening rural development operations in water and natural resource management; and (iv) expanding energy efficiency, clean development, climate change, and renewable energy operations. These will help ease the povertyenvironment nexus that exists in rural and urban PRC, and continue to support economic growth. 223. ADB needs to retain a critical mass of lending activities in the selected areas to ensure sustainability and to make a difference. It has to develop a sufficient skill base to support innovation in the selected areas and ensure adequate technically competent staff with delegated authority are available especially in the PRCM to nurture the more complex and new areas of operation from project concept to implementation. 224. Increasing Private Sector Operations. ADB should have a clear strategy to support PSO and nonsovereign operations in the PRC in terms of the areas of focus, new products, and initiatives. The private sector program falls far short of potential for a transitional economy such as the PRC (paras. 158159). 225. Given the PRCs vastness and diversity, the private sector strategy in the CSP should become more sector and/or subsector-oriented and build synergies with the public sector operations
123

Some improvements have been made in reducing the PPTA allocations (i.e., in the transport sector) to about $400,000 in 2007 compared with the average allocation of $635,000 for all sectors during the CAPE period.

65 so that they can make a difference with the limited resources available to ADB for private sector and nonsovereign operations. The East Asia Department and PSOD should jointly develop a private sector road map for the new CPS that would specify development targets and resource requirements, thus guiding PSODs annual preparation of more detailed country business plan. 226. The PRCM needs to be equipped with more PSO and nonsovereign operations skills and capabilities, and should be provided with greater responsibility, accountability, and leadership to promote ADB business. This will be an improvement from the current model where PSOD staff are placed in the PRCM as an independent PSOD representative, acting separately from the PRCMs mainstream operations, to do relationship management and business development. The outcomes of ADB operations in the public and private sector should be more than the sum of the outcomes of the separate parts given the synergies that can be built. 227. Increasing ADB Responsiveness to Client Concerns. To respond to clients demand for more responsive, efficient, and high-quality services, ADB should (i) provide better communication, more delegation of authority, and better staffing and increase participation of local human resources (para. 68); (ii) gradually strengthen the PRCM staff structure and delegation of authority and utilize technical expertise more efficiently; (iii) review rationale and feasibility of gradually moving from a structure with one-third staff in the field to a structure having at least half the core staff in the field; and (iv) deploy Headquarters-based technical staff efficiently for knowledge sharing and to build synergies across regions. 228. ADB should also gradually strike a balance between in-house and consulting skills. Management should ensure that in-house expertise is used to manage and undertake work on core issues and priority areas. Consultants should be used strictly for specialized work on issues where such expertise is not needed regularly. 229. ADB should consider moving away over time from ADB execution of ADTA to client execution by gradually shifting accountability to clients with good governance mechanisms, experienced clients that have implemented ADB ADTA successfully and are equipped adequately to monitor and manage implementation progress and results. This would free up staff time and enable ADB staff to devote more time to focus on TA designs that link ADTA outputs with ADB or non-ADB projects leading to useful outcomes and monitor the implementation of the ADTAs for results. Work more closely with recognized think tanks to tap their advice. 230. ADB should move toward pilot testing the use of country systems for environmental safeguards beginning with the infrastructure sectors (para. 102). Authorize pilot testing of the use of country standards against ADBs updated environmental safeguards (to be completed in early 2008) in a more advanced province or city that is familiar with ADBs standards. If successful, gradually mainstream this approach as in-country capacity is confirmed. It should use accreditation systems that exist in the country to monitor implementation and results. 231. Deepening Regional Cooperation Initiative. ADB should provide a strategic framework for regional cooperation in the CPS and focus on a few selected areas based on client ownership, ADBs familiarity with the related agencies, and ADB staff experience and potential capacity (para. 212). 232. The selected areas can include helping the PRC to go beyond the existing initiatives to broaden new areas or deepen the contribution in current areas of focus with resources necessary to achieve the desired outcomes, which need to be monitored. The following areas are suggested for selection of ADBs involvement as an honest broker, depending on where gaps currently exist. (i) broadening regional cooperation by expanding transport development, and trade facilitation;

66 (ii) deepening ADB involvement to facilitate cooperation on crossborder issues as an honest broker (to mitigate natural disasters, address environmental concerns, or combat the spread of diseases and illegal trafficking); leveraging mutual comparative advantages of partners to facilitate trade agreements on commodities and energy; and disseminating proactively the knowledge and lessons learned from ADB operations and country experience across the region.

(iii) (iv)

233. Obtaining Government Support for a More Responsive ADB. ADB needs to have a dialogue with the Government to: (i) facilitate ADBs selective involvement early in project design with interested counterparts. Project design is influenced best at project identification stage, not when feasibility studies have been completed. Where innovation is needed or design issues are more complex, early collaboration between ADB and particular provinces should be facilitated selectively in a few projects; (ii) encourage piloting ADTA recommendations in investment expenditure programs to increase impact. For example, ADTA recommendations on user charges for education could be piloted in a government program if endorsed; (iii) encourage the appropriate province or municipality to pilot gradually the use of country systems for safeguards on environmental concerns in ADB projects. While provinces might not be interested in being the test case, a successful outcome will be in the country interest; and (iv) encourage more intensive and longer-term involvement with a few provinces and/or cities to facilitate joint efforts on more challenging options. Given the PRCs size, addressing issues that are more complex would benefit from building a longer-term and more intense lending relationship with some local counterparts. Facilitate the use of ADBs new products and initiatives.

Appendix 1

67

EVALUATION METHODOLOGY
1. The country assistance program evaluation (CAPE) report was scheduled so that it could provide inputs to the Asian Development Bank (ADB)-Peoples Republic of China (PRC) country partnership strategy (CPS). The CAPE team interacted closely with key stakeholders to determine areas to be covered, including ADB Board members, Management, and key staff; and government officials. During the fieldwork, key PRC ministries, provincial governments, academic institutions, other development partners, and ADB staff and consultants were interviewed using standard interview guides. As part of efforts to solicit early comments before the CAPE was written, a short storyline describing its approach was discussed with the PRC Resident Mission (PRCM) and key government agencies. Prior to finalization, the draft CAPE report was provided to stakeholders within ADB and the PRC. In March 2007, a country consultation workshop was held in Beijing with the PRC central and provincial government representatives and international development partners to solicit their views and suggestions. There was close interaction with the country team during the preparation of the CAPE.

2. Assessment Approach. The evaluation used a three-pronged approach to determine how well ADB has positioned itself to achieve results: (i) assessment of the country strategy and program (CSP), (ii) assessment of ADB performance, and (iii) development results and impact. These were considered for the top-down assessment at the country level. Twelve criteria were developed for the top-down assessment: (i) strategic positioning based on six specific criteria, and (ii) institutional positioning based on five other criteria and the value added for development results as the final criteria. For each criteria, four ratings were used: highly successful (3), successful (2), partly successful (1), and unsuccessful (0). 3. Sector assessments of lending and nonlending operations were considered for the bottom-up assessment. Detailed reviews of projects and technical assistance (TA) grants using the standard evaluation criteria (relevance, effectiveness, efficiency, sustainability, and impact) were carried out for each sector. The evaluation criteria were aggregated giving twice as much weight to effectiveness, sustainability, and impact compared to relevance and efficiency. The overall bottom-up assessment was completed aggregating across sectors according to their portfolio share in terms of value of lending operations. The lending operations were given 75% weight and the nonlending operations 25% weight. 4. Sources of Information. The inputs for the CAPE came from various instruments and studies, including in-depth evaluations of ADBs work in a particular sector or in key operations, interviews with key stakeholders, and secondary data. The sources of information for the CAPE included the following. (i) Operations Evaluation Department inputs. Several ongoing Operations Evaluation Department (OED) evaluation studies fed into the CAPE process. These studies were carried out mostly in 2006, and their early findings were used to finalize the fieldwork preparation and to determine which areas needed further investigation. The evaluation studies included the following. (a) Sector assistance program evaluation (SAPE) of ADB for roads and railways in the PRC. Given that transport sector operations represent 70% of the PRC portfolio, the SAPE provided a substantial part of the strategy and program assessments. The SAPE 1 tracked ADBs cumulative contribution over the review period to each of the priorities established by its roads and railway subsector strategies. The addition of value from ADB
1

ADB. 2007. Sector Assistance Performance Evaluation of the Asian Development Bank Assistance for Roads and Railways in the Peoples Republic of China. Manila.

68

Appendix 1

(b)

(c)

(d)

(e)

(f)

support is a theme of the SAPE since it provided the justification for ADBs continued involvement in the sector. The SAPE identified successes in value addition and areas where greater value addition could be achieved.2 Special evaluation study (SES) on involuntary resettlement. This included the PRC as a case study country. The SES reviewed eight ADB projects in which resettlement issues were present. It sketched the extent to which social safeguard policies were applied within ADB operations; noted trends; and assesses the relevance, effectiveness, efficiency, and sustainability of the policy in the context of past experience, changing circumstances, and new demands. The impact of the policies on the affected persons, policy development, and executing agency capacity building was analyzed. The study also focused on the transaction costs and added value of ADBs due diligence. SES on environmental safeguards. This SES included the PRC as a case study and focused on six projects. The evaluation assessed inputs (resources used for environmental impact assessments or initial environmental examinations), outputs (quality of these reports), and outcomes (environment impacts generated). ADB projects were compared with those financed by government resources or other development agencies. The role of ADBs safeguard procedures in raising and maintaining the environmental safeguard standards of the countries in general and the capacity building of clients applying the standards were reviewed. SES on indigenous peoples. The SES aimed to (i) provide an overview of the scale and nature of indigenous peoples safeguards in ADB operations; (ii) examine the extent of application of ADBs indigenous peoples policy; (iii) review trends; (iv) make comparisons with other multilateral banks; (v) assess the indigenous peoples policys relevance, effectiveness, efficiency, and sustainability on the basis of evidence gathered; and (vi) identify issues that should be considered in the update of the safeguard policies in the context of past experience, changing circumstances, and new demands. Attention was paid to transaction costs and the value added of ADB in the assessment of two PRC case studies. Technical assistance performance evaluation report on public administration. This focused entirely on the PRC, and evaluated selected ADB TA support for audit, procurement, and performance management. The evaluation included a review of (i) the enabling environment legislation and regulations; (ii) the organizationinstitutional systems and procedures, rules of business, organizational arrangements, physical infrastructure, and networks; (iii) individual factorshuman resource management, competence when measured against job description, training, and performance assessment; and (iv) service delivery impact quality, predictability, and timeliness of services provided by the executing agency to clients as a result of the TA. The CAPE supplemented this review by looking at other advisory technical assistance (ADTA) grants, including governance-related ADTAs. SES on urban sector strategy and operations. This SES used the PRC as one of its three case study countries. It examined urbanization in the PRC, the governments response to urban problems, and assessed the

The SAPE relied on outputs of ongoing evaluation studies (Loan 1617-PRC: Hebei Roads Development Project, Loan 1638-PRC: Chengdu-Nanchong Expressway Project, Loan 1641-PRC: Changchun-Harbin Expressway Project [Hashuang Expressway], and Loan 1642-PRC: Changchun-Harbin Expressway Project [Changyu Expressway]).

Appendix 1

69

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(viii)

(ix) (x)

success of ADBs lending operations and TAs provided. It compared ADBs program with that of the World Bank. It also provided insights into ADBs added value, its transaction costs, and the recommendations of its clients. The SES covered five of the 10 urban sector projects approved during the CAPE period. (g) SES on ADBs energy policy. This SES used the PRC as a case study, particularly in evaluating ADBs work on energy efficiency, renewable energy, and the clean development mechanism. Since the main focus of the SES is to establish whether there are any gaps in ADBs energy policy, the number of case studies covered in terms of past experience in the PRC were two projects. However, the SES provided information on ADBs strategic focus in the sector in general. Inputs from operations. The draft CSP completion report prepared by the PRCM was a useful source of information and lessons identified by the East Asia Department (EARD), including the PRCM. Several sector studies prepared by EARD were also shared with the CAPE team as they became available. Project visits. The CAPE team comprising a total of 10 international and domestic consultants collected other information from stakeholders. Some consultants visited selected project sites, which were chosen based on their geographical spread, budgetary concerns, and level of client participation. Perceptions of key informants. Qualitative and quantitative information on selected topics was collected through workshops, focus group interviews, and key informant interviews Perception surveys. The CAPE team conducted a limited perception survey about the client orientation of the PRCM and also drew on an ADB-wide client perception survey conducted by the Department of External Relations (Appendix 8). Assessment of TA performance. The CAPE team carried out a semistructured questionnaire survey of executing agencies, project officers, and consultants for one third of all policy-oriented ADTAs, both closed and ongoing. Project documents. For ongoing projects, information was obtained from back-tooffice reports, project performance reports, project completion reports, and other project-related documents to understand the progress of the projects and their implementation. Literature review. The CAPE used secondary information and data from documents of the government; ADB (CSPs; loan and TA documents; management review meeting minutes; Board discussion summaries; and economic, thematic, and sector work); OED evaluations; other development partners; and other reports, documents, and research papers. Data analysis. Before and after the fieldwork, the CAPE team carried out a desk review of data from the various sources mentioned above. External peer review. The draft CAPE report was sent to an external peer reviewer for comments, and the comments were incorporated as appropriate.

5. The information collected from all the sources above was triangulated to strengthen its validation and applicability.

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Appendix 2

MACROECONOMIC BACKGROUND 1. Since the advent of reforms in 1978, the Peoples Republic of China (PRC) has shifted from a centrally planned economy to a market economy. During the past 25 years, it has achieved a remarkable growth rate of about 9% per annum. Stimulated by economic reforms, decentralization, and the creation of markets, gross domestic product (GDP) growth averaged 8.2% in 19982002, in spite of the Asian financial crisis. It accelerated to about 10% per year in 20032005. High output growth has been driven by robust export growth, which averaged 32.8% in 20032005 (from about 12.7% in 19982002) and sustained investment growth. Investment-led demand since the mid-1990s has boosted the share of gross domestic capital formation as a percentage of GDP from 38% in 19982002 to 46.2% in 20032005 (Table A2). Economic growth has helped improve income per capita by over 65%, from about $890 in 19982002 to about $1,485 in 20032005. 2. Industry has led this economic growth, and its share of GDP increased from 46.4% of GDP in 19901997 to 49.9% in 1998-2002 and to 50.9% in 20032005. The share of agriculture declined from about 22% in 19901997, to 16.7% in 19982002, and then to about 14% in 20032005. The services sector maintained its momentum, and its share of GDP was about 32% in 19901997, 33% in 1998-2002, and 35% in 20032005.1 Since 1990, investments have been very strong and have mostly been funded from domestic sources, especially domestic banks that are highly liquid. The gross national savings to GDP ratio averaged 40.3% in 1990 1997 and became slightly lower at 38.2% in 19982002. However, it increased again to an average of 44.6% of GDP in 20032005. External trade continued to strengthen led by sustained trade surplus. The trade balance to GDP ratio increased from 1.9% in 19901997 to 3.6% in 19982002, and 4.3% in 20032005. 3. The annual average exchange rate was about CNY8.2 per US dollar in 20032005 (as compared with CNY6.9 in 19901997). Consumer price inflation has remained low and declined from an annual average of 10% in 19901997 to 2.3% in 20032005. This reflects the supply side nature of the economys rapid growth, since investment-led demand has continually added to productive capacity and in some sectors has led to overcapacity. Substantial liquidity from foreign exchange reserve accumulation and associated credit growth has largely financed investment and not consumption and this has kept inflation at bay. There are no major problems with external debt, and the external debt-to-GDP ratio is 13.8%. The fiscal position remains strong, and revenue performance has reduced the fiscal deficit from about 3% of GDP in 1998 2002 to 1.8% in 20032005. The International Monetary Fund (IMF) projects the fiscal deficit to rise over time as expenditures to improve the delivery of social services (e.g., transfers to poor regions, social sector spending, and farmers support) are increased over the medium term.2 These expenditures are made possible by fiscal consolidation, which has left room for some deficit spending without putting long-term fiscal sustainability at risk.

These estimates may be understated because of measurement problems typical for a transition economy. While the PRC is making substantial improvements in upgrading its statistical systems with the help of countries like Canada, care needs to be taken in interpreting the data. The Asian Development Bank (ADB) has provided at least five advisory technical assistance (ADTA) grants and three regional technical assistance grants to improve the PRCs statistical capability. Both the IMF and the PRC consider that expenditures on social security obligations can only be increased once formulation of spending plans (more concrete plans) and implementation capacity (adequate controls to monitor higher spending) improve.

Appendix 2

71

4. In its 2006 staff appraisal, the IMF also explained that the effectiveness of monetary instruments needs to be improved. 3 The efficacy of moral suasion and administrative controls to manage the exchange rate (to restrain credit and investment growth and keep inflation low) will diminish as the economic sophistication increases further. The potential cost of distortions from such controls is seen to grow larger. In due course, it will also be important for the central bank to establish and articulate an appropriate monetary policy framework to underpin market expectations about inflation, interest rates, and exchange rate. 5. The Government aims to continue rapid and stable economic growth in order to generate jobs, while reducing social stresses from the widening income gaps between rural and urban areas. The IMF notes that the medium-term prospects in the PRC are favorable, but changes are needed to rebalance the economy away from the current heavy reliance on investment and exports toward self-sustaining domestic demand and to spread the benefits of growth more equitably across the country. Structural reforms to carry out this rebalancing will include (i) improving intermediation of savings through further banking sector reform and capital market development; (ii) continuing reforms in state-owned enterprises and the labor market to maintain strong productivity growth; and (iii) reforms to pension, education, and health care systems, along with a shift in public expenditures toward these areas to help increase private consumption. 6. The PRC has several key challenges remaining. It needs to continue to move toward an efficient and market-based financial sector, reducing the potential for nonperforming loans. According to the World Trade Organization accession agreement, the PRC needs to open its banking system to foreign competition. The financial sector is constrained by the inefficient state banks, which are in turn affected by weak state-owned enterprises. It also needs to develop a legal system with a competent, independent, and powerful judiciary. The PRC needs to address its growing environmental problems, as its polluted cities and its high energy consumption affect the rest of the region and the rest of the world. Economic growth has severely challenged sustainability of the PRCs environmental resources in four interrelated areas of (i) air, land, and water pollution; (ii) water shortages and land degradation; (iii) increasing environmental accidents; and (iv) energy inefficiencies and green house gas emissions.4 Lastly, it needs to sustain efforts to reduce the rural-urban disparities in income and non-income poverty.

3 4

IMF. 2006. Peoples Republic of China: Staff Report of the 2006 Article IV Consultation. Washington, DC. Department of Energy. 2003. China: Environmental Issues. Available: http://www.eia.doe.gov/emeu/cabs /chinaenv.html. A report released in 1998 by the World Health Organization on air quality in 272 cities worldwide, the PRC had seven of the 10 most polluted cities in the world. It is the second largest emitter of carbon dioxide after the United States.

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KEY INDICATORS Table A2.1: Macroeconomic Indicators

Item 19901997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 19982002 20032005

Appendix 2

Estimate Projected A. Income and Growth GDP per Capita (US dollars, current prices) a Growth of GDP (annual change %, constant prices) Growth of GDP (annual change %, constant prices) a. Agriculture b. Industry c. Services Structure of Output (% of GDP at current prices) a. Agriculture b. Industry c. Services B. Employment Population (million, calendar year) Total Employment (million, calendar year) Unemployment Rate (%) C. Savings and Investments (% of GDP at current prices) Gross Domestic Saving Gross National Saving Gross Domestic Capital Formation D. Money and Inflation Consumer Prices (% change, annual average) Broad Money (M2, % change) Percent of GDP Average Central Bank Discount Rate (%) Average 3-month Interbank Real Interest Rate (%) Average 3-month Interbank Lending Rate (%) Narrow Money (% change) E. Government Finance Total Revenue (Official, % of GDP) Total Expenditure (Official, % of GDP) Overall Budget Balance (Official, % of GDP) F. Balance of Payments Trade Balance (% of GDP) Current Account Balance (% of GDP) Overall Balance (% of GDP) Export Growth (value terms, annual % change) Import Growth (value terms, annual % change) Foreign Direct Investments (net, billion dollars) 1.9 1.5 2.6 17.2 12.3 22.7 4.9 3.3 0.7 0.5 (1.5) 41.1 3.6 2.1 0.9 6.1 18.2 37.0 3.2 1.9 1.0 27.8 35.4 37.5 2.9 1.5 4.0 6.8 8.2 37.4 3.5 2.8 5.9 22.4 21.3 46.8 3.2 3.2 8.3 34.6 39.8 47.2 3.6 4.2 12.5 35.4 35.8 53.1 6.0 7.2 9.3 28.4 17.6 67.8 23.0 24.0 7.0 6.8 3.6 2.3 2.5 12.7 16.3 39.9 4.3 4.9 10.0 32.8 31.1 56.1 12.6 15.7 (2.4) 12.6 15.2 (2.6) 13.9 17.2 (3.2) 15.0 18.1 (3.1) 16.8 19.7 (2.8) 18.0 21.2 (3.2) 18.5 21.2 (2.7) 19.3 20.8 (1.5) 17.3 18.5 (1.2) 15.3 18.3 (3.0) 18.4 20.2 (1.8) 10.0 29.8 100.8 8.9 (0.8) 14.8 133.4 6.1 8.7 7.9 11.7 (1.4) 14.7 146.1 3.8 8.0 6.6 17.7 0.4 12.3 150.5 3.2 3.6 3.9 16.0 0.7 17.6 162.7 3.2 3.2 4.0 12.7 (0.8) 16.9 175.9 2.7 4.1 3.4 16.8 1.2 19.6 188.5 2.7 1.8 2.9 18.7 3.9 14.6 185.6 2.9 (0.7) 3.2 13.6 1.8 17.6 163.9 0.7 2.5 11.8 1.5 2.2 (0.4) 15.3 153.7 3.8 5.5 5.2 15.0 2.3 17.3 179.3 1.9 0.6 2.9 14.7 40.9 40.3 38.6 40.8 39.0 37.7 39.4 37.6 37.4 39.0 37.6 36.3 39.4 37.8 38.5 40.3 39.1 40.2 42.4 41.9 43.9 44.6 44.4 50.5 47.0 47.4 44.1 39.8 38.2 38.0 44.7 44.6 46.2 1,191.0 671.9 2.7 1,247.6 706.4 3.1 1,257.9 713.9 3.1 1,267.4 720.9 3.1 1,276.3 730.3 3.6 1,284.5 737.4 4.0 1,292.3 744.3 4.3 1,299.9 752.0 4.2 1,307.6 758.3 4.2 1,315.2 1,323.1 1,266.7 721.8 3.4 1,299.9 751.5 4.2 21.7 46.4 31.9 18.6 49.3 32.1 17.6 49.4 32.9 16.3 50.2 33.4 15.8 50.1 34.1 15.3 50.4 34.3 14.6 52.3 33.2 15.2 53.0 31.8 12.5 47.3 40.3 16.7 49.9 33.4 14.1 50.9 35.1 504.2 10.6 10.3 4.6 14.0 9.0 758.5 7.8 7.8 3.5 8.9 8.7 788.1 7.6 7.1 2.8 7.9 8.4 852.7 8.4 8.0 2.4 9.2 9.1 921.2 8.3 7.5 2.8 8.5 8.4 1,131.8 9.1 8.3 2.9 9.8 8.5 1,269.8 10.0 9.5 2.5 12.7 7.9 1,486.0 10.1 9.5 6.3 11.0 8.5 1,701.6 9.9 9.9 5.2 11.0 10.4 10.0 10.0 9.5 9.5 890.5 8.2 7.7 2.9 8.9 8.6 1,485.8 10.0 9.6 4.7 11.6 8.9

Item G. External Payments Gross International Reserves (billion dollars, EOP) Months of Imports (EOP) b External Debt (billion dollars, EOP) Percent of GDP b Short Term External Debt (billion dollars, EOP) Short Term Debt (% of Total debt) Short Term Debt (% of Gross International Reserves) b Debt Service (% of XGS) OER (CNY per US dollar, average) Real Effective Exchange Rate Index (1996=100) H. Stock Markets Average Stock Price Index in Local Currency Average Stock Price Index in Local Currency (1996=100) Average Stock Price Index in US$ (1996=100) Stock Exchange Capitalization (% of GDP) Number of Listed Companies I. Corporate Soundness Indicators Debt-Equity Ratio Return on Equity J. Financial Soundness Indicators Gross Foreign Liabilities of Banking Sector as Percent of Total Liabilities (%, EOP) Loans-to-Deposits Ratio Real Bank Credit Growth Rate (%) Ratio of Gross Foreign Liabilities of the Banking Sector to Gross Foreign Assets Foreign-Currency Sovereign Bond Ratings Moody's Standard and Poor's

19901997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

19982002 20032005

Estimate Projected 62.4 8.0 89.1 14.7 12.0 13.8 27.1 10.1 6.9 94.2 149.8 13.1 146.0 15.4 17.3 11.9 11.6 8.6 8.3 117.0 158.3 12.0 151.8 15.3 15.2 10.0 9.6 11.7 8.3 110.5 168.9 9.4 145.7 13.5 13.1 9.0 7.7 9.3 8.3 108.9 218.7 11.3 184.8 15.7 65.3 35.3 29.9 7.9 8.3 116.8 295.2 12.6 186.3 12.8 70.8 38.0 24.0 25.3 8.3 117.1 412.2 12.6 208.8 12.7 92.2 44.2 22.4 21.3 8.3 112.2 618.6 13.9 247.5 12.8 123.2 49.8 19.9 17.0 8.3 109.4 825.6 15.8 281.0 16.0 156.1 55.6 18.9 17.8 8.2 108.9 8.0 7.6 323.0 17.0 358.0 17.0 198.2 11.7 162.9 14.6 36.3 20.8 16.5 12.6 8.3 114.1 618.8 14.1 245.8 13.8 123.8 49.8 20.4 18.7 8.2 110.2

412.4 174.3 175.0

438.1 185.1 185.9

623.7 263.6 264.7 53.8 572.0

612.9 259.0 260.2 44.4 646.0

480.3 203.0 203.9 36.4 715.0

423.9 179.1 179.9 36.3 780.0

395.3 167.1 167.8 27.4 837.0

292.3 123.5 125.4 -

513.5 217.0 217.9 44.9 644.3

370.5 156.6 157.7 21.2 539.0

0.9 8.1

0.9 8.0

1.0 6.9

1.1 4.6

1.0 6.9

6.1 1.2

4.1 1.0 17.5

3.2 1.0 12.7 0.6

3.0 1.0 9.8 0.5 A3 BBB

2.0 1.0 9.7 0.3 A3 BBB

1.9 1.0 17.7 0.3 A3 BBB

1.8 1.0 17.0 0.4 A2 BBB

1.9 0.9 8.6 0.4 A2 BBB+ A2 A-

2.8 1.0 13.5 0.5

1.9 1.0 12.8 0.4

0.9

0.8

Appendix 2

a b

CNY = Chinese Yuan, EOP = end of period, GNI = gross national income, NFS = nonfactor services, OER = official exchange rate, XGS = exports of goods and services. Adjusted. Data reflects upward revision of GDP figures from 1993-2004 (National Bureau of Statistics, Dec 2005) based on evidence that tertiary sector has been underestimated by previous accounting methods. Official data sources. The coverage and classification of official external debt data were modified in 2001. Categories of debt not previously covered are now included. IMF Article IV Consultation-Staff Report , October 2006, and various country reports from the Economist Intelligence Unit (2006). Sources: ADB 2006, Key Indicators 2006, Manila; ADB 2006, Asian Development Outlook, ADB ARIC Online Economic Indicators, various issues of ADB CSPs and CSPUs, and

73

74

Appendix 3

POVERTY REDUCTION, SOCIAL SECTOR, AND GENDER 1. Part 1 of this appendix is on poverty reduction and the social sectors. It shows progress toward the Millennium Development Goals (MDGs) and assesses the work of the Asian Development Bank (ADB) in this area. Part 2 is on gender. A. Part 1: Poverty Reduction and Social Sector

2. Millennium Development Goals. Because of its sustained rapid economic growth, the Peoples Republic of China (PRC) is ahead of schedule in achieving its national poverty reduction targets (Table A3.1). For instance, the percentage of the absolute poor (with incomes below $1 per capita income a day) was 13% in 2003, which was already below the 2015 goal of 16.5%. Most of the reduction took place during the first country assistance program evaluation (CAPE) period (19901997) as the indicator was almost halved by 1996 from the 1990 level. This trend was sustained throughout the second CAPE period (19982005). Using the official poverty line measure offers an even better picture, as the 2015 target of 4.7% was achieved as early as 1998 when the share of the poor fell to 4.6%.
Table A3.1: Summary of PRC's Progress Toward its Millennium Development Goals (first and second CAPE periods)
CAPE Period First (19901997) Second (19982005) Indicator Share of population with income below $1 per day (PPP-values) (%) Share of population with income below the official poverty line (%) Share of children under five who are underweight (%) Share of population with inadequate caloric intake (%) Elementary school enrolment rate of school-age children (net, %) Enrolment rate in junior secondary education (gross, %) Infant mortality rate (per 1,000 live births) Under age 5 mortality rate (per 1,000 live births) Mortality rate of women in childbirth (per 100,000 births) Number positive for HIV/AIDS (in 1,000 persons) Positive rate for tuberculosis smear test (per 100,000 people) Proportion of land area covered by forest (%) Proportion of population with sustainable access to improved water (%) Share of rural population with sanitary toilets (%)

Goal 1 2 3 5 6 7 8 9 10
Legend:

Early achiever. Slow. On track. Regressing. AIDS = acquired immunodeficiency syndrome, CAPE = country assistance program evaluation, PRC = People's Republic of China, HIV = human immunodeficiency virus, PPP = purchasing power parity. Sources: ADB. 2005. China's Progress Towards the Millennium Development Goals (MDG). Manila; ADB. 2003. MDGs: China's Progress . Manila; ADB. 2005. China Human Development Report . Manila; ADB. 2006. The MDGs: Progress in Asia and the Pacific . Manila; ADB. 2006. ADB Basic Statistics . Manila; and various PRC country strategy and program updates. Also available http://mdgs.un.org/unsd/mdg/Data.aspx?cr=156

3. However, during these periods, there was worsening income inequality across regions1 and between urban and rural areas,2 where children, the elderly, the disabled, and people living in remote and upland areas constitute most of the poor. New forms of poverty have emerged, represented by migrants to urban areas who are not yet covered under the urban registration system. These indicators suggest that more targeted and innovative approaches are needed to
1 2

The share of the population living in the central and western regions to the total rural poor had increased from 77% in 1992 to 86% in 2003. The urban-rural income ratio increased from 2.5 to 1 in 1990 to 3.2 to 1 in 2004. The largest income gaps are noted in Shanghai and Beijing although, in all provinces, the shares of the rural per capita income to the per capita income in the province is less than one-third.

Appendix 3

75

work on (i) persistent absolute poverty, increasingly concentrated in hard-to-reach groups (e.g., remote communities and the elderly and disabled); (ii) the vulnerability of a large population living on the brink of poverty; and (iii) new manifestations of urban poverty. 4. There have been fluctuations in the education indicators, but there has been fairly steady progress toward the 2015 goal of 100% enrollment in primary school. Based on official figures, this target had already been achieved in 16 provinces by 2000, but for the remaining provinces, per capita incomes3 seemed less of a factor influencing the dropout rate compared with the number of population. In fact, 52% of dropouts left school because of a shortage of workers at home. The 2000 census revealed that only 14% of the population aged 15 to 64 years living in cities received primary education, compared with 39% of the population in villages.4 5. In terms of health indicators, the proportion of malnourished children has been falling more rapidly than targeted, and the 2015 goal of 10.5% was substantially achieved as early as 1998. The incidence of malnourished children in the countryside (14% in 2000) is higher than in the cities (3% in 2000), and it is not decreasing as rapidly as the national figure (the rural incidence was 19% in 1992). Incidence of malnourished children was twice as high in the west as in the east, where obesity was noted in 10% of the children. However, malnutrition may be attributed more to parents poor nutrition awareness (typified by iodine, calcium, iron, and zinc deficiencies in many provinces) than to food shortages. 6. Overall infant and child mortality rates have not declined to the levels necessary to achieve the 2015 targets of 13% (infant mortality) and 16% (child mortality). Although these rates have declined, close attention is still required. Infant mortality, in particular, seems to be correlated with economic growth. For instance, the infant mortality rate is twice as high in the lowest quartile as in the highest quartile. Rates in developed coastal areas are already about the same as those in industrialized countries, while rates in most western provinces are three to five times higher. Maternal mortality ratios reflected substantial improvements during the CAPE period, as economic growth led to improved medical services and good access to emergency obstetric care. If this trend is sustained, early achievement of the 2015 target may be expected. 7. Another challenging goal involves halting and reversing the spread of HIV/AIDS5 by 2015. The number of HIV/AIDS cases ballooned during the second CAPE period with over 40% of reported cases being due to infection from drug use, while 25% came from transfusion of infected blood. Males comprised about 70% of total cases. A very large increase in infection through commercial sex has recently been noted. The PRCs record in controlling tuberculosis has regularly been short of targeted levels, although to a less serious extent than HIV/AIDS. Tuberculosis is clearly linked to poverty and poor access to health care, and incidence is 50% higher in the poorer central and western provinces than in the eastern provinces, and twice as high in villages as in cities. 8. Safe drinking water had become more accessible during the CAPE period, although the PRC is still short of achieving its annual MDG targets. In 2004, 67% of the rural population had access to an improved water source, compared with 93% of the urban population. In terms of absolute numbers, however, the people drinking unsafe water still number about 180 million mostly located in the poorer provinces. The proportion of the rural population with access to sanitary toilets more than doubled during the second CAPE period, but there are still areas where sanitation access is as low as 1030%. The countrys forest cover diminished significantly during the first CAPE period, but recovered during the second period. However, other indicators of environmental sustainability, such as the ratio of protected areas to total surface area, carbon dioxide emissions,
3

4 5

For instance, the enrollment rate in poor counties was 95% in 2002, while that in poor western counties was 93%. One factor constraining achievement of the 100% target was the greater support given by county governments to secondary schools. National expenditures on education reached 3.4% of gross domestic product in 2002, still below the international average of 3.8% and the Governments own target of 4% by 2000. Taken from the China Human Development Report 2005, Table 3.5 on page 48. Human immunodeficiency virus/acquired immunodeficiency syndrome.

76

Appendix 3

energy use, and consumption of ozone-depleting substances are not being tracked as part of the national MDGs. The PRC may need to devote extra efforts to achieving its MDG targets for infant and child mortality reduction, HIV/AIDS reversal, enhanced access to safe drinking water and sanitation, and environmental sustainability. More attention needs to be placed on addressing regional disparities. 9. The Government has reiterated its self-imposed deadline of 2010 for eradicating extreme rural poverty. Another major change in the way poverty is being tackled in the PRC is the increasing use of participatory processes involving the poor. Such processes help to define poverty and the needs of the poor, instead of the traditional top-down planning for poverty programs. In the past, the Government adopted a geographically targeted approach to rural poverty reduction by offering subsidized loans, food-for-work programs, and special development funds to poor villages and households in poor counties. A study6 had shown that the increase in real agricultural prices and availability of off-farm employment are the primary drivers for reducing rural poverty in the short term, yet targeted poverty reduction programs provided directly to poor villages7 cannot influence these drivers in a major way. These arguments appear to validate the overall approach in the earlier country strategy and programs (CSPs) of promoting economic growth in poor areas in order to reduce poverty. 10. ADB Program. The Medium-Term Strategy II8 (MTS II) redefined ADBs role. It specified that ADB needed to move from being a project financier to playing the part of a broader development institution by maximizing the development impacts of its operations through the provision of development services (Table A3.2). However, the PRC authorities insist that executing agencies should still be responsible for foreign loan repayment. As a result, the Government has been unwilling to borrow from ADB on ordinary capital resources (OCR) terms for poverty-related and social sector projects.9 Coupled with the PRCs lack of access to Asian Development Fund resources, this has precluded ADBs involvement in health, education, and direct poverty reduction. Since the PRC did not borrow OCR funds for poverty reduction and the social sector during the CAPE period, direct interventions covered knowledge-based products and services rather than loans. From 1998 to 2005, out of the total of 145 advisory technical assistance (ADTA) grants approved by ADB in the PRC worth $89 million, 20 had a poverty reduction theme. These amounted to $11 million (or 12%). Of these 20 ADTAs, three concerned education,10 while four involved health and nutrition,11 all of which represent 6% of the total ADTA amount in the PRC (Appendix 5).
6 7

ADB. 2004. Poverty Profile of the Peoples Republic of China. Manila. In addition, such targeting efforts in the past did not sufficiently integrate the poorer communities into existing and new markets through improved road connections. 8 ADB. 2006. Medium-Term Strategy II 20062008. Manila. 9 This is not unique to the PRC. According to a recent study (ADB. 2005. Special Evaluation Study on ADB Policy for the Health Sector. Manila), there are few OCR-financed health projects (most are program loans) ADB-wide because major OCR countries like the PRC and India and middle-income countries like Indonesia and the Philippines are reluctant to borrow OCR money for nonrevenue-generating projects. This is because of the risk that offered rates may increase overtime, and there are explicit or implicit national policies against borrowing on nonconcessional terms. ADB does not have attractive financing products for it to be involved in the health and education sectors in the PRC. 10 These three ADTAs on education refer to ADB. 2001. Technical Assistance to the Peoples Republic of China for Strengthening the Accountancy Profession. Manila (TA 3713); ADB. 2002. Technical Assistance to the Peoples Republic of China for Improving Basic Education in Underdeveloped Areas through Information and Communication Technology. Manila (TA 3958); and ADB. 2004. Technical Assistance to the Peoples Republic of China for Support for Reforms in Compulsory Education Financing. Manila (TA 4363). 11 The four ADTAs on health, nutrition, and social protection are ADB. 2002. Technical Assistance to the Peoples Republic of China for Strengthening National Public Nutrition Planning. Manila (TA 3992); ADB. 2003. Technical Assistance to the Peoples Republic of China for Combating Severe Acute Respiratory Syndrome in the Western Region. Manila (TA 4118); ADB. 2003. Technical Assistance to the Peoples Republic of China for Preventing HIV/AIDS on Road Projects in Yunnan Province. Manila (TA 4142); and ADB. 2004. Technical Assistance to the Peoples Republic of China for the National Food Safety Regulatory and Strategic Framework. Manila (TA 4342), although ADB also provided policy support through subprojects under ADB. 2003. Technical Assistance to the Peoples Republic of China for a Fund for Strategic Policy Conferences and Studies for Poverty Reduction. Manila (TA 4200); and ADB. 2004. Technical Assistance to the Peoples Republic of China for the Facility for Policy Reform. Manila (TA 4365).

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77

Table A3.2: Features of and Strategies for Poverty Reduction and Social Sector
Sector Characteristics The extremely poor population in rural PRC (based on CNY683/capita/ year) fell from 85 million in 1990 to 23.7 million in 2005, while the population living below the $1 per day standard fell from 375 million in 1990 to 135 million in 2005. PRC Government Strategy Narrow regional economic disparities ensure equitable distribution of gains from economic growth and improve education and health services. Promote growth in inland provinces and openings to the outside. Reduce poverty through the Eight-Seven Poverty Reduction by raising agricultural output of the absolute poor in remote, resource-poor upland regions, deserts, Yellow Plateau and flood-prone areas along Yellow River. Mobilize society to assist in alleviating poverty and be more concerned about it. Reduce inequalities between rural and urban residents, between regions, and among individuals by enlarging the middle-income class and increasing the incomes of the low-income group. Improve targeting by focusing on poor households and village activities. Give priority to remote and mountainous areas, minority groups, and pockets of severe poverty. Use participatory approaches to involve the poor in decisions that affect them. Address urban poverty by strengthening the social safety net, raising minimum living standards, and job creation initiatives. Increase the fiscal transfer to poor areas. Raise investments to these areas. Strengthen the construction of infrastructure (rural roads, drinking water, and smallscale irrigation facilities). ADB Sector Strategy Promote economic growth to reduce poverty in inland provinces by strategically locating traditional growth projects in officially designated poor counties. Develop transport and communication links between rural and urban areas. Provide better access to credit in poor areas. Spread examples of successful marketbased reforms to interior provinces. Lessons Identified in Previous Reports ADBs operations in the PRC are shaped more by governments borrowing policy than by ADBs lending strategy. The Governments emphasis on EAs loan repayment, coupled with lack of access to ADF resources, has precluded ADB lending for health, education, and direct poverty reduction. ADB should consider putting safety net projects under the poverty classification. Since the PRC is trying to develop a market-oriented social insurance system, projects in this area may be suitable for OCR financing.

Poverty alleviation remains formidable because of (i) the large incidence of poverty; (ii) adverse natural and agricultural conditions in these rural areas, the lack of education and skills of rural labor, and vulnerability, which means that people can slip into extreme poverty because of disasters, illnesses, deaths of family members, and problems with food security.

Support pro-poor sustainable economic growth through propoor infrastructure and environmental improvement projects. Promote a vibrant private sector to create jobs. Undertake policy studies and other knowledge products related to poverty. Support for infrastructure development will lie with ADB and the World Bank, while bilateral aid agencies will primary channel their concessional funds to support environmental improvement, education, and health. Social development targets (e.g., poverty reduction and other human development targets in the MDGs, including income and regional disparities), will be monitored. Identify social sector projects that yield adequate financial returns to pay OCR loans. Through its ADTA and ESW program, help to strengthen the institutional and management capabilities of key agencies in social development as well as policy environment. The nonlending program will be

ADBs policy advice and the demonstration effects of new institutional approaches in its projects are its most important contribution to poverty reduction. Advice and new knowledge products that promote free basic education, a revision of the rural minimum living standards policy, and use of NGOs to deliver targeted poverty reduction support are examples of such approaches. ADB has not been able to develop social sector loans because (i) NDRC has continued to require the use of concessional foreign financing for such projects; (ii) changing priorities of bilateral donors have frustrated ADBs search for a bilateral partner to soften its lending terms; and (iii) the World Bank is a more experienced source of project support to social sectors, given that it has 16 education and 11 health projects in the PRC. All COS documents treat the use of ADTA resources as

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Appendix 3

Sector Characteristics

PRC Government Strategy

ADB Sector Strategy more focused, better targeted, and will address emerging topics. More effort will be made to ensure quality at entry. Clusters of ADTA will be identified to support long-term relationships with selected agencies involved in strategic policy work. Umbrella ADTA will be used to enable a quick response to the government and markets. Few capacity-building ADTAs for individual local EAs will be included.

Lessons Identified in Previous Reports supplementary to lending rather than as an equally important strategic instrument. There has been no coherent strategy on use of ADTA. ADB has significant ADTA resources but, unlike other funding agencies, it has not fully exploited this comparative advantage. Its ADTA program has been too diverse and incoherent to achieve strategic objectives. The 1991 COS acknowledged that lending to education and agriculture would not be feasible without ADF.

Education The PRC has made impressive progress toward achieving universal 9-year compulsory education, as well as in gross enrollment rates in senior secondary and tertiary education. Despite this, there are disparities in access, quality, and outcomes across regional, urban rural, and gender dimensions. An overemphasis on the user pays principle threatens access for children in poor households. Health While public access to health services improved in the 1990s, challenges remain. These include (i) the large gap in quality between rural and urban populations; (ii) inadequate disease prevention, control, and treatment systems; (iii) weak health insurance systems and exclusion of rural residents and migrant workers; and (iv) inequitable and inefficient distribution of public health resources.

Develop the country through science and education. Reinforce compulsory education in urban and rural areas. Develop vocational and adult education vigorously. Improve the structure and quality of higher education. Accelerate and promote education system reform. Strengthen the capacity of teaching staff. Develop various types of education and deepen reform of the education system.

ADB will continue to work with the Government through its ADTA program to develop practical ways that will enable it to contribute to the achievement of the countrys strategic priorities in the education sector. If suitable opportunities arise, loans and ADTAs will be added to the program in the education sector. In all ADB-supported projects, efforts will be made to ensure that affected people at least maintain their living standards.

Improve medical treatment and health conditions in rural areas. Reinforce the prevention of serious diseases. Strengthen the management of medicine and medical equipment market. Reform the health service, medical treatment, and health surveillance systems. Implement a regional planning system to regulate resources. Develop traditional Chinese medicine in tandem with western medicine.

If suitable opportunities arise, loans and ADTAs will be added to the program in the health sector. In all ADB-supported projects, efforts will be made to ensure that the affected people at least maintain their living standards.

ADB = Asian Development Bank, ADF = Asian Development Fund, ADTA = advisory technical assistance, COS = country operational strategy, CSP = country strategy and program, PRC = Peoples Republic of China, EA = executing agency, ESW = economic and sector work, FYP = five-year plan, MDG = Millennium Development Goal, NDRC = National Development and Reform Commission, NGO = nongovernment organization, OCR = ordinary capital resources. Sources: Ninth and 10th FYPs, 1997 COS, 2003 CSP, 2006 CSPU, 1998 CAPE, and draft CSP completion report.

11. Relevance. The design of ADBs operations has closely followed its CSPs over different periods. Under the 1991 country operational strategy (COS), the geographical focus of projects shifted

Appendix 3

79

from eastern coastal areas to poorer interior provinces. The 1997 COS promoted economic growth in inland provinces by locating traditional growth projects in officially designated poor counties and developing transport and communication links between rural areas and urban growth centers. The 2003 CSP supported pro-poor sustainable economic growth through pro-poor infrastructure and environmental improvement projects. The CSP did not include any loans to finance a directed poverty intervention. The overall CSP strategy was to use knowledge-based products to help improve the efficiency and effectiveness of poverty reduction policies and programs, including analytical work related to providing social protection in rural areas. The ADTAs were responsive to sector needs to develop new policies, such as formulating a more holistic approach and participatory planning methodology to identify poor villages and households,12 addressing urban poverty issues,13 implementing poverty monitoring,14 introducing sustainable rural credit via institutional microfinance15, and involving civil society in government-financed village-level poverty reduction programs.16 All of these ADTAs have made fundamental contributions to poverty reduction work in the PRC. The ADTAs also followed up on gains from previous interventions, as with the technical assistance (TA) on nongovernment organization (NGO)Government partnerships (footnote 16), which built on the policy papers developed under International Conference on Nongovernment Organization Poverty Reduction Policy financed under a previous TA.17 12. However, for education and health, ADTA topics have been quite ad hoc, in part because of vague and broad guidance from the 2003 CSP. The absence of a single TA on education from 1997 to August 2001 meant that there has been no sustained dialogue18 with the Government on education issues. There was a similar gap in health policy dialogue, with the absence of a health TA19 until 2003. Since then, however, ADB has engaged in active dialogue with the Government and international agencies on health-related areas. The Ministry of Finance has recently expressed a strong interest in a possible blending of a government grant with OCR funds, although discussions with the National Development and Reform Commission have not yet yielded concrete progress. Of the four ADTAs on health, the two on public nutrition and containment of severe acute respiratory syndrome (SARS) within the Western Region (footnote 11) reflected ADBs go inland strategy. The SARS TA was a quick response to an urgent and high-priority government request. However, the relevance of the other two ADTAs (HIV/AIDS prevention in Yunnan and a national food safety regulatory and strategic framework) to the CSP and, by extension, to the five-year plans (FYPs) was not clear, although the Yunnan TA tackled the worsening problem of HIV/AIDS infection in support of the MDGs. 13. The designs of most social sector ADTAs were appropriate from the technical point of view, although some were found to be too academic and technical to disseminate to policy makers, which reduced their policy impacts. The cross-sectoral approach employed under the TA to preempt the possible effects of road construction on HIV/AIDS transmission within Yunnan
12

ADB. 2000. Technical Assistance to the Peoples Republic of China for Preparing a Methodology for Development Planning in Poverty Blocks under the New Poverty Strategy of PRC. Manila (TA 3610-PRC, for $150,000, approved on 21 December). 13 ADB. 1999. Technical Assistance to the Peoples Republic of China for Urban Poverty Study. Manila (TA 3377PRC, for $410,000, approved on 27 December) 14 ADB. 2004. Technical Assistance to the Peoples Republic of China for Developing a Poverty Monitoring System at the County Level. Manila (TA 4454-PRC, for $300,000, approved on 1 December). 15 ADB. 2005. Technical Assistance to the Peoples Republic of China for Rural Finance Reforms and Development of Microfinance Institutions. Manila (TA 4430-PRC, for $1 million, approved on 11 September). 16 ADB. 2005. Technical Assistance to the Peoples Republic of China for Nongovernment Organization-Government Partnerships in Village-Level Poverty Alleviation. Manila (TA 4580-PRC, for $1 million, approved on 20 April). 17 ADB. 2003. Technical Assistance to the Peoples Republic of China for Policy on the Poverty Reduction Program of the Peoples Republic of China - Trends, Challenges, and Future Directions. Manila (TA 4222-PRC, for $150,000, approved on 20 November). 18 In order to revitalize such a dialogue and to explore possibilities for larger-scale, loan-based support in this sector, ADB had to start TA 3713-PRC: Strengthening the Accountancy Profession (footnote 10) at a later stage. 19 A PRC-specific nutrition ADTA had been approved in November 2002 building on dialogue from a series of three regional TAs in which the PRC participated, but none had been approved on mainstream health areas before 2003.

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(footnote 11) provided a good model for cooperation by initiating joint action by the health and construction departments as well as by local communities. The design of the TA on combating SARS (footnote 11) allowed for flexibility in addressing immediate threats and responding to collaboration opportunities, thus allowing the TA to achieve outcomes that exceeded expectations. Finally, although the ADTAs were designed mainly to yield policy impacts, the inclusion of pilot elements in the overall design (for example, on the impact of infrastructure development on poverty reduction,20 or the new training models in the SARS TA) were much appreciated by executing agencies and other local counterparts. These pilot activities demonstrated ADBs efforts to pursue reforms from the development of ideas to their practical application. 14. There is little indication that the Government of the PRC may consider borrowing OCR funds for poverty reduction and social development in the immediate future. While the same scenario is true for the World Bank, it was able to blend grants from bilateral agencies such as the Department for International Development of the United Kingdom with its loans, thus reducing the overall cost of its social sector projects in the PRC. However, the draft completion report21 for the World Bank country assistance strategy suggests that this arrangement may not be sustainable, given the plans of bilateral donors to shift resources gradually away from the PRC, because of the countrys sustained and dramatic growth. The Government will soon have to review its policy if it wants the multilateral institutions to remain involved in soft sectors. Recently, following indicative requests from Guangxi and Yunnan, ADB has had preliminary discussions with the Government about possible lending on rural disease prevention and control, building on models developed under the SARS TA. Another positive development involves early talks with the Shanghai Municipal Government to combine a grant from the Shanghai Poverty Reduction Fund with ADB OCR loan to finance credit extension by village poverty reduction cooperatives and dragonhead enterprises22 in Yunnan Province. 15. Effectiveness.23 Most of the social sector ADTAs made significant contributions to the formulation of new strategies or to the introduction of innovative operational mechanisms, although the impacts of some ADTAs may be felt only in coming years. In general, the policy impacts of poverty reduction ADTAs have been dramatic and can be grouped in three areas. (i) Defining and understanding what poverty is. The systematic and participatory methodology developed under the TA to identify poor villages and households based on a multidimensional conceptualization of poverty (footnote 9) was adopted as official government policy in 2001. This was followed up by an ongoing urban poverty ADTA24 to investigate ruralurban migration and how to improve the access of poor urban migrants to social services. (ii) Enhancing how poverty is addressed. A TA on supporting rural poverty reduction projects (footnote 20) successfully pilot-tested the integration of rural poverty reduction and development projects in villages in Guizhou, which had important impacts on national poverty reduction programs. The key findings of the TA on the poverty reduction strategy (footnote 17) were incorporated into a government report delivered at a Scaling-Up Poverty Reduction Conference in April 2004 and its main recommendations were endorsed by Premier Wen Jiabao. This TA was one of the first recipients of the advisory TA award program and it
20

ADB. 1998. Technical Assistance to the Peoples Republic of China for Study on Ways to Support Rural Poverty Reduction Projects. Manila (TA 3150-PRC, for $715,000, approved on 31 December). 21 May 2006 version. 22 According to the Dragonhead Enterprises policy, private entrepreneurs are given preferential policies in return for working directly with poor farmers or farmer groups, either through management contracts, contract growing or sales contracts with technical support, to improve their management and technical skills, agricultural productivity, and market access. 23 This subsection draws heavily on materials prepared by the PRC Resident Mission in 2006 to support its consideration for the Second China Poverty Eradication Awards. 24 ADB. 2005. Technical Assistance to the Peoples Republic of China for Urban Poverty Strategy Study II. Manila (TA 4694-PRC, for $300,000, approved on 23 November).

Appendix 3

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(iii)

was cited for its flexibility and strong impact on national policy, despite its small budget ($150,000). Expanding the involvement of other social forces in poverty reduction. ADB has worked to mainstream the role of NGOs in national poverty reduction efforts through the TA, which pioneers cooperation between the Leading Group on Poverty Alleviation and Development (LGOP), the Jiangxi Poverty Alleviation and Development Office, and the China Foundation for Poverty Alleviation, a national NGO (footnote 16). Under this ongoing TA, NGOs were competitively selected to manage government funds and implement government programs at a significant scale for the first time, setting a precedent for a change in the governments role in public service delivery.

16. The three education ADTAs (footnote 10) have not resulted in significant policy outcomes to date, except potentially the TA on improving basic education in underdeveloped areas through information and communication technology (ICT). ADB worked with the Ministry of Education to develop policy recommendations and pilot test new approaches for training teachers in the use of ICT tools for innovative teaching and providing them locally relevant educational content and materials, new peer support networks, and monitoring and evaluation to advance education objectives. If the PRC decides to initiate a second phase of its modern distance learning program, and the TA recommendations are applied, significant TA impacts may be recognized. 17. ADBs involvement in the health sector has not generally been linked to CSP priorities and, with the exception of the nutrition TA (footnote 11), has emerged relatively recently in response to specific Government priorities. Policy impacts, therefore, have to be reviewed individually. For instance, the SARS TA has successfully introduced a participatory training approach, which has been widely applied in other health training in the four provinces covered by the TA. The nutrition TA has supported the inclusion of public nutrition improvement in the overall 11th FYP, for the first time, as well as identification of nutritional fortification as a priority area in a sectoral FYP on food industry development. The outcomes of the other two TAs, on HIV/AIDS and the National Food Safety Regulatory and Strategic Framework, are still to be seen. 18. The ADTAs that have contributed to capacity building of the executing agencies are as follows. (i) The SARS TA introduced innovative models for participatory disease response including (a) face-to-face training for health care staff at county and township levels, supported by an innovative and integrated training-of-trainers program; (b) an applied training program for provincial and prefectural staff on field epidemiological investigation; and (c) a training program for provincial health education institutes on information, education, and communication (IEC) to address public health emergencies, in addition to the TAs school-to-community grassroots IEC campaign. (ii) The TA on NGO-government partnerships in poverty alleviation (footnote 16) included local training during the pilot test and the development of capacity building frameworks and resource kits to support post-TA replication. It also included handson learning and long-term civil society development through training and the management of government poverty alleviation funds and programs. 19. For ADTAs with pilot elements, there have been successful field outcomes. For instance, the TA on supporting rural poverty reduction projects (footnote 20) has analyzed the impact of rural infrastructure provision on poverty reduction. It continues to monitor and evaluate these benefits. Farmers in the pilot village in Nayong County reported higher incomes after provision of a small access road, electricity, water, and irrigation infrastructure, although such benefits cannot be sustained unless the infrastructure is maintained regularly. These lessons have been

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much appreciated by poverty reduction agencies, local officials, and village inhabitants, and have built up recognition of ADBs engagement in direct poverty reduction efforts. 20. Efficiency. Most of the social sector ADTAs were designed as quick responses to the needs of executing agencies and implementing agencies. The TA on SARS, which addressed the immediate threat posed by the outbreak while building longer-term public health system capacities, particularly in the rural areas, is a good example. ADBs reaction time to the PRC request was very short (within 1 month), making the TA highly efficient. 21. The implementation of some ADTAs was delayed because of (i) low executing agency ownership or different understanding of the TA; (ii) fewer incentives for ADB staff to focus on TAs (especially post-approval) compared with loans; (iii) frequent changes of responsible officers within ADB (in one case, the responsible officer for an ADTA was changed three times); (iv) late feedback from ADB to the executing agencys requests or guidance regarding complicated ADB financial procedures; and (v) communication problems between ADB officers, executing agencies and the consultant team, or within the consultant team. 22. Since ADTAs typically allocate a lot of their budgets to international consultants, their performance tends to be scrutinized closely, and feedback from PRC clients has not been encouraging. International consultants were perceived to lack experience and exposure to the PRC and its socioeconomic, cultural, and political environment. They were, therefore, sometimes insensitive to client needs and constraints. Many faced significant language barriers. Most of the international specialists chosen for ADTAs, especially those hired through consulting companies, are consultants by profession who work full-time in project design and implementation. However, ADTAs supporting policy reform require more innovative inputs, and experts working in universities or research institutes, policy advisory organizations, and international development organizations may be better placed to provide these. International consultants were often given low to medium performance ratings, in contrast with most national consultants, who tended to be highly appreciated by many stakeholders. 23. ADB tends to be highly compartmentalized and operations administered by different divisions are often not well coordinated. There seems to be a lack of communication and coordination about TA design and follow-up of operations across sectors. For instance, while ADTAs in the social, agriculture, and transport sectors may all have poverty reduction as an important objective, they are often not coordinated with each other. 24. Sustainability. Since the ADTAs are regarded as effective, they are also sustainable, as they have made significant progress in achieving policy or regulatory reform and in adding value. The following TAs show prospects for replication and sustainability: (i) the development planning TA (footnote 12), whose proposed methodology was adopted by LGOP as official government policy in 2001; (ii) the poverty reduction program TA (footnote 17), whose findings were incorporated in a high-level Government report; (iii) the rural poverty reduction TA (footnote 20), which established village-led management systems for drinking water, irrigation, road, power use, and community development, thus ensuring smooth completion and strong, systematic management after the TA conclusion (community development funds set up for these systems are still being operated with success, and other villages have come to learn from them); and (iv) if successful, the channeling of government funding through NGOs that is being pilot-tested under the NGO-government partnership TA (footnote 16) would also dramatically increase the sustainability of participatory grassroots poverty reduction work, possibly reducing NGOs reliance on donor funding.

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83

25. The policy impacts of health and education ADTAs are less sustainable. The SARS TA (footnote 11) is an exception, as its participatory training approach has been widely disseminated and applied in health sector works in the provinces covered by the TA. Its results have been welcomed by staff of health agencies. The TA on improving basic education through ICT may have strong impacts on improving basic education (footnote 10), but occasionally weak ownership of the TA and coordination problems between the executing agency and local implementing agencies have affected the sustainability of the pilot TA. 26. Key Issues A fundamental question is whether the current strategy of using economic growth to reduce poverty is still as effective as in the past. Recent studies25 show that this direct relationship has been weakened by unequal income distribution and a slowdown in rural income increases, especially since the early 1990s.26 Another study indicated that locating projects in poor regions did not guarantee significant poverty reduction if the project interventions were largely irrelevant to the key causes of poverty in those areas.27 The PRC case study28 showed that, even when expressways are located in poor regions, because such expressways are closed to local traffic (except those near the exits), the nearby villages remained poor. Therefore, the existing geographic targeting used in investment projects did not directly tackle the key causes of poverty but simply assumed that funds flowing into poor regions would automatically lead to poverty reduction. There needs to be a fundamental rethinking of the current strategy of pro-poor sustainable economic growth through infrastructure improvement projects. 27. Following this logic, ADBs go inland policy may not contribute directly to poverty reduction unless operations directly address the causes of poverty and target poor groups. While there have been some indications that there may be spatial concentrations of the poor in highly populated coastal regions and their urban centers, recent data29 show that 50% of the extreme poor continue to live in the west, 36% in central PRC, and 14% in the east, confirming the higher incidence of poverty in inland provinces. ADB interventions, therefore, still need to be directed at poor communities in western and central PRC. 28. Since the Government has not borrowed from ADB for poverty reduction and other social projects, ADB interventions have been confined to knowledge-based products and services, mostly in relation to policies and operational mechanisms. Such ADTAs commonly involve policy dialogue with the PRC authorities and are typically executed by ministries and organizations at the national level. 29. In the past, the PRCs main poverty reduction efforts targeted the extreme poor rather than vulnerable groups. Even so, it has been estimated that government welfare efforts have managed to reach only 20% of the extreme poor, who are often defined by physical or functional characteristics (e.g., disabled, handicapped, sick) rather than their geographic location. The implication, therefore, is that the extreme poor should be helped primarily through social assistance and by channeling
Done under TA 4222-PRC (footnote 17). Chen, Shaohua, and Yan Wang. 2001. China's Growth and Poverty Reduction: Recent Trends between 1990 and 1999. Washington, DC: The World Bank; Jalan, Jyotsna, and Martin Ravallion. 1998. Transient Poverty in Postreform Rural China, Journal of Comparative Economics, Volume 26, 338357; Khan, A.R. 2000. A Comparative Analysis of Selected Asian Countries, UNDP; Fang, Cheng, Zhang, Xiaobo, and Shenggen Fan. 2002. Emergence of urban poverty and inequality in China: evidence from household survey, China Economic Review, 13(2002), 430443. 27 ADB. 2006. Special Evaluation Study on Pathways Out of Rural Poverty and the Effectiveness of Poverty Targeting. Manila. 28 The same study found that add-on components designed to satisfy ADBs desire to address social issues (e.g., HIV/AIDS control, womens empowerment, and ethnic minority development) unduly burden borrowers with social costs. It has been suggested that borrowers may prefer to pay an additional charge, say 0.5%, on OCR loans as along as they are not compelled to accept poverty reduction or social components. This poverty fee can then be used to subsidize standalone projects for poverty reduction. 29 National Bureau of Statistics of China. 2006. Poverty Monitoring Report of Rural China 2005. Beijing: China Statistics Press.
26 25

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subsidies to targeted households (in order to minimize leakage of benefits to the nonpoor), rather than through economic development support. An ADB Observations and Suggestions policy note was instrumental in catalyzing initial pilot testing of rural minimum living standard protection (dibao) schemes, and key recommendations from small-scale ADB support to the Ministry of Civil Affairs via subprojects under two facility-type TAs were directly integrated into the Ministry of Civil Affairs recommendations to the State Council in early 2007. Establishment of a nationwide rural dibao system, a major first for the PRC, was ratified by the National Peoples Congress in March 2007. By addressing the needs of those lacking productive capacity and suffering major shocks, construction of a dibao system complements ADBs sustained support to the Governments development-based poverty alleviation programs. 30. ADB is not alone in poverty reduction and social sector efforts. The World Bank has contributed to participatory poverty reduction, training of migrant labor, and community-driven development, and many other bilateral donors have significant involvement in poverty reduction, education, and health. ADBs policy impact to date has focused on changing poverty reduction policies and improving their implementation, thus allowing government to employ its resources more efficiently. However, the TA are small. These gaps have weakened ADBs position in engaging the government in policy dialogue on education and health. 31. Lessons and Recommendations. The PRCs 11th FYP emphasized future rural development in terms of the construction of the new countryside within which poverty reduction, education, and medical care will be essential aspects of a harmonious society. Under this new drive, the Government will invest very large amounts of capital in rural infrastructure construction and in social security,30 education,31 and health care.32 These plans may provide ADB with the opportunity to diversify its lending portfolio toward poverty reduction and social sectors. 32. Since ADB has declared that its overarching goal is poverty reduction, almost all of its loans in the PRC have, in theory, had poverty reduction objectives. However, the reality is that there have so far been no ADB lending operations that directly address the causes of poverty in the PRC, leading the State Council LGOP to criticize ADB for presenting an image of fighting against poverty. To improve its credibility, ADB needs to carefully re-categorize its operations and to determine which of its operations support economic growth and which are really for poverty reduction, instead of using the umbrella of poverty reduction for all operations. 33. ADBs MTS II indicates that the future ADTA program will need to be better integrated into ADBs lending operations in developing member countries to increase their effectiveness. This may be a sensitive strategy given the continued reluctance of the Government to borrow OCR funds directly for poverty reduction and social development. However, MTS II also indicates that an equally important objective is ensuring more equitable and inclusive development in developing member countries. Despite this, ADBs delivery of knowledge-based products in these sectors appear to be shrinking, thus weakening ADBs impact on national policies, strategies, and operations. This strategic gap has to be reconciled with ADBs redefinition of its role since the 1990s, from a project financier to a broader development institution. Hence, MTS II needs to be interpreted with flexibility in this case, since in the PRC, ADTAs on poverty reduction and the social sector ought to assume more importance in the absence of lending to these sectors.
30

For example, by improving safety nets for the unemployed (skills training and labor export opportunities for the able-bodied, relief, and assistance for disabled); assisting poor children through better a boarding school system, family fostering, social trust, and free vocational education; assisting people affected by natural disasters or illnesses through social relief or special loans; and concentrating support on whole villages. 31 By exempting rural students from tuition for compulsory education; providing free textbooks and an accommodation subsidy to poor students; training village teachers; implementing long-distance education; guaranteeing equal access to children of migrant workers and urban residents; and by allocating more resources for public education to villages, the west and central PRC, poor areas, areas inhabited by minorities, and poor students. 32 By focusing health infrastructure construction on townships; strengthening disease prevention; promoting trade Chinese medicine and medical science; among others.

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34. As a consequence of the rapid urbanization in the PRC, the 150 million rural migrants working in cities every year leave behind 23 million children, 47 million wives, and 18 million parents in rural communities. This population belongs to an emerging disadvantaged group that will require a specific approach to poverty reduction, health, and education interventions. Future ADB involvement in the social sector will need to address this issue. 35. PRC clients have complained that some ADB ADTAs were too donor-driven, thus reducing the motivation of executing agencies and implementing agencies to participate fully. On the other hand, ADB project officers noted that executing agencies have a strong tendency to control TA inputs and outputs without seriously participating in their design and implementation, and that executing agencies then tend to criticize consultants for not following their instructions. Most ADTAs failed to build trusting and effective working relationships between ADB and the executing agencies, even upon TA conclusion. During this CAPE evaluation, at least two of the 11 executing agencies clearly showed little interest in the evaluation. In contrast, the Ministry of Health was exceptionally supportive and showed great appreciation of the work done under the SARS TA (footnote 11). 36. ADTAs should rely mainly on national consultants and should recruit international consultants only if necessary. Whenever possible, pilot elements should be included in ADTAs for this sector to show practical and direct achievements of the policy and strategy changes. Table A3.3: SWOT Analysis: Poverty Reduction and Social Sector
Strengths 1. Alignment of poverty reduction ADTAs with the CSP and the FYP made these interventions very relevant and effective in defining what poverty is, improving how it is addressed, and expanding the involvement of other stakeholders. 2. Government agencies and village beneficiaries have shown deep appreciation for TAs that include components for pilot testing innovative proposals from the TAs. 3. Recommendations of poverty reduction ADTAs were incorporated into country policies and regulations and are, therefore, regarded as sustainable. Weaknesses 1. ADB interventions had been limited to TAs based on knowledge-based products and services. Only 12% of the TA amount approved from 1998 to 2005 was used for poverty reduction, and only half of this involved education and health. 2. Lack of major ADB assistance through direct poverty reduction in the PRC has reduced its credibility as an institution fighting poverty in Asia. 3. Vague ADB country strategies on education and health meant ad hoc development of TAs, especially in the absence of sustained policy dialogue with government. 4. Some of these TAs outputs were presented too technically, diminishing their influence on policymakers. 5. Implementation delays were due to low EA ownership or different EA understanding about the TA; lower priority placed by ADB staff on TAs relative to loans; frequent ADB staff turnover; late ADB feedback; communication problems. Threats 1. The Government is reluctant to borrow OCR funds for these projects because of repayment concerns. Other donors have softened their nonconcessional rates by blending them with grants from bilateral sources, although such grants may become less available as the PRC experiences higher economic growth. 2. While poverty has decreased nationally, urban-rural and regional disparities have become wider. 3. Strict interpretation of the MTS II instruction to integrate ADTAs with loans may compel ADB to further reduce its poverty-related assistance in the PRC.

Opportunities 1. ADTAs addressing national policies and regulations lessen the need for geographicallyselective interventions.

2.

Certain poverty characteristics suggest that directly addressing key causes of poverty may be more effective than indirect initiatives (e.g., through economic development of poor areas). 3. The 11th FYPs emphasis on social security, education, and health may open the window for ADB lending for poverty reduction and social sectors. ADB = Asian Development Bank; ADTA = advisory technical assistance; CSP = country strategy and program; PRC = Peoples Republic of China; EA = executing agency; FYP = five-year plan; MTS II = Medium-Term Strategy II; OCR = ordinary capital resources; SWOT = strengths, weaknesses, opportunities, and threats; TA = technical assistance. Source: Country assistance program evaluation team.

86 B.

Appendix 3

Part 2: Gender and Development

37. Gender Disparities in Poverty.33 Despite the lack of systematic data on womens share in poverty at the national level, existing data suggest a significant gender gap in the distribution of income and control of assets. A womans estimated earned income in 2003 was only 66% that of a man, because females tend to be engaged more frequently than men in low profit and high risk agricultural activities. Of the female rural population, 82% are solely engaged in agricultural production compared to less than 65% of the male rural population. This is exacerbated by the inordinate time women spend on unpaid work (household chores and caring for children, the infirm, and the elderly) and subsistence food production. Thus, women are highly vulnerable to poverty. 38. Millennium Development Goals Related to Gender.34 The only gender-specific indicators under the MDGs that are monitored regularly are those on education enrollment and maternal mortality.35 MDG targets on equal access for boys and girls to primary and secondary education appear to have been achieved (Table A3.4) ahead of 2015 targets (in 2001 for primary and in 2004 for secondary). While this impressive record has yet to be achieved at the subnational level, the gaps are not very substantial. For instance, the girl-boy ratio for primary school in the western areas is already 95%, implying good progress has been made toward reaching equal access to education. Maternal mortality had also been falling more quickly than the targets. However, HIV/AIDS infection has been increasing, especially among women (the percentage of female cases increased from 15% of total cases in 1999 to 39% in 2004). The growth of HIV/AIDS among women may be traced to increases in transmission from commercial or unprotected sex and, to a much lesser extent, from mother to child.
Table A3.4: Summary of PRC's Progress Toward its Millennium Development Goals (first and second CAPE periods)
Goal 3 4 5 6 7 10
Legend: Early achiever. Slow. On track. Regressing. AIDS = acquired immunodeficiency syndrome, CAPE = country assistance program evaluation, PRC = People's Republic of China, HIV = human immunodeficiency virus. Sources: ADB. 2005. China's Progress Towards the Millennium Development Goals (MDG). Manila; ADB. 2003. MDGs: China's Progress . Manila; ADB. 2005. China Human Development Report . Manila; ADB. 2006. The MDGs: Progress in Asia and the Pacific . Manila; ADB. 2006. ADB Basic Statistics . Manila; and various PRC country strategy and program updates. Also available http://mdgs.un.org/unsd/mdg/Data.aspx?cr=156

Indicator Elementary school enrolment rate of school-age children (net, %) Enrolment rate in junior secondary education (gross, %) Ratio of girls to boys in primary education (%) Ratio of girls to boys in secondary education (%) Infant mortality rate (per 1,000 live births) Under age 5 mortality rate (per 1,000 live births) Mortality rate of women in childbirth (per 100,000 births) Number positive for HIV/AIDS (in 1,000 persons) Proportion of population with sustainable access to improved water (%) Share of rural population with sanitary toilets (%)

CAPE Period 1st (19901997) 2nd (19982005)

33 34

ADB. 2006. Country Gender Assessment: Peoples Republic of China. Manila. MDGs that are not related to gender issues are discussed in the first part of this appendix. 35 It is hard to find sex-disaggregated data in general. National data often relate to economic and livelihood factors, and, even then, there are no official records of intra-household income and welfare distribution. Social development aspects (such as education and health, personal security, basic services and infrastructure, environment, and power and decision-making) are not adequately monitored.

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39. Poor access to water resources and sanitation seems to affect women disproportionately as (i) women take more responsibility for agricultural resources; (ii) tradition dictates that women fetch water for drinking and other household uses; and (iii) when household members fall ill due to poor sanitary conditions, it is the women who care for the sick. 40. Other quantitative measures of gender disparities are cited below, although they are mainly for education and health. The dropout rate in 2002 for girls aged 712 in poor counties was 2 percentage points higher than for boys, while for girls aged 1315, the difference was 5 percentage points. In 2000, the national illiteracy rate was 5% for males and 13% for females (female illiteracy was 8% in urban areas and 17% in rural areas, while male illiteracy was 2% in urban areas and 6% in rural areas). Tibet had the highest illiteracy rate, with 45% for males and more than 60% for females, followed by Qinghai, Gansu, and Yunnan, where the rates cluster above 10% for males and above 25% for females. 41. Educational ratios may not reflect gender equality as accurately as representation in business and government. Women account for 45% of the total workforce, which is significantly higher than the global share of 35%. Some 36% of government officials are women, and 22% of the seats in the National Peoples Congress are held by women. As more men migrate to urban areas for work, women are gradually assuming traditionally male roles in agriculture. Women from rural areas have fewer opportunities than their male counterparts to work in urban areas so very few migrate. On the other hand, if they stay, women have less access to non-farm income, the main source of incremental income for the rural poor. These trends need to be considered when poverty interventions in rural areas are considered. 42. Census data show that the number of boys born per 100 girls increased from 108 in 1982 to 11736 in 2000 and to 118 in 2005, because of a strong preference for sons37 and widespread availability of means to determine the sex of an unborn child. Since infant mortality among girls was also 40% higher than among boys, it seems likely that a substantial number of men will not have female counterparts in the future. This has led to kidnapping and selling of women for marriage purposes, which peaked at 17,963 cases in 2000 and dropped to 3,056 in 2002. Despite this fall, there is evidence that girls and young women are increasingly being trafficked for sexual and labor exploitation. Access to health care had become less equitable since payment for these services was introduced, as rural families are more likely to spend on health care for boys and men rather than on girls and women. Ironically, women tend to need more health services due to reproductive needs. 43. These indicators seem consistent with trends in the gender-related development index, which lag behind the human development index, according to the Country Gender Assessment.38 The traditional bias against women stems from the pattern of male dominant marital relations and a patriarchal structure of kinship that have rendered women at a disadvantage in resource allocation.39 One of its more dramatic manifestations is the suicide rates for women, which have been high relative to the global average (4.5% of female deaths in the PRC versus 1.6% worldwide).40 Suicides of Chinese women now make up half of the world total of female suicides. The PRC is the only country in the world where the rate of suicide is higher among women than among men, especially in the rural areas where the instance of suicide among women is 34 times higher than the rate among men. A high proportion of
36

The international sex ratio at birth is only 103107 males per 100 females. The above-normal ratio noted for the PRC may be due to illegal abortions of female fetuses, or underreporting of girl infants in order to reserve the quota for a son. 37 Traditions dictate that sons stay in the village to look after elderly parents, while daughters have to move to their husbands family home. 38 ADB, East Asia Department and Regional Sustainable Development Department. 2006. Country Gender Assessment. Manila. 39 Ibid. page 5. 40 ADB. 2003. Peoples Republic of China Country Strategy and Program (20042006). Manila (Appendix 3, para. 121).

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Chinese women who end their lives stay in the countryside, are in the 1626 age range, lack education, and have ready access to lethal pesticides. 44. While no loan or TA was programmed specifically for gender issues under the 2003 CSP, an appendix was devoted to discussing gender needs and challenges, government policy, ADB and other donors past experiences, and a proposed ADB gender strategy and monitoring. The approach was consistent with ADBs overall policy of mainstreaming gender issues in all aspects of ADB operations to promote equity (Table A3.5). Table A3.5: Features of and Strategies for the Gender Sector
Sector Characteristics
Disparities have widened in education, health, social security, and by gender. Women are often (i) disproportionately represented among groups that are vulnerable to poverty; (ii) underrepresented in political positions; (iii) have higher school drop-out rates than boys; and (iv) are employed in jobs with lower status and lower pay and are likely to be laid off first.

PRC Government Strategy

There is a legal framework in place to promote and protect the rights of women. While the transition to a market economy has had clear benefits for women, some market-oriented reforms have had adverse impacts. Female workers are likely to be the first to get laid off during SOE restructuring. They are also more vulnerable than men to weaknesses in the health care system. There is an unexplained wage gap after accounting for differences in education and experience.

ADB Sector Strategy

Consider gender issues in ADB policies and programs, and ensure the integration of gender into sector policies, programs, and projects.

Lessons Identified from Previous Reports

There is a need to promote the participation of women in the labor force and to integrate womens rights programs with economic development programs.

Social impact assessments should include a gender analysis for ADB projects when appropriate. During project design, consider the gender impacts associated with the project. Some aspects of beneficiary monitoring (e.g., gender effects, poverty effects) are not directly linked to decision making and have been a source of frustration to local authorities. Encourage more NGO activities in the western region (where gender inequality is more pronounced).

Gender inequality in the PRC is more pronounced in the west of the PRC than in the east.

Strengthen partnerships with NGOs and civil society in all poverty-related loans and TAs.

ADB = Asian Development Bank, CSP = country strategy and program, PRC = Peoples Republic of China, FYP = five-year plan, NGO = nongovernment organization, SOE = state-owned enterprise, TA = technical assistance. Sources: 2003 CSP and draft CSP completion report.

45. ADTAs. While none of the ADTAs approved during the second CAPE period had an explicit focus on gender, features of certain ADTAs addressed gender issues. (i) Anemia and other forms of malnutrition disproportionately affect women and children and lead to increased maternal mortality and cross-generational effects (linked to malnutrition during pregnancy). To the extent that the nutrition ADTA (footnote 11) was successful in incorporating the concept of nutrition improvement in the 11th FYP, then women interests had been supported. (ii) The methodology proposed under the development planning ADTA (footnote 12) strongly promoted womens participation in poverty reduction planning for rural communities. During ADTA implementation, rural women were able to express

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(iii)

their views and fully participate in the dialogue and decision-making processes for poverty reduction and development of their communities. Building on the development planning ADTA, the introduction of NGOs to facilitate participatory village interventions under the ADTA on NGO-Government partnerships (footnote 16) has the potential to dramatically increase the voice of women and other marginalized groups.

46. Key Gender Issues. While enrollment rates of girls in the PRC have closed in on those for boys, gender challenges remain: (i) the gender ratio at birth has historically been skewed and female infant mortality has been unusually high, (ii) the rate of HIV/AIDS infection among women is increasing,41 and (iii) the suicide rate among women is very high. 47. As rural men migrate to urban areas, more and more women have had to manage both the farm and the household, making them vulnerable to poverty. The transition to a market economy also means there have been fewer services available to lighten the demands on womens time (such as housework, childcare, caregiving for sick or elderly members of the household, water and firewood collection, household food security, and agricultural work). Moreover, societys patriarchal structure suggests a preference for hiring and retention of males, who are considered head of the family and therefore may need the income more. In addition, females continue to assume (unpaid) household responsibilities in addition to their productive work. They are overrepresented in the low-skill, low-wage sectors and tend to lose land42 upon marriage or divorce. Ironically, tendencies toward gender discrimination in the workplace have been exacerbated by some pro-women policies: since labor laws entitle women to 90 days of maternity leave, the hiring of females is perceived as leading to lower productivity and higher costs for the company (because of the maternity insurance premiums paid by employers). 48. Lessons and Recommendations for Future ADB Assistance. While most of the gender biases discussed above are also observed in other countries, the following gender issues are distinct in the PRC: (i) the unnatural female-to-male ratio at birth and during infancy; (ii) because of this, an above-normal vulnerability of rural and migrant women to trafficking; and by extension to HIV/AIDS; (iii) an alarming rate of female suicides; and (iv) a weak safety net for rural women who are left to manage both households and farms by husbands or fathers who migrate to the urban centers. 49. Aside from broad gender mainstreaming activities43 proposed for the Government and ADB consideration, ADB may consider offering TA to address these issues, possibly drawing on its ADTAs in countries where similar gender biases exist, such as those in South Asia.

41

Especially since commercial sex workers were excluded from special education and information dissemination activities meant to increase knowledge about HIV/AIDS among women and youth. 42 According to custom, a woman who marries a man from another village moves permanently to her husbands village, thus foregoing her user rights over her own land by tenure or inheritance. Thus, if she gets divorced, she becomes landless as the land that she owned prior to marriage has already been taken over by her family, and she cannot claim her share of the land in her ex-husbands village. 43 For example, the collection and analysis of sex-disaggregated data and strengthening of womens organizations. ADB will also try to ensure womens full participation in its projects and will carry out social and gender analysis during project design.

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GOVERNMENT AND ASIAN DEVELOPMENT BANK STRATEGIES FOR THE PEOPLES REPUBLIC OF CHINA 1. This appendix summarizes the Asian Development Banks (ADBs) overall strategy documents and the Governments five-year plans (FYPs) for the country assistance program evaluation (CAPE) review period (19982005). It also compares the country development trends and issues with the highlights of the national and ADBs strategy documents. A. National Development Strategy in the PRC

2. Pre-CAPE Period (19861997). ADBs operations in the Peoples Republic of China (PRC) started in 1986 under the Seventh FYP (19861990). During this period, the PRC was in the process of moving rapidly from a centrally-planned economy to a market-oriented system. The objectives of the Seventh FYP were largely oriented toward establishing foundations for more rapid growth and maintaining macroeconomic stability, while using the gains from growth to upgrade productivity, improve enterprise efficiency, and acquire technology from abroad for continued social and economic development. The highest priority was assigned to those sectors that were bottlenecks to further economic growth, such as energy, raw and semi-finished materials, and transportation. Much of the emphasis was on establishing a strong industrial base, with an emphasis on heavy industries. 3. The Eighth FYP (19911995) had broadly similar objectives but gave more emphasis to improving living standards and acquiring technology from abroad. By then, the success of the household responsibility system had revived growth in agriculture, and the creation of tens of thousands of new township and village-based enterprises had created a substantial wagebased manufacturing line of activity that eventually paved the way for broad-based export and assembly plants. In order to avoid overheating the economy, the Eighth FYP targeted more modest growth. The Eighth FYP signaled the beginning of a more indicative approach, reflecting the declining role of rigid central planning. A key aspect was the initiation of policies to diversify the ownership structure of state-owned enterprises which, at the time, was a highly sensitive issue. Other notable features were the launching of major targeted poverty programs in the interior provinces through the highly publicized Eight-Seven Poverty Reduction Program initiated in 1993 and the increased prominence given to infrastructure, especially transport. During the latter years of this period, there was also an emerging recognition that environmental degradation needed more attention. 4. CAPE Period (19982005). The Ninth FYP (19962000) marked a shift in focus toward more balanced, efficient, and sustainable growth, coupled with reductions in poverty. It defined nine principles to guide long-term economic and social development, which are shown in Table A4. It noted the massive funding needed for infrastructure development and provided for incentives to attract foreign capital to the sector. It called for improving efficiency in operations by adjusting prices, introducing competition, and commercializing management. It placed more emphasis on mitigating environment degradation. The objective was to improve the environment in major cities where pollution was most severe, prevent further degradation of natural ecosystem, and integrate the environmental protection program into national economic and social development planning. Regarding regional development and antipoverty initiatives, the Ninth FYP gave more prominence to promoting growth specifically in the poorer inland provinces by (i) formulating an equitable fiscal transfer system; (ii) promoting investment especially for infrastructure, both domestic and foreign; (iii) expediting the implementation of the economic reform program; and (iv) taking measures to reduce poverty especially through implementation of the Eight-Seven Poverty Reduction Program.

Table A4: Contexts, National Development Plans, and ADB Strategies

Development Trends and Issues For 19921996 (COS 1997)a Annual GDP growth of 11.9%, one of the highest in the world, making the PRC the seventh largest economy by 1996. Growth driven by non-state investment (especially in the export-oriented manufacturing sector in coastal cities) and huge FDI inflows. Very high domestic investment rates (up to 44% of GDP) from similarly massive domestic savings, since 1994. Inflationary pressures coming from credit requirements of SOEs and faster-growing provinces. Relatively large fiscal deficit (56% of GDP) due to the devolution of tax exemption powers, directed credit, and inflation-indexed interest rates on bond issues. Significant surplus labor in SOEs and in the rural areas, coupled with labor market rigidities. Heavily-polluted cities where TVEs predominate due to proliferation of polluting and energyintensive technologies. Government Priorities Ninth Five-Year Plan (19962000) The Ninth Five-Year Plan priorities are: maintain sustained economic growth of 8% per annum; achieve productivity and efficiency gains in implementation of development projects; improve education and make greater use of modern science and technology; modernize the agriculture sector; reform and upgrade the technology in SOEs; develop and use appropriate laws, regulations, and policies to support a market economy; narrow regional economic disparities; and ensure equitable distribution of gains from growth. Development Trends and Issues For 19982002 (CSP 20022004)b GDP growth of 8.1% per annum, although accompanied by widening disparities between coastal and interior provinces, rural and urban areas, and within rural and urban populations. Exceptionally good macroeconomic performance in 19972002 cushioned impact of Asian crisis and consequent global slowdown. Ahead of MDG schedules at the national level but local performance variable. Specific challenges: increasing income and regional inequalities, rising urban unemployment, slow growth in rural incomes, weaknesses in the social security system, mounting environmental pressures, and potential macroeconomic instability (stemming from incomplete reforms in the financial system and SOEs). Development Trends and Issues For 20062007 (CSPU 20072008)c GDP projected to grow by about 10.1% in 2006 and to slow to 9% in 2007. Inflation expected to maintain at 1.6% per year due to oversupply in manufacturing and good grain harvests. Trade surplus for 2006 will surpass 2005's record to reach $150 billion. Fiscal deficit forecast to rise to more than 2% of GDP in 2007. Risks and uncertainties from three sources: (i) increasing income inequality, (ii) environmental pollution and low energy efficiency, and (iii) weaknesses in the financial system.

Government Priorities 10th Five-Year Plan (20012005) The 10th Five-Year Plan targets are: foster rapid GDP growth at 7% per annum; reduce unemployment; maintain price stability; and maintain a balance on the external accounts. Key strategic themes include: continue reliance on market-oriented reforms; promote nonstate sector development; accelerate urbanization; continue to transform government functions and build a clean, diligent, and efficient government; protect the environment; improve the quality of life for all, including programs

Government Priorities 11th Five-Year Plan (20062010)c The 11th Five-Year Plan targets are: target growth of 7.5% per annum; reduce energy consumption per unit of GDP by 4% points; keep inflation below 3%; create 9 million new jobs and keep the registered urban unemployment rate below 4.6%;and maintain a sound balance of payments. To achieve these, the Government will: manage growth and rebalance the economic structure; deepen reforms to further open the economy; strengthen social development to build a

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Government Priorities 9th Five-Year Plan (19962000)

Government Priorities 10th Five-Year Plan (20012005) to reduce poverty; develop education, health, scientific, technological, cultural, and other fields; and strengthen the social safety net.

Government Priorities 11th Five-Year Plan (20062010)c harmonious society; place more emphasis on rural development, including increasing farmers incomes and enhance public services in the countryside; eliminate all tuition and fees for compulsory education in rural areas; and streamline local government bureaucracies.

Appendix 4

Country Operational Strategy 1997 ADB Objectives Overall objective is to support Government efforts to complete the reform program and establish a more effective system of macroeconomic management consistent with a market-oriented economic system. Program organized around three strategic pillars: improve economic efficiency; promote economic growth to reduce poverty in inland provinces; and enhance environmental protection and natural resource management. ADB strategy will focus on: strengthening macroeconomic management and the policy, legal, and regulatory framework to support market-oriented reforms. addressing issues and constraints in three key sectors: physical infrastructure (covering energy, transport, water supply, and wastewater); finance and industry; social security; and agriculture/rural development. promoting sound environmental management to ensure sustainability. Framework and Priority Areas To assist Government in achieving macroeconomic stability and increased investment efficiency, ADB policy advice will focus on: improving market-oriented fiscal and monetary policy tools; establishing efficient financial markets; supporting systemic changes in economic management through enterprise reform; strengthening the legal and regulatory framework. ADBs Sectoral Strategies: Physical infrastructure: energy/power, transport, communications, and water supply sectors will continue to account for half to two-thirds of ADB lending per year.

Country Strategy and Program 20042006 ADB Objectives Overall objective is to promote pro-poor economic growth by enabling greater access of the poor to the benefits of economic prosperity and opportunity to achieve it. Program organized around four strategic pillars: promote equitable and inclusive economic growth; make markets work better; foster regional cooperation to integrate the PRC into global economy; and promote environmental sustainability. ADB strategy will focus on: increasing its knowledge transfer and strategic and policy influence rather than financial transfers (while the level of lending must be sufficient for ADB to be a significant development partner, ADBs knowledge-based products must result in greater strategic and policy impacts); designing operations more selectively and concentrating them in sectors where ADB has comparative advantage. Framework and Priority Areas Promote equitable and inclusive economic growth: mix of poverty reduction projects and other development initiatives; minimize infrastructure barriers; support rural development and finance; support social sector development and social security reform; promote pro-poor fiscal reform; and encourage participation of the poor in decisions that affect them. Make markets work better: promote good governance, rule of law, and transparent regulation; develop an enabling environment for the private sector;

Country Operational Strategy 1997 aside from lending, ADB will tap into BOT and BOO schemes, joint ventures, cofinancing, and guarantee facilities to mobilize additional resources, especially from the private sector. strengthen the policy framework to promote the flow of foreign investment into these sectors and further develop domestic capital markets. Environment sector: continue and expand focus on severe urban pollution and environmental degradation, especially water and wastewater and solid waste pollution on the east coast. consider natural resource management if they can service OCR loans. Industry and finance sector: mainly TA and ESW programs on enterprise reforms; institutional strengthening of Peoples Bank of China and smaller banks and nonbank financial institutions; and development of capital markets and domestic mutual funds, pension, and insurance industries. selective lending assistance for energy conservation and pollution abatement, and development of non-state sector, provision of credit lines for relending to subprojects that address ADB crosscutting concerns and strategic objectives. Agriculture and rural development sector: use TA and the ESW program to support policy reforms on enterprise restructuring, establishment of market information systems, and the framework on private sector investment; use loans to assist projects on employment generation, value-added economic activities and natural resource management, and environment protection in rural areas.

Country Strategy and Program 20042006 remove infrastructure constraints to improve business environment; support financial sector reform; support SME development; and expand ADBs private sector operations.

Foster regional cooperation to integrate the PRC into global economy: address policy and institutional barriers on regional cooperation; remove barriers to crossborder trade and investment; encourage private investment that supports regional cooperation; and strengthen regional surveillance and financial infrastructure. Promote environmental sustainability: strengthen the environmental legal, policy, and regulatory framework and institutional reform; encourage clean production technologies and renewable energy; address land degradation, water resource management, water and air pollution, and solid waste management; and promote private sector and civil society participation in the provision of environmental infrastructure and services.

ADB = Asian Development Bank, BOO = build-own-operate, BOT = built-operate-transfer, COS = country operational strategy, CSP = country strategy and program, CSPU = country strategy and program, PRC = Peoples Republic of China, ESW = economic and sector work, FDI = foreign direct investment, GDP = gross domestic product, OCR = ordinary capital resources, SME = small and medium-sized enterprise, SOE = state-owned enterprise, TA = technical assistance, TVE = township and village-based enterprise. Sources: ADB. 1997. Peoples Republic of China: Country Operational Strategy Study. Manila; ADB. 2003. Peoples Republic of China: Country Strategy and Program (20042006). Manila; Abstracted from ADB. 2006. Peoples Republic of China: Country Strategy and Program Update 20072008. Manila (page 1).

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5. The 10th FYP (20012005), supplemented by Party Congress statements, embraced the concept of developing a xiaokang (all-around well-off society) by focusing more than before on improving the living standards. It recognized that the country was faced with a number of new challenges, such as widening income inequality, stresses on the environment, and pressing difficulties with financial sector and enterprise reforms, which were more complex than those faced during the earlier years of reform. The Government established four targets: (i) fostering rapid gross domestic product growth, (ii) reducing unemployment, (iii) ensuring price stability, and (iv) maintaining an external account balance. The main features of the Governments reform program are summarized in Box A4.1 and the key strategic themes are in Table A4.
Box A4.1: Government Agenda for Economic Reform and Social Development in the New Centurya Rural Development. Increasing the Governments emphasis on raising rural incomes (instead of continuing to focus on food self-sufficiency), reducing the tax burden of farmers through fiscal reform, creating off-farm employment opportunities, and allowing farmers to sell their land-use rights to allow for economies of scale in agriculture and to enable their exit from the sector. Urbanization. Accelerating urbanization and coordinating the development of large, medium, and small cities and small towns were identified as ways to address the disappointing performance of the agriculture sector and emerging urban unemployment. Private Sector Promotion. Establishing a level playing field for both domestic and foreign companies and ending policy biases that favor state companies. Legal protection will be provided for income and property, whether derived from labor or from investment. Job Creation and Social Security. Creating more jobs through small- and medium-sized enterprise development, particularly in the services sector. The old age pension, medical insurance, unemployment insurance, and subsistence allowances for urban residents will be improved, and some restrictions on labor mobility will be removed. Central and Western Development. Developing the poor interior regions by restructuring the agriculture and industry sectors in the central region and infrastructure and environmental improvement in the western region. Funds will be provided through budget transfers and tax incentives. Economic cooperation between the eastern and interior provinces will be strengthened. Improving Income Distribution. Reducing inequalities between rural and urban residents, between regions, and among individuals by enlarging the middle-income class and increasing the incomes of the low-income group. Education. Making senior secondary education universal and eliminating illiteracy. The private sector will be encouraged to invest in education. Rule of Law. Ensuring that courts and prosecutors operate independently and impartially according to law, and improving enforcement of judgments. Improving transparency and law enforcement will strengthen anticorruption activities. State-Owned Enterprise Reform. Strengthening state-owned enterprise management systems and selling merging, or closing some state-owned enterprises; reforming monopoly industries, including power, railways, and telecommunications to introduce competition; developing markets for property rights, land, labor, and technology; and separating Government functions from enterprise management. ADB. 2003. Peoples Republic of China Country Strategy and Program (20042006). Manila (page 14). Sources: Statements made during the 10th National Peoples Congress in March 2003.
a

6. The 11th FYP (20062010), while retaining the 10th FYP target of doubling per capita income from 2000 to 2010, also focused even more on social and sustainability issues. The Government shifted its development philosophy from a growth-centered approach to a more people-centered policy1 by achieving five balances between (i) rural and urban development, (ii) interior and coastal development, (iii) economic and social development, (iv) humankind and nature, and (v) domestic and international development.
1

The approach will require a shift from the present growth pattern that encourages capital-intensive industry to one that is less resource-intensive, more knowledge-driven, and shares the benefits across the population.

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7. The first balance seeks to narrow the growing gap between the rural and urban areas. The second balance may be achieved by the adoption of a comprehensive policy to develop the western region, the revitalization of the traditional industrial bases in the northeastern provinces, and the promotion of the mutual development of western and eastern regions. In the third balance, while economic development will remain a core task, further efforts to improve social security (including pension, basic medical care, industrial injuries, and safety nets for migrant farmer workers in cities) would be prioritized. To restore the balance between humankind and nature, the Government seeks to promote an energy-saving and environmentally-friendly society that will make sustainable development possible. Toward this goal, the PRC adopted the target of reducing energy use per unit of gross domestic product by 20% over the next 5 years. Regarding the balance between domestic and overseas demand, the 11th FYP sought to maintain the expansion of domestic demand (both investment and consumption), while further opening up the PRC for the international market (export, import, and foreign direct investment). Table A4 compares the PRC development strategy with that of ADB over the CAPE period. B. Asian Development Banks Country Strategy and Program

8. Pre-CAPE Period. ADB has been a partner in the PRC development program since 1986. In the early phase of ADB operations (19861990), the selection of loan projects and technical assistance (TA) grants was guided by an interim strategy (19871990). During this period, the PRC offered projectsmost of which were concentrated in industry and financeand the interim strategy did not have much impact on ADBs lending operations. The Governments strategy at that time was that external assistance should be used to support industrial development and provide financing for production. Thus, the country program mostly comprised financing for industrial restructuring and credit lines for agriculture and manufacturing industries. 9. The role of the 1991 country operational strategy (COS) on operations from 1991 to 1997 was more significant than that of the interim strategy. The COS provided the basis for a shift in the portfolio in favor of infrastructure. Drawing lessons from the disappointing results from the initial cohort of industrial and financial projects, the COS outlined three broad strategic objectives: (i) improving the efficiency of the economy, (ii) reducing poverty, and (iii) protecting the environment and conserving natural resources. With variations and changing emphasies over time, these three objectives have remained largely intact as ADBs strategic priorities for the PRC, although how they have been addressed has evolved. 10. As of 31 December 1997, ADB had approved 64 loans to the PRC, amounting to about $7.03 billion. Of these, 22 are complete. All the loans were from ADBs ordinary capital resources. ADBs lending has concentrated on physical infrastructure, with the transport and communications sector accounting for 41% of total lending, and the energy sector another 22%. The agriculture, industry, and finance sectors accounted for about 25% of the total, with industry accounting for about 10% and agriculture and finance about 7% each. Social infrastructure and environmentrelated projects accounted for the remaining 12%. 2 By December 1997, ADB had approved 273 TAsboth project preparatory and advisory TAstotaling about $122.9 million and covering a diverse range of topics and sectors. The annual TA program increased from about $3 million to $4 million per year and reached about $20 million in 1997. The sectoral pattern of TA operations differed significantly from that for lending operations. Agriculture and natural resources accounted for 19% of TA operations (compared with 7.4% of loans), while transport and communications accounted for 20% of TAs (41% of loans). TA operations reflected an attempt to contribute to
2

Abstracted from ADB. 1998. Country Assistance Program Evaluation in the Peoples Republic of China. Manila (page 9).

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soft sectors such as human resource development and agriculture where the PRC borrowing from ADB was limited, since the PRC was not eligible for concessional loans. 11. CAPE Period. ADBs strategy during the CAPE period has been shaped by several major government policy initiatives. After initially focusing on the coastal provinces, the PRC launched its Go West strategy in the second half of the 1990s. Renewed attention to the depressed northeast provinces was added a few years later. While the FYPs have consistently recognized efficiency and environmental sustainability as objectives, these did not significantly influence decision making until the latter years of the Ninth FYP and became more influential in the 10th and 11th FYPs when concepts such as promoting a more harmonious and balanced development process were set forth as guiding principles by the senior leadership. More recently, attention has shifted toward moderating the high growth rates experienced during the post-Asian financial crisis years and conserving use of natural resources. This shift in policies is inspired by the sharp rise in commodity and energy prices, growing political awareness of the costs of degrading the PRCs land, water, and air resources, and the social unrest brought on by increasing inequities in incomes and access to social services. This has prompted a major shift in ideology that the current senior leadership is using to differentiate itself from previous regimes. 12. The ADB strategy for the PRC outlined in the 1997 COS reflected the evolution in the Governments policies. The COS continued support for the countrys transition from a centrallyplanned to a market-oriented economy. ADB supported market-based approaches to improve economic efficiency, including the rationalization of legal and regulatory frameworks, adoption of pricing mechanisms, commercialization of services, and financial sector modernization. Whenever possible, ADB also supported the Government in promoting growth in the inland provinces and enhancing environmental protection, recognizing even the adverse impact of market failures arising from rapid growth. During the ensuing period, most economic indicators benefited from the exceptional economic growth in the eastern coastal regions. However, the income distribution between the eastern and interior regions widened as the country made a transition to a market-based economy. Under the country strategy and program (CSP) for 20042006, greater attention was given to spreading the benefits of the countrys economic prosperity to the poor, while sustaining efforts to complete the reform process. The overall strategic objective of the CSP was pro-poor growth with assistance organized under four pillars: (i) promoting equitable and inclusive growth, (ii) making markets work better, (iii) fostering regional cooperation, and (iv) promoting environment sustainability. Under each of these four pillars, the CSP identified a number of strategic priorities. On an annual basis, a rolling 3-year assistance pipeline was prepared and reported on in CSP updates for the period 20052008. 13. The country strategy documents have been developed in line with the priorities in ADBs long-term strategic framework (LTSF) and the corporate strategies (Box A4.2) The LTSF is being implemented through a set of three medium-term strategies (MTSs).3 The first MTS approved in September 2001, covered 20012005. The LTSF defined three core areas of intervention in support of poverty reduction: (i) sustainable economic growth, (ii) inclusive social development, and (iii) governance for effective policies and institutions. Following the adoption of the poverty reduction strategy in 1999, the system of project classification has changed. Projects are no longer classified by their primary and secondary objectives in accordance with the old MTS framework. They are now classified according to their (i) poverty focus under three categories (core poverty intervention, poverty intervention, and other development intervention); and (ii) thematic focus under seven categories (economic growth, environmental protection, good governance, gender and development, human development, private sector development, and
3

ADB. 2001. Medium-Term Strategy (20012005). Manila.

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regional cooperation). MTS I also outlined a series of reforms to align the organization with institutional priorities and to streamline processes with the objective of making ADB a more clientoriented and knowledge-based agency. The Medium-Term Strategy II (20062008), or MTS II, was designed to flesh out the LTSF approach, and it has adopted five strategic priorities: (i) catalyzing investment, (ii) strengthening inclusiveness, (iii) promoting regional cooperation and integration, (iv) managing the environment, and (v) improving governance and preventing corruption.
Box A4.2: Asian Development Bank Corporate Strategies 1. With the establishment of the Strategic Planning Unit in July 1991, the Asian Development Bank (ADB) formally introduced a process of strategic planning. Learning from experience that a good policy environment was a necessary condition for better project implementation, ADB redefined its role so it could become a project financier and a catalyst for policy change and capacity development. It identified three broad functions: (i) banking to mobilize resources (concessional and nonconcessional), (ii) developmental, and (iii) promoting regional cooperation. The development agenda should emphasize that development must look beyond growth to reducing poverty and promoting greater equity; enhancing progress in education, health, nutrition, and population planning; and protecting the environment. In this context, a series of medium-term strategic frameworks (MTSF) identified ADBs strategic thrusts to guide individual strategies for developing member countries (DMCs). These included (i) economic growth, (ii) human development, (iii) poverty reduction, (iv) women in development, and (v) environment protection. To implement the MTSF, four priority areas were identified: policy support; capacity building for development management; strengthening productive capacity, infrastructure, and services; and regional cooperation. However, the MTSF noted that to take full account of DMC diversity, individual country strategies and programming should be placed at the heart of forward planning. At the same time, a stronger link should be forged between country strategies and ADBs development objectives. 2. In 1999, ADB adopted poverty reduction as its overarching goal. The framework for the poverty reduction strategy (PRS), approved in November 1999, was based on three pillars: (i) good governance; (ii) social development; and (iii) pro-poor, sustainable economic growth. Together, these three pillars aimed for socially inclusive development. The PRS included the thematic priorities of environment, gender equity, private sector development (PSD), and regional cooperation. To implement the strategy, the strategy recommended that poverty partnerships should be formed between ADB and DMCs, beginning in 2000 to establish a program of targets for operational activities. At least 40% of its public sector lending was to be devoted to poverty interventions by 2001, with substantial increases in lending for core poverty interventions by 2002. 3. The recently completed review of ADBs PRS recognized that the achievement of socially inclusive growth required that DMCs enhance their capacity for strategy formulation, policy reforms, and implementation of national PRSs. Therefore, it recommended that ADB add capacity development to its crosscutting thematic priorities. The review also recognized that the ADB-wide 40% lending target for poverty intervention was inconsistent with individual country focuses, as it ignored or prejudged individual country assessment of the binding constraints on poverty reduction. For instance, the financial crisis and the change in the political and administrative regimes in Indonesia during the period under review would certainly have been binding constraints. The PRS also narrowly defined the poverty intervention projects as those designed to disproportionately benefit the poor. However, broader, non-targeted interventions geared for economic growth could have led to a potentially larger impact on poverty reduction. The review found that the PRS targets stressed the importance of inputs, prioritizing a sector approach, rather than aiming for development objectives and outcomes. Subsequently, a PSD strategy was formulated in 2000, emphasizing the strengthening of DMCs capacity to create an effective enabling environment for the private sector, and encouraging innovative publicprivate partnerships. 4. The long-term strategic framework (LTSF) 20012015, prepared in March 2001, provided a new vision and mission to ADB for its previously adopted poverty reduction and PSD strategies, as well as other policies, such as governance and international development goals. In line with the PRS, the long-term strategic agenda was divided into three core areas of interventions: (i) sustainable economic growth, (ii) inclusive social development, and (iii) governance for effective policies and institutions. These core areas were to be implemented by promoting the role of PSD, supporting regional cooperation and integration, and addressing environmental sustainability. To implement this strategy, it identified four strategic operating principles: (i) ensuring country leadership and ownership of the development agenda; (ii) taking a long-term approach to development assistance that implies selectivity, long-term targets, and performance benchmarks for measuring development impacts; (iii) enhancing strategic alliances and partnerships, and selecting sectors and areas where ADB plans to maintain a long-term focus with country-based coordination; and (iv) measuring development impacts of operations through indicators for short- to medium-term targets toward achieving long-term development goals.

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5. The first phase of the LTSF was to be achieved through the MTS I (20012005), which strove to make ADB more efficient and responsive to its clients needs. To achieve this, changes were made to identify a more efficient business process and flexible modalities, and to reorganize ADBs organizational structure to provide clear accountability for operations in each DMC. It also emphasized developing knowledge products for better analysis of strategic and operational needs, stressing the importance of being a learning organization and building on experience across DMCs. To improve internal resource management, performance-based allocation of ADB resources was used to assess better the delivery of country strategy and program (CSP). 6. Following the September 2000 Millennium Summit, 191 United Nations member countries, including 42 DMCs, adopted the Millennium Development Goals (MDGs), targets addressing poverty and established indicators for measuring the progress toward these targets. Subsequently, ADB endorsed the MDGs in April 2002. ADB stipulated that its PRS, LTSF, and MTSF would form the basis for achieving the eight MDGs, which are to be measured by 18 different indicators. 7. The main purpose of MTS II (20062008) is to strengthen the poverty reduction impact of ADBs assistance programs in the context of the key challenges facing the region. To achieve this objective, MTS II has adopted five strategic priorities: catalyzing investment, strengthening inclusiveness, promoting regional cooperation and integration, managing the environment, and improving governance and preventing corruption. MTS II discusses how each of these strategic priorities will be pursued by ADB during the next few years. Sources: ADB. 2001. Medium-Term Strategy (20012005). Manila; ADB. 2006. Medium-Term Strategy II 20062008. Manila; and ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and the Pacific: The LongTerm Strategic Framework of the Asian Development Bank (20012015). Manila.

14. The poverty reduction focus in the PRC was established by a poverty reduction partnership agreement between ADB and the PRC in 2003. That agreement reviewed the PRCs major successes in reducing poverty over the previous 2 decades and the policies that were instrumental in this regard. It endorsed the poverty strategy in the PRCs long-term plans and noted that ADB could assist in many aspects. The agreement specifically endorsed the view that projects in sectors such as transport, energy, water management, and the environment could play an effective role in reducing poverty. It recognized that, in the absence of Asian Development Fund resources, appropriately designed and located projects in these sectors combined with pro-poor analytical work would be an appropriate means to support poverty reduction objectives. The focus on spreading benefits was to be achieved through the removal of infrastructure constraints in the poor interior regions, and through reforms of rural finance, fiscal, and social security programs to make them more pro-poor oriented. According to this CSP, the shift to a pro-poor orientation would be mainly carried out by allocating about 84% of the program (averaging $1.5 billion per year) to the poorer interior regions, thus reducing regional disparities (Figure A4.1).
Figure Lending to Eastern Provinces versus Central Figure A4.1:A4.1: Lending to Eastern Provinces versus CentralWestern Provinces, 19982005 and and Western Provinces, 19982005
1,600 Approved Loan Amount ($ Million 1,400 1,200 1,000 800 600 400 200 0 1998 1999 2000 2001 2002 2003 2004 2005

Eastern Provinces

Central and Western Provinces

Source: Asian Development Bank.

Appendix 4

99

15. Prior to 2003, the Government was not willing to use ordinary capital resources loans to fund poverty reduction or non-revenue generating health and education projects because of concerns regarding cost and other obligations. However, during the last CSP, the Government agreed to consider utilizing ADB loans and TA to develop health and education programs. The other objectives of enhancing the business climate to encourage greater private sector investment, strengthening public sector governance, and promoting environmental sustainability, were all maintained under the CSP 20042006. 16. The latest CSP also added the objective of integrating the PRC into the world and regional economies in the context of its accession to the World Trade Organization in late 2001 and its emergence as one of the worlds largest economies. This objective was to be addressed through regional cooperation, especially between the PRC and the Greater Mekong, Central Asia, and Mongolia subregions. This strategy involved the elimination of policy and institutional barriers to regional cooperation, particularly barriers to crossborder trade and investment, in order to stimulate regional economic activity. ADB also supported regional cooperation management, regional cooperation surveillance, and regional financial infrastructure, a role that was welcomed by the Government. More than half of the loans were still programmed for transport infrastructure (Figure A4.2) mainly in the central and western regions.4 This continued focus on infrastructure lending was based on the Governments and ADBs own assessment of its comparative advantage. Comparative advantage means not only performance in terms of project successes, but also what ADB does differently and more effectively than others. The World Bank lending portfolio over a similar period was also concentrated on transport infrastructure and urban and environment projects, thus confirming the impression that development partners loans are driven mainly by the Governments stringent external borrowing policy and loan repayment requirements, rather than by the partners country strategies.

Figure A4.2: Lending Program by Sector, 19982008

1,800 1,600 Approved Loan Amoun (US $ Million) 1,400 1,200 1,000 800 600 400 200 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Water Supply, Sanitation, and Waste Management Transport and Communications Energy Agriculture and Natural Resources

Source: Asian Development Bank.

Less than 66% was programmed for environmental management, while the remaining 16% was for the green side of agriculture and rural development projects, e.g., land degradation, soil and water management, etc.

100

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17. For this reason, nonlending activities have become critical in advancing ADBs goal of promoting inclusive growth. However, the Government has preferred to use partners analytical and advisory assistance in developing planning and operations systems and innovation, rather than in poverty reduction measures, such as designing or financing social security reform. Therefore, the project preparatory TA distribution shows minimal allocation toward economic management and public policy which includes projects directly targeting poverty (Figure A4.3) The latest CSP highlighted ADBs role as a provider of knowledge-based products and services5 as $14 million was allocated to the core nonlending program focus, which includes several advisory TAs targeting inclusive growth.
Figure A4.3: Project Preparatory Technical Assistance by Sector, 19982006
10,000 TA Amount (net, $ thousands) 8,000 6,000 4,000 2,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006

Agriculture and Natural Resources Industry and Trade Multisector Water Supply, Sanitation, and Waste Management

Energy Law, Economic Management, and Public Policy Transport and Communications

TA = technical assistance. Source: Asian Development Bank.

Despite this limitation, the CSP managed to cite plans for policy studies intended to help relieve the financial burden faced by disadvantaged groups with regard to compulsory education and agricultural taxation and improve their access to safe drinking water and health services, as part of its 20042006 nonlending program.

Appendix 5

101

LENDING AND NONLENDING OPERATIONS (19982005)

CAPE Date Sector Approved AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG AG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG FI FI FI FI FI FI 09/16/98 12/15/98 12/22/98 03/18/99 04/22/99 04/22/99 04/22/99 05/25/00 09/05/00 11/20/00 12/11/00 12/19/00 05/25/01 06/05/01 08/28/01 08/28/01 12/19/01 06/26/02 09/20/02 10/22/02 11/04/02 12/19/02 04/14/04 04/28/04 06/28/04 09/30/04 10/07/04 11/25/04 12/23/04 03/14/05 08/30/05 09/28/05 12/19/05 11/25/98 11/27/98 11/27/98 12/07/99 12/26/99 11/16/00 12/20/00 06/19/01 12/20/01 03/11/02 09/24/02 10/18/02 05/21/03 12/05/03 12/19/03 09/13/04 10/20/04 11/05/04 11/25/04 12/20/04 12/20/04 11/02/05 12/02/05 06/04/98 06/24/98 11/20/98 12/23/98 12/28/98 11/23/99 ADB Sector AGR AGR AGR AGR MUL MUL MUL AGR AGR AGR AGR AGR AGR AGR AGR AGR AGR AGR AGR MUL AGR AGR AGR MUL AGR AGR AGR AGR AGR AGR AGR AGR AGR EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY EGY MUL EGY FIN FIN FIN FIN FIN FIN Amount ($ million) 0.10 0.30 0.66 0.02 110.00 110.00 110.00 0.15 0.10 0.80 2.10 64.30 1.15 0.61 150.00 0.97 0.10 0.60 150.00 33.12 0.60 1.00 0.50 80.00 1.00 0.90 0.38 0.50 0.40 15.00 0.15 0.05 0.55 0.75 100.00 0.79 102.00 0.70 0.80 58.00 0.85 100.00 0.78 0.50 144.00 0.50 35.00 0.60 0.40 0.50 0.50 70.00 117.40 0.50 0.30 0.60 1.80 0.15 0.83 0.15 2.40 0.70

Type TA TA TA TA LN LN LN TA TA TA TA LN TA TA LN TA TA TA LN LN TA TA TA LN TA TA TA TA TA LN TA TA TA TA LN TA LN TA TA LN TA LN TA TA LN TA LN TA TA TA TA LN LN TA TA TA TA TA TA TA TA TA

No. 3069 3123 3139 3172 1685 1686 1687 3446 3497 3548 3588 1814 3657 3663 1835 3708 3821 3891 1919 1924 3963 4061 4327 2082 4358 4401 4404 4447 4553 2157 4641 4327 4741 3100 1644 3105 1715 3369 3547 1818 3673 1901 3840 3931 1922 4117 2032 4309 4389 4416 4402 2112 2146 4511 4680 4706 3026 3032 3098 3143 3148 3302

Project Name Soil and Water Conservation in the Upper Yangtze River Basin Provincial Legislation on Environmental Protection and Natural Resources Conservation Policies and Strategies for Sustainable Development of the Lancang River Basin Bank Participation in Kunming Horticultural Exposition Northeast Flood Damage Rehabilitation: Inner Mongolia Autonomous Region Northeast Flood Damage Rehabilitation: Heilongjiang Province Northeast Flood Damage Rehabilitation: Jilin Province Study of Funding Options for Agricultural Research in the People's Republic of China GEF Partnership on Land Degradation in Dryland Ecosystems Preparing National Strategies for Soil and Water Conservation Transjurisdiction Environment Management (TA cluster) West Henan Agricultural Development PRC-GEF on Land Degradation in Dryland Ecosystems Optimizing Initiatives to Combat Desertification in Gansu Province Yellow River Flood Management (Sector) Strategic Planning Study for the Preparation of the Yellow River Law Nature Reserve Management Plan in Guangxi Zhuang Autonomous Region Study of Control and Management of Rural Nonpoint Source Pollution Songhua River Flood Management Sector Efficient Utilization of Agricultural Wastes Study of Carrying Capacity of Water Resources Songhua River Water Quality and Pollution Control Management Flood Management Strategy Study Fujian Soil Conservation and Rural Development II Capacity Building to Combat Land Degradation Rural Income and Sustainable Development Implementation of the National Strategy for Soil and Water Conservation Evaluation of Environment Policy and Investment for Water Pollution Control in the Huai River Basin and the Taihu Lake Basin Support for Environmental Legislation Sanjiang Plain Wetlands Protection Country Environmental Analysis Flood Management Strategy Study (Supplementary) Institutional Development of SEPA's Regional Supervision Centers Institutional Strengthening of the China Huaneng Group Yunnan Dachaoshan Power Transmission Institutional Reform of Yunnan Electric Power Group Corporation Shanxi Environment Improvement Rural Electricity Supply Study Interregional Power Transmission Network Development Strategy Wind Power Development Pro-Poor Urban Heating Tariff Reforms Shen-Da Power Transmission and Grid Rehabilitation Opportunities for the Clean Development Mechanism in the Energy Sector Establishing the National Electricity Regulatory Commission Hebei Zhanghewan Pumped Storage Power Pricing Strategy: Tariff Setting and Regulation Gansu Clean Energy Development Renewable Energy for Poverty Reduction Waste Coal Utilization Study Capacity Strengthening of Power Planning Process Heating Supply for Urban Poor in Liaoning Province Liaoning Environmental Improvement Coal Mine Methane Development Energy Development Strategy for the Inner Mongolia Autonomous Region Alternative Livelihood Options to Facilitate Coal Sector Restructuring Energy Conservation and Resource Management Strengthening Risk Management of the Agriculture Bank of China Legislation Drafting Support for PRC Securities Law Strengthening the Banking Supervision and Liquidity Risk Management International Symposium on Microfinance and Urban Unemployment in PRC Pension Reform Capacity Building for the Insurance Sector Regulatory and Supervision

Appendix 5

102
ADB Sector FIN FIN IND FIN IND LW FIN FIN FIN IND FIN FIN FIN FIN FIN FIN FIN FIN FIN LW LW IND LW LW LW LW LW LW LW LW LW LW LW LW IND LW LW LW LW LW LW LW MUL LW LW LW LW LW MUL LW LW LW LW LW LW LW PS Amount ($ million) 0.80 1.00 0.75 0.60 0.70 0.60 0.15 1.00 0.80 0.15 0.70 0.50 0.40 0.40 0.55 1.00 1.00 0.70 0.30 0.63 0.15 0.57 0.04 0.70 0.70 0.60 1.40 0.81 0.90 0.78 0.57 0.90 0.60 0.58 0.70 1.00 0.55 0.50 0.40 0.60 0.88 0.40 0.15 0.45 0.35 0.36 0.45 0.50 0.25 0.30 0.60 0.40 0.55 0.50 0.05 1.00 50.00

CAPE Date Sector Approved FI FI FI FI FI FI FI FI FI FI FI FI FI FI FI FI FI FI FI LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW LW PS-Eg 11/24/99 11/24/99 08/30/00 10/30/00 11/10/00 11/14/00 12/21/00 10/02/01 06/25/02 09/24/02 10/21/03 10/27/03 12/08/03 06/18/04 06/18/04 11/09/04 07/19/05 12/09/05 12/16/05 03/23/98 04/01/98 05/20/98 11/25/98 11/26/98 12/22/98 09/08/99 10/19/99 11/08/99 12/27/99 05/18/00 06/14/00 07/14/00 09/26/00 02/20/01 06/14/01 12/14/01 12/18/01 09/25/02 11/04/02 11/04/02 11/08/02 11/08/02 04/11/03 06/10/03 12/04/03 12/19/03 07/26/04 09/29/04 12/14/04 12/16/04 12/23/04 04/21/05 06/28/05 08/19/05 10/26/05 12/12/05 02/26/98

Type TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA LN

No. 3303 3304 3493 3527 3534 3543 3607 3733 3890 3930 4201 4206 4240 4349 4350 4430 4618 4725 4746 3000 3003 3019 3101 3103 3138 3253 3279 3290 3375 3441 3457 3468 3503 3631 3672 3799 3806 3933 3971 3970 3979 3980 4095 4125 4237 4298 4365 4399 4477 4486 4529 4581 4604 4634 4604 4727 7144/161

Project Name Institutional Strengthening of the Cinda Asset Management Company Capacity Building of the Capital Markets' Regulatory System Development of a Small and Medium-Sized Enterprise Credit System Institutional Strengthening of China Development Bank Development of Financing Policies and Mechanisms for Small and MediumSized Enterprises Private Sector Development Policy Support for Social Security Reform under Tenth Five-Year Plan Policy and Institutional Support for the Social Security Reform Pilot Program Banking Laws and Regulations Development of Small and Medium Enterprise Alternative Financing Policy and Institutional Support for Social Insurance Administration Advisory Support for the National Council for the Social Security Fund Foreign Bank Rating and Risk Management System Strengthening of the Statistical System of the China Banking Regulatory Commission Development of Small and Medium-Sized Enterprise Credit Guarantee Companies Rural Finance Reforms and Development of Microfinance Institutions Development of Asset-Backed Securities Market and Restructuring of Asset Management Companies National Fund for Development of Credit Guarantees for Private Enterprises Bank of China Ltd. for Improving Corporate Governance Strengthening of the Legal Information System Country Assistance Program Evaluation Policies and Regulatory Framework for the Construction Industry Capacity Building in Loan Administration and Accounting Procedures Strengthening the Government Auditing System Regulatory Framework for the Engagement of Consultants Strengthening Public Infrastructure Investment Policy Development of Economic Laws Capacity Building in Ministerial Status Responsibilities in the State Environmental Protection Administration Project Performance Management Capacity Building Capacity Building for Social Assessments Implementation of the Tendering and Bidding Law and Related Regulations Policy Support for PRC 2020 Project (Phase III) Establishing an Enterprise Sample Survey System Formulation of Government Procurement Law WTO Membership and Foreign Trade Law Reform Western Region Human Resource Development Study of Foreign Capital Utilization for Western Region Improving Corporate Governance and Financial Performance of State-Owned Enterprises Enforcement of WTO Rules by the Judicial System Hebei Provincial Development Strategy Fiscal Management Reforms Strengthening Public Debt Management Policy Reform Support Improving Services Sector Statistics Support to the Review and Planning for Development of the Legal and Judicial System Capacity Strengthening of the PRC's National Development Planning Process Technical Assistance Facility for Policy Reform Agricultural Taxation Reform Exploring New Areas of Operation Formulation of the Regulation for Selection and Engagement of Consultants for Government-Financed Projects Competition Policy and Laws Developing a Results-Based National Monitoring and Evaluation System for Key Projects Nanjing Water Utility Long-Term Capital Finance in Commercial Markets Support for the Preparation of the 11th Five-Year Plan Nanjing Water Utility Long-Term Capital Finance in Commercial Markets (Supplementary) Provincial Development Strategy of Selected Provinces in Northwestern Region Power company

Appendix 5

103

CAPE Date Sector Approved PS-W PS-F PS-W PS-Ev PS-F PS-F PS-F PS-F PS-F PS-W SO SO SO SO SO SO SO SO SO SO SO SO SO SO SO SO SO SO SO SO SO TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR TR 02/11/99 10/06/00 07/02/02 10/29/02 03/19/04 08/31/04 11/26/04 08/11/05 10/04/05 12/20/05 12/31/98 12/27/99 12/21/00 05/16/01 09/05/01 10/30/02 11/20/02 05/22/03 07/14/03 08/12/03 10/21/03 11/20/03 12/19/03 12/19/03 05/28/04 07/22/04 12/01/04 02/15/05 04/20/05 09/21/05 11/23/05 06/18/98 08/18/98 10/13/98 11/10/98 11/27/98 11/27/98 06/24/99 09/30/99 12/14/99 08/17/00 11/21/00 11/21/00 12/12/00 08/30/01 10/30/01 10/30/01 08/12/02 09/20/02 12/12/02 09/11/03 10/28/03 11/27/03 12/15/03 12/15/03 03/26/04 04/02/04 06/24/04 09/09/04 10/21/04 12/02/04 12/02/04 12/13/04 09/21/05 09/22/05

Type LN LN LN LN LN LN LN LN LN LN TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA TA LN LN LN LN LN LN LN LN TA LN LN LN TA LN LN LN TA LN LN LN LN LN LN TA TA TA TA LN LN LN TA LN TA LN

ADB Sector PS PS PS PS PS PS PS PS PS PS LW LW LW LW EDU EDU HNS HNS HNS LW LW LW AGR AGR HNS EDU LW EGY MUL EGY MUL TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN TRN

No. 7152/166 7159 7175/190 7179 7196 7200 7204 7216/217 7219 7255 3150 3377 3610 3150 3713 3958 3992 4118 4142 4158 4200 4222 4307 4308 4342 4363 4454 4566 4580 4649 4694 1617 1626 3086 1638 1641 1642 1691 1701 3341 1748 1783 1784 3569 1838 1850 1851 3900 1918 1967 2004 2014 2024 2051 4255 4322 4325 4351 2089 2094 2116 4455 2125 4650 2181

Amount ($ million) 26.50 25.00 35.00 10.00 45.00 10.00 45.00 20.72 75.00 20.00 0.72 0.41 0.15 0.27 0.60 0.50 0.50 2.00 0.80 0.40 0.15 0.40 0.40 0.40 0.50 0.30 0.50 1.00 0.50 0.30 180.00 140.00 1.19 250.00 170.00 220.00 250.00 250.00 0.60 300.00 120.00 200.00 0.56 250.00 200.00 150.00 0.25 300.00 124.00 250.00 250.00 270.00 500.00 0.15 1.00 0.40 0.50 312.50 200.00 180.00 0.15 300.00 0.15 600.00

Project Name Water company Investment company for SME projects Water development and investment company (cancelled) Investment company for environment projects Investment company for state-owned enterprises with nonperforming loans Credit guarantee company serving SMEs Fund for capital markets Bank serving SMEs Bank Water company Study on Ways to Support Rural Poverty Reduction Projects Urban Poverty Study Preparing a Methodology for Development Planning in Poverty Blocks under the New Poverty Strategy of PRC Study on Ways to Support Rural Poverty Reduction Projects (Supplementary) Strengthening the Accountancy Profession Improving Basic Education in Underdeveloped Areas through Information and Communication Technology Strengthening National Public Nutrition Planning Combating Severe Acute Respiratory Syndrome in the Western Region Preventing HIV/AIDS on Road Projects in Yunnan Province Participatory Poverty Reduction Planning for Small Minorities A Fund for Strategic Policy Conference and Studies for Poverty Reduction Policy on the Poverty Reduction Program of the People's Republic of China Trends, Challenges, and Future Directions Poverty Reduction in Key Forestry Conservation Programs Poverty Reduction in Grassland Improvement Program National Food Safety Regulatory and Strategic Framework Support for Reforms in Compulsory Education Financing Developing a Poverty Monitoring System at the Country Level Poverty Reduction in Coal Mine Areas in Shanxi Province Nongovernment Organization-Government Partnerships in Village-Level Poverty Alleviation Alternative Energy Supply for Rural Poor in Remote Areas Urban Poverty Strategy Study II Hebei Roads Development Guizhou-Shuibai Railway Regional Road Sector Study Chengdu-Nanchong Expressway Changchun-Harbin Expressway: Hashuang Expressway Changchun-Harbin Expressway: Changyu Expressway Southern Yunnan Road Development Shanxi Road Development Capacity Building in Traffic Safety, Planning and Management Hefei-Xi'an Railway Chongqing-Guizhou Roads Development (Leichong Expressway) Chongqing-Guizhou Roads Development (Chongzun Expressway) Jiangsu Highway Build-Operate-Transfer Project Shaanxi Roads Development Ganzhou-Longyan Railway Guangxi Roads Development Socioeconomic Assessment of Road Projects Southern Sichuan Roads Development Shanxi Road Development II Ningxia Roads Development Western Yunnan Roads Development Xi'an Urban Transport Yichang-Wanzhou Railway Ensuring Safeguard Practices Poverty Impact of Area-Wide Road Networks WTO-Policy Reform Support to the Ministry of Railways Policy Reform in Road Transport Hunan Roads Development II Guangxi Roads Development II Dali-Lijiang Railway Support to Ethnic Minorities Development Plan Gansu Roads Development Evaluating Poverty Impacts of Transport Projects Central Sichuan Roads Development

Appendix 5

104
ADB Sector Amount ($ million)

CAPE Date Sector Approved

Type

No.

Project Name

TR 09/22/05 LN TRN 2182 400.00 Zhengzhou-Xi'an Railway TR 10/21/05 TA TRN 4671 0.25 Rural Road Development Strategy TR 11/24/05 TA TRN 4698 0.63 Road Safety Improvement TR 11/28/05 TA TRN 4701 0.40 Railway Passenger and Freight Policy Reform Study TR 12/08/05 TA TRN 4724 0.50 Application of Public-Private Partherships in Urban Rail-Based Transportation TR 12/15/05 LN TRN 2219 208.00 Hunan Roads Development II UR 09/29/98 TA IND 3079 3.50 Promotion of Clean Technology UR 09/30/98 LN WSS 1636 102.00 Fuzhou Water Supply and Wastewater Treatment UR 11/10/98 TA WSS 3095 0.57 Hai River Basin Wastewater Management and Pollution Control UR 11/11/98 TA LW 3096 0.15 Urban Policy Workshop UR 06/29/99 LN WSS 1692 300.00 Suzhou Creek Rehabilitation UR 06/29/99 TA WSS 3211 0.84 Improving Environmental Management in Suzhou Creek UR 09/03/99 TA WSS 3250 0.95 Water Tariff Study II UR 12/07/99 TA EGY 3325 0.70 Shanxi Air Quality Improvement UR 05/25/00 TA WSS 3447 0.60 Strengthening Urban Solid Waste Management UR 10/25/00 TA LW 3521 0.15 Assessment of Small and Medium Cities Urban Infrastructure Development UR 12/11/00 LN MUL 1797 130.00 Tianjin Wastewater Treatment and Water Resources UR 10/25/01 TA WSS 3749 0.70 National Guidelines for Urban Wastewater Tariffs and Management Study UR 12/19/01 LN MUL 1890 147.00 Acid Rain Control and Environmental Improvement UR 12/19/02 LN WSS 1985 82.36 Hebei Province Wastewater Management UR 03/11/03 LN WSS 1995 100.00 Harbin Water Supply UR 04/25/03 LN WSS 1996 83.00 Wuhan Wastewater Management UR 11/12/03 TA WSS 4215 0.40 Safe Drinking Water and Sanitation for the Rural Poor UR 05/06/04 TA LW 4335 0.75 Town-Based Urbanization Strategy Study UR 07/18/05 LN WSS 2175 100.00 Jilin Water Supply and Sewerage Development UR 07/29/05 LN WSS 2176 55.80 Fuzhou Environmental Improvement UR 11/28/05 TA MUL 4702 0.50 Study on Sustainable Urbanization in Metropolitan Regions UR 12/09/05 LN WSS 2207 100.00 Henan Wastewater Management and Water Supply Sector ADB = Asian Development Bank; AG = rural development and natural resources; AGR = agriculture and natural resources; CAPE= country assistance program evaluation; PRC = People's Republic of China; ED/EDU = education; EG/EGY = energy; GEF = Global Environment Facility; HNS = health, nutrition, and social protection; FI/FIN = finance; IND = industry and trade; LN = loan; LW = law, economic management, and public policy; MUL = multisector; PS-Eg = private sector-energy; PS-Ev = private sector-environment; PS-F = private sectorfinance; PS-W = private sector-water and sanitation; SME = small- and medium-sized enterprise; SO = social sectors; TA = technical assistance; TR/TRN = transport and communications; UR = urban; WSS = water supply, sanitation, and waste management; WTO = World T d O CAPE sector category denotes how the CAPE classified the operation based on the major sectors covered and also shows in what i ti Note: appendix it may be discussed. ADB sector denotes the sector classification currently used in ADB. Names of private sector operations Source: Asian Development Bank.

Appendix 6

105

ASIAN DEVELOPMENT BANKS CONTRIBUTION TO ANTICORRUPTION AND GOVERNANCE-RELATED WORK A. Corruption Perceptions and Anticorruption Measures

1. The corruption problem in the Peoples Republic of China (PRC) emanates largely from the transition from a centrally planned economy to a market-oriented one, which had created incentives and opportunities for personal gain through corrupt practices due to unintended loopholes in the legal and institutional frameworks. The Organisation for Economic Co-operation and Development (OECD)1 reported an increase in the PRC corruption levels toward the end of the 1980s up to the beginning of the 1990s, especially in the coastal areas, which is consistent with the countrys reform process. 2. Table A6.1 presents the corruption perceptions index for the PRC, which indicates the degree to which businessmen and analysts perceive public officials to be corrupt, as surveyed by Transparency International (TI).2 During the country assistance program evaluation (CAPE) period, the PRC had consistently scored less than 4 out of a clean score of 10, suggesting a serious image of corruption in the country. However, while the PRC does score lower than other middle-income countries, its ranking near the median3 meant that only about seven other Asian countries4 are perceived to be less corrupt than the PRC. Table A6.1: Corruption Perceptions Index for the Peoples Republic of China
Corruption Perceptions Index Scorea Surveys Used Country Rank No. of Countries 1998 3.5 10 52 85 1999 3.4 11 59 99 2000 3.1 11 63 90 2001 3.5 10 58 91 2002 3.5 11 59 102 2003 3.4 13 66 133 2004 3.4 16 71 146 2005 3.2 14 78 159 2006 3.3 9 70 163 a The nearer to 0, the higher the degree of perceived corruption. Thus, 0 is highly corrupt and 10 is highly clean. Source: Transparency International website. Year

3. The Millennium Challenge Corporation also ranked 113 countries according to 16 policy indicators that measure a countrys capacity to rule justly,5 invest in human development, and encourage economic freedom in order to determine their eligibility for bilateral aid from the United States. In 2005, while the PRC ranked very low for those governance indicators involving individual rights, it scored above the median in terms of government effectiveness, rule of law and control of corruption, 6 thus displaying better public governance than other big Asian Development Bank (ADB) borrowers like Bangladesh, Indonesia, Pakistan, and Viet Nam.

1 2

OECD. 2005. Governance in China. Paris. TI also maintains a Global Corruption Barometer to survey businessmens opinions about which sectors are the most corrupt, which spheres of life are most affected, whether corruption has changed, and whether it is likely to be prevalent in the future. Unfortunately, such data was missing for the PRC. TI gives a separate ranking for Hong Kong, China; Macau, China; and Taipei,China. Thus, the PRCs improved ranking of 70 out of 163 countries, in 2006 did not incorporate Hong Kong, Chinas 15th slot, Macau, Chinas 26th slot, and Taipei,Chinas 34th place. Of these seven Asian countries in 2006, three are ADB developing member countries: Bhutan, Malaysia, and Thailand. The six governance indicators involve political rights, civil liberties, control of corruption, government effectiveness, rule of law, and voice and accountability. The PRC is presently categorized under Millennium Challenge Corporation-prohibited countries because it is subject to a United States sanction.

106

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4. Nonetheless, the rapid transition period, the business sectors desire to quickly get things done, and the creeping materialism had bred varied forms of corruption. A 2001 study7 estimated that economic losses from corruption in the PRC during the transition period ranged from 13% to 17% of gross domestic product (GDP), half of which comes from tax fraud. A 2002 study by the same author8 sought to document claims by different government agencies made in various publications about their own economic losses from corruption. The findings revealed that losses from bad loans in the financial industry alone account for 5% of the GDP, while those associated with arbitrary charges or embezzled capital for key public expenditures like food supplies, oil, other monopolistic industries, and schools approximate 2.5% of GDP. Past efforts to curb corrupt practices may not have been very effective, as evidenced by relatively low conviction rates9 and continued massive outflow of illegally-gained assets.10 5. In recognition of such costs that undermine reform and development, social justice, and Party capability, the Government had taken more concrete measures to weed out corruption following a two-pronged approach: (i) Punishment, by strengthening the investigation and deterrent aspects of (a) criminal law, with very harsh penalties for bribery, graft, or embezzlement that exceed even the standard in OECD countries; (b) administrative regulations on ethical conduct, embezzlement, income disclosure, and gifts, violations of which will entail warnings, demerits, demotion, dismissal from office, and reduction or loss of pension; and (c) disciplinary codes and sanctions against Party members, which range from warnings, removal from Party posts, or probation within and expulsion from the Party. (ii) Prevention, which was given equal priority beginning the mid-1990s by (a) reviewing the risks areas that are prone to corruption,11 particularly by closing loopholes in public procurement and contract management, simplifying procedures on administrative licensing, etc.; (b) encouraging ethical conduct, by promoting professionalism in human resources management and piloting specific measures for promoting integrity in selected cities; and (c) making corruption more difficult to commit and easier to discover, by separating the collection and spending of public funds, beefing up oversight and internal audit institutions, and using new technologies to improve accessibility to public information. 6. The impact of the punishment track in terms of recent detection and prosecution is clearcut. For example, the number of people being investigated by the Supreme Peoples Procuratorate rose by 71% from 2004 to 2005. In 2005, 73% of the 41,449 employees it investigated for corruption and dereliction of duty were brought to court. While majority of this number comprised local government officials and executives of state-owned enterprises, such measures still led to the prosecution of senior officials12 and even some procurators and judges
7

Hu, Angang, 2001. China: Fighting Against Corruption, Zhejiang Peoples Press (Chinese version). The other types of corruption considered were rent-seeking, corruption related to the underground economy, and corruption involving government investments and public expenditures. 8 Hu Angang. 2002. Public Exposure of Economic Losses Resulting from Corruption, Institute of World Economics and Politics Chinese Academy of Social Sciences. 9 The same 2001 Hu study estimated that only 1020% of corruption cases are eventually solved, and only 7% of Party officials received criminal punishment. 10 According to the International Monetary Fund estimates, some $24 billion of illegally acquired assets are laundered every year. Between $9 to 59 billion were supposedly brought out of the PRC in recent years. Figures were quoted from China Daily (9 July 2004, 15 June 2004, and 20 August 2004). 11 Commercial bribery was found to be widespread in construction, land use, transaction of property rights, distribution of medicine, government procurement, and development of land resources. Source: Top officials pledge intensified fight against corruption 3 March 2006 news article, website of the Embassy of the Peoples Republic of China in the United States of America. 12 Like a former party chief in Shanghai and a former Beijing Vice Mayor. Earlier investigations had involved the former head of the PRCs drug administration, a former minister of Land and Resources, a former secretary of the Guizhou Provincial Committee, and former governor of Hubei. Note, however, that disciplinary action for a Party member is enforced by the Central Commission for Discipline Inspection of the Communist Party of China.

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themselves. In the lead up to the National Peoples Congress in March 2007, President Hu Jintao made pronouncements highlighting the need to further step up anticorruption efforts by stemming graft at its source and continuing to build a clean government. 7. However, challenges remain. The rapid reform of the legal and regulatory framework had led to inconsistency or loopholes that make interpretation and enforceability difficult. In addition, the integrity of the system depends to a large deal on government stability, which is tested every time a corruption case involves higher Party members. There was also an apparent reluctance to penalize private businesses who bribe government officials for fear of hindering private sector development, which is evident from the harsher policy toward the receiver of the bribe rather than the giver. 13 Since it is also the worlds fourth largest exporter, there is increased pressure for the PRC to adopt the provisions of the OECD Anti-Bribery Convention that will confirm its intent to play by the rules. It sent a delegation for the first time to the January 2007 OECD Working Group on Bribery to present its strategy, efforts, and instruments for fighting commercial bribery. B. ADB Assistance in Governance Reforms

8. The PRCs rapid economic growth has led to (and resulted from) major policy reforms and reforms of the legal system. Key reforms to the legal system include14 (i) a constitutional amendment to include the rule of law as a guiding principle; (ii) the adoption of economic laws affecting foreign enterprises; (iii) adoption of laws and regulations to reform the banking system and to establish capital markets; (iv) preparation of legislation to create a social security system, protect the environment, and fight against corruption; (v) restoration, development, and reform of the judicial system; and (vi) development of an independent legal profession with legal education and training systems. These reforms have required drafting new legislation and regulations; building new institutions; and training millions of new regulators, judges, and lawyers. In addition, rapid economic growth has generated a demand for policy reform in all areas of activity. 9. ADB has supported the Government in addressing public sector governance issues, in addition to its support to the financial sector. While there was no specific reference to the governance sector in the CAPE 1 15 or specific lessons identified, it did refer to fiscal policy reform and private sector development as part of an evaluation of advisory technical assistance (ADTA). It noted that ADB had responded to government requests for support in fiscal policy reform through a series of ADTAs. These had covered fiscal relations between the center and the provinces; policy and regulatory framework and financial management of the social security system; the policy regulatory and institutional framework for foreign direct investment in the power sector; and the legal and regulatory framework for highway financing. A general lesson was that TA resources can be very effective instruments to bring about capacity building and policy reforms. Succeeding country strategy and programs and country strategy and program updates have addressed ADBs strategy toward the governance sector in different ways (Table A6.2), but all are fairly consistent.

13

TI developed such an indicator of the supply side of corruption. Its bribe payers index is based on a survey of business executives asking about the propensity of private sector companies from exporting countries to pay bribes abroad. PRCs bribe payers index ranked second to the worst in terms of rampant bribery, among 21 countries. 14 ADB. 2004. ADB-PRC Partnership in Law and Policy Reform. Manila. 15 ADB. 1998. Country Assistance Program Evaluation in the Peoples Republic of China. Manila.

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Table A6.2: ADB Country Strategy toward Governance

CSPU 20022004
No explicit strategic reference to governance other than ADB is conducting a study on governance issues entitled Sound Development Management to be a completed in 2001.

CSPU 20032005
The proposed TA program in 20032005 reflected the findings of the SDMS (footnote a), to date the most comprehensive treatment of development management issues in the PRC. The program built on previous and ongoing ADB activities to help strengthen the legal, policy, fiscal, and regulatory environment to accommodate greater decentralization and the emerging role of the private sector and market reforms. Future collaborative efforts will promote corporate governance through improved capacity for financial market supervision, a stronger legal and judicial system, and NGO partnerships for poverty reduction.

CSP 20042006 and CSPU 20052007

ADB will strengthen and enhance the public administrative, financial, legal, and regulatory systems needed in a market economy. It will help to improve public accountability and anticorruption efforts. ADB will continue to help the PRC build its enabling environment for private sector development, and particularly for SMEs. ADB will help to improve public service delivery through developing the capacity of utilities, improving local governance so it can administer services to the public more effectively. ADB will encourage the use of NGOs in service delivery and improve access to information for such services. ADBs operations in governance will help improve the institutional basis for improved public administration and financial management in central and western provinces.

ADB = Asian Development Bank, CSP = country strategy and program, CSPU = country strategy and program update, PRC = Peoples Republic of China, NGO = nongovernment organization, SDMS = Sound Development Management Study, SME = small- and medium-sized enterprise, TA = technical assistance. a SDMS, eventually published in 2003 as ADB. 2002. Development ManagementProgress and Challenges in PRC. Manila. Source: Compiled from the PRC country strategy and program documents.

10. The publication of Development Management Progress and Challenges16 in 2002 was a major milestone. This laid out a detailed framework for ADBs future governance work in the PRC, including (i) continue to help draft procedures on making and applying rules, strengthen public financial management institutes, particularly at the subnational level, draft economic laws, and strengthen the regulatory framework for a market economy; (ii) continue to help revise laws and regulations that are in conflict with the World Trade Organization (WTO) and ensure policy recommendations and structural reforms in ADBs loans are consistent with WTO rules; (iii) support the development of the legal aid system, especially in the central and western regions and the development of legal advice, counseling, and alternative dispute resolution mechanisms; (iv) further support accounting and audit systems to regulate the accounting profession and raise accounting and auditing standards; (v) reduce impediments to the development of the private sector through work on the reform of economic laws, the regulatory system, and promoting fair competition; (vi) support judicial reform; (vii) support fiscal reform; (viii) design appropriate incentive systems for the implementation of sound corporate governance structures; and (ix) improve the statistical system. 11. ADBs overall strategy toward governance is set out in the Medium-Term Strategy II 2006 2008 (MTS II). It sets out improving governance as a key part of the overall strategy and states that MTS II proposes that ADBs governance interventions give priority to public sector management, including procurement, public expenditure management, as well as the legal and regulatory framework and capacity development in sectors or subsectors where ADB is active.17 Elsewhere, MTS II states that law and the judiciary, public finance, and economic management are classified as group II sectors, defined as sectors that are not selected as core operational sectors. Building ADBs expertise or capacity in group II sectors is not a priority. The latter is somewhat unclear.
16 17

ADB. 2002. Development Management Progress and Challenges. Manila. ADB. 2006. Medium-Term Strategy II 20062008. Manila (page 15).

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Thus, in terms of guiding a country strategy with regard to the governance sector, MTS II provided mixed signals by giving a high priority to governance reforms but highlighting ADBs lack of comparative advantage there. Nevertheless, ADBs past focus on governance in the PRC has been influential in developing suitable policies and laws as is summarized below. C. ADB Program 12. ADB has had substantial involvement in governance-related work in the PRC since 1998. Some 36 ADTAs have been made for work on law and economic management, including 21 in the legal sector. The CAPE team reviewed all TAs in the governance sector from 1998 to 2005, but focused on the examination and evaluation of six ADTAs in some depth through a review of documents and a program of interviews with executing agencies when these were available, project officers, and consultants. It also drew on an Operations Evaluation Department report18 covering five other governance-related ADTAs on procurement, audit, and performance evaluation. 13. Procurement. The legal and regulatory framework governing public procurement in the PRC has been developed since the late 1970s. In 1980, the State Council issued a regulation proposing competitive bidding. Over the next 2 decades, a number of ministries issued similar regulations on public procurement leading to the promulgation of the Tendering and Bidding Law (TBL) in 1999 and the Government Procurement Law (GPL) in 2002. 14. Issues related to the legal and regulatory framework and application of rules were addressed in a World Bank operational procurement review (OPR) 19 in 2002 with ADB participation. The OPR included a review of the GPL, which was then in its final draft stage, and raised some concerns with the legal framework. 20 To address these concerns, the OPR proposed the consolidation of the TBL and the GPL. However, convention dictates that laws passed in new areas for the first time should be refined only after, say 5 years, to allow more experience to be gained. This has constrained the tightening of the legal framework on procurement. 15. Regarding the application of rules, the OPR identified a small number of main issues that constitute intractable barriers to good procurement, including weak planning, unrealistic cost estimates, poor technical specifications, incomplete design studies, suboptimal packaging, and inadequate management capacity. All these barriers need not be intractable and can be addressed through intensive capacity development programs. Since the OPR, an increasing amount of public procurement has been carried out in the more than 1,000 procurement and contracting trading centers across the country21 under the overall supervision of the Ministry of Construction. Daily supervision of the integrity of administrative regulations is conducted by the Ministry of Supervision staff. The Beijing Municipality center has been designed and administered to ensure a high degree of process transparency, security, and predictability. The
18

ADB. 2006. Technical Assistance Performance Evaluation Report for Selected TA Projects in Public Administration in the Peoples Republic of China. Manila. 19 World Bank. 2003. China Operational Procurement Review. Beijing (pages 8692). ADB was part of the review team. 20 The main concerns were (i) although the GPL is cross-referenced to the TBL, the more competitive procedures in the TBL do not appear to apply to fiscal funds, which use the GPL; (ii) foreign companies are excluded except when no domestic bidder qualifies; (iii) competitive negotiations are proposed where a two-envelope system would better achieve the objective intended by the competitive negotiations; (iv) consultant selection procedures are not included; (v) provisions dealing with central procurement agencies acting on behalf of purchasing agencies are confusing; (vi) a very complex shopping procedure is outlined, carried out by an evaluation committee, when checking price references on the internet would be simpler and more effective; (vii) no well-established principles govern government contracts, and it is unclear if these contracts should follow commercial contract law; and (viii) no implementing procedures had been drafted. 21 These centers are locally referred to as tangible markets and are based on the Beijing Municipality Construction Procurement and Contracting Trading Center established in 1997 to manage bidding and tendering for publicly funded construction in the municipality. A national association of trading centers meets annually, and regional associations meet regularly to exchange experiences and technology providing an existing institutional structure and network for capacity development activities.

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next step would be for technical specialists to review the suitability for alignment of multilateral development banks systems with the PRC system, taking into consideration the degree to which legal, regulatory, and implementation issues raised in the OPR have been addressed in practice. ADB, as trusted advisor on legal, judicial, and policy reform, should provide such assistance, possibly in a cluster TA to achieve sustainability. 16. The Operations Evaluation Department review of ADTAs (footnote 18) for procurement points out that, while legal and regulatory frameworks and associated rules prescribing administrative practices need to be transparent and to outline clear accountabilities, it is in the daily practice of procuring works, goods, and services that corruption occurs. Therefore, addressing corrupt practice requires practical support to strengthen the capacity and coordination between agencies with supervising mandatesdaily on site, and periodically through evaluation and audit. Efforts to strengthen anticorruption capacity should build on existing systems and procedures. In this regard, the role of the Ministry of Supervision is critical as its staff monitors the integrity of government officials in implementing the laws, regulations, and rules on-site every day. Other important agencies include the National Development and Reform Commissions (NDRCs) Key Projects Inspectorate Office (KPIO), which monitors procurement on-site and conducts periodic evaluations; and the China National Audit Office (CNAO), which conducts financial, compliance, and performance audits of all government agencies. 17. Audit. A resolution to establish an audit system was made by the National Planning Commission in 1982. In 1983, the CNAO was established, followed by provincial, municipal, and country audit institutions reporting to the CNAO and their respective local governments. The Audit Law adopted in 1994 tasked the CNAO to promote good governance in the government system. The regulations to implement the Audit Law were promulgated in 1997. The 10th FiveYear Plan emphasized the importance of an auditing system penetrating all aspects of financial management to improve transparency, including a website providing access to audit reports. 18. The objectives of the ADTA on the government auditing system22 approved in 1998 were to help the CNAO to (i) formulate auditing standards and procedures for the government and its enterprises, and (ii) design and implement an auditing training program. The performance evaluation report (footnote 18) rates this TA as highly successful and reports that, subsequent to the TA, CNAO introduced internal systems for accountability, quality review, and reward. CNAO continues to use and update the training manual developed under the TA. In 2003, there was a so-called audit storm when the CNAO audit findings led to a number of high-profile corruption-related court cases. In 2002, 50 financial reports from 39 ADB-financed projects were audited by CNAO. It found no cases of misuse of ADB funds, although it identified some issues relating to the use of counterpart funds. Subsequently, ADB supported a review of the financial management system pertaining to ADB-financed projects. The review found, among other things, that (i) the current audit reports for ADB-financed projects were using the format agreed between Ministry of Finance (MOF), CNAO, and the World Bank; (ii) there is a need to standardize the formats of the financial statements in the audit reports; and (iii) that as part of its efforts to increase transparency, CNAO has adopted an audit finding announcement system. 19. Evaluation. Several ADB ADTAs have supported evaluation capacity building in the PRC since 1994. The first TA23 supported evaluation capacity and introduced the concept of evaluation. It was rated generally successful. The second, 24 approved in 1995, shared the lessons of successful project implementation performance with less experienced agencies, particularly in the interior provinces where ADB operations were expected to grow. This TA was also rated generally successful. In 1996, a follow-up TA that focused on enhancing the appraisal
22

ADB. 1998. Technical Assistance to the Peoples Republic of China for Strengthening the Government Auditing System. Manila (TA 3103-PRC, for $700,000, approved on 26 November). 23 ADB. 1994. Technical Assistance to the Peoples Republic of China for Developing the Performance Evaluation Capability of the Peoples Bank of China. Manila (TA 2133-PRC, for $100,000, approved on 9 August). 24 ADB. 1995. Technical Assistance to the Peoples Republic of China for the Study of Project Planning and Management. Manila (TA 2462-PRC, for $225,000, approved on 8 December).

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and evaluation aspects of financial intermediation by the State Development Bank of China was rated partly successful due to lack of executing agency ownership and poor consultant performance monitoring by ADB. In 1997, the first 25 of the three ADTAs to the KPIO was approved, with the objective of harmonizing the evaluation system, methodology, practices, and capacities of agencies including CNAO, China International Engineering Consulting Corporation, and the State Development Bank. The TA also aimed to develop an appropriate plan of action for building a long-term evaluation capacity. This TA was rated generally successful. Two subsequent TAs for KPIO capacity building were also approved. One26 was rated highly successful by the performance evaluation report and the other27 is ongoing. D. Assessment of ADBs Governance-Related Technical Assistance 1. Relevance

20. Overall, the relevance of ADTAs reviewed by the CAPE team was high. All executing agencies reported that all evaluated ADTAs were important for the Government, and the CAPE team considered that the TA designs met requirements to a medium degree or better. Some of the TAs built on previous TA work; for example, the TA concerned with consultant selection28 built in some part on the experience gained during the implementation of a number of previous TAs (Appendix 5).29 Ownership is an important prerequisite for the success of TAs and is influenced by the degree of executing agency involvement at all stages of the process, including identification, design, procurement, and management. Executing agencies reported that they generally felt they had good ownership of the projects, largely because they found them very relevant. All the ADTAs were described by executing agencies as having been identified jointly with ADB and all reported that the executing agency senior management indicated what was required in the TA. This high level of ownership by executing agencies was largely endorsed by consultants and project officers. 21. In one instance,30 reports reviewing the key issues surrounding development of the legal system were drafted by each of the key agencies involved in reform,31 supported by recognized international experts. These experts also summarized the findings of the review and planning exercise and assessed the development of the legal and judicial system. The preliminary findings from each of these studies were presented at a workshop. Interviews with each of the agencies confirmed that they had all thought very highly of this TA. In particular, they felt very strong ownership of their reports (as they had drafted them) and welcomed the workshop as a forum to discuss their ideas. 22. Overall, ADTA design was reported to be satisfactory by most executing agencies. However, several commented that designs tended to be fairly inflexible, leading to some problems during implementation. This was particularly so when there were not enough resources to make consultants available for a long enough period, particularly when a short extension after report completion would have improved dissemination of findings. A few executing agencies felt that ADTA designs gave too much emphasis to the writing of reports
25

ADB. 1997. Technical Assistance to the Peoples Republic of China for the Strengthening of Evaluation Capacity. Manila (TA 2821-PRC, for $400,000, approved on 4 July). 26 ADB. 1999. Technical Assistance to the Peoples Republic of China for Project Performance Management Capacity Building. Manila (TA 3375-PRC, for $900,000, approved on 27 December). 27 ADB. 2005. Technical Assistance to the Peoples Republic of China for Developing a Result-Based National Monitoring and Evaluation System for Key Projects. Manila (TA 4581-PRC, for $400,000, approved on 21 April). 28 ADB. 2004. Technical Assistance to the Peoples Republic of China for Formulation of the Regulation for Selection and Engagement of Consultants for Government-Financed Projects. Manila (TA 4486-PRC, for $300,000, approved on 16 December). 29 Including ADB. 1997. Technical Assistance to the Peoples Republic of China for the Establishment of National Procurement Regulations for the Public Sector. Manila (TA 2845); ADB. 2000. Technical Assistance to the Peoples Republic of China for Technical Assistance to the Peoples Republic of China for the Implementation of the Tendering and Bidding Law and Related Regulations. Manila (TA 3457); and ADB. 2001. Technical Assistance to the Peoples Republic of China for the Formulation of Government Procurement Law. Manila (TA 3631). 30 ADB. 2003. Technical Assistance to the Peoples Republic of China for Support to the Review and Planning for Development of the Legal and Judicial System. Manila (TA 4237-PRC, for $350,000, approved on 4 December). 31 Legislative Affairs Commission, Office of Legislative Affairs, Supreme Peoples Court.

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rather than covering all the areas of activity needed for capacity building support. Typically, designs referred to the production of inception, midterm, and final reports. Although these provided useful payment milestones for consultants and TA monitoring information, some executing agencies felt that the designs should have focused more on skills transfer. 2. Effectiveness 23. These legal TAs were assessed as effective. While the executing agencies were satisfied with the outputs and potential outcomes, some project officers gave a lower assessment of their effectiveness. This may have been because of the difficulties that some project officers encountered with consultants during implementation. All the TAs that were reviewed achieved most of the specified outputs and outcomes. These projects can be divided into three groups: (i) legal sector reform, (ii) policy advice, and (iii) public administration. 24. Legal TA. Overall, legal sector-related TAs have been effective. A total of 28 TAs have been carried out in this sector since 1994 and 21 of these were approved after 1998. The TAs have focused on32 (i) development of a legal system suitable for a market economy, (ii) legal adjustments for integration into the global economy, (iii) transparency of legal information, (iv) banking laws and regulations, (v) development of capital markets, (vi) promotion of smalland medium-sized enterprises, (vii) environmental protection and natural resources management, and (viii) strengthening the legal framework for procurement. 25. In general, this wide-ranging program of assistance has been well received by the Government. Several recent TAs have sought to involve all the key agencies involved in legal reform, and these have been particularly welcomed. Examples include a TA on planning for development of the legal and judicial system (footnote 30) that closely involved the Legislative Affairs Commission, the Office of Legislative Affairs, and the Supreme Peoples Court, and a TA on competition policy and laws33 that involved the Office of Legislative Affairs, the Ministry of Commerce, and the State Administration for Industry and Commerce (which is part of the MOF). In both cases, their close involvement resulted in outcomes being achieved and in the case of the TA on competition policy and laws, the resulting competition legislation is in the process of being approved by government. 26. Policy Advice. A small-scale TA on policy reform support34 was approved in 2003 to provide a quick response mechanism that allows ADB to react quickly to support policy reform initiatives at a time when government is ready to deal with the issue. The success of this TA led to the approval of a larger cluster TA on policy reform.35 Using a set of criteria identified in the original cluster TA document, components are proposed by MOF (the executing agency) and then agreed by the PRC Resident Mission (PRCM). This cluster TA has financed 10 different policy components. However, the executing agency commented that, although the assistance was useful, the time taken to approve proposals was too long and the basis on which ADB agreed to fund components was unclear. According to the executing agency, the program has been effective overall, although the performance on individual components has been variable. 27. Public Administration. In the field of public administration, a recent evaluation report36 concluded that the level of [ADBs] design ambition has a significant impact on the effectiveness of a TA. A TA approved in 1997 had a stated outcome of formulating national procurement regulations (footnote 29) with achievements measured by the PRC adoption of WTO acceptance of the regulations. At approval, it had been assumed unrealistically that the TBL would have
32 33

Drawn from ADB and the PRC Partnership in Law and Policy Reform (footnote 14). ADB. 2004. Competition Policy and Laws. Manila. (TA 4529-PRC, for $ 600,000, approved on 23 December). 34 ADB. 2003. Technical Assistance to the Peoples Republic of China for Policy Reform Support. Manila (TA 4095PRC, for $450,000, approved on 26 July). 35 ADB. 2004. Technical Assistance to the Peoples Republic of China for the Facility for Policy Reform. Manila (TA 4365-PRC, for $150,000, approved on 11 April). 36 See footnote 18. TA projects covered were TA 3103: Strengthening the Government Audit System; TA 3457: Implementation of the Tendering and Bidding Law and Related Regulations; TA 3631: Formulation of Government Procurement Law; TA 3375 Project Performance Management Capacity.

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become law by the time the TA commenced. It had not, so the State Council was unable to issue instructions for regulation preparation until the law was promulgated. This delayed the issuing of instructions until 2005. In the interim period, NDRC issued administrative rules. 28. Despite these issues, a further follow-up TA (footnote 29) was approved in 2000, prior to the completion of the previous TA on procurement regulations. This assumed both that the regulations would have been issued by the time the TA began and that the Department of Public Procurement would have been established. This was not the case and the assistance was, therefore, ineffective. It was not possible to establish a department to administer regulations that had not been issued because the legislation had not been promulgated. This chain of events highlights a lack of flexibility and willingness to change either content or delivery timeframes for TAs. This could have been avoided if a single program of support had been devised at the outset with clear milestones being achieved before subsequent stages were implemented. 29. A more successful example is a TA on improving corporate governance and the financial performance of state-owned enterprises.37 This TA successfully developed a rating system for corporate governance whose principles have been accepted by MOF, together with clear approaches to the transfer oversight to a companys Board of Directors. However, the TA did not have sufficient resources to complete a detailed framework for the design of supporting software for the implementation of the new system. 30. Performance of Consultants. The performance of consultants was generally good. All executing agencies rated consultants understanding of their needs and their ability to communicate as satisfactory or above. In one instance, the executing agency regarded the consultants as not having satisfactorily communicated best practice. The executing agency had been particularly keen that the consultants should share their international experience, but this had not been the case. Other than this instance, the major issue raised by executing agencies was not the overall quality of consultants but their own role in the selection process, particularly for national consultants. Some executing agencies felt that they knew of good national consultants who did not appear on ADB shortlists. Any such inclusion on shortlists would need to ensure that candidates were subject to the same selection procedures as others and that their selection was transparent. 31. In two cases, executing agencies felt that if they had been more involved in the consultant selection procedure better consultants could have been selected. Areas needing more future attention included a lack of cultural fit, insufficient country and technical knowledge, and arrogance. The remaining executing agencies all believed that their needs had been well understood. All responding executing agencies stated that the work of consultants enhanced the good name of ADB, and all executing agencies believed that consultants were helping them to do the work through sharing best practice and knowledge rather than doing the work for them. 32. Performance Measurement. Few monitoring indicators were specified in the original documents for most ADTAs. Performance measurement centers on overall outcomes and the completion of specified outputs and reports rather than any attempt to measure the longer-term effects and impact of the TA. For example, a TA may specify an outcome as the revision of policy in a particular area. However, the issue is not whether the policy was revised, but whether the proposed changes were implemented and what their effects were. There is little evidence that such monitoring information was collected by ADB during implementation or after. This is a serious deficiency, since without such information it is impossible to establish whether TA outcomes have achieved desired results or to manage TAs to achieve intended results. Furthermore, such information forms a valuable source of knowledge to assist in the design and implementation of future TAs and ensures that past experience is fully brought to bear on new programs.

37

ADB. 2002. Technical Assistance to the Peoples Republic of China for Improving Corporate Governance and Financial Performance of State-Owned Enterprises. Manila (TA 3933-PRC, for $500,000, approved on 25 September).

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33. Corruption allegations relating to ADBs own operations in the PRC during the CAPE period were not many.38 Between 1998 and 2007, there were disproportionately less cases filed with ADBs Integrity Division involving the PRC (accounting for only 6% of total cases) than Indonesia and the Philippines, relative to their respective shares of the loan portfolio. The predominant type of the PRC case dealt with corruption39 (ranging from 30% to 49%), and were often associated with improper actions made by bidders under loans (60%; such as submission of false certification or bank guarantees or falsely audited financial report) or TAs (23%; like misrepresentation of proposed experts or arrangement to turn over part of a consultants salary to the executing agency). Of these cases, only 12% resulted in disciplinary action such as sanctions for outside parties or termination of erring ADB staff,40 a record that is slightly lower than the 16% ADB average. This suggests that the direct impact of alleged PRC corruption on actual ADB operations may not be very significant. 3. Efficiency 34. Measured against how well resources were used in achieving desired ADTA outcomes, overall efficiency was assessed as successful. However, executing agencies and consultants raised concerns about inefficiencies in the processes for ADTA implementation, notably over consultant selection and financial procedures and the lack of flexibility during implementation. Some of the legal TAs resulted in large workshops (with more than 100 participants), which were funded by executing agencies on a reimbursable basis. Because of misunderstandings about ADB procedures and the eligibility of certain expenses, there were delays in reimbursements. 35. Although executing agencies were generally very satisfied with the quality of consultants recruited by ADB, only two said they were satisfied with the process of choosing consultants. The rest were concerned about their lack of involvement in consultant selection and the length of time taken to complete the process. They identified a need to be involved at all stages of the process from the initial screening of candidates to possible interviews with those short-listed or at least with the preferred candidate. They reported that this would have provided an opportunity for the consultants to feel that they were working for the executing agency and not just for ADB. It would, therefore, have fostered an early and strong working relationship. A further possibility could have been for executing agency approval to be sought on consultant outputs before payment was made. 36. All executing agencies expressed satisfaction with TA supervision. The supervision of legal TAs by the PRCM received particular praise in terms of technical competence and understanding of executing agency requirements. All executing agencies also expressed a strong preference for ADB supervision to be carried out from the PRCM as this ensured a timely response to inquiries. However, one executing agency felt that, even though supervision was intended to be provided from the PRCM, many issues were still referred back to Manila for clarification and this frequently delayed TA implementation. 37. All executing agencies rated ADBs responsiveness and flexibility as either satisfactory or very satisfactory. Although not seen as a major problem, the time taken by ADB Headquarters to respond to critical issues was reported by executing agencies as sometimes being too long. In the case of the umbrella TA facility (footnote 35), which had been redesigned to provide a rapid response to policy questions raised through MOF, there were some implementation difficulties. First, ADB procedures still required full consultant contracts for each smaller TA within the umbrella and the workload for a project officers is the same whether the contract is for $50,000 or $500,000. As the arrangements could not be altered for smaller contracts, additional resources could have been made available to manage the extra workload. Second, the workload at the
38 39

Based on information provided by the Office of the Auditor General Integrity Division (OAGI) as of February 2007. As separate from misrepresentation, fraud, abuse of position, embezzlement, conflict of interest, bribery or kickbacks, ADBs 2006 annual report, para. 16 says OAGI further categorizes corrupt practices as bribery and extortion, theft and embezzlement, collusive practices, kickbacks and others (implying that corruption is the general term). 40 Some 15% were closed for being outside OAGIs mandate while 25% of the cases were not credible, verifiable, nor material.

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PRCM is significant. A log frame for each smaller TA within the umbrella had to be produced and then approved by the country director. This could be simplified for the smaller TAs under the umbrella TA facility. Third, it is difficult for the PRCM to track expenditure, when some components may originate from ADB Headquarters and the resulting financial information is not shared with the PRCM. Fourth, the program is critically dependent on the presence of experienced project officers in the PRCM. Fifth, the demand for work under the facility is high and this has led to a large number of proposals that have to be reviewed. This has caused delays with the average decision time being about 3 months. For all assistance under this umbrella TA facility, it will remain important that responsible project officers are based at the PRCM. 4. Sustainability

38. All executing agencies, project officers, and consultants thought that changes would be sustainable. However, their sustainability will ultimately be measured by the level of adoption of the policy, regulatory, and legislative changes proposed. In this respect, although recommendations may have been accepted by the respective executing agency, much remains in the hands of the state institutions, such as the NDRC, MOF, and the National Peoples Congress, who are ultimately responsible for the implementation of change. An example is the ADTA on regulations governing selection and engagement of consultants for government-financed projects (footnote 28). This TA updated guidelines and drafted regulations. It has also produced training manuals for use once the regulations are approved. The difficulty is that the regulations have not yet been approved. The lead agency is occupied with many pressing matters and it is unlikely that it will address this issue in the short term. Once approval has been given, it is likely that further TA will be sought to assist in the training of relevant staff. However, if approval is delayed significantly, it is also likely that the proposed regulations will not be able to keep up with the pace of change and will require redrafting before they become acceptable. 39. All executing agencies reported that the TA provided by ADB had given ADB considerable influence over the future direction of key governance areas. This was especially true for those projects in the legal sector, where one executing agency commented that ADB has had more influence over this legal area with this small TA than the World Bank and European Union (EU) have had with their considerably greater financial resources. Following on from the success of TA in the legal reform sector, the PRCM is currently reviewing the possibility of TA loans for further support to the economic and legal reform sectors. Although discussions are at an early stage, this appears a promising possibility for building on past success in a financially viable way. E. Key Issues and Recommendations (from Governance Related Technical Assistance) 40. In terms of governance, ADB needs to exploit its position as a trusted advisor in the legal, judicial, and policy reform sectors by seeking to carry out such assistance on a financially sustainable basis. Assistance for public administration reform has been less consistent and has been affected by government attention being diverted toward pressing economic reforms. The possibility of TA in the legal sector being partly loan financed needs to be developed in view of the high demand for ADB support. It is less likely that public administration support could be funded in this way and such support will, therefore, will have to compete for available TA funds according to the priorities to be laid down in the forthcoming country partnership strategy. The success of many interventions in the governance sector has been partly due to the involvement of ADB staff who are respected by government, have long exposure to the sector in the PRC, and are now at the PRCM. 41. The study has shown that several ADTAs have successfully influenced government policy and have undoubtedly raised the profile of ADB in key institutions (Table A6.3). All TAs evaluated as part of this study were rated as at least satisfactory. The possibility of a TA loan fund for future governance-related work would appear to offer strong benefits to both ADB and the PRC. However, ADB should build on its past strengths and continue supporting governance TAs, even if the proposal for TA loans does not ultimately proceed.

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Table A6.3: SWOT Analysis of ADB Support to the Governance Sector

Strengths 1. Program addresses high government priorities 2. Mostly strong PRC ownership 3. Good relationship between TA program and overall strategy 4. Innovative policy reform TA enables somewhat quicker response to client demand 5. Highly respected PRCM staff 6. Leading experts used as consultants 7. Reasonable knowledge management in terms of collection, analysis, reuse and learning from experience 1. 2. 3. 4. 5. 6. 7. 8. Weaknesses Cumbersome TA approval process Lack of flexibility with regard to resources and timing Focus on written products rather than implementation assistance Reliance on a few highly experienced project officers No road map MTS II is somewhat unclear about the importance of governance Few experienced and well qualified senior EA staff Future program constrained by the size of the Resident Mission Threats ADB may become known for too broad an approach to TA Potential changes in the Government agenda that negates plans and delays implementation

Opportunities 1. ADB could use role as trusted advisor to further 1. influence governance development 2. ADB could provide sectoral support, based on 2. identified needs and road maps 3. ADB could build on past sector support, e.g. policy reform and legal reform TA projects 4. ADB staff governance expertise could be more closely matched with country sector requirements, including at the Resident Mission 5. Cofinanced TA loans could be used to increase ownership and gain income ADB = Asian Development Bank; PRC = Peoples Republic of China; EA = executing agency; MTS = medium-term strategy; PRCM = PRC Resident Mission; SWOT = strengths, weaknesses, opportunities, and threats; TA = technical assistance. Source: Country assistance program evaluation team.

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REGIONAL COOPERATION AND THE PEOPLES REPUBLIC OF CHINA A. Introduction

1. The Asian Development Bank (ADB) support for regional cooperation stems from its Charter, which mandates ADB to promote economic growth and cooperation in the Asia and Pacific region by financing development of developing member countries (DMCs), giving priority to those regional, subregional as well as national projects and programmes which will contribute most effectively to the harmonious growth of the region as a whole 1 In 1994, ADB adopted a regional cooperation policy2 that articulated ADBs approach to promoting regional cooperation. ADB policy and strategy documents, including the long-term strategic framework, 20012015, have recognized the importance of regional cooperation in addressing poverty reduction in the region. 2. Since 1994, significant changes affecting ADB support for regional cooperation have taken place. The regional cooperation policy was reviewed, and a regional cooperation and integration strategy (RCIS) 3 was formulated in 2006. It acknowledges the need to adopt a more coherent and strategic approach to regional cooperation and integration (RCI) support in the region. Past experience has shown that RCI initiatives can considerably strengthen poverty reduction efforts if they are properly designed and managed. It also provides a coherent strategy for ADB lending and nonlending support across regions and subregions. ADBs RCIS has four pillars: (i) regional and subregional economic cooperation programs on crossborder infrastructure and related policies and procedures, (ii) trade and investment cooperation and integration, (iii) monetary and financial cooperation and integration, and (iv) cooperation in regional public goods. These pillars are mutually reinforcing, but prioritization of the four pillars and the selection of priorities within each pillar has to be in line with ADBs Medium-Term Strategy II 20062008 (MTS II) and takes into account the specific conditions prevailing in each region or subregion. 3. ADB has supported various regional and subregional economic cooperation programs since the early 1990s. However, its support for regional cooperation has been fragmented and uncoordinated. 4 To address this, a regional cooperation strategy and program (RCSP) was developed to guide operations in each subregion. The essential objective of the RCSP is to incorporate regional priorities into the operational pipeline and to complement country strategy and programming. The first Greater Mekong Subregion (GMS) and Central Asia Regional Economic Cooperation (CAREC) RCSPs were drafted in 2004, and these involve the Peoples Republic of China (PRC) through some of its provinces. B. ADB Regional Cooperation Activities involving the PRC

4. The PRC is an active player in three ADB subregional programs: (i) the GMS Program, (ii) the CAREC Program, and (iii) the recent PRC-Mongolia Subregional Cooperation. The South Asia Subregional Economic Cooperation (SASEC) program has four countries bordering the PRC. Possibilities for regional cooperation between the PRC and South Asia are currently being explored.5
1 2 3 4 5

ADB. 1966. Agreement Establishing the Asian Development Bank. Manila (Chapter 1, Article I and Article II [ii]). ADB. 1994. Bank Support for Regional Cooperation. Manila. ADB. 2006. Regional Cooperation and Integration Strategy. Manila. Ibid. The SASEC RCSP 20062008 indicated the possibility of connecting India with the PRC via Nepal to increase trade and investment among the three countries. Similarly, India has also signed a series of agreements with the PRC to end boundary disputes, improve economic ties, and increase bilateral trade. It is also positioning its northeastern states as a gateway to East and Southeast Asia. The Bhutan and Nepal country strategy and programs also cited the possibility of ADB assistance to enhance border-trade connections with the PRC.

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5. Greater Mekong Subregion. The PRC is a member of the GMS through Yunnan province, which shares borders with the Lao Peoples Democratic Republic, Myanmar, and Viet Nam and with Guangxi Zhuang Autonomous Region, which is contiguous to Viet Nam. It has demonstrated strong commitment to regional economic cooperation by pursuing activities not only in its territory but also in other GMS countries. As of September 2006, the PRC had been involved in seven (out of 26) GMS projects that have received assistance from ADB (Table A7.1) and had participated in 96 (out of 125) regional technical assistance (RETA) projects. ADBs lending operations include projects that will enhance connectivity with neighboring GMS countries. These include projects in Yunnan and Guangxi that form important sections of the North-South Economic Corridor and a railway project to promote tourism. Table A7.1: ADB Loans to the PRC Promoting Regional Cooperation in the GMS
Loan Amount Year of Project Name Status No. Approval ($ million) 1325 Yunnan Expressway Project 150 1994 Completed. 1427 Fangcheng Port Project 52 1996 Completed. 1691 Southern Yunnan Road Development Project 250 1999 Completed. 1851 Guangxi Roads Development Project 150 2001 Expected completion Oct 2007. 2014 Western Yunnan Roads Development Project 250 2003 Expected completion Sep 2007. 2094 Guangxi Roads Development II Project 200 2004 Expected completion Dec 2008. 2116 Yunnan Dali-Lijiang Railway Project 180 2004 Expected completion Jun 2010. ADB = Asian Development Bank, PRC = Peoples Republic of China, GMS = Greater Mekong Subregion. Source: Asian Development Bank database.

6. Meanwhile, the PRC has taken a proactive role in GMS projects and initiatives supported by ADB RETA projects, including the GMS Cross Border Transport Agreement, the Development of Strategic Framework for Action on Trade Facilitation and Investment, the GMS Business Forum, Developing the Energy Sector Strategy, Strategic Environmental Framework, Core Environment Program, and Biodiversity Conservation Corridor Initiative, among others. Unlike loans (which were concentrated in the transport sector), GMS RETA projects involving the PRC mostly funded activities under the agriculture and natural resources sector (29%); energy sector (20%); and law, economic management, and public policy (15%)see Table A7.2. Table A7.2: GMS RETA Projects Involving the PRC by Sector
($ million) Activity Total % Share Agriculture and Natural Resources 4.50 29.3 Energy 3.00 19.6 Health, Nutrition, and Social Protection 1.60 10.4 Industry and Trade 1.88 12.2 Law, Economic Management, and Public Policy 2.30 15.0 Multisector 0.70 4.6 Transport and Communications 1.37 8.9 Total 15.34 100.0 PRC = Peoples Republic of China, GMS = Greater Mekong Subregion, RETA = regional technical assistance. Source: Asian Development Bank database.

7. A study6 on the closer integration of Guangxi into the GMS was prepared in November 2005 by ADB in close consultation with the Government of the PRC and the Guangxi provincial government. The study identified a number of high-priority projects in Guangxi that would promote closer cooperation between Guangxi and other GMS countries, including potential
6

Butiong, Ronaldo Antonio and Zhang Chuntai. 2005. Study for the Closer Integration of Guangxi into the GMS. Manila.

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projects in use of seaports, participation in regional power grid interconnection, development of economic corridors, health, joint tourism promotion, private sector development, and integrated border area development. 8. CAREC. The PRCs involvement in CAREC7 started with the participation of the Xinjiang Uygur Autonomous Region, which is the most western territory of the PRC and geographically contiguous to three Central Asian republics (CARs): Kazakhstan, Kyrgyz Republic, and Tajikistan. The collapse of the Soviet Union in 1991 and the subsequent emergence of independent CARs posed challenges and opportunities for regional cooperation. Compared to the GMS, the CAREC program is still in the early stages of regional cooperation, but it has made progress in identifying and mobilizing support for regional projects and expanding policy dialogue with the goal of (i) securing access to larger markets, (ii) reducing transaction costs and facilitating transit and transport across the region, (iii) ensuring energy efficiency and sufficiency in the region, and (iv) preventing negative regional outcomes. 9. ADB is the lead agency in coordinating transport sector activities under CAREC. A regional transport sector road map was endorsed in April 20058 with the goal of developing an integrated and efficient transport system. With regard to the PRC, ADB has provided assistance for the improvement of important sections of the Asian highway network and other Silk Road routes. A $150 million loan project is also being prepared for upgrading the Korla-Kuqa road in Xinjiang. 10. Drawing on its GMS experience, ADB assisted in the preparation of a regional transport agreement9 to reduce nonphysical barriers to trade. Other ADB-supported measures for trade facilitation include ADBs comprehensive customs modernization and cooperation initiative launched in 2003, aimed at strengthening customs organizations and improving governance through cooperation; and ADBs support for bilateral trade and data sharing agreements, and pilot-testing of joint border agreements. 11. In the area of trade, a trade policy coordinating committee was created following a recommendation at the senior officials meeting in April 2004, with support from the International Monetary Fund. Papers on the barriers to trade in Central Asia, regional trade agreements and World Trade Organization accession, and potential comparative advantage in trade for Central Asia were presented by ADB and International Monetary Fund at the second trade policy coordinating committee meeting. Based on a number of policy studies, recommendations were made to reduce barriers to transit trade in the region, and a monitoring and reporting system was set up for the implementation of recommendations by CAREC countries. 12. The PRC is the second biggest consumer of energy next to the United States. Energy security is, therefore, one of its interests in regional cooperation with the energy-rich CARs. It has entered into several bilateral agreements on energy with neighboring CARs. While trading in energy has not yet taken off between the PRC and the CARs under the CAREC program, ADB has provided several ADTAs to promote regional cooperation and trade in the energy sector (Table A7.3).
7

The European Bank for Reconstruction and Development, the Islamic Development Bank, the International Monetary Fund, the World Bank, and the United Nations Development Programme are also involved in CAREC. In the future, the Shanghai Cooperation Organization and the Central Asia Cooperation Organization are expected to coordinate with CAREC. The CAREC Regional Transport Sector Road Map was endorsed by CAREC member country representatives during the senior officials meeting on 2627 April 2005 at ADB Headquarters. ADB. 2004. Technical Assistance for Formulating and Implementing an Intergovernmental Agreement of the Shanghai Cooperation Organization Member States on Facilitation of International Road Transport. Manila (TA 6223-REG, for $500,000, approved on 23 December).

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Table A7.3: ADB Technical Assistance Promoting Regional Cooperation in the Energy Sector in CAREC Countries
TA No. 5663 Project Name Kyrgyz Republic and Xinjiang Uygur Autonomous Region: Preparing the Regional Power Transmission 5960 Modernization Project in the Central Asian Republics 900 2000 May 2003 6023 Regional Gas Transmission Project in the Central Asian Republics 900 2002 March 2006 3956 Hydropower Development Strategy (Tajikistan) 600 2002 April 2006 6163 Improved Management of Shared Water Resources in Central Asia 700 2003 December 2007 4596 Preparing the Power Rehabilitation Phase II Project (Tajikistan) 500 2005 October 2006 6267 Establishment of the Central Asia Regional Economic Cooperation 743 2006 March 2007 Members Electricity Regulators Forum (plus supplementary) ADB = Asian Development Bank, CAREC = Central Asia Regional Economic Cooperation, TA = technical assistance. Source: Asian Development Bank database. Amount ($000) 360 Year of Approval 1995 Estimated Closing May 2000

C.

Relevance

13. The PRCs Regional Cooperation Strategy Alignment with PRC and ADB Strategies. The PRCs 10th Five-Year Plan (FYP) and the succeeding 11th FYP highlighted its open policy, balanced regional development, and environmental sustainability as crucial ingredients of its overall development agenda. Regional cooperation has played a key role in opening the PRCs economy and will continue to play an important role as the PRC emerges as a major global trading partner and manufacturer. As early as the 1970s, the country sought to secure a regional and global environment for itself and to foster good relations with countries that could aid in its economic development. The PRC has looked beyond its borders to promote expansion of trade, including the improvement of mechanisms and policies to promote the crossborder flow of factors of production. At present, the PRC is a member of seven regional cooperation groups.10 14. Regional cooperation is seen as essential to the countrys efforts to balance regional disparities by promoting the trade and investment prospects of its less-developed border provinces with neighboring countries. The PRCs Go west policy seeks to correct disparities in economic development between the eastern coastal regions and the relatively undeveloped and inland western provinces. By enhancing connectivity, fostering enabling policies and building institutional capacity favorable to crossborder trade and investment, regional cooperation can help boost growth and prosperity in the western provinces by improving economic competitiveness and providing economies of scale. The best examples are Xinjiang in the western region, Yunnan and Guangxi in the south-central part of the PRC, and the Inner Mongolia Autonomous Region in the north. Recently, the government has also made efforts to develop other marginalized regions, particularly the northeastern and central provinces. A recent study 11 shows the positive impact of Yunnan provinces cooperation with the GMS in terms of trade with countries surrounding the Mekong region, such as Indonesia, Malaysia, and Singapore. Physical infrastructure investments may bring markets closer, but the broader and lasting interventions are the legal and regulatory harmonization of tariffs and nontariff barriers, customs procedures, and labor policies. 15. In addition, the PRC cooperates with a number of Asian countries to generate regional and global public goods as well as to foster shared regional prosperity. An emerging priority of the
10

Asia Cooperation Dialogue (ACD), Asia Pacific Economic Cooperation (APEC), ASEAN+3, Asia-Europe Meeting (ASEM), CAREC, GMS, and the Shanghai Cooperation Organization (SCO). GMS and CAREC are the ones that ADB is involved in. 11 Poncet, Sandra. 2006. Economic Integration of Yunnan with the Greater Mekong Subregion. Asian Economic Journal, Volume 20, Issue 3. Hong Kong (September).

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PRC is ensuring environmental sustainability through resource conservation and environmental protection. When border barriers are brought down, environmental issues come to the forefront. A key characteristic of environmental problems is that they are viewed as externalities (public goods), which cannot be addressed only by market forces. In such situations, ADBs involvement becomes beneficial to both parties as crossborder solutions are needed for environmental concerns such as land degradation, dust and sandstorms, air pollution, and downstream impacts of dams. Social concerns like HIV/AIDS12 infection and drug trafficking have already become part of regional cooperation initiatives. It is essential that ADB systematically supports initiatives that minimize the negative externalities of these problems and monitor the progress. 16. The GMS is a subset of the Association of Southeast Asian Nations (ASEAN) + 1,13 while CAREC shares the same geographical region as the Shanghai Cooperation Organization (SCO). For the PRC, both GMS and CAREC are important supplements to its other regional cooperation efforts. In some cases, ADB participation is necessary so an agenda can be moved forward. For example, ADB support was needed in an SCO initiative for crossborder transport agreements because it had the experience as well as the financial resources to support crossborder transport agreement negotiations. Similarly, ADB assistance was also sought in the construction of the Singapore-Kunming rail link project, an ambitious project that links seven ASEAN member countries and the PRC via rail. The project was initiated by the ASEAN Mekong Basin Development Cooperation. ADB is the only multilateral agency to promote regional cooperation in its Charter, and these regional cooperation activities are aligned with ADBs overarching objective of poverty reduction. 17. The PRC has pursued regional cooperation with its neighbors through bilateral loans and agreements and through active participation in other regional cooperation groups. It recognizes regional cooperation as an area where ADB has exhibited a clear comparative advantage. First, regional cooperation involves sensitive coordination with different countries, and ADBs role as an honest broker puts it in a position no country can assume. Political and economic breakthroughs achieved through the GMS program have also established ADBs role as a credible facilitator and matchmaker. Second, the PRC looks to ADB for knowledge transfer because of its technical expertise and its extensive development experience in the region. Third, ADB has the capacity to finance and/or the credibility to mobilize financial support for projects that need huge investments. Fourth, the PRC can and does benefit from a variety of regional public goods produced in partnership with ADB and other countries in the region, e.g., those connected with the environment, social, public health, and finance. Fifth, partnership with ADB in financing regional cooperation projects can help mitigate perceived risks (e.g., political and economic uncertainties). 18. Alignment of the ADB Program and the PRCs Regional Cooperation Strategy. ADB strategy documents have recognized that regional cooperation is an essential part of the PRCs strategy for integration with the world economy. Projects that promote regional cooperation or that have regional cooperation impacts have been pursued. However, ADBs country strategy and programs (CSPs) have not been clear as to how these projects tie up with the RCI initiatives of the GMS and CAREC. One of the strategic objectives of the CSP (2004 2006) is the promotion of regional cooperation. The CSP allocated 12% of its programmed loans and 3% of its TAs to projects with regional cooperation impacts (Table A7.4). Data show that of the $5.2 billion programmed loans for 20042006, $0.6 billion (12%) was allotted for transport projects connecting the PRC with the GMS. Similarly, $2.9 million (6%) worth of TA out of the total $48.8 million TA allocation was programmed for regional cooperation activities. In theory, the CSP identified transport and energy as the priority sectors for intervention, but in
12 13

Human immunodeficiency virus/acquired immunodeficiency syndrome. ASEAN countries plus the PRC.

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practice it concentrated on transport projects. Of the three projects in the lending pipeline, one was dropped from the program. Except for the development of regional and provincial development strategies in provinces along the western border, programmed TA also focused on transport projects. There was no TA programmed for regional surveillance activities as outlined in Table A7.5 and identified as a priority in the CSPs strategy for regional cooperation, indicating that there is a mismatch between strategy and program. Table A7.4: Regional Cooperation Sector Focus CSP (20042006): Strategy versus Program
Strategic Objective Promoting regional cooperation (accounts for 12% of total lending and 3% of TA) Key Thematic Priorities and Sectors of Intervention Regional cooperation transport and energy Major Types of Investment Projects Transport and energy projects to support subregional initiatives Major Areas for KnowledgeBased Products RETA projects to support subregional cooperation initiatives, regional economic surveillance, support for other regional cooperation initiatives.

CSP = country strategy and program, RETA = regional technical assistance, TA = technical assistance.
Source: ADB. 2003. Peoples Republic of China Country Strategy and Program (20042006). Manila.

Table A7.5: Programmed Loans and Technical Assistance on Regional Cooperation

Project Title A. Loans Guangxi Roads Development II Yunnan-Dali-Lijiang Railway Western Regions Road Development Subtotal (A) B. Technical Assistance Xinjiang Autonomous Region Economic Development Strategy Study Amount ($ million) 200 200 200 600 0.4 2004 Provincial Development Strategy of Selected Provinces in Northwestern Region was approved in 2005 to assist the governments of Xinjiang and governments of Xinjiang and Gansu formulate their development strategies. Included in the CSPU (20052007). Year Programmed 2004 2004 2006 Status Approved in 2004. Expected completion date is December 2008. Approved in 2004. Expected completion date is June 2010. Dropped from program.

Road Safety and Urban Transport 1.0 2004 Improvement Provincial Poverty Reduction and 0.5 2004 Provincial Development Strategy IV amounting to Development Strategy Study $0.5 million was included in the 2006 pipeline of (Western Region) the CSPU (20052007). Western Region Roads 0.5 2005 Western Roads Development was approved for Development $0.8 million in 2005. Inner Mongolia Autonomous 0.5 2005 Included in the TA pipeline of the CSPU (2005 Region Development Strategy 2007). Study Subtotal (B) 2.9 CSPU = country strategy and program update, TA = technical assistance. Source: ADB. 2003. Peoples Republic of China Country Strategy and Program 20042006. Manila.

D.

Effectiveness

19. It is too early to assess the effectiveness of ADBs regional cooperation activities involving the PRC. Some projects have been undertaken as part of a whole line of interrelated projects (e.g., the Yunnan Expressway is only a portion of the North-South Corridor). An assessment based on project completion reports or TA completion report ratings would therefore have limited

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value. Similarly, RETAs for the facilitation of subregional cooperation are undertaken in phases. Therefore, an achievement under one RETA (e.g., a meeting of country leaders or the signing of an agreement) is based on earlier efforts that underlie regional cooperation, such as confidence building and getting the political commitment of countries to participate in regional cooperation activities. Nonetheless, a preliminary assessment of selected regional cooperation projects completed between 2000 and 2005 shows that most regional cooperation activities are generally satisfactory (Table A7.6). Table A7.6: Project Completion Report or TA Completion Report Ratings of Selected Loans and TA Projects on Regional Cooperation
Loan/TA No. 1325 1427 1691 5770 5818 5824 Project Name Amount ($ million) 150.00 52.00 250.00 0.97 1.35 0.80 Year of Approval 1994 1996 1999 1998 1998 1998/ 2000 Completion PCR/TCR Rating HS HS S S S HS

Yunnan Expressway 2000 Fangcheng Port 2001 Southern Yunnan Road Development Project 2005 Study of Financial Markets in Selected Countries 2000 Regional Cooperation in Central Asia 2003 Regional Study of Nutrition Trends, Policies, and 2001 Strategies in Asia and the Pacific (plus supplementary) 5878 Regional Cooperation for Sustainable Mountain 0.38 1999 2003 S Development in Central Asia 5886 Promoting Subregional Cooperation Among 0.80 1999 2003 S Cambodia, PRC, Lao PDR, Myanmar, Thailand, and Viet Nam 5961 Promoting Subregional Cooperation Among 0.80 2000 2003 S Cambodia, PRC, Lao PDR, Myanmar, Thailand and Viet Nam (Phase IV-Year 2) 5969 Strategic Study on Development Options for 0.25 2000 2003 S Economic Cooperation between PRC and Mongolia in Eastern Parts of Inner Mongolia Autonomous Region 6020 Facilitating Cross-Border Trade and Investment for 0.60 2001 2005 S SME Development in the Greater Mekong Subregion 6083 ICT and HIV/AIDS Preventive Education in the 1.00 2002 2004 S Cross-Border Areas of the GMS 6084 Promoting Subregional Cooperation Among 1.00 2002 2005 S Cambodia, PRC, Lao PDR, Myanmar, Thailand and Viet Nam (Phase V) AIDS = acquired immunodeficiency syndrome, PRC = Peoples Republic of China, GMS = Greater Mekong Subregion, HIV = human immunodeficiency virus, HS = highly successful, ICT = information communication and technology, Lao PDR = Lao Peoples Democratic Republic, PCR = project completion report, S = successful, SME = small- and medium-sized enterprise, TA = technical assistance, TCR = technical assistance completion report. Source: Asian Development Bank database.

20. At the Fifth Ministerial Conference held in Urumqi, Xinjiang province in October 2006, ministers from eight CAREC member countries adopted a comprehensive action plan to strengthen momentum and increase the benefits of regional cooperation. The comprehensive action plan provides for broadening the program into new areas such as human development, agriculture, environment, and tourism, while continuing to focus on specific regional initiatives in support of CARECs priority sectors, transport, trade facilitation, trade policy, and energy. E. Conclusions and Recommendations

21. The PRC and ADB have a lot to gain from and contribute to regional cooperation (Box A7). It secures the PRCs political and economic interests by fostering goodwill with its neighbors and helps the country achieve its development objectives. Regional cooperation promotes a sense of security and stability, brings down physical and nonphysical barriers, and

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results in an efficient movement of goods, people, capital, and information. Boosting trade and investment ties with its Asian neighbors expands the market for goods and services produced in the PRC and secures the raw materials that it may require in the future. Regional cooperation helps address challenges that require collective action (e.g., in relation to the environment and health). While opening up the Chinese economy resulted in unprecedented economic growth, it also made the country vulnerable to external shocks. By cooperating on a regional basis, the PRC and its neighbors can safeguard their economies from disruptions that could affect global trade by creating stable and efficient markets.
Box A7: Partnership between ADB and the PRC in Promoting Regional Cooperation and Integration in Asia Physical Connectivity and Infrastructure Development Support infrastructure development programs under the Greater Mekong Subregion and Central Asia Regional Economic Cooperation because they can generate tangible results over the short to medium term. Support (through guarantees or funding mechanisms) for physical connectivity will stimulate enormous investment demand in South and South East Asia. Roads and railway projects connecting western and southwestern PRC with south and central Asia can revive the traditional silk routes and improve trade and social welfare. Gas and oil pipeline projects, linking gas supply from Central Asia and Myanmar to the PRC and South Asia consumers. Assist in developing regional power trading. Trade and Investment Support for open regionalisma should also consider ensuring the compatibility of free trade agreements (FTA) with b WTO principles and support for the formation of regional-wide FTA projects through regional trade policy dialogue and studies/training for developing member countries on FTA negotiations to help DMCs design and implement FTA projects that are compatible with WTO rules. Money and Finance ADB support to strengthen regionalc and national financial safeguards and surveillance. Regional Public Goods ADB support in intensifying cooperation to: o address the spread of HIV/AIDs and other infectious diseases, o develop regional programs on the environment, and o learn from the PRCs development experience. Assist the PRC to learn from international good practices from other parts of Asia and beyond e.g., information technology, microfinance, financial governance, environmental protection, managing and avoiding public health outbreaks, and scientific innovations. ____________________________ ADB = Asian Development Bank, AIDS = acquired immunodeficiency syndrome, PRC = Peoples Republic of China, DMC = developing member country, HIV = human immunodeficiency virus, WTO = World Trade Organization. a Not discriminatory against outside countries (definition from internet = international economics glossary). b Consolidate FTA projects, reduce nontariff measures, and improve trade facilitation. c By supporting the ASEAN+3 Economic Review Policy and Dialogue Process, Chiang Mai Initiative, and Asian Bond Market Initiative, and examining issues related to greater monetary and financial cooperation and integration (studies on collective exchange rates, currency indexes, institutional and regulatory impediments, closer coordination of monetary policies, etc). d Through regulatory and supervisory reforms, etc. Source: PRC Resident Mission. 2006. Regional Cooperation and the PRC: Proposed Strategic Direction. Background Paper for the Preparation of the Country Partnership Strategy. Beijing.

22. ADB has supported the PRCs efforts to strengthen regional cooperation through the GMS and CAREC subregional programs and more recently through the PRC-Mongolia subregional program. ADB has also financed projects within the PRC with regional cooperation impacts. ADB strategy documents have indicated support for possible PRC economic cooperation with SASEC countries. The PRCs role as an emerging global economic leader puts the country in a position to assist neighboring countries while pursuing its own interests. The PRCs development agenda also calls for more regional cooperation initiatives, as it seeks to balance the gains of economic growth across its regions and ensure environmental sustainability.

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23. There is a need for stronger links between country and regional programs. Regional cooperation should be mainstreamed in future country partnership strategies. In the past, ADBs regional cooperation activities were fragmented and uncoordinated. ADB has taken steps to address this issue, beginning with the adoption of the RCIS in 2006. For ADB regional cooperation activities involving the PRC, stronger internal coordination between the different departments involved in regional cooperation is also required. 24. Emerging ADB strategy for regional cooperation and integration involving the PRC has concentrated on four main areas: 14 (i) strengthening connectivity and market integration; (ii) developing regional public goods; (iii) monetary, financial, and trade reform; and (iv) new frontiers for the PRC involvement in RCI. So far, ADBs regional cooperation assistance has mostly focused on areas (i) and (ii). ADB has established some competency in these two areas through its extensive experience in development work in the region. However, the Asian financial crisis has underscored the importance of integrating and safeguarding regional financial markets. ADB initiatives in this area include capacity-building programs for economic surveillance, financial regulation, and regional and international trade negotiations. Whether ADB has a comparative advantage in initiating monetary, financial, and trade reforms is an area that needs further study. 25. Other areas for possible ADB-PRC partnership includes channeling a portion of the PRCs excess reserves through ADB to fund much needed infrastructure projects in the region. An RCI facility was approved by the ADB Board in February 2007 to fill the financing gap in RCI activities. The PRC may consider contributing to this to supplement the PRC fund for regional cooperation and poverty reduction that was established in 2005. The PRC fund allocates $4 million annually for 5 years to finance TA operations and other activities in the following areas: (i) research and analytical work; (ii) piloting of innovative work; (iii) capacity building and institutional development in DMCs; and (iv) dissemination, networking, and cross-learning (e.g., workshops, conferences, publications, and website development). As of 31 December 2006, the PRC fund had financed 15 projects amounting to $5.87 million. The fund has given priority to projects under the GMS (which received 47% of the total value of the fund) and CAREC (which received 26%) subregional programs. In terms of the RCIS pillars, 40% of the total number of projects addressed pillar 1 (regional and subregional economic cooperation programs); 27% addressed pillar 2 (trade and investment cooperation and integration); 20% addressed pillar 4 (cooperation in regional public goods); and 13% addressed pillar 3 (monetary and financial cooperation and integration). However, in terms of value, projects addressing pillar 2 received 35% of the total funds during the period. 26. The Government of the PRC has also expressed an interest in expanding trade, transport, and investment ties with India. In the last 5 years, the average growth of Sino-Indian trade has been 44% a year, and the PRC is poised to overtake the United States as Indias largest trading partner in the future. Increased Sino-Indian trade will generate positive externalities in other South Asian countries. Nepal has proposed to India that Nepal be used for Sino-Indian trade. Alternative routes such as the Nathu La Pass connecting India and Tibet lack infrastructure, while Stilwel Road, which is the shortest road linking southwest China with northeast India, still needs to be reconstructed. The existing Kathmandu-Kodari Road and the construction of the Kathmandu-Rasuwa Road remain the most attractive options for Sino-Indian trade at present and they will help to develop Nepal as a transit point.15 For ADB to play a facilitating role in this area, new approaches and new institutional arrangements will be required.

14

Liang, J. et. al. 2006. Regional Cooperation and the PRC: Proposed Strategic Direction (A Background Paper for the Preparation of the Country Partnership Strategy). Beijing. 15 Raj, Prakash. Nepal as a Transit Point. Retrieved 1 February 2007 from www.ifa.org.np/pdf/new3.pdf.

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27. A lot can be learned from the PRCs development experience. Collaboration with the PRC to develop knowledge products about the countrys development strategy could be a model for success for other DMCs. 28. Regional cooperation is a long process and success cannot be achieved overnight. The GMS program took 10 years of ADB negotiation and confidence building before countries could sit together and talk real business. This is where ADBs role as an honest broker is critical. As the gains from cooperation are recognized, ADB can stand back and play the role of facilitator, financier, partner, and source of technical expertise. In the end, the success of regional cooperation will rest on country ownership of regional cooperation activities.

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CLIENT PERCEPTIONS A. Client Perceptions of the Asian Development Bank

1. In 2006, the Washington-based Princeton Survey Research Associates International conducted a survey of opinion leadersincluding clients and partners of the Asian Development Bank (ADB)to assess their views of the role of ADB within the development context of Asia and the Pacific, its effectiveness and helpfulness, and the way it communicates its mission and activities with external audiences (Table A8.1). The survey results provided feedback on the perceived performance of ADB in pursuing its corporate objectives. 1 The survey explored a number of issues with a random sample of respondents. These include development issues facing developing member countries and the region, general impressions of ADB, ADB priorities compared with respondents views of what its priorities should be, ADBs performance and effectiveness, and ADBs communication and outreach. Over the long term, the goal is to track survey findings and measure how and why the attitudes and opinions of key stakeholders toward ADB change. 2. The result for East Asia region is based on observations in the Peoples Republic of China (PRC) only. It shows that on several indicators for ADB helping to meet clients development goals, the expectations were quite high in the PRC than with clients in other regions. Table A8.1: Client Perception of ADB (affirmative responses as a % of total)
Item EA CWA A. Meeting Developing Member Country Development Goals and Objectives 72 89 ADBs helpfulness in meeting development goals and a objectives of its DMCs * Technical skills and abilities b 70 88 b 85 86 * Knowledgeable staff * Understand process and procedures b 65 65 b 55 63 * Efficiency and timely handling of projects * Understanding staff b 70 78 b 75 93 * Loan and resource capacity * Ability to bring development partners together b 65 74 b 75 73 * Work effectively with other development partners * Effective consultation with different stakeholders b 50 83 * Range and quality of services offered by field office 65 92 ADB impact on ways things are going in the DMCs c 93 91 Greatest strengths of ADB * Financial assistance 2 30 * Nonfinancial services 16 34 * Regional focus 26 8 * Capacity 21 9 Greatest weaknesses of ADB * Practices and procedures 22 39 * Not enough capacity, spread too thin 16 14 * Responsiveness 10 12 * Type of Assistance given 16 8 B. Priorities and Operational Performance d Priority ADB places on: * Promoting poverty reduction * Promoting environmental sustainability * Promoting gender equality * Improving governance SA 86 89 88 61 77 87 94 86 84 88 75 91 46 27 4 1 19 24 17 10 SEA 90 93 89 72 78 87 88 82 83 83 88 90 51 21 10 2 42 18 3 9 PAC 91 96 91 78 87 91 83 91 82 73 87 85 12 42 18 0 36 9 6 3 DON 87 21 24 19 11 34 25 6 6

76 90 62 66

79 65 64 69

83 72 64 63

90 78 71 75

85 48 60 81

89 68 56 61

As established by the Review of ADBs Poverty Reduction Strategy (2004), the Reform Agenda (2004), and the Public Communications Policy (2005).

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Item EA CWA SA SEA PAC DON * Improving infrastructure 82 93 95 92 88 94 * Supporting development of local capital markets 61 51 40 72 79 77 * Mobilizing growth in the private sector 59 52 48 67 72 71 * Promoting regional cooperation/economic integration 85 75 61 83 66 84 * Improving social services 67 74 74 85 69 75 ADB Performance on: e * Promoting poverty reduction 98 88 90 90 90 88 * Promoting environmental sustainability 96 76 87 89 84 82 * Promoting gender equality 89 73 77 83 81 74 * Improving governance 83 80 81 87 84 76 * Improving infrastructure 95 94 97 94 93 95 * Supporting development of local capital markets 84 74 80 86 81 82 * Mobilizing growth in the private sector 84 77 80 85 84 85 * Promoting regional cooperation and economic integration 88 83 83 92 81 90 * Improving social services 86 85 82 93 81 83 = not available, ADB = Asian Development Bank, CWA = Central and West Asia, DMC = developing member country, DON = donor, EA = East Asia, PAC = Pacific, SA = South Asia, SEA = Southeast Asia. a Percentage of respondents who stated that ADB was very or somewhat helpful in meeting development goals and objectives. b Percentage based on respondents who stated that ADB was helpful in meeting development goals and objectives. c Percentage of respondents who said that ADB impacts were very good or somewhat good. d Percentage of respondents who stated that ADB has placed either high or moderate priority. e Percentage of respondents who stated that ADB performance was either excellent or good or average. Source: Princeton Survey Research Associates International. ADB Perceptions Survey of Opinion Leaders. November 2006.

B.

Client Perceptions about the Resident Mission

3. The country assistance program evaluation (CAPE) team conducted a small questionnaire survey to obtain insights into the client orientation of the PRC Resident Mission (PRCM). There were 26 responses, of which about 60% indicated either direct involvement with the PRCM or familiarity with its activities. These activities focused on project implementation and portfolio management (78%), country strategy and program (CSP) formulation and programming (77%), technical support (69%), project design (65%), funding agency and aid cooperation (61%), policy dialogue (38%), and analytical work (35%). 4. The level of affirmative or favorable responses was used to measure client awareness of and satisfaction with activities based at the PRCM. Positive responses were found to be highest on average for relevance, generally satisfactory for efficiency, and mixed for effectiveness. About 68% of the respondents thought that the PRCM performed better in comparison with other development agencies. On the other hand, only 55% thought that decentralization of ADBs work and staff had changed and improved services. Overall, 92% of the respondents indicated that they were satisfied with services based at the PRCM. In terms of knowledge management products provided by the PRCM, only 58% of respondents said they were relevant, while about 19% thought these were partly relevant. The findings are reviewed below. 5. Relevance. The survey confirms a good perception of PRCM capacity, interaction, and efforts to respond to the country context and needs (Table A8.2). The PRCM has established itself as a capable development partner that is knowledgeable and appreciates the PRC is able to communicate and deliver on commitments, and seeks to help meet development issues and priorities. The survey also indicates that the PRCM should foster further and deeper understanding of sector issues, promote a faster response to changing country conditions, and allow for flexibility in light of PRC-specific circumstances. With respect to sensitivity to country circumstances and changing conditions, 15% of respondents said ADB was not sensitive and 19% said it was not responsive to changing conditions. Other areas of potential improvement

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identified by the survey were (i) communicating ADB study findings and recommendations concisely and convincingly, (ii) encouraging provision of valuable lessons and practices from other countries, (iii) obtaining enough delegated authority to operate effectively, and (iv) promoting more use of available local expertise. Table A8.2: Personal Interaction and Response to Country Context and Needs (affirmative responses as % of total)
Areas of Strength Personal Interaction 1. Country knowledge (96%) 2. Treats the PRC counterpart as development partner/ colleague and understand their responsibilities (96%) 3. Good communication skills and timely communications (96%) 4. Accessible when needed (92%) 5. Delivers on commitments (92%) Response to Country Context and Needs 1. Local knowledge (96%) 2. Able to respond to development issues and priorities of the PRC (89%) PRC = Peoples Republic of China. Source: Country assistance program evaluation team. Areas for Development 1. Understanding of relevant sector issues (73%) 2. More use of local expertise (73%) 3. Feedback and knowledge transfer (65%81%) 4. Delegated authority to operate effectively (65%)

1. Sensitivity to country-specific circumstances (77%) 2. Response to changing conditions within the PRC (69%)

6. Efficiency. In terms of the efficiency of the PRCM, 92% of respondents indicated that it had provided timely responses to their inquiries. Likewise, 85% of the respondents thought that the PRCM has learned from experience. On the other hand, only 50% of respondents thought that the PRCM worked to ensure that benefits from given actions exceeded costs, as compared with 19% who believed otherwise. 7. Effectiveness. With respect to the effectiveness of activities based at the PRCM, the survey showed a higher level of awareness or satisfaction with respect to the main country and project process, including (i) CSP formulation and programming; (ii) project design; and (iii) project implementation and portfolio management as compared with technical support, economic and sector-related work, and donor cooperation (Table A8.3). 8. The level of affirmative responses was comparatively high with respect to CSP formulation and programming. Of the respondents, 92% thought that the PRCM consulted and listened to relevant stakeholders (8% disagreed), while 85% thought the PRCM was able to adequately consider realities, development issues, and priorities during the CSP process (12% disagreed). Based on the level of affirmative responses, there is room for strengthening (i) dissemination and explanation of new ADB policies and changes in its lending and knowledge management products, and (ii) incorporating relevant experience from previous projects in the PRC. 9. For project design, 81% of the respondents thought the PRCM took adequate account of social and environmental aspects and listened to alternative views. On the other hand, only 73% thought the PRCM adequately considered country realities and the sector context, or got involved in the project at an early enough stage, including design and implementation of the project preparatory technical assistance. Sixty-nine percent thought that the PRCM tried to ensure the benefits to the country justified the costs and helped prepare country counterparts to assume responsibility. Only 62% thought the PRCM was able to incorporate experience from previous projects and only 54% thought it assessed the quality of the existing feasibility study (if any) and followed up only in the areas where the gaps exist.

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Table A8.3: Strategy and Program, Project Design, and Project Implementation (affirmative responses as % of total)
Areas of Strength Areas for Development Country Strategy and Formulation and Programming 1. Consults and listens to relevant 1. Adequately explain new ADB policies and changes to ADBs lending stakeholders in the PRC (92%) and knowledge management products (73%) 2. Adequately consider realities, 2. Incorporate relevant experience from previous programs and projects in development issues, and priorities (85%) the PRC (62%) Project Design 1. Adequately takes account of social and environmental aspects (81%) 2. Listens to alternative views and considers alternative options (81%)

1. Use available local expertise (77%) 2. Adequately considers country realities and sector context (73%) 3. Gets involved in the project at an early stage including in the design and implementation of the project preparatory technical assistance (73%) 4. Ensure that benefits to the country justify the cost (69%) 5. Help prepare country counterparts to assume responsibility (69%) 6. Incorporate experience from previous projects (62%) 7. Assesses the quality of the existing feasibility study (if any) and follows up only in the areas where the gaps exist (54%)

Project Implementation/Portfolio Management 1. Help reconcile differences between 1. Help to ensure that procurement and disbursements are not delayed ADB and Government (84%) (69%) 2. Work with project managers to 2. Help government to resolve negative project impacts (69%) resolve issues (81%) 3. Provide explanation when declining 3. Provide information on ADB position on progress and issues (69%) requests (81%) 4. Effectively manage the loan portfolio (69%) 5. Flexible when standard solution does not work (65%) 6. Provide training opportunities for executing agency and project staff (62%) ADB = Asian Development Bank, PRC = Peoples Republic of China. Source: Country assistance program evaluation team.

10. In terms of project implementation and portfolio management, the results underscored the key intermediary and facilitating role of the PRCM. The highest affirmative responses were with respect to reconciling differences between ADB and the Government and at the project level working with project managers to resolve issues. The respondents also appreciated the explanation provided by the PRCM when requests were declined by ADB. On the other hand, only 69% of the respondents thought that the PRCM was able to ensure that procurement and disbursements were not delayed. Only 69% of respondents thought that the PRCM was able to provide information on ADBs position on progress and issues, while only 65% thought ADB and the PRCM were flexible when a standard solution did not work. A number of respondents felt that there were not enough training opportunities. Only 62% thought that ADB and the PRCM were able to ensure the provision of training opportunities for executing agency and project staff. 11. The level of affirmative responses for economic and sector-related work points to a need to (i) foster participation by local experts; (ii) increase relevance (ensuring ADB focuses on the most important issues and needs of the PRC, provides inputs to development policy formulation, and takes into account the sociopolitical realities of the country); (iii) strengthen coordination (avoiding duplication of work done in the sector by others, filling in gaps in sector literature); (iv) increase feedback (ensuring results reach the right people); and (v) strengthen knowledge transfer (effective application of experience from other countries) (Table A8.4).

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Table A8.4: Economic and Sector-related Work, Technical Support, and Aid Support (affirmative responses as % of total)
Areas of Strength Economic and Sector-Related Work Areas for Development 1. Is a joint effort with local experts in this country (73%) 2. Focuses on the most important needs and issues of the country (73%) 3. Makes a valuable contribution to the design of policies and projects (69%) 4. Takes into account the sociopolitical realities of the country (62%) 5. Effectively provides inputs to development policy formulation in this country (62%) 6. Has sufficient detail to guide action (62%) 7. Produces results that reach the right people (62%) 8. Identifies all feasible options (58%) 9. Prepares policy briefs on major studies in local knowledge (54%) 10. Does NOT duplicate work that has already been done in the sector by others (50%) 11. Effectively applies experience from other countries (46%) 12. Works to fill in gaps that exist in the sector literature (46%)

Technical Support 1. Is well focused on key capacity needs in this country (81%) 2. Makes optimal use of local expertise (81%)

1. Is effectively timed to support project implementation (77%) 2. Uses approaches that effectively fit country situations (73%) 3. Is accurately targeted (69%) 4. Makes a tangible contribution to development effectiveness (69%) 5. Improves institutional/organizational capacity within this country (69%) 6. Improves individual capacity within this country (65%) 7. Provides benefits that exceed the costs (35%) 1. Respects the governments responsibility for aid coordination (73%) 2. Helps attract optimal external support for the country (58%) 3. Helps the country obtain access to and manage project cofinancing (58%) 4. Helps the country avoid duplication of aid efforts (50%)

Donor and Aid Support

Source: Country assistance program evaluation team.

12. In terms of technical support from the PRCM, about 77% of respondents thought that this support was effectively timed to support project implementation, while 73% replied that the approach used effectively fits the PRC situation. Only 69% of respondents thought the PRCMs technical support was accurately targeted, and a similar proportion thought that it improved institutional or organizational capacity within the PRC. About 65% of respondents said such technical support improved individuals capacity. 13. The PRCM was perceived to play a smaller role in terms of promoting donor and aid coordination. Only 58% of respondents thought the PRCM helped attract optimal external support for the PRC (12% disagreed) or was able to help the PRC obtain access to and manage project cofinancing (15% disagreed). Only 50% of respondents thought the PRCM helped the country avoid duplication of aid efforts. 14. As with donor and aid coordination, the PRCM was not regarded as playing a very visible role in policy dialogue. About 65% of respondents thought the PRCM helped focus policy dialogue on the most important development needs or explained the rationale for ADBs country strategy. Similarly, 65% of respondents said that the PRCM gave advice that is sensitive to social goals. Of the respondents, 62% thought that the PRCM supported government leadership in policy reform or provided policy advice based on practical insights. Finally, only 46% of the respondents thought that the PRCM involved interest groups in policy discussions.

132 C.

Appendix 8

Special Initiatives of the PRC Resident Mission

15. To improve its effectiveness of the ADB program in the country and to help ADB communicate its mission and activities, the PRCM initiated various methods of cooperation to improve ADB-PRC partnership. Some of the key ones are described below. 16. ADB TA Award Program. The TA Award Program was initiated by the PRCM and the Ministry of Finance in early 2004 in an effort to strengthen ownership of TAs by executing agencies and to improve the effectiveness and impacts of advisory technical assistance (ADTAs). In 2005, 5 out of 50 ADTAs completed since 2002 received the first of these awards.2 17. Knowledge Management Activities. The PRCM has sought to strengthen knowledge management through greater emphasis on TA administration and dissemination, including more frequent publications and wider distribution of observations and suggestions (O&S).3 Seven O&Ss were completed during 20042005. By 2006, the PRCM had published 12 O&Ss in Chinese and had circulated these among government decision makers and later to the public. Some O&Ss have reached the State Council for consideration, including the most recent on food safety, drawing on cooperation with the World Health Organization. The PRCM also produced several staff study reports such as Suggestions on Foreign Reserve Management and a Review of Real Estate Development in the PRC. With the PRCMs supervision and guidance, studies on provincial development strategies were undertaken as part of ADTAs. These activities aim to increase ADB links between economic, sector, and thematic work, and lending operations in the future. The PRCM website will be revamped as part of ADB-wide knowledge management initiatives. 18. Facility-Type ADTA. The PRCM processed an ADTA on support for reforms and capacity building.4 This was the third facility-type ADTA approved in the PRC. Such projects are designed to enable ADB to respond more flexibly and quickly to requests from clients. 19. Pre-Project Training Courses. In 2006, the PRCM conducted 11 pre-project training courses for staff of new executing agencies and implementing agencies in procurement and consulting services, disbursements, project financial management, and reporting and safeguard polices. Since the number of new executing agencies and implementing agencies will continue to increase and their institutional capacities are relatively weak, it will be critical to provide them with such training. 20. Intensive External Relations Work. The PRCM helped to make ADB visible in the PRC and to disseminate ADB work to the general public and other development partners by (i) organizing interviews and articles on ADB in international and national media, (ii) arranging tours for local media to ADB project sites, (iii) organizing press conferences for Asian

An Expert Committee (from government agencies, the academe, nongovernment organizations, and ADB) identified the awardees based on the following criteria: (i) TA policy impacts on the executing agency, ADB, and the PRC; (ii) timeliness of the TA; (iii) capabilities of the consultant team, communication among the executing agency, the consultant, and ADB; and (iv) capacity building impacts of the project. Information products used to promote ADB profile include (i) O&S which are occasional publications that contain short policy notes on selected topics to bring the results of ADB knowledge-based products to the attention of senior PRC leaders. Many lengthy ADTA reports are not read by senior officials; and (ii) regular update of sector write-ups. The PRCM has prepared 11 sector write-ups covering major sectors of ADB PRC operations. These are posted in the PRCM website and routinely given to journalists, academics, and other donors. The write-ups provide present sector profiles, key issues and constraints, ADB PRC operations, and major recommendations. ADB. 2006. Technical Assistance for Facility for Reform Support and Capacity Building. Manila (TA 4790-PRC, for $500,000, approved on 22 May).

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Development Outlook and Asian Development Outlook Update, (iv) translating documents to and from Chinese and English and providing interpretation facilities, and (v) issuing publications. D. Comparison of Resources with Other Resident Missions

21. There were 18 ADB resident missions in 18 developing member countries in 2006 (excluding the Philippines Country Office, the Special Office in Timor-Leste, the Pacific regional mission in Suva, and the Pacific liaison office in Sydney). When it was established in 2000, the PRCM was the 11th resident mission to be opened. In 2006, it was the second largest in terms of staff strength and the fifth largest in terms of proportion of delegated loan administration. Table A8.5 presents comparative basic data on the PRCM and five other major ADB resident missions. 22. For the last 6 years, the budget allocation to the PRCM has been sufficient to support the achievement of work program targets. However, the PRCM has noted that there may be a need to increase allocations for information and communications technology and administrative expenses. In 2005, operational and administrative expenses in the PRCM were comparable to those in the five other resident missions in Table A8.5. The operational administration expenses were $308,000 per loan processed and administered in 2005. This was below the Indonesia Resident Mission ($388,000) but 1.52.0 times higher than the cost per loan processed and administered in 2005 at the Bangladesh, India, Nepal, and Pakistan resident missions. 23. During country portfolio review missions in 2002 and 2004, the PRC asked for more delegation of authority to the PRCM, particularly authority relating to procurement, disbursements, and project administration. A phased delegation of projects to the PRCM for administration started with four projects in 2002 and another four in 2003. As part of actions to increase delegation to the PRCM, PRCM staff administered 14 of the 41 active loans during 2005, an increase from the 9 loans administered during 2004. A plan has been prepared for 50% of the active portfolio to be delegated by the end of 2006. In 2006, ADB regional departments delegated about 40.9% of loans to the PRCM and, on average, about 51.5% to the other five major resident missions. The performance of delegated loans to the PRCM was satisfactory in 2006, with none of the delegated loans rated partly satisfactory or unsatisfactory. This compares with an average of 1.4 loans (7.8%) of total loans rated partly satisfactory or unsatisfactory in the other five resident missions. 24. In November, the PRCM had a total of 24 international staff and national officers as compared with an average of 23 for four of the other major resident missions (i.e., excluding the Nepal Resident Mission). International staff and national officers comprised about 59% of total budgeted PRCM staff positions in 2003 and 57% in 2006. This was generally in line with trends found in other major resident missions, i.e., 58% in 2003 and 56% in 2006 (Figure A8.1). The ratio of national officers to international staff was 2:1, a similar ratio to that at other resident missions. The proportion of delegated loans to international staff and national officers in the PRCM was 0.8 loans per staff member as compared with an average of 0.9 loans per staff member for the other major resident missions. Supervision of all delegated loans (by primary officers) in the PRCM was assigned to national officers (as in the Nepal Resident Mission). On the other hand, all loans at the Indonesia Resident Mission were handled by international staff. National officers were responsible for about 69% of delegated loans in the Bangladesh and PRC resident missions, but in the India Resident Mission about 52% of delegated loans were supervised by international staff.

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Figure A8.1: Comparison of Resident Mission Supervision and Staffing, 2006a

70 60 50 % of Total 40 30 20 10 0 PRCM BRM INRM IRM NRM PRM RM Delegated Loans to Active Portfolio No. of Loans Per RM-based IS+NO Staff IS+NO Staff to Total RM Staff No. of Loans Per Project/Sector NO 1 0 Number 3 2 5 4

BRM = Bangladesh Resident Mission, INRM = India Resident Mission, IRM = Indonesia Resident Mission, IS = international staff, NO = national officer, NRM = Nepal Resident Mission, PRCM = PRC Resident Mission, PRM = Pakistan Resident Mission, RM = resident mission. a As of November 2006. Source: Asian Development Bank database.

25. The composition and mix of the PRCM international staff were generally in line with those at the other ADB resident missions reviewed. Project and sector specialists accounted for about 43% of the PRCM staff (as compared with about 39% for the others). Specialists on thematic areas accounted for 14% of international staff in the PRCM and at the other resident missions. Programs coordination and economics specialists comprised 28.6% of the PRCM international staff and 24.7% at the other resident missions. 26. On the other hand, the position titles of the PRCM national officers indicate that only four (29%) of the 14 national officers were project and sector specialists. This is low compared with the average of 41% in the other major resident missions. The figures for national officers in thematic areas were 14% (12% in the other resident missions) and for finance and administration 36% (30% in the other resident missions). National officers dedicated to programs coordination and economics accounted for 21% of the PRCM total (17% in the other major resident missions). This may have been because of the regional cooperation and other initiatives in the PRCM. Four national officers were available for project and sector work in the PRCM, which was generally in line with the other resident missions. The ratio of about 4.5 loans supervised per national project officer was comparable to levels in Bangladesh and Pakistan (4.4 loans) and higher than in Nepal (3.3 loans) and India (1).The relatively high ratio of loans supervised by local project officers in the PRCM is because of the predominance of a single sector in the active portfolio. Of the 18 active PRC projects in November 2006, project performance reports indicate that 12 were assigned to two national officers, with 8 transport projects assigned to one transport specialist. The remaining 6 were assigned to four different local staff.

Table A8.5: Basic Data on PRCM and Select ADB Resident Missions A. Outputs
Established RM PRCM BRM INRM IRM NRM PRM Country Program Led by RM since 2001 since 2001 since 2002 since 2000 since 2004 since 2001 Processing Number of Projects 2000 2003 2005 0 0 0 1 0 1 0 0 0 0 0 0 0 1 0 0 0 0 2000 1 0 0 2 0 1 Number of TAs 2003 3 1 2 2 1 3 2005 0 1 1 1 1 1 Project Administration Number of Projects Number of TAs 2000 2003 2005 2000 2003 2005 0 0 14 0 6 11 0 0 0 0 0 12 13 13 7 16 19 18 11 11 19 0 0 0 0 0 6 13 9 2 12 9 15 9 12 22

2000 1982 1992 1987 1989 1989

B. Financials Operational and Administrative Expenses ($000) Salary Benefits Business Travel Staff Consultants 2000 2005 2000 2005 2000 2005 3,027 64 149 31 195 58 146 106 44 118 82 301 147 93 189 134 4 108 13 14 289 177 155 78 326
a

RM PRCM

Other Adminstrative 2000 2005 315 934 364 276 544 154 215 154 456 473 232 547

Total 2000 410 1,954 1,680 2,646 838 1,575

2005 4,305 2,854 3,826 4,265 1,982 3,150

OAE Per Loan Processed/ Administered ($'000) 2005 308 143 213 388 180 166

BRM 1,398 2,329 INRM 1,254 2,892 IRM 1,888 3,490 NRM 627 1,579 PRM 1,228 2,088 a Excludes others/capital expenditures.

C. Delegation of Loans and Portfolio Performance a Portfolio Performance Ratings (2006) Active Delegated Percent Loans Loans US+PS Impact and Outcome Implementation Progress RM 2006* 2006* HS+S PS+US HS+S PS+US PRCM 44 18 40.9 18 0 18 0 0 BRM 39 25 INRM 30 17 IRM 32 14 NRM 23 13 PRM 71 26 a PPR summary as November 2006. 64.1 56.7 43.8 56.5 36.6 25 17 14 12 25 0 0 0 1 1 23 15 14 11 25 2 2 0 2 1 2 2 0 2 1

% 0.0 8.0 11.8 0.0 15.4 3.8

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136

D. Loan Supervison RM Staff Numbers International National IS+NO RM Staff (IS) Officer (NO) PRCM 8 16 24 BRM INRM IRM NRM PRM 7 7 10 4 7 15 17 14 10 15 22 24 24 14 22

Ratio of NO to IS 2.0 2.1 2.4 1.4 2.5 2.1

Delegated Loan to IS+NO 0.8 1.1 0.7 0.6 0.9 1.2

IS 0 8 9 14 0 8

Loan Supervision by Primary Officer NO Unassigned Total 18 0 18 17 7 0 13 18 0 1 0 0 0 25 17 14 13 26

Percent of Delegated Loans IS NO Unassigned 0.0 100.0 0.0 32.0 52.9 100.0 0.0 30.8 68.0 41.2 0.0 100.0 69.2 0.0 5.9 0.0 0.0 0.0

Appendix 8

E. Staffing, Composition, and Skills Mix International Staff (number) 2000 2003 2006 0 7 8 4 4 6 3 4 7 6 9 3 6 7 9 10 4 7 National Officers (number) 2000 2003 2006 0 12 16 0 0 0 0 0 13 11 14 9 12 Loans Per Project/ Sector-IS 0.0 0.7 0.9 0.3 0.0 0.8 Loans Per Project/ Sector-NO 4.5 15 17 14 10 15 Administrative Staff (number) 2000 2003 2006 0 13 18 22 16 20 11 17 17 13 15 8 13 19 21 15 11 18 Total (number) 2003 32 37 30 38 20 31 Ratio of IS+NO to Total (%) 2000 2003 2006 0.0 59.4 57.1 15.4 20.0 23.1 21.4 19.0 54.1 56.7 60.5 60.0 58.1 57.9 53.7 55.3 61.5 56.0 55.0 56.3

RM PRCM BRM INRM IRM NRM PRM

2000 0 26 20 26 14 21

2006 42 41 47 39 25 40

Loans Ratio of Number of Supervised Loans Per Project/ Number of IS RM by IS IS Sector-IS PRCM 7 0 0.0 3 BRM INRM IRM NRM PRM 6 5 10 3 5 8 9 14 0 8 1.3 1.8 1.4 0.0 1.6 2 2 5 1 2

Senior Staff 14.3 16.7 20.0 10.0 33.3 20.0

Classification by Position Title (% of total IS) Project/Sector Thematic Programs/ AG+SOC INF+FIN GEN Economics 14.3 14.3 14.3 14.3 28.6 16.7 20.0 10.0 0.0 0.0 16.7 20.0 0.0 0.0 20.0 0.0 0.0 40.0 33.3 20.0 0.0 20.0 10.0 0.0 40.0 50.0 20.0 20.0 33.3 0.0

Finance/ Admin. 0.0 0.0 0.0 10.0 0.0 0.0

RM PRCM

Loans Ratio of Number of Number of Supervised Loans Per Project/ NOs by NO NO Sector-NO 14 18 1.3 4

AG+SOC 14.3

Classification by Position Title (% of total NOs) Project/Sector Thematic Programs/ INF+FIN GEN Economics 7.1 7.1 14.3 21.4

Finance/ Admin. 35.7

BRM 11 17 1.5 4 4.3 9.1 0.0 27.3 9.1 9.1 45.5 INRM 14 7 0.5 7 1.0 0.0 21.4 28.6 7.1 14.3 28.6 IRM 13 0 0.0 6 0.0 15.4 7.7 23.1 7.7 15.4 30.8 NRM 10 13 1.3 4 3.3 0.0 0.0 40.0 20.0 20.0 20.0 PRM 12 18 1.5 4 4.5 25.0 8.3 0.0 16.7 25.0 25.0 ADB = Asian Development Bank, AG = agriculture, BRM = Bangladesh Resident Mission, FIN = finance, GEN = general, HS = highly successful, INF = infrastructure, INRM = India Resident Mission, IRM = Mission, IS = international staff, NO = national officer, NRM = Nepal Resident Mission, PRCM = PRC Resident Mission, PRM = Pakistan Resident Mission, PS = partly successful, RM = resident mission, S = SOC = social, US = unsuccessful. Sources: Asian Development Bank databases.

Appendix 8

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E.

Comparison of ADBs Resident Mission Staff Structure with that of the World Bank

27. In 2006, the PRCM had a staff contingent of 39, including 7 professionals from Headquarters. For rough comparison purposes, the World Bank Office in Beijing had 104 (excluding some service-related and non-regular staff) of which international professionals spend about 17 staff years on the PRC work. The World Bank lending is about the same as that for ADB ($1.5 billion annually for about 79 projects). It also undertakes a broad range of analytical- and policy-related work funded largely from its administrative budget and augmented by various ad hoc trust funds, but it does not have a formal TA program similar to ADBs advisory and preparatory TA. Measured in dollar values, both institutions might be spending about the same amount annually for nonlending activities, but the World Bank is seen to be using more of its own staff relative to consultants in undertaking such activities. 28. ADBs model for the PRCM delegates less decision-making authority and management for its operational activities to the field office compared with the World Bank. For the World Bank, a substantial amount of the operational work is being managed from the field office, including almost all of the core project services such as procurement and disbursements as well as safeguard-related issues such as resettlement and environmental impact assessments. Fieldbased officers also manage and carry out a substantial share of project preparation and supervision as well as country economic work. The World Banks stronger local presence allows it to interact somewhat more extensively with provinces on project concept and design issues. 29. Comparing the staff years spent on the PRC (excluding Mongolia) work, ADB spends about 126 staff years compared to 127 staff years by the World Bank. What is significant is the location splitwith the World Bank having roughly two-thirds of its staff in field, while for ADB it is the reverse. Of the total ADB staff years spent on the PRC work, 44% is spent using international professionals compared to 36% in the World Bank. However, the World Bank spends 29% of staff year using national professionals based in Beijing, compared to ADBs 11% in Beijing and 6% in Manila. Given the ratio of remuneration and benefits of international and national professionals, and the travel and administrative budgets, more consideration should be given to see whether the current World Bank model is more or less expensive than the current ADB model overall. This is best undertaken within the context of the ongoing evaluation of resident mission effectiveness by the Operations Evaluation Department. The outputs from this evaluation will be considered in the review of Resident Mission Policy by the Strategy and Policy Department, which is due for completion in the third quarter of 2007. 30. The disparities regarding staff numbers working on private sector operations between the two institutions is much more striking. However, since this is a different issue, this has not been taken into consideration in this analysis.

138

Appendix 9

TECHNICAL ASSISTANCE1 A. Introduction 1. This appendix focuses mainly on advisory technical assistance (ADTA). The review by the country assistance program evaluation (CAPE) team demonstrated that ADTA is a relevant and useful Asian Development Bank (ADB) instrument for policy development and capacity building. 2 The review examined how technical assistance (TA) is administered and implemented, rather than the TA content. It showed where and why TA has been successful and where it has been less so. It approached the evaluation of TA from different angles and from the perspectives of executing agencies, project officers, and consultants. 2. TA operations in the Peoples Republic of China (PRC) were reviewed in 2001 and 2005. These reviews were broadly consistent with ADB-wide assessments of weaknesses in TA both systemic weaknesses about how ADB as an institution has managed TA, and countryspecific weaknesses in how the instrument is used in the PRC (main text, section IV.B). Overall, ADTAs have complemented lending by (i) strengthening the legal system and thus the enabling environment for investment; (ii) supporting macro and sectoral strategies as preconditions for lending; (iii) enhancing knowledge transfer and support for innovation; (iv) building capacity and helping to align national systems with ADBs; and (v) facilitating stakeholder participation in development programs, especially in poverty reduction. 3. In 1998, CAPE 13 raised a number of issues about the effectiveness of ADTAs: (i) early obsolescence caused by a lack of coordination with local counterparts during implementation, and use of international consultants perceived as insensitive to the needs; (ii) overemphasis on report writing and recommendations that were not relevant to sociocultural conditions; (iii) a TA program that was too diverse and incoherent to achieve strategic objectives and supply-driven TAs to meet ADB requirements, which lowered ownership levels; and (iv) underexploitation of comparative advantage afforded by significant TA resources including lack of report translation into Chinese, and lack of ADB follow-up.

4. The CAPE 1 also concluded that (i) the country operational strategy documents treated the use of TA resources as supplementary to lending, rather than as an equally important strategic instrument; (ii) ADB played a strategic role in improving the environmental policy, legal, and regulatory framework and in strengthening the PRCs environmental impact assessment process; (iii) ADBs TA program should be more focused, better targeted, and managed more effectively; and (iv) cluster TAs in support of niche agencies should be defined to develop long-term relationships between ADB and selected agencies. The CAPE came to the following conclusions: (i) the TA program was too diverse; (ii) there was insufficient focus to ensure substantial impacts (except environment and fiscal policy reform); (iii) little emphasis was given in country strategy documents on TA as an instrument for promoting reform and institutional strengthening; (iv) project preparatory technical assistance (PPTAs) were often ineffective and there was little or no value added;
1

This appendix does not cover technical assistance (TA) grants to the transport sector as they have been extensively covered in the transport sector assistance program evaluation (SAPE). Since the TAs related to roads and railways were discussed in the transport SAPE, they were not covered by the CAPE team survey of TAs and, hence, not included here except in Figure A9.3 (overall assessment table). ADB. 1998. Country Assistance Program Evaluation in the Peoples Republic of China. Manila.

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139

(v) (vi) (vii) (viii) (ix)

many ADTAs were supply-driven and lacked PRC ownership; the TA cluster for environment was successful; TA strategic objectives and programs should be clearly spelled out in the country operational strategy; TA resource management should be improved by involving staff more fully from project departments in TA programs; and consideration should be given to how TA funds could be used more effectively to assist staff in TA project design and implementation.

5. Many of these issues have been repeatedly raised in other reports (Table A9.1) and are still relevant today. Table A9.1: Past Reviews of Technical Assistance in the Peoples Republic of China
Source of Document CAPE (December 1998) Conclusion Inadequate ownership by EAs for implemented TAs; TA resources are scattered over a large number of operations with inadequate coordination and supervision; no strategic objectives formulated for TA operations; many TAs were supply-driven to satisfy ADBs internal needs; use of TA resources should be considered more fully in COS and CAP documents; and project department staff should be more involved in TA programs to improve TA management. Lack of sense of involvement and ownership by EAs; EAs not involved in drafting TORs leading to problems in implementation as ADB might not be aware of constraints imposed by local conditions; international consultants lack knowledge of local conditions; ADB should give more responsibility to domestic consultants; and EA should be informally involved in the selection process. The focus and impact of ADBs knowledge-based products need to be improved by drawing on the results of a joint Government and ADB study. Weak ownership because ADB generally identifies and prioritizes the TAs and consultant selection process is long; TAs are not necessarily relevant or useful; heavy reliance on international consultants undermining building of strong ADB capability; ADB should prioritize allocation of TA to activities that produce benefits; PRC-requested TAs tend to not start and finish on time, making scope and outputs irrelevant; reports only submitted in English, restricting dissemination; international consultants lack experience in the PRC and international experience; and need for increased local ownership in engagement of consulting services.

Improving Effectiveness of ADTA in the PRC (June 2001) CSP 20042006 (14 October 2003) SPD Report on Partnership Framework for Middle Income and OCR Countries Consultation Mission to PRC (15 December 2004) More Focus of ADTA Operations in the PRC Review of ADTA Operations and Recommendations (11 November 2005)

TAs should be provided where signs of government ownership and commitment are clear; high-level official involvement promotes longer-term impact; need for more strategic focus; TAs are spread too thinly; ADB should provide successive TAs to several limited sectors that are strategically important from ADB and PRC perspective, and where ADB has long involvement and comparative advantages; TAs should focus on (i) policy and institutional reforms, (ii) legal reforms and good governance, (iii) capacity building of agencies that would be EAs and IAs for loans, and (iv) sectors where TA is expected to create lending opportunities; timing of TA provision is a critical element that affects TA impact; insufficient staff time allocated to TAsome EAs reported that ADB had not attended key meetings; in certain cases, ADBs involvement has not been successful in producing solid results such as (i) potential lending projects, (ii) solid knowledge-based products, (iii) significant policy impacts, and (iv) notable capacity building efforts. ADB = Asian Development Bank, ADTA = advisory technical assistance, CAP = country assistance plan, CAPE = country assistance program evaluation, COS = country operational strategy, CSP = country strategy and program, PRC = Peoples Republic of China, EA = executing agency, IA = implementing agency, OCR = ordinary capital resources, SPD = Strategy and Policy Department, TA = technical assistance, TOR = terms of reference. Source: Country assistance program evaluation team.

B.

Technical Assistance Program in the PRC

6. A breakdown of ADTAs by the number of approved TAs and their value for each year from 1998 to 2005 is given in Figure A9.1 and a similar figure is given for PPTAs in Figure A9.2. The total value of the 151 ADTAs conducted over the period was $90 million, and for the 74 PPTAs, it was $44 million.4 These charts illustrate the increasing number of ADTAs from 2001 to 2004 and
4

Includes 15 supplementary TA approvals (six ADTAs and nine PPTAs).

140

Appendix 9

a decline in their average value (from $0.70 million in 2001 to $0.52 million in 2004). The lower amounts of ADTAs during this period is in part because of resource constraints and because of limited internal capacity to manage the amounts formerly available. By reducing the values of TA, each would have a reduced scope and be more manageable. Greater care was taken in selecting topics that were more demand-driven and undertaken with committed clients. Dissemination of results was also improved. After an increase in 2004, reflecting support from the United Kingdoms Department for International Development for a greater focus on poverty issues, ADB decided in 2005 to reduce the number of ADTAs. For PPTAs, the number declined from 2002 to 2004 but doubled in 2005 over the previous year. Average values have varied widely from a high of $0.81 million in 2000 to $0.43 in 2002. The average value in 2005 was $0.63 million.
Figure A9.1: Advisory Technical Assistance Figure A9.1: Advisory Technical Assistance 19982005
30 25 20 15 10 5 0 1998 1999 2000 2001 Number 2002 2003 2004 2005 Value/$ million

19982005

Figure A9.2: PPTA 19982005 Figure A9.2: PPTA19982005

14 12 10 8 6 4 2 0 1998 1999 2000 2001 Number 2002 2003 2004 2005

Value/$ million

Source: Asian Development Bank database.

PPTA = project preparatory technical assistance. Source: Asian Development Bank database.

7. Figure A9.3 compares the total value of ADTAs and PPTAs by sector over the CAPE period. It highlights two factors: (i) the focus of ADTAs on sectors where ADB has not had a major lending program; and (ii) the focus of PPTAs on sectors with lending programs5 (para. 80, main text).
Figure A9.3: Values of ADTAs and PPTAs, by Sector 19982005
25 20 ($ million) 15 10 5 0 Edu Egy Fin HNS Ind ADTAs Law PPTAs Mul RNR TRN WS

ADTA = advisory technical assistance; Edu = education; Egy = energy; Fin = finance; HNS = health, nutrition, and social protection; Ind = industry and trade; Law = law, economic management, and public policy; Mul = multisector, RNR = rural and natural resources; WS = water supply, sanitation, and waste management; PPTA = project preparatory technical assistance; TRN = transport and communications; WS = water supply, sanitation, and waste management. Source: Asian Development Bank database.

ADB had lending programs in energy; industry and trade; transport and communication; and water supply, sanitation, and waste management.

Appendix 9

141

8. Figure A9.4 highlights the shift in the sectoral composition of ADTAs during the CAPE period in favor of social issues, especially in the health sector as severe acute respiratory syndrome and avian influenza drew attention to deficiencies in rural health services. It also illustrates the decline in advisory work in industry (in line with the phasing out of lending) and some increase for transport, multisector, and energy in line with their rising share in lending.
Figure A9.4: ADTA Values by Sector (19982005)
14 12 10 ($ million) 8 6 4 2 0
an ce Ag ric ul tu re Po lic y Tr ad e th M ul t is ec to r Ed uc at io n
19982001 20022005

En er gy

ta tio n

sp or t Tr an

Fi n

,a nd

an d

,E co n

us t ry

C.

Overall Assessment

9. The CAPE team did a rapid assessment of one-third of the 151 ADTAs across all nontransport sectors.6 The assessment of ADTA effectiveness was mixed, but the overall study rating is satisfactory, with ADTAs achieving better than a medium rating for all criteria except efficiency. The Operations Evaluation Department ratings of the ADTAs, as illustrated in Figure A9.5, were highly relevant (2.7), effective (2.2), efficient (2.0), and sustainable (2.1).
Figure A9.5: Overall ADTA Ratings
3.0 2.5 Rating Value 2.0 1.5 1.0 0.5 0.0 Relevance Effectiveness Efficiency Sustainability Study Rating

La w

ADTA = advisory technical assistance. Source: Asian Development Bank database.

ADTA = advisory technical assistance. Source: Country assistance program evaluation team.
6

The sample of about 50 TAs assessed were rated using the standard scale 0 to 3 where 0 = negligible, 1 = low, 2 = medium, and 3 = high.

W at er

In d

an

Sa ni

ea l

142 D.

Appendix 9

Relevance

10. Figure A9.6 presents the sectoral breakdown of ADTA performance according to the four evaluation criteria. For all sectors, the rating for relevance was high, with the exception of the water supply and energy sectors. This may be due to the initial designs needed to adapt to demand-driven changes in resource requirements, particularly national consultant availability and executing agency capacity to do more in-house project preparation work. Also, the length of time taken to develop ADTAs (i.e., the 3-year rolling plan for TAs contained in the country strategy and programs (CSPs) can mean that executing agency priorities have changed by the time the ADTA commences.
Figure A9.6: A9.6: Advisory Technical A Performance by Sector Figure Advisory Technical Assistance Performance by Sector
Relevance
3.5 3.5

Effectiveness

3.0

3.0

2.5

2.5

2.0

2.0

1.5 Egy Env Fin Gov Pov

1.5

RNR Rrl

Urb

WS

Egy

Env

Fin

Gov

Pov

RNR Rrl

Urb

WS

Efficiency
3.0
3.0

Sustainability

2.5

2.5

2.0

2.0

1.5 Egy Env Fin Gov Pov

1.5

RNR Rrl

Urb

WS

Egy

Env

Fin

Gov

Pov

Rrl RNR

Urb

WS

Egy = energy, Env = environment, Fin = finance, Gov = governance, Pov = poverty, RNR = rural, Urb = urban, WS = water supply. Source: Country assistance program evaluation team.

11. Ownership is an important prerequisite for relevance and project success and is influenced by the degree of executing agency involvement at all stages of the ADTA process. Executing agencies reported that they generally felt good ownership because of the high relevance of the ADTAs. Of the ADTAs, 60% were identified by executing agencies, 37% jointly with ADB, and only one by ADB alone. 7 All executing agencies reported that their senior management had designated what was required in the ADTA. This high level of ownership by executing agencies was largely endorsed by consultants and project officers.
7

ADB. 2000. Technical Assistance to the Peoples Republic of China for Transjurisdiction Environment Management. Manila (TA 3588-PRC, for $2.1 million, approved on 11 December).

Appendix 9

143

12. Overall, ADTA design was regarded as satisfactory or very satisfactory by executing agencies in 89% of cases. However, designs do not always take into account the realities on the ground. In one case,8 the ADTA was intended to develop the basic elements of a renewable energy strategy through, among other measures, a straw gasification plant. The project was not satisfactory as the design had not taken into account (i) appropriate off-take tariffs, (ii) time and resources required to create a replicable model, (iii) the fact that households could use the straw for fuel themselves, and (iv) a distribution company was not obliged to take the production. As a result of these design shortcomings, more than 200 local communities which had been anticipating benefits were left disappointed.9 13. Of the remaining ADTA designs rated as unsatisfactory, most were in the transport sector. The principal reason given by executing agencies for their dissatisfaction with the designs was that they frequently contained items that were not relevant to the overall objectives of the ADTA. In two examples, 10 the ADTA initiated a mathematical optimization model for planning rural road links. The software were developed by the consultant and have been demonstrated to be operationally feasible, although whether in practice the provinces will use them are doubtful. 14. Some executing agencies felt that there was insufficient attention paid to training requirements and that this had adversely affected skills transfer and potentially the sustainability of the ADTA. In several cases, the ADTA design had no component for skills transfer and in those designs that did, 10% of executing agencies reported that the approach to skills transfer was unsatisfactory. Several executing agencies felt that the design of the ADTA was too inflexible and made it difficult to adapt requirements to changing circumstances during implementation. For example, 81% of executing agencies felt it would have been useful if consultants had been available for a longer period, pointing to implementation inflexibility and inadequate appraisal of requirements during ADTA design. In particular, they felt that the allocation of financial resources at the design stage was difficult to alter later on, although executing agencies appreciated flexibility in terms of time allotments. 15. Many executing agencies felt that ADTA designs gave too much emphasis to the writing of reports rather than covering all the areas of activity needed for capacity building support. Typically, designs referred to the production of inception, midterm, and final reports. Although these provided useful payment milestones for consultants and ADTA monitoring information, some executing agencies felt that the designs should have focused more on skills transfer. At the design stage, although a design and monitoring framework approach was used, there was varying consistency in the approach to aligning ADTA objectives to CSP objectives and also in the way in which specific ADTA objectives were set. Goals and objectives needed to be sensible, to relate the ADTA to the CSP and government goals and objectives, and to be measurable. There is little evidence that measurable indicators were included in ADTA designs or that those monitoring indicators that were included were subsequently measured to assess impact and sustainability (para. 22, Appendix 9).

ADB. 2003. Technical Assistance to the Peoples Republic of China for Renewable Energy for Poverty Reduction. Manila (TA 4309-PRC, for $600,000, approved on 19 December). 9 This outcome may now improve with the unforeseen effectiveness of the Renewable Energy Law, which will oblige the distribution companies to purchase the power produced by the plant at a premium. 10 ADB. 2004. Technical Assistance to the Peoples Republic of China for Poverty Impact of Area-Wide Road Networks. Manila (TA 4322-PRC, for $1 million, approved on 26 March); and ADB. 2002. Technical Assistance to the Peoples Republic of China for Socioeconomic Assessment of Road Projects. Manila (TA 3900-PRC, for $250,000, approved on 12 August).

144 E.

Appendix 9

Effectiveness

16. ADTA effectiveness was generally high, although outputs were not always in a suitable format for executing agencies. Overall, the ADTA was rated as effective (Figure A9.6). Some ADTAs were activities identified primarily by the Government (rather than by ADB) and most were regarded as having high relevance to government strategies. In successful ADTAs, key individuals worked well together. The combination of competent and respected project officers and consultants with executing agency managers with strong ADTA ownership correlated with successful ADTAs. This is illustrated in the ADTA supporting the review and development planning for the legal and judicial system, 11 which has produced reports reviewing the achievements of the past 5 years and plans in the next 5 years covering economic laws, administration in accordance with law, judicial reform and development. A key feature is that the reports have been drafted by the agencies themselves, with support from the project officers and respected international experts who were very familiar with the PRC. This TA has reinforced ADBs position of influence as a trusted advisor in the field of legal reform, as all executing agencies interviewed remarked on how helpful the support has been. The TA workshops were very well attended, but participants had wanted more time to consult the international experts. The agencies, especially the Legislative Affairs Commission, expressed a need for the support to continue in the longer term. 17. Effectiveness is not related to the size of the ADTA. In one example, 12 a small-scale TA examining poverty reduction strategies with a budget of $150,000 was regarded by government as having had a very strong impact on national policy. Findings were incorporated into a highlevel government report and a summary of priority recommendations from the ADTA was endorsed by Premier Wen Jiabao in April 2004. This ADTA was one of the first recipients of the TA award.13 18. Beyond the scope of the actual survey, the CAPE team sought to determine the extent to which executing agencies made maximum use of the grant resources. On average, some $50,000$60,000 remained unutilized for each TA that was closed during the CAPE period from 1998 to 2003 (Table A9.2). This accounts for 9% to 14% of the TA amount and may reflect the savings of the contingency funds owing to the non-realization of expected risks or prudent TA administration. This would not normally be an issue, and is even an indicator of implementation efficiency, except when the executing agencies still indicated a need for additional funds to better disseminate the results of the TA and to operationalize the recommendations. These savings could have been used for such purposes during the CAPE period, but were not due to cited difficulties in getting ADB approval to reallocate TA savings. In the future, the need for such outcome enhancing activities would have to be taken into account and saving reallocation flexibility needs to be built into the TA design to maximize the efficiency, impact, and sustainability of this valuable resource that ADB manages.

11

ADB. 2003. Technical Assistance to the Peoples Republic of China for Support to the Review and Planning for Development of the Legal and Judicial System. Manila (TA 4237-PRC, for $350,000, approved on 4 December). 12 ADB. 2003. Technical Assistance to the Peoples Republic of China for Policy Study on the Poverty Reduction Program of the Peoples Republic of China Trends, Challenges, and Future Directions. Manila (TA 4222-PRC, for $150,000, approved on 20 November). 13 These awards were made by the Ministry of Finance (MOF) following its review of TAs in collaboration with ADB and relevant PRC ministries and agencies (para. 16, Appendix 8).

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Table A9.2: Unutilized TA Resources in the PRC (19982005)

Year 1998 1999 2000 2001 2002 2003 Number of TAs 21 13 16 10 7 5 Average TA Savings (%) 8.6 14.5 13.8 9.0 9.2 12.5 Average TA Savings ($) 53,487 55,025 59,223 58,262 38,858 64,096

PRC = Peoples Republic of China, TA = technical assistance. Source: Asian Development Bank database.

19. Consultant Performance. The performance of consultants on ADTA was mixed. Executing agencies and project officers rated consultants understanding of needs, ability to communicate, and of sharing best practice as satisfactory or better for all ADTAs except three. Of these exceptions, executing agencies reported reasons as including a lack of time for implementation, meaning that the consultants were not able to grasp the local situation sufficiently, and poor coordination between the executing agency, implementing agency, and the consulting company. Project officers reported that not all consultants delivered a satisfactory performance in terms of meeting the requirements of ADB. In one case, the poor performance of a consultant meant that the project officer had to complete the assignment in order for the original objectives to be met. 20. The consultants who were rated most highly by executing agencies were those who had had prior experience in the PRC, good technical skills, and the ability to share international best practice. This was greatly facilitated if the consultant spoke Chinese. In one ADTA, 14 such consultants were used and were highly praised by all three of the executing agencies involved in the work. In the few cases where executing agencies reported that they had been dissatisfied with the quality of consultants, this mostly related to an inability to communicate best practice. Many executing agencies felt that the key benefit to be gained from international consultants was the gaining of fresh ideas and experience from individuals who were recognized leaders in their fields. Other reasons given for dissatisfaction included a lack of cultural fit, insufficient country and technical knowledge, and arrogance. In all these cases, the executing agencies felt that if they had been more involved in the consultant selection procedure, these issues could have been addressed prior to consultant mobilization. They felt that these problems had been time consuming, sometimes involving briefing a new consultant on relevant issues, and had effectively wasted project resources. 21. A further issue is that there is a relatively small pool of consultants who are used by ADB. Some project officers with little prior knowledge of working in the PRC relied on this pool (and the relevance of individual consultants resumes) for ADTA assignments. There is a risk that such consultants may have increasingly impressive resumes purely because they have carried out many ADB assignments and not because they are the leading experts in their fields. 22. Performance Measurement. Wide ranges of monitoring indicators are specified in the TA paper for most ADTAs. However, there was little evidence that such monitoring information was collected by ADB during implementation. This is a serious deficiency, since without such
14

ADB. 2003. Technical Assistance to the Peoples Republic of China for Support to the Review and Planning for Development of the Legal and Judicial System. Manila (TA 4237-PRC, for $350,000, approved on 4 December).

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Appendix 9

information, it is impossible to establish whether ADTA outcomes have achieved the desired results or to manage ADTAs to achieve such results. This information is valuable for future ADTA and ensures that past experience is fully brought to bear on new programs. Particular problems are caused when a project officer leaves the relevant division in ADB during the implementation of the ADTA. There were some instances in the PRC where it proved very difficult to gain information about ADBs perspective on ADTA effectiveness when the project officer had changed. This situation was exacerbated when these changes also involved a change in the location of supervision from Headquarters to the PRC Resident Mission (PRCM). There is no evidence that long-term performance measurement information has been collected following completion of ADTAs. TA papers frequently set long-term objectives and associated indicators in the TA framework, but this is meaningless if the relevant information is not collected and analyzed after completion. F. Efficiency

23. Measured against how well resources were used in achieving desired ADTA outcomes, overall efficiency was less than satisfactory. Both executing agencies and consultants raised concerns about inefficiencies in the processes for ADTA implementation, notably over continuity in ADB planning and supervision of ADTA and the need for flexibility during implementation. Some ADTAs were inflexible and not supervised optimally. Figure A9.6 shows that in all sectors except poverty and finance, efficiency was rated as being below medium. This reflects the many processes and procedural issues, which hinder the implementation of ADTAs including consultant selection, implementation flexibility, and supervision. 24. Consultant Selection. A recurring issue raised by executing agencies was their lack of involvement in the consultant selection process. Of the executing agencies consulted, 26% said they were dissatisfied with the process of choosing consultants, in particular, their lack of involvement in the process. They identified a need to be involved at all stages, from the initial screening of candidates to interviews with those shortlisted or at least with the preferred candidate. They felt that many of the problems with consultant attitudes and suitability could have been averted with their greater involvement. 25. These issues have been raised before. In 2004, ADB Central Operations Services Office carried out a pilot study of 20 TAs, including five in the PRC (Appendix 5),15 wherein executing agencies were delegated responsibility for consultant selection, subject to ADB guidelines and procedures being adhered to. The pilot appears to have worked well in the PRC, where selection for three pilot PPTAs was completed in 2004. Of the other two ADTAs, one was completed in 2005 and one is still outstanding. Preliminary analysis indicates that, where an executing agency is used to working with ADB, the delegation is more likely to succeed. 26. As a result of this study, the Central Operations Services Office has included a footnote in the revised guidelines which states In order to increase ownership of TA projects and improve sustainability of project benefits, ADB may, in particular circumstances, delegate responsibility to a borrower (delegated TA) to recruit and supervise TA consultants. This is an important change for the PRC, and those responsible for future TAs will need to implement this
15

ADB. 2004. Technical Assistance for Xi'an-Zhengzhou Railway Development Project. Manila (TA 4340); ADB. 2004. Technical Assistance for Hunan Roads Development III. Manila (TA 4384); ADB. 2004. Technical Assistance for Evaluation of Environment Policy and Investment for Water Pollution Control in the Huai River Basin and Taihu Lake Basin. Manila (TA 4447); ADB. 2004 and 2005. Technical Assistance for Flood Management Strategy Project. Manila. (TA 4327 [Supplementary]; ADB. 2004. Technical Assistance for Support for Reforms in Compulsory Education Financing. Manila (TA 4363). This TA was not successful and ADB has withdrawn the responsibility of recruiting consultants from the executing agency.

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147

wherever possible. Anecdotal evidence from the PRC suggests that the pilot study caused a considerable extra workload for those executing agencies involved, as all steps in the recruitment process had to be agreed to and signed off by ADB. It is to be hoped that, following the pilot, more responsibility and accountability for the recruitment process will also be delegated to executing agencies. 27. A further issue is that many executing agencies, although involved in the design and formulation of ADTAs, are keen to formulate and design ADTAs themselves, with ADB providing technical support when needed. 28. Counterpart Staff. All executing agencies made counterpart staff available from the outset of the ADTA and, in all cases, the counterparts were the people who would continue the work of the ADTA following completion. For those counterparts who were trained as part of the ADTA, the majority still work in the executing agencies. The relationship between consultants and their counterparts is crucial both for efficient ADTA implementation and for sustainability of outcomes through capacity building. In 72% of cases, counterparts were not made available full time. Some counterparts felt they should have been remunerated for the extra work undertaken as part of the ADTA (which was in addition to their normal duties) and lacked motivation as a result. 29. Supervision. Of the executing agencies surveyed, 88% described the adequacy of ADB supervision of ADTA as satisfactory or better. The remainder described the variable quality of project officers, and the fact that those based in Manila were often out of touch with the day-today situation. Except in one instance, all executing agencies felt that project officers were technically competent. This view was not shared by consultants, 25% of whom felt that supervision missions had not added value and 35% of whom said that the project officer was not technically competent to supervise the ADTA. These issues refer to a small number of project officers, as only a limited number of consultants responded to the questionnaire out of the many who were involved in evaluated ADTAs, but these examples serve to highlight the variable quality of project officers and their managerial skills. 30. The location of supervision is an important issue in the PRC, where responsibility for some 15% of active 2005 TAs has been delegated to the PRCM. Several consultants commented on the variable quality of supervision following delegation and noted some confusion over the location of responsibility for responses to technical issues. In some cases, both executing agencies and consultants felt that, although responsibility had been delegated, the PRCM was acting as a post box for the transmission and receipt of technical enquiries that were actually dealt with by Headquarters staff. Most executing agencies and consultants agreed that, for delegation to succeed, there needs to be a close match between the technical requirements of the TA and the skills available in the PRCM. Despite these issues, there was a strong feeling that TAs should be delegated to the PRCM. 31. A potentially more serious issue concerns lack of continuity of project officers. The average number of project officers involved between design and implementation is two. This can lead to confusion and changes of direction, management style and technical focus, as well as placing extra demands on the time of executing agencies who have to brief new incumbents. A further issue is the lack of an adequate handover process, resulting in loss of specific ADTA knowledge when a project officer departs ADB or changes positions. 32. Flexibility. Of the executing agencies surveyed, 83% of executing agencies rated ADBs responsiveness and flexibility as either satisfactory or very satisfactory. The main issues reported by the remainder center on the need for ADB to be more flexible in extending the resources available to a particular ADTA, financial management, and the selection of

148

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consultants. The time taken by ADB Headquarters to respond to critical issues can have a serious impact on efficiency. On occasion, ADTAs can be delivered quickly. In the case of an ADTA16 related to combating the threat of severe acute respiratory syndrome, ADB responded to a direct request from government for assistance within a month. 33. Almost half of executing agencies and consultants reported that there were not quite enough time or resources dedicated to a particular ADTA. Some executing agencies felt they would have benefited from an extension of the time available for consultants or that the effectiveness of the ADTA would have been improved through workshops, seminars, extra training, publishing of findings, etc. Many ADTAs are implemented with a strict adherence to the original timeframe and budget, and some interviewed project officers regarded this as a sign of strong management. In practice, many ADTAs do not expend all the resources available to them, and there are often ADTA resources remaining at the conclusion of an assignment (para. 18, Appendix 7). G. Sustainability

34. The ADTAs are assessed as likely sustainable. Many of them achieved outcomes that are likely to be sustainable, especially in environment, finance, poverty, and urban areas. The relatively poor sustainability reported in Figure A9.6 for the energy sector results from some ADTA outputs not being relevant to the rapidly changing conditions in the sector, caused by designs being inflexible. In the case of rural development, the low rating reflects uncertainty over the sustainability of Global Environment Facility (GEF) cofinanced ADTA outputs. All executing agencies and most project officers and consultants thought that change sustainability was possible or probable. In the light of the implementation difficulties highlighted by all three parties, this result probably reflects their adaptability and the high relevance of ADTAs. 35. Capacity Building. Capacity building is often seen as a major prerequisite for long-term sustainability. Capacity building is frequently measured in terms of numbers of training exercises conducted and numbers of people attending. Several TA papers referred to the key performance indicator for training workshops as number of staff attending or training program. Such indicators provide no information on the suitability of trainees, the quality of the trainer, the training provided, and its long-term impact. Most ADTAs included an element for training (60% of the sample of ADTAs), and this was frequently directed at counterparts. Of executing agencies responding, 91% perceived a long-term improvement in trained staff performance, with 85% of trained staff performing at least satisfactorily. However, 44% regarded the training as being too short. Overall, 90% of executing agencies rated the approach to technology and skills transfer as satisfactory or better. Among the remainder, all felt that the quality of training was mostly fine, there was just not enough of it. A further measure of the sustainability of capacity building is whether any counterparts still work in the agency. All executing agencies reported that they did. 36. Sustained focus on a cluster of TAs can also lead to sustainability in capacity building. In the mid-1990s, ADB provided two TAs introducing concepts of monitoring and evaluation (M&E)17 and supported capacity building in this area. A Government task force in 1996 found that 20% of Government projects were experiencing problems of mismanagement and established the Key Project Inspectorate Office (KPIO) in 1998, within the predecessor of the National Development Reform Commission (NDRC). ADB provided two subsequent M&E TAs to the KPIO in 1999 and
16

ADB. 2003. Technical Assistance to the Peoples Republic of China for Combating Severe Acute Respiratory Syndrome in the Western Region. Manila (TA 4118-PRC, for $2 million, approved on 22 May). 17 ADB. 1994. Technical Assistance to the Peoples Republic of China for Developing the Performance Evaluation Capability of the Peoples Bank of China. Manila (TA 2133-PRC, for $100,000, approved on 9 August); and ADB. 1995. Technical Assistance to the Peoples Republic of China for Study of Project Planning and Management. Manila (TA 2462-PRC, for $225,000, approved on 8 December).

Appendix 9

149

2005 to improve its capacity formulating guidelines, training, and building partnerships with other evaluation agencies. A recent Operations Evaluation Department study18 rated this TA as highly successful. The ongoing project on developing a results-based national M&E system 19 is supplementing the traditional early warning M&E system design, with a more results-based orientation incorporating several outcome and impact indicators. The attention to results orientation has now developed into a country-led approach for results-based strategic planning and results monitoring of the 11th Five-Year Plan with the help of other donors.20 The Ministry of Finance has also established its own evaluation office to evaluate the multilateral development bank (MDB)-funded projects. This illustrates that, within the decade since ADBs introduction of the concepts of M&E, the PRC has come a long way, with sustained involvement from ADB. However, the lessons also show that the impact of these interventions can be further improved if the PRCM can manage and monitor the progress of such TAs. 37. Policy Reform. In 86% of ADTAs, recommendations were made to improve the functioning of the executing agency. These recommendations ranged from the introduction of new office procedures to more substantial reorganization issues. Figure A9.7 shows the degree to which these were acted on according to the executing agencies. Of those recommendations that were implemented, 70% of executing agencies stated that they were easy to implement and 30% not. This reflects the fact that reform implementation is possible and could improve if recommendations were tailored to the specific needs of the executing agency and in a format suitable for implementation in the PRC.
Figure A9.7: Implementation of Recommendations to Improve Functioning of Executing Agency
13%

7%

Not at all Partly Substantially

80%

Source: Country assistance program evaluation team.

38. Influencing government policy is essential to ensuring the sustainability of ADTA outputs. Of all ADTAs examined, 80% sought to make recommendations for policy reform. Of these, all executing agencies except one described the recommendations as being suitable or very
18

ADB. 2006. Peoples Republic of China: Technical Assistance Performance Evaluation Report for Selected Technical Assistance Projects in Public Administration. Manila. 19 ADB. 2005. Technical Assistance to the Peoples Republic of China for Developing a Result-Based National Monitoring and Evaluation System for Key Projects. Manila (TA 4581-PRC, for $400,000, approved on 21 April). The TA is ongoing and facing implementation issues currently. While the identification and pilot testing of the results indicators through the case studies had been substantially completed by September 2006, the database integration and training components had not been started with 3 months remaining before scheduled completion in December 2006. 20 Under this initiative undertaken in collaboration with the World Bank, for the first time, the 11th Five-Year Plan will contain a matrix with 22 monitoring indicators, 8 of them with targets, and 14 with benchmarks.

150

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suitable. In 82% of cases, the executing agency reported that it had to alter policy recommendations substantially in order for them to be accepted by government. This finding is to be expected. It is not the duty of ADB to formulate policies that will be accepted unchanged. Rather, its role is to present options and recommendations that can then be altered to fit the precise requirements of the PRC. While accepting the reality that the government owns and controls the reform process, ADTA outputs could still be more closely allied with government needs, including with regard to format and presentation. Overall, 12% of policy recommendations were mostly accepted and 78% partly accepted by government. H. Project Preparatory Technical Assistance

39. Although the ADTA effectiveness survey of the PRC did not review PPTAs in detail, the survey did identify a number of issues during the information collection for the CAPE. These included concerns raised by ministries and project management offices. The PRC institutions (typically those in infrastructure operations) increasingly prepare their own feasibility studies to a high standard (sometimes exceeding the requirements of ADBs own standards). Typically, these studies are then passed by ADB to their own consultants who use them as the basis for a PPTA. Some executing agencies have reported that in effect this means that their work is taken, translated, adjusted, and returned to them, often with little change in the original content. Executing agencies also reported that they had spent much time and effort in sharing their knowledge with PPTA consultants while gaining little in return. These findings reflect the growing capability in the PRC to design projects and the need for ADB to recognize this and change the requirements of PPTAs in appropriate cases rather than using a one size fits all policy. This means that, for some PPTAs, the need to review safeguards and due diligence may be the main concern, rather than a full-fledged PPTA. This will remove a major duplication of effort, reinforce the capacity of institutions in the PRC to design their own projects, and reduce the financial burden on both ADB and the PRC. I. Conclusions and Recommendations

40. The study has shown that ADTA has been a very effective instrument in assisting in policy development in the PRC, particularly in the legal, poverty, and social sectors. This effectiveness results from a combination of clear, focused terms of references developed with and agreed by the Government in line with national priorities, receptive executing agencies, well-respected project officers located at the PRCM, and the use of consultants to provide new knowledge where they are leading experts in their field. ADTAs have been less successful where this combination does not exist. There exists much scope to continue and further develop the role of ADTA in fostering capacity building and institutional development, which will concurrently build the influence of ADB and create opportunities for extending both existing and innovative lending instruments. 41. The role of ADTA in sectors where lending programs are well advanced is less clear. In particular, traditional attached TAs involved with capacity building are becoming less relevant as the PRC continues to build its own capabilities in these sectors. This maturity in lending programs to these sectors, such as transport, also requires the role of PPTAs in their current form for developing loans to be re-examined. The PRC has built a considerable and advanced feasibility study capability, which needs to be recognized and embraced by ADB when formulating projects. 42. In the conclusions chapter in the main text, a few key recommendations were made on the ADTAs and PPTAs. The following items are also suggested so these recommendations can be implemented in both ADTAs and PPTAs to enhance the quality of ADTAs and encourage innovation.

Appendix 9

151

(i)

(ii)

(iii)

(iv)

(v)

(vi)

(vii) (viii)

Use provincial ADTAs to deepen work on selected issues, which have been difficult to address previously. Some issues are better addressed at the provincial or municipal level, e.g., work on local public expenditures, especially social and poverty programs and regulatory regimes governing transport services. Rely on a more flexible system for approving quick response and cheaper studies, such as the recently created multipurpose TA financing facility. Create more formal processes, including peer reviewers for a more costly and long-term cluster of studies, but provide more flexible procedures for individual contracts once the cluster is approved. Avoid multiyear programming of ADTAs. Do not try to program beyond 1 year for specific activities. Instead, develop thematic clusters that can be supported over many years with only the first tranche defined. Build synergy among related interventions by identifying issues that can serve many objectives as priorities for funding. For example, addressing policy issues on rationalizing water tariffs can serve sector interests as well as having a positive environmental impact. Strengthening local environmental management bureaus can be part of a broader effort to make use of national safeguard systems. Build more synergy between ADTAs for regional cooperation and PRC-specific issues by working with the Ministry of Finance to support work in ministries like Ministry of Commerce and Ministry of Foreign Affairs who deal with regional policy issues such as trade and foreign investment. Get client feedback on a more systematic basis by surveying counterpart agencies regularly on the quality of TAs and projects and getting more formal inputs for completion reports. Review factors leading to unutilized ADTA savings and implications for reallocation and TA design. Rationalize use of international and national consultants for core safeguard and design issues. Identify domestic firms and consultants for standard safeguard and procurement preparatory activities. Put in place risk filters to identify when international expertise is needed.

152

Appendix 10

PORTFOLIO ANALYSIS 1. Program Implementation. The public sector portfolio of the Peoples Republic of China (PRC) is considered to be among the Asian Development Banks (ADB) good performers. With a 92% satisfactory project rating during this country assistance program evaluation (CAPE) period (19982005), it is also among the largest (18.5% of all ADB active loans by amount) and is generally stable at around $6 billion per year. The portfolio comprises mainly project loans (10.3% of the ADB total by number and 23.6% by amount). The PRC portfolio indicators continue to do better than the ADB average. Table A10.1 compares selected the PRC portfolio indicators with East Asia region and ADB averages. The 2006 country portfolio review mission (CPRM) attributed the constantly favorable performance to a high degree of government ownership, fairly strong institutional capacity, and portfolio that consists predominantly of infrastructure projects. Table A10.2 provides a retrospective of portfolio issues since the last country strategy paper in 1997. Table A10.1: Selected Portfolio Management Indicators of the Peoples Republic of China
Item 19982002 PRC REG ADB 46 90 419 6.2 7.4 26.6 6.3 7.7 35.5 3.3 3.1 3.6 5.9 4.6 3.3 3.8 3.8 3.8 0.7 0.8 4.2 23.5 22.1 0.9 1.0 4.7 24.7 22.9 0.3 (0.3) 1.0 20032005 PRC REG ADB 37 87 416 6.5 7.8 26.7 6.5 8.1 33.2 2.8 2.9 3.4 6.6 5.0 3.6 4.2 4.5 4.5 0.8 1.0 4.2 22.4 20.7 0.7 0.9 3.9 20.8 19.5 (0.5) (1.8) (2.6) 19982005 PRC REG ADB 43 88 418 6.3 7.6 26.7 6.4 8.0 34.6 3.1 3.0 3.5 6.2 4.8 3.4 4.0 4.2 4.1 0.7 0.9 4.2 23.1 21.6 0.8 1.0 4.4 23.2 21.7 0.0 (1.4) (0.4)

Active Portfolio (project loans, number)a Active Portfolio (project loans, $ billion)a a Active Portfolio (all loans, $ billion) Average Age of active portfolio (years) Avg Time from Approval to Signing (mos.) Avg Time from Signing to Effectiveness (mos.) Contract Awards ($ billion) Contract/Commitment Ratio (%) Disbursements ($ billion) Disbursement Ratio (%) Net Transfer of Resources ($ billion) Portfolio Performance (all loans) Project Ratings (HS + S, %) 88.5 87.0 80.0 96.6 92.4 88.8 91.5 90.2 83.3 Project at Risk (number of loans) 6 17 106 1 8 62 4 12 90 Problem Projects (combined IP and 11.5 13.1 20.0 3.4 7.6 11.2 8.5 9.8 16.7 DO, %) Potential Problem (%) 1.1 2.9 4.0 0.0 0.7 1.2 0.4 1.6 2.3 Problem Projects (% of active portfolio) Implementation Progress (PS and U) 8.9 9.8 17.2 3.4 7.3 9.7 6.9 7.9 14.4 Impact and Outcome (PS and U) 5.8 1.0 7.8 0.9 2.9 3.3 3.7 2.0 6.1 b/ 8.5 13.7 17.1 7.2 10.6 13.2 7.7 11.9 14.7 Overall Risk Ratio of Portfolio (%) Supervision intensity (staff days/project) 17.2 24.5 18.2 26.2 24.4 25.6 20.6 24.5 21.0 ADB = Asian Development Bank, Avg = average, PRC = Peoples Republic of China, DO = development objective, HS = highly satisfactory, IP = implementation progress, mos. = months, PS = partly satisfactory, REG = East Asia region, S = satisfactory, U = unsatisfactory. a Comparative data for region refers to old East and Central Asia region. b Weighted average of 12 risk ratios from ADB project performance reports. Source: ADB Central Operations and Services Office, Portfolio Management Information System.

2. Portfolio Size and Trends. Table A10.3 provides a detailed view of portfolio management indicators for the PRC. Project loans (including sector loans) comprised 98% of total loan volume. The average age of the portfolio was 3.1 years during the CAPE period and averaged 2.8 years in 2005 as compared with the ADB average of 3.6 years. Most (80.5%) of active loans at the end of 2005 had been approved since 2001 and were less than 6 years old. Twenty-one (51.2%) of the ongoing loans were approved between 2003 and 2005. Three loans were more than 6 years old and the oldest active loan was approved in June 1999 (6.5 years).

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153

Table A10.2: Review of Key Portfolio Issues During the Country Portfolio Review Missions
Issue 19982001 Nov 1998 (CPR)/NovDec 2000 (CPRM 2000)/ MarApr 2002 (CPRM 2002) CPRM 2002 reconfirmed reasons identified during CPRM 2000 for delays in loan effectiveness: (i) new EAs lack of familiarity with ADB and domestic procedures; (ii) complexities in finalizing and securing approval (i.e., long time to finalize relending and onlending agreements; delays due to reasons beyond EAs control such as government institutional reforms, and delays in government approval for the start of project construction); and (iii) EA preference to postpone signing and effectiveness until the first contracts to be financed by ADB are ready for award to minimize commitment fees. CPRM 2000 also cited some delays at the time were attributable to procedural changes due to the transfer of the project portfolio from Peoples Bank of China to the Ministry of Finance in 1998. 20022006 JunJul 2004 (CPRM 2004)/Aug 2006 (CPRM 2006) CPRM 2004 reconfirmed reasons for start-up delays identified by CPRM 2002: (i) lack of EA familiarity of with ADB and domestic procedures; and (ii) complexities in finalizing and securing approval. With respect to the latter, specific reasons for delays are: (i) mismatches between ADB and PRC procedures for project approval and procurement; (ii) the long time needed to finalize relending and onlending agreements; (iii) delays in readiness of first contracts to be awarded; (iv) conditions for loan effectiveness not being met (e.g., establishment of a corporatized entity and restructuring of the EA); and (v) the long time for the PRCs internal approval of feasibility study. CPRM 2006 reconfirmed some reasons for startup delays already identified in previous CPRMs. It also pointed out that delays mostly occurred at loan signing. Specific reasons identified by CPRM 2006 are (i) delays in finalizing onlending and relending agreements; (ii) non-readiness of procurement documents for infrastructure projects; (iii) late approval of feasibility study reports in the case of agriculture and natural resource projects; and (iv) major changes in project scope and implementation arrangements. CPRM 2004 pointed out less than satisfactory contract award performance due to (i) EAs lack of familiarity with ADB procedures; (ii) poor quality of procurement documents; (iii) slow response from ADB on EA requests for review and approval of procurement documents; and (iv) the mismatch between ADB and domestic procurement procedures. CPRM 2006 reported capacity assessment being undertaken by ADB as part of project processing. Procurement capacity assessment process and supporting tools are currently under development with ADB. EA capacity assessment aim to place appropriate functions with the appropriate body, prepare improvement plans addressing weaknesses, determine steps required to mitigate risks, detail national practices inconsistent with ADBs procurement policy, and establish prior and post-review thresholds.

Project Start-Up Delays

Contract Awards and Bid Process

CPRM 2002 reconfirmed reasons for delays in procurement process identified during CPRM 2000. Delays in procurement process due to the unfamiliarity of EAs with ADB procedures (with some not adhering to these procedures) and inadequate quality of tender documents. CPRM 2002 discussions also indicate a communication gap between ADB and EAs on the objectives, policies, and requirements of ADB. Often, EAs do not fully understand or appreciate the need to include certain components in a project to comply with loan covenants or procedural requirements. This has resulted in EAs at times being reluctant or unwilling to meet ADB requirements.

Consultant Recruitment

During CPRM 2000, elapsed time from loan approval to the first consultant contract award is substantially above ADB-wide average. During CPRM 2002, Elapsed time from loan approval to first consultant contract award increased (although this was lower than the ADB-wide average). EAs have stated that because of a perceived lack of value added and high costs, they would like to keep international consultant inputs to a minimum. CPRM 2000 reported lower disbursement ratios due to a large amount of new loans becoming effective. CPRM 2002 observed that inadequate quality of withdrawal applications (WA) slowed down the disbursement process. This was due to EAs unfamiliarity with ADB disbursement procedures and were not being prepared according to requirements. CPRM 2006 noted that 11 projects had significant disbursement delays.

Disbursements and Net Resource Transfers

154
Issue

Appendix 10 19982001 Nov 1998 (CPR)/NovDec 2000 (CPRM 2000)/ MarApr 2002 (CPRM 2002) Actual costs were much less than appraisal estimates, leading to large loan savings. Conservative estimates were based on outdated norms, while contingencies were perhaps too conservative as well. Large loan savings have led to cancellations of surplus funds and unnecessary burden from excessive fees. Seventeen loan projects (out of 45 active loans) have loan savings of about $800 million. Of this, $330 million was cancelled, $300 million was scheduled for cancellation, and $170 million was estimated as potential savings. Total loan savings on the 17 projects accounted for 30% of loan amounts, and 13% of loan amounts for all ongoing projects. By the end of 2001, 42 of 88 approved loans had savings, resulting in cancellations of about $880 million, or 8% of total approved loan amount. Because of this, MOF expressed unwillingness to borrow for foreign exchange contingencies. MOF and EAs proposed a more flexible process for reallocating loan savings. MOF also expressed the view that in case of loan savings, the proportionate front-end fee be returned to the Government. During CPRM 2000, EAs, particularly for industrial environment control projects, faced difficulties in complying with stipulated financial covenants because of poor demand forecasts, pricing policy changes, and inadequate tariffs EAs place emphasis on physical implementation of the works rather than policy aspects, which do not exhibit immediate impacts. 20022006 JunJul 2004 (CPRM 2004)/Aug 2006 (CPRM 2006) CPRM 2004 reconfirmed the earlier findings of the PRCM study on reasons for cancellations: (i) reductions in the actual cost of equipment, materials, and civil works compared with appraisal estimates (mainly because of competitive prices under ICB and lower prices offered by domestic bidders); (ii) cancellation of project subcomponents; (iii) replacement of ADB loan with alternate domestic financing; and (iv) higher appraisal estimates for contingencies and interest during construction. Cancellation of surplus loan proceeds was $281 million in 2003, higher than in 2002 and 2001. In 2003, the PRC loan cancellations accounted for one quarter of ADB cancellations. Cumulatively, $1.38 billion has been cancelled or 10.2% of total loans.

Loan Savings and Cancellations of Surplus Loan Amounts

Loan Extensions

CPRM 2004 reported 13 of loans closed in 2003 required extensions of closing dates, with average extension times of 462 days (1.3 years), which was higher than in 2001 and 2002. Reasons for delays include (i) delays in procurement and disbursements, (ii) changes in EA or IA implementation arrangements, and (iii) changes in project scope and design. CPRM 2006 cited delays in signing of onlending agreement affected project implementation. Impacts included: delayed project commencement, delayed achievement of physical and financial targets, and extension of loan closing date. CPRM 2004 reported that the submission of APAs and AFSs declined in 2003 compared with previous years. These resulted in the PRC being among the poor performers in this aspect in 2003. Reasons identified are (i) EAs do not pay enough attention to deadlines or are not fully familiar with requirements; and (ii) EAs need additional time to summarize when several levels are involved in preparing financial statements, especially in social sector projects. During CPRM 2006, CNAO remarked that the audit reports in general needed qualitative improvement. It suggested that CNAO should cooperate with line departments and ADB. CNAO also expressed concerns about workload and staff constraints as ADB requires unified audit reports by submission deadline for all new projects, and this may have a negative impact on quality of audit work. CPRM 2006 reported financial management issues such as differences between ADB records and audited accounts, inadequate scope in some audit reports; audit recommendations not implemented; and no satisfactory explanations on qualified audit opinions. Common project financial management weaknesses disclosed in audit reports were highlighted. Questions were also

Submission of Audited Project Accounts (APA) and Financial Statements (AFS)

CPRM 2000 cited poor compliance in timely submission of audited accounts. The quality of submitted reports is an issue. Financial statements are sometimes not in required format, inaccurate figures are reported, and required clarifications are not provided. Compared with the status in 2000 compliance with submission of audited accounts and financial statements deteriorated, as late compliance increased significantly in 2001, although the timeliness improved in 2002.

Appendix 10 Issue 19982001 Nov 1998 (CPR)/NovDec 2000 (CPRM 2000)/ MarApr 2002 (CPRM 2002) CPRM 2000 observed that EAs, particularly for industrial environment control projects, faced difficulties in complying with stipulated financial covenants because of poor demand forecasts, pricing policy changes, and inadequate tariffs. EAs place emphasis on physical implementation of the works rather than policy aspects, which do not exhibit immediate impacts. CPRM 2002 stated that EAs have also faced difficulties in complying with financial covenants. They focused more on physical implementation than on complying with policy conditionalities because he policy environment is beyond their control. EAs need to have greater awareness and appreciation of the rationale of policy covenants relating to institutional, economic, financial, environmental, and social aspects. CPRM 2000 mentioned that there were several instances where EAs or IAs were changed during implementation. While in some cases these were part of sector reform, changes were made without consulting ADB in advance or sometimes without informing ADB. During CPRM 2002, MOF requested additional delegation of powers be granted to the PRCM with respect to procurement and disbursement.

155

Compliance with Financial and Policy Covenants

20022006 JunJul 2004 (CPRM 2004)/Aug 2006 (CPRM 2006) raised about multi-access to the ADB LFIS for provincial finance bureaus within the province. CPRM 2004 indicated that projects have generally good performance records in complying with sector, environmental, and social covenants. However, some EAs experience difficulties in complying with financial covenants. Reasons for noncompliance include (i) qualifications and experience of accounting personnel in some EAs are inadequate; (ii) project financial statements are not standardized; (iii) EAs do not fully understand the purpose, definition, and calculation methods for financial ratio covenants; and (iv) unrealistic financial covenants.

Changes in Implementation Arrangements of Projects Project Administration

During CPRM 2004, MOF continued to request that additional responsibility be delegated to the PRCM, particularly relating to procurement, disbursements, and project administration. CPRM 2006 cited CNAO advice to EAs and IAs (based on its audit findings) to take a scientific and forward-looking approach and also to strengthen project supervision. It also reported that the PRCM, in collaboration with ADB headquarters, will undertake training in project management, resettlement, procurement of goods and works, recruitment of consultants, disbursement and environment management, and monitoring of the staff of EAs and IAs at project processing and or inception to help jumpstart project implementation activities.

TA under Implementation

CPRM 2000 pointed out that the number of TAs under implementation was too large and a large number had unliquidated advances, late procurement, or submission of receipts over long periods.

CPRM 2006 stated that PRC has given high priority to monitoring and evaluation of project performance. The Comprehensive Division of MOF has been given the specific responsibility of monitoring and evaluating the projects. The PRCM is also recruiting a project management officer to assist EAs in effective project implementation management through proven project management techniques (i.e., design and monitoring frameworks, critical path analysis, and results-based project management techniques). ADB = Asian Development Bank, CNAO = China National Audit Office, CPR = country portfolio review, CPRM = country portfolio review mission, PRC = Peoples Republic of China, EA = executing agency, IA = implementing agency, ICB = international competitive bidding, LFIS = Loan Financial Information System, MOF = Ministry of Finance, PRCM = PRC Resident Mission, TA = technical assistance. Sources: Aide memoires and back-to-office reports of various country portfolio review missions. Project Performance Management

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Appendix 10

Table A10.3: Portfolio Management Indicators

CSP Period Average Indicators I. Public Sector Loans A. Country Portfolio 1. Active Loan Portfolio of which: Project Loans 2. Average Loan Size 3. Average Age of Active Loan Portfolio B. Start-Up Compliance 1. Loans Approved During the Year Average Loan size 2. Loans Not Yet Signed 3. Loans Awaiting Effectiveness 4. Average Time from Approval to Signing 5. Average Time from Signing to Effectivity 6. Average Time from Approval to Effectivity 7. Loans that Became Effective >90 Days after Signing no. $mn $mn no. no. months months months no. % C. Financial Performance 1. Contract/Commitment Achievement 2. Contract/Commitment Ratio 3. Disbursement Achievement 4. Disbursement Ratio
b c a

ADB 2005

Unit

1998

1999

2000

2001

2002

2003

2004

2005

1998 2002

2003 2005

1998 2005

no. $mn no. $mn $mn years

46 6,052 44 5,892 131.6 2.9

50 6,793 48 6,633 135.9 3.3

45 5,941 44 5,881 132.0 3.2

48 6,393 47 6,333 133.2 3.6

46 6,286 45 6,253 136.6 3.6

39 6,115 38 6,082 156.8 3.1

35 6,130 34 6,097 175.1 2.4

41 7,321 40 7,288 178.6 2.8

47 6,293 46 6,198 133.9 3.3

38 6,522 37 6,489 170.2 2.8

44 6,379 43 6,307 147.5 3.1

512 33,907 426 27,698 66.2 3.6

7 1,162 166.0 6 3 6.0 3.3 9.3 12 32.4

7 1,232 176.0 3 1 5.5 3.8 9.3 24 50.0

6 872 145.4 5 2 6.1 4.0 10.1 23 60.5

6 997 166.2 6 1 5.9 4.0 9.9 24 58.5

6 834 138.9 6 3 6.4 4.0 10.4 23 62.2

7 1,488 212.6 5 6 6.8 4.4 11.2 21 75.0

7 1,260 180.0 6 1 6.7 4.1 10.8 20 71.4

7 1,479 211.3 5 0 6.2 4.1 10.3 25 69.4

6 1,019 158.5 5 2 6.0 3.8 9.8 21 52.7

7 1,409 201.3 5 4 6.6 4.2 10.8 22 72.0

7 1,165 175.9 5 2 6.2 4.0 10.2 22 59.9

65 5,261 80.9 34 25 3.7 4.6 8.3 278 61.4

$mn % % $mn % % % no. % no. % no. % $mn $mn $mn

539 18.1 818 25.6 1.0 NA NA NA 318 48 500

802 94 25.1 792 124 19.3 1.2 2 5.9 0 0 366 25 426

755 104 26.2 832 108 22.8 0.7 0 0 0 435 30 397

588 80 22.1 1,042 128 29.8 0.9 5 13.9 0 0 488 0 555

673 84 26.0 782 139 25.9 1.2 3 9.7 0 0 1,017 459 (235)

455 75 14.9 705 120 25.8 2.5 3 13.6 0 0 2,672 2,130 (1,967)

686 105 19.1 636 124 17.0 1.1 1 5.3 0 0 578 235 58

1,386 133 33.4 875 122 19.7 2.1 1 3.7 0 0 435 36 440

671 90.4 23.5 853 125 24.7 1.0 3 9.8

842 104.4 22.4 739 122 20.8 1.9 2 7.5

735 96.4 23.1 810 123 23.2 1.3 3 8.7

5,708 27.4 4,541 20.7 1.6 47 15.0 8 2.5 4 1.3

5. Imprest Fund Turnover Ratio 6. Submission of APA and AFS (a) =< 6 months (b) > 6 =< 12 months (c) > 12 months 7. Loan Service Payments 8. Loan Prepayments 9. Net Resource Transfer D. Portfolio Performance 1. Project Ratings (a) Highly Satisfactory (HS) (b) Satisfactory (S) (c) Partly Satisfactory (PS) (d) Unsatisfactory (U)

525 112 328

1,228 800 (490)

789 370 22

5,076 (535.6)

no. % no. % no. % no. %

3 6.5 33 71.7 8 17.4 2 4.3 10 21.7 10 21.7 0 0 7 15.2 3 6.5

2 4.0 41 82.0 7 14.0 0 0 7 14.0 7 14.0 0 0 5 10.0 4 8.0

2 4.4 39 86.7 3 6.7 1 2.2 4 8.9 4 8.9 0 0 3 6.6 3 6.6

3 6.3 43 89.6 1 2.1 1 2.1 3 6.3 2 4.2 1 2.1 2 4.2 0 0

1 2.2 41 89.1 0 0.0 4 8.7 4 8.7 4 8.7 0 0 4 8.7 1 2.2

0 0.0 35 89.7 0 0.0 4 10.3 4 10.3 4 10.3 0 0 4 10.3 1 2.6

0 0 35 100.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0 0 0.0 0 0.0

1 2.4 40 97.6 0 0.0 0 0.0 0 0.0 0 0.0 0 0 0 0.0 0 0.0

2 4.7 39 83.8 4 8.0 2 4.3 6 11.9 5 11.5 1 2.1 4 8.9 3 5.8

0 0.8 37 95.8 0 0 1 3.4 1 3.4 1 3.4

2 3.2 38 88.3 2 5.0 2 3.9 4 8.7 4 8.5 1 2.1

3 0.6 472 92.2 21 4.1 16 3.1 44 8.6 37 7.2 7 1.4 33 6.4 12 2.3

2. Projects At Risk (no. of loans) (a) Problem Projects (combined IP & DO) (PS & U) (b) Potential Problem Projects (c) Problem Projects (i) Implementation Progress (PS & U) (ii) Development Objectives (PS & U)

no. % no. % no. % no. % no. %

1 3.4 0 0.9

3 6.9 2 3.7

Appendix 10

157

CSP Period Average Indicators Unit 1998 1999 2000 2001 2002 2003 2004 2005 1998 2002 3. Risk Ratios
d

ADB 2005

2003 2005

1998 2005

(a) Project Implementation Delays (b) Loan Utilization Delays (c) Established, Staffed, and Operating PMU/PIU (d) Fielding of Consultants (e) Environment or Social Problems (f) Poor Compliance with APA and AFS (g) Poor Compliance with other Covenants (h) Shortage of Counterpart Funds/Cofinancing (i) Unsettled Cost Overrun (j) Significant Disbursement Delays (k) In Risk Sector or Country with History of Past Problems (l) Project Fielded Missions 4. Overall Risk Ratio of the Portfolio E. Portfolio Supervision f 1. Proactivity Index 2. Average Supervision Intensity (staffdays/project) 3. Resident Mission Delegated Projects 4. Loans with Settled Cost Overruns 5. Loans with Changes in Project Scope 6. Loans with Changes in Implementation Arrangements 7. Loans with Extensions 8. Loan Cancellations 9. Loans Closed during the year 10. Loans Closed with extensions II. Technical Assistance (TA) 1. Active TA Portfolio 2. Avg Time from Approval to Signing of TA Agreement 3. TAs Completed but not Financially Closed (undisbursed)
a e

no. % no. % no. % no. % no. % no. % no. % no. % no. % no. % no. % no. % % na

9 19.1 0 0.0 0 0.0 1 2.1 0 0.0 1 2.1 6 12.5 1 2.1 0 0.0 6 12.5 10 20.8 11 22.9 8.6

9 20 0 0.0 1 2.2 1 2.2 0 0.0 0 0.0 5 10.9 0 0.0 0 0.0 7 15.2 4 8.7 15 32.6 8.3

5 12.8 0 0.0 0 0.0 0 0.0 1 2.6 2 5.1 2 5.1 0 0.0 0 0.0 8 20.5 0 0.0 15 38.5 7.7

4 11.4 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 1 2.9 0 0.0 0 0.0 7 20.0 0 0.0 14 40.0 6.7

6 14.6 0 0.0 1 2.4 2 4.9 0 0.0 1 2.4 1 2.4 0 0.0 0 0.0 11 26.8 0 0.0 10 24.4 7.1

9 19.4 0 0 1 1 1 2 0 0 1 1 6 12 1 1 0 0 7 13.9 7 14.8 13 27.8 8

5 13.0 0 0 0 1 1 2 0 1 1 3 1 3 0 0 0 0 9 22.4 0 0 13 34.3 7

7 15.5 0 0.0 0 1 1 2 0 1 1 2 3 7 0 0 0 0 8 19.0 3 5.9 13 31.7 8

124.0 24.9 4 13.8 9 2.0 21 4.2 18 4.1 13 2.9 50 9.8 13 2.6 2 0.5 152 29.7 90 17.6 159 31.1 12.2

no. % days no. no. no. no. no. $mn no. no.

NA 16.0 NA 4 4 7 33.0

NA 14.4 NA 6 4 12 60.5

NA 16.0 NA 7 3 6 472.9 9 7

4 100.0 17.8 2 5 4 15 229.6 6 5

1 33.3 21.9 4 3 0 0 16 183.9 7 5

3 75.0 24.1 8 4 1 0 9 281.3 14 13

4 100.0 28.3 9 0 4 2 4 69.9 9 8

0 0 26.1 14 0 2 5 7 37.0 1

3 67 17.2 4 3 4 3 11 196.0 7 6

4 88 26.2 10 1 2 2 7 129.4 8 11

3 77 20.6 9 2 4 3 10 171.0 8 8

52 75.4 24.4 7 53 63 141 728.2

no. $mn months no. $mn

NA NA NA

114 76.1 3.0 44 3.9

87 66.8 2.8 23 2.4

82 66.5 3.0 198 2.7

100 75.1 3.1 37 5.3

96 65.5 2.7 31 2.4

98 65.1 2.5 20 1.7

93 54.6 2.3 9 1.6

g g

96 71.1 3.0 76 3.6

96 61.7 2.5 20 1.9

96 67.1 2.8 52 2.9

1,048 772.6 3.3 71 8.8

g g

ADB = Asian Development Bank, Avg = average, CSP = country strategy and program, PRC = People's Republic of China, NA = not available, na = not applicable, TA = technical assistance. Contract/commitment award ratio is defined as the ratio of contract awarded/actual commitment during the year over the value available for contract/commitment awards at the beginning of the year. The value of the contracts/commitments to be awarded/committed under newly approved loans during the period is/will be added to the opening balance of the value available for contract/commitment awards. b Disbursement ratio is the ratio of total disbursement in a given year/period over the net loan amount available at the beginning of the year/period plus the loan amounts of newly approved loans which have become effective during the year/period. Where (i) "Total disbursement in a given year/period" refers to the confirmed disbursement for a particular year/period covered; (ii) "Net loan amount available at the beginning of the year/period" refers to all loans that were effective at the beginning of the year; (iii) "Loan amounts of newly approved loans which have become effective during the year/period" refers to all loans approved before and after the beginning of the year that have become effective after the beginning of the year. c The annualized turnover rate is computed as the ratio of total liquidation over the time-weighted average fund balance for 12 months. d Percentage of problem-flagged projects (loans) to total no.of loans in various loan portfolio categories. e The weighted average of the 12 risk ratios. f Percentage of problem projects changed through upgrading, restructuring, closure, or cancellation during the last 12 months. g Include adjustments to TA amounts made after the cutoff period (4629-PRC - reduction of $.207; 4631-PRC - reduction of $.350; and 4671-PRC - additional of $.100). Source: ADB Central Operations and Services Office, Project Management Information System.

3. The public sector portfolio at the end of 2005 consisted of 41 loans with a net loan amount of $7.3 billion, up from about $6.1 billion per year in 2003 and 2004. By loan amount,

158

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the portfolio ranged from $6.3 billion per year during 19982002 to about $6.5 billion per year during 20032005. The increases have been due to recent accelerations in annual loan approval amounts. The average loan size of the active portfolio increased to $170.2 million during 20032005 (up from $133.9 million during 19982002). On the other hand, by number of loans administered, the PRC portfolio has declined from 47 loans per year during 19982002 to about 38 loans per year during 20032005. The number of active loans fell from 46 loans per year during 20002002 to 39 in 2003 and 35 in 2004. The reduction was due to a large number of loan closures in 2003 and 2004. During the 2-year period, 23 loans were closed, while the number of loans approved remained constant at about seven per year. 4. Performance Ratings. Project performance was generally satisfactory, with about 92% rated satisfactory or higher during 19982005 (Table A10.1). The improvement in portfolio performance has been remarkable in 2004 and 2005, with the ratio of loans rated satisfactory or better rising from 89% during 19982002 to 97% during 20032005 (the ADB average during the latter period was 89%). All loans were classified as satisfactory or better at the end of 2004 and 2005 and the proportion of projects at risk decreased from 11.5% (5 loans per year) during 19982002 to 3.4% (1 loan per year) during 20032005. There were no projects in the at-risk category (compared with about 10% at-risk loans in 2003) and in the potential problem category in 2004 and 2005. The PRC portfolio performance was better than both the East Asia region and the ADB average during 19982002, and this was strengthened during 20032005. The ratio of at risk projects was 8.5% during 19982005, compared with the ADB average of 16.7%. Table A10.1 also shows that there has been a decline in the number of PRC projects that had problems with implementation and meeting development objectives. This was in line with ADB-wide improvements over the same period. Despite this good performance, CPRM 2006 noted several shortcomings in 2005 which require attention: (i) project implementation delays (six projects), (ii) a delay in establishing a project management unit, (iii) delays in fielding consultants, (iv) poor compliance with submission of project accounts, and (v) delays in processing disbursements (11 projects). 5. Contract Awards. Contract awards performance was mixed. The amounts of contract awards for active loans were generally short of targets during 19982002. Contract awards averaged only 90% of projections during 19982002 and 79% during 20012003. CPRMs in 2000, 2002, and 2004 attributed the delays in the procurement process to executing agencies lack of familiarity with ADB procedures, poor quality of procurement documents, slow response time from ADB, the mismatch between ADB and domestic procedures, unrealistic annual targets for contract awards, and low bids. However, contract award achievements averaged 119% of targets during 20042005, with awarded contracts reaching $1.4 billion in 2005, the highest achieved during the CAPE period. Consequently, the amount of contracts awarded improved from $671 million per year during 19982002 to $842 million per year during 2003 2005. The contract commitment awards ratio improved to 33% in 2005 after falling below 20% during 20032004.1 The contract awards ratio averaged around 22% during 20032005 and about 23% during the CAPE period. The ratio is better than the ADB-wide averages for all loans (22%) and project loans (17%) during 19982005. In terms of size, contract awards from the PRC portfolio averaged about 16.7% of ADB-wide commitments of about $4.2 billion during 19982005.

Contract and/or commitment ratio is defined as the ratio of contract awarded and/or actual commitment during the year over the value available for contract commitment awards at beginning of year.

Appendix 10

159

6. For project loans only, the contract and/or commitment award ratio of the PRC portfolio averaged 23.1% during 19982005, as compared with the ADB-wide average of 17.1% (Figure A10.1). During 20012005, the PRC contract commitment ratio averaged about 23%, as compared with 14% for India and 17.5% for Indonesia. ADB contracts and/or commitments in the PRC accounted for more than a fourth of ADB-wide project loan disbursements (about 29% during 20012005).
Figure A10.1: Trends in Contract Commitments (active loans without program loans)
40 5,000 4,000 3,000 20 2,000 10 1,000 0 1998 1999 2000 2001 2002 2003 2004 2005 Contract Ratio (PRC) Contract Ratio (ADB) Contract Ratio (IND) Contract Awards (PRC) Contract Ratio (INO) Contract Awards (ADB) $ Million

30 Percent (%)

ADB = Asian Development Bank, PRC = People's Republic of China, IND = India, INO = Indonesia. Source: Asian Development Bank database.

7. Disbursements. Disbursement performance during the CAPE period was good, but there were some difficulties in later years. Annual disbursements consistently exceeded the ADB-wide average. Actual disbursements averaged 123.5% of projections during the CAPE period, which was better than the ADB-wide average of 101.1% for project loans and 102.8% for ordinary capital resources loans. However, the average disbursement ratio declined from 24.7% during 1998 2002 to 20.8% during 20032005, which remains slightly better than the ADB-wide average disbursement ratio of 19.6% for all loans during 20032005. The disbursement ratio fell to a low of 17% in 2004 because of a reduction in the disbursed amount to $636 million and an acceleration in loan approval amounts. The ratio improved slightly to 19.7% in 2005, with a recovery in disbursements to $875 million in 2005 (a ratio of about 20% appeared reasonable based on an average implementation period of over 5 years for the portfolio). The total disbursed amount averaged about $800 million during 19982005 but only $739 million during 20032005, following a slowdown from 2003 to 2004. The PRC disbursement ratio of 23.2% (mostly project disbursements) from 1998 to 2005 remained better than the ADB average of 21.7% (including program loans) for the same period. In terms of size, disbursements from the PRC portfolio averaged about 18.2% of ADB-wide commitments of about $4.2 billion during 19982005. 8. For project loans only, the disbursement ratio of the PRC portfolio averaged 23.2%, as compared with the ADB-wide average of 17.9% during 19982005 (Figure A10.2), The PRC disbursement ratio was also better than those for India (18.9%) and Indonesia (18.5%). ADB disbursements to the PRC accounted for 28.8% of ADB-wide project loan disbursements during 19982005.

160

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Figure A10.2: Trends in Disbursements (active loans without program loans)

40 4,000

30 Percent (%) 20

3,000 2,000 $ Million

10 0 1998 1999 2000 2001 2002 2003 2004 2005

1,000 0

Disbursement Ratio (PRC) Disbursement Ratio (ADB)

Disbursement Ratio (IND) Disbursements (PRC)

Disbursement Ratio (INO) Disbursements (ADB)

ADB = Asian Development Bank, PRC = People's Republic of China, IND = India, INO = Indonesia. Source: Asian Development Bank database.

9. Net Resource Transfers. There was a negative resource transfer of $490 million to the PRC during 20032005, as compared with a positive transfer of $328 million during 19982002 (Figure A10.3). Loan prepayment, which totaled $2.8 billion, was the key contributor to the negligible resource transfers during 20022004. Loan prepayments were mainly in the energy and transport sectors, which accounted for about 90% of the total prepayment during 20022004. The reasons for the loan prepayments were (i) large cash balances among power companies along with few safe investment channels in the domestic financial market; (ii) expressway companies that had been listed in the stock market used some of the funds raised to pay back debts; and (iii) a favorable domestic financial environment made it easier for the executing agencies to borrow domestic commercial loans and use them to pay ADB loans, which carry a higher interest rate and foreign exchange risk. With the return of loan prepayments to their 19982000 levels, net resource transfers increased to $440 million in 2005 from about $58 million in 2004.
Figure A10.3: Net Transfer of Resources
3,000 2,500 2,000 $ Million 1,500 1,000 500 0 1998 1999 2000 2001 2002 2003 2004 2005 Loan Approvals Loan Service Payments Net Transfer of Resources Source: Asian Development Bank database. Disbursements Loan Prepayments 3,000 2,000 1,000 0 -1,000 -2,000 -3,000 $ Million

Appendix 10

161

10. Start-Up Compliance. The average time elapsed from approval to effectiveness during 19992004 has been longer than the ADB-wide average and has generally shown an increasing trend (Table A10.3). The average time from approval to effectiveness reached a peak of 11.2 months in 2003 from 10 months in 2000. Two-thirds of this increase was accounted for by a longer time from approval to signing. The average time from approval to signing increased from 6.1 months in 2000 to a high of 6.8 months in 2003. Average time from signing to effectiveness increased from 4 months to 4.4 months in 2003. CPRMs in 2000, 2002, and 2004 identified the reasons for delays in effectiveness to (i) executing agencies lack of familiarity with ADB and domestic procedures; and (ii) complexities in finalizing and securing approval (Table A10.2). Likewise, CPRM 2000 and 2002 observed that executing agencies prefer to postpone signing and effectiveness until the first contracts to be financed by ADB are ready for award to minimize commitment fees, which start 60 days after loan signing. 11. Recent ADB and the PRC efforts managed to reduce the average time from approval to effectiveness to about 10.3 months by 2005. Overall, the average time from approval to effectiveness increased to about 10.8 months during 20032005, from about 9.8 months during 19982002. The practical issue of executing agencies preferring to postpone signing and effectiveness in order to reduce commitment fees will continue to influence the average time from approval to effectiveness, which in 2005 was still about 1.2 times the ADB-wide average of 8.3 months. This was largely due to the time from approval to signing, which was about 1.7 times the ADB-wide average of 3.7 months. The CPRM 2006 confirmed that start-up delays from approval to effectiveness mostly occurred at signing of loan agreements. The relative improvement in terms of time from signing to effectiveness was only due to a deterioration in the ADB-wide average (from 3.6 months in 2000 to 4.6 months in 2005). 12. Consultant Recruitment. CPRM 2000 found the time from loan approval to first consultant contract award was significantly longer than the ADB-wide average growth. CPRM 2002 observed that this time period had increased, but by less than the ADB-wide average. Both CPRMs noted that, because of a perceived lack of value added and high costs, executing agencies would like to keep international consultant inputs to a minimum (Table A10.2). CPRM 2004 did not flag specific issues on consultant recruitment. Meanwhile, ADB has updated its project administration guidelines on procurement and use of consultants to bring greater flexibility, reduce delays, and cut unnecessary transaction costs. However, future cooperation with the PRC will need to take into account its rapid development and accumulated experience. Future projects may need to use more domestic inputs, while international consultants with their ideas and expertise should try to better understand the country-specific needs. 13. Cancellation of Surplus Loan Amount. CPRMs in 2000, 2002, and 2004 repeatedly discussed the issue of large loan savings and loan cancellations (Table A10.2). A PRCM review identified the reasons for cancellations as (i) reductions in actual cost of equipment, materials, and civil works, compared with appraisal estimates (mainly due to competitive prices under international competitive bidding and lower prices offered by domestic bidders); (ii) cancellation of project subcomponents; (iii) replacement of the ADB loan by alternate domestic financing; and (iv) higher appraisal estimates for contingencies and interest during construction. 14. ADB and PRC efforts to reduce the level of loan savings and cancellations have shown results. The average amount of loan cancellations declined from about $196 million during 19982002 to about $129 million during 20032005. Loan cancellations in 2004 were only $70 million, compared with 2001 ($230 million), 2002 ($184 million), and 2003) $281 million. They declined further to $37 million in 2005.

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15. Loan Extensions. The issue of loan extensions was first highlighted during CPRM 2004 (Table A10.2). At that time, 13 loans due for completion in 2003 had to be extended as did all 8 loans scheduled for closing in 2004. Extensions of loan closing dates were due to (i) start-up delays, (ii) major changes in project scope and implementation schedules, (iii) the long time for executing agencies to obtain Government approval of procurement documents, (iv) executing agencies lack of familiarity with ADB procedures, and (v) unrealistic estimates for implementation and closing dates. 16. ADB had some success in reducing the number of loan extensions, with the average number of active loans with extensions falling from about 13 loans during 20012003 to about 6 during 2004 2005. Consequently, the average number of active loans with extensions declined from 11 loans per year during 19982002 to 7 during 20032005. 17. Audit Compliance. Audit compliance (quality and timeliness of submission) was raised in CPRM 2000, 2002, and 2004, and the PRC was among ADBs poor performers in terms of audit compliance in 2003 (Table A10.2). CPRM 2004 identified several reasons for late submission of audited project accounts and audited financial statements: (i) executing agencies do not pay enough attention to deadlines or are not fully familiar with what is required; and (ii) executing agencies need additional time to summarize when several levels are involved in preparing financial statements, especially in social sector projects. The midterm country portfolio review reconfirmed the reasons for noncompliance identified by CPRM 2004 and added (i) misunderstanding of the wording furnish, and (ii) the absence of an ADB manual on project audits. 18. The midterm CPR in 2005 noted a significant improvement. By the end of 2004, of 19 loans due for submission of audited project accounts and audited financial statements, 18 fully complied with requirements, and one complied late. By comparison, in 2003, only 27% fully complied, 59% complied late, 9% partly complied, and 5% failed to comply. Actions taken that contributed to this better compliance included (i) financial management reviews in 20022003 and 2005 by the PRCM; (ii) four financial management workshops funded under an ADB regional technical assistance project in MayJune 2004; (iii) intensive discussions between ADB, the Government, executing agencies, and the China National Audit Office (CNAO) on submission of audited project accounts and audited financial statements during CPRM 2004 (as a result of which CNAO has strengthened its planning and implementation of audit work on ADB projects); and (iv) better monitoring by the PRCM, advising CNAO at the start of each year about which projects are due for submission of audited project accounts and audited financial statements. 19. Compliance with Financial and Policy Covenants. Compliance with financial and policy covenants was another common issue during CPRMs (Table A10.2). Recently, multisector projects have experienced more difficulties than other projects in complying with loan covenants, since these projects are implemented by several executing agencies and implementing agencies. CPRM 2000 and 2002 observed that executing agencies were more focused on physical implementation than on complying with policy conditions because the policy environment was beyond their control. CPRM 2002 recommended that executing agencies be made aware of the rationale of policy covenants pertaining to institutional, economic, financial, environmental, and social aspects. CPRM 2004 noted that active projects had a generally good performance record in complying with sector, environmental, and social covenants. 20. On the other hand, CPRM 2004 noted that some executing agencies still experienced difficulties in complying with financial covenants. The midterm CPR in 2005 reconfirmed the reasons for noncompliance with financial covenants identified by CPRM 2004. In addition, it noted that financial ratio covenants are not considered in an executing agencys financial planning and decision making. The joint ADB and PRC action plan will continue to address

Appendix 10

163

issues on noncompliance with loan covenants particularly the unrealistic loan covenants and executing agencies lack of sufficient attention to complying with loan covenants. The observations by the CPRM 2004 still hold true: (i) there needs to be closer attention paid by Government to executing agencies compliance with loan covenants, and (ii) executing agencies require greater awareness and appreciation of the rationale and purpose of covenants. In addition, executing agencies need to improve their capacity to prepare financial projections (for financing planning and achieving financial targets). 21. Self-Evaluation and Independent Evaluation. Overall, combined evaluation ratings from ADB project completion reports and project performance evaluation reports improved from about 51% during 19901997 to about 68% during 19982006 (Table A10.4). The PRC continued to record the highest success rate in ADB in terms of postevaluation results during 19902006 despite strong improvements in all ADBs DMCs during 19982006. For all loan types during 19982006, 82% of projects in the PRC were rated successful, compared with 67% for ADB Group B countries, 71% for India, 68% for Indonesia, and 68% ADB-wide. During 19901997, 86% of projects in the PRC were rated successful or better, compared with 53% for ADB Group B countries, 50% for India, 60% for Indonesia, and 51% ADB-wide. Table A10.4: Performance Ratings of Rated Projects by Circulation Yeara (as of 31 December 2006)
Item GS/HS/S All Loans PRC Country Group B India Indonesia ADB-Wide 85.7 53.4 50.0 60.0 51.4 19901997 PS US 14.3 36.2 50.0 26.0 33.7 0.0 10.4 0.0 14.0 14.9 Total 100.0 100.0 100.0 100.0 100.0 GS/HS/S 82.5 67.1 71.4 67.5 67.8 19982006 PS US 9.5 27.9 21.4 28.8 27.4 7.9 5.0 7.1 3.8 4.9 Total 100.0 100.0 100.0 100.0 100.0

ADB = Asian Development Bank, PRC = Peoples Republic of China, GS = generally successful, HS = highly successful, PS = partly successful, S = successful, US = unsuccessful. a Evaluation ratings from rated project completion and project performance evaluation reports. Note: Items do not add up due to rounding. Source: Operations Evaluation Department internal database.

22. The TA evaluation results by sector in Table A10.5 show that these were mixed and the performance has slightly deteriorated compared to the CAPE 1 period. Table A10.5: Evaluation Results: Performance Ratings of ADB Technical Assistance Completion Reports by Circulation Year, 19982005
19901997 19982005 HS/S/GS PS US Total HS/S/GS PS US Total No. % No. % No. % No. % No. % No. % No. % No. % Agriculture and Natural Resources 9 100 0 0 0 0 9 100 16 70 5 22 2 9 23 100 Education 3 75 1 25 0 0 4 100 1 100 0 0 0 0 1 100 Energy 3 100 0 0 0 0 3 100 21 81 5 19 0 0 26 100 Finance 3 75 1 25 0 0 4 100 12 60 7 35 1 5 20 100 Health, Nutrition, and Social Protection 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industry and Trade 5 100 0 0 0 0 5 100 8 67 4 33 0 0 12 100 Law, Economic Management, and Public Policy 6 86 1 14 0 0 7 100 22 92 1 4 1 4 24 100 Transport and Communications 2 67 1 33 0 0 3 100 9 75 2 17 1 8 12 100 Water Supply, Sanitation, and Waste Management 1 100 0 0 0 0 1 100 10 91 1 9 0 0 11 100 Multisector 1 100 0 0 0 0 1 100 3 60 1 20 1 20 5 100 All Sectors 33 89 4 11 0 0 37 100 102 76 26 19 6 4 134 100 ADB = Asian Development Bank; GS = generally succcesful; HS = highly successful; No. = number of projects; PS = partly succcessful; US = unsucccessful; %= percent of total (sector). Source: Operations Evaluation Department postevaluation information system. Sector

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23. Country Portfolio Review Mission. CPRMs were undertaken in 2000, 2002, 2004, and 2006 (i.e., during the CAPE review period). A full CPRM was not carried out in 1998 because of the portfolio transfer from the Peoples Bank of China to the Ministry of Finance, while a CPRM was not fielded in 2003 because of the outbreak of severe acute respiratory syndrome. The CPRM has been useful for identifying portfolio issues, and the discussions involved active participation from Government and the executing agencies. The CPRM 2004 generated the largest participation, including by high-level officials from the PRC and ADB. 24. The CPRM has been a key and elaborate exercise in providing inputs for country programming and preparing the country strategy program and its updates. The midterm CPR in 2005 noted that the joint action plan developed in 2002 has been progressively implemented. The agreed action plan and performance targets provide a framework for monitoring and improving portfolio performance. CPRM 2004 adopted results-based management concepts in preparing a time-bound action plan to improve portfolio performance. These included (i) training to executing agencies on ADB procedures; (ii) speeding up the procurement process; (iii) better communication among the government, executing agencies, and ADB; (iv) special portfolio performance studies; and (v) a greater role for the PRCM in project administration. 25. Recommendation. ADB should refocus portfolio and monitoring indicators more on development effectiveness and service delivery and less on internal efficiency. Project indicators should relate less to processing and more to development objectives and outcomes. Indicators should track ADB responses to client requests, e.g., the interval between a disbursement request and payment, and the time to prepare a project.

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ASSESSMENT OF SAFEGUARD SYSTEMS USED IN ASIAN DEVELOPMENT BANK OPERATIONS IN THE PEOPLES REPUBLIC OF CHINA A. Introduction 1. In 2006, responding to a request from the Asian Development Bank (ADB) Board of Directors Development Effectiveness Committee, the Operations Evaluation Department (OED) began three special evaluation studies (SESs) 1 assessing policies on the environment, involuntary resettlement, and indigenous peoples. The evaluations were designed to contribute to an ongoing review of ADBs safeguard policy. 2 As all three SESs included the Peoples Republic of China (PRC) as case studies, this appendix summarizes their findings. B. Key Findings of the Special Evaluation Study on Environmental Safeguards 2. Environmental Safeguards System. Of the four developing member countries (DMCs) selected for case studies, the PRC probably has the most stringent environmental safeguards and legal and regulatory system. It also has the strongest institutional capacities for environmental assessment, monitoring, and implementation. The PRCs major development partners, particularly ADB and the World Bank, have provided assistance in the form of technical assistance (TA) and investment projects to help the PRC build capacity in these areas. Depending on the anticipated severity of the environmental impact of a proposed investment project, there are three possible levels of analysis and reporting. (i) Category A. Where the potential impact is substantial, a comprehensive environmental impact assessment (EIA) report is required. The developer must hold a public hearing or seek comments and suggestions from experts and the public before submitting the environmental impact statements for approval. Government approval or disapproval must be issued within 60 days. (ii) Category B. Where moderate or minor environmental impacts are expected, the law requires completion of an EIA form. Government approval or disapproval must be issued within 30 days. (iii) Category C. For projects with minimal environmental impact, the EIA law requires completion of an environmental impact registration form for which government approval or disapproval is issued within 15 days. 3. The comprehensive EIA report or EIA form for each project should be prepared by the certified EIA institutions, which may be research or design institutes, companies, or universities. They should obtain EIA certificates from the State Environmental Protection Administration (SEPA) or provincial environmental protection bureau (EPB), which will qualify them to conduct EIAs for designated types and scales of projects. SEPA is responsible for major projects of national importance, including nuclear facilities, projects affecting more than one province, and projects that require review and approval by the State Council or ministries. Provincial EPBs are responsible for review and approval of all other projects. The proponent is required to resubmit the EIA documents for reapproval if any major changes occur in the nature, scale, site, production process, or pollution control measures of the proposed project. The proponent must resubmit the EIA documents for reexamination if project implementation does not begin within 5 years of the initial document approval. The environmental protection bodies, including SEPA and the EPBs, are required to monitor the actual environmental impact during project implementation and operation and, as appropriate, to report on causes and liabilities of environmental and ecological incidents, particularly major catastrophes.
1

ADB. 2006. Special Evaluation Study on Environmental Safeguards. Manila; ADB. 2006. Special Evaluation Study on Involuntary Resettlement Safeguards. Manila; and ADB. 2007. Special Evaluation Study on Indigenous Peoples Safeguards. Manila. Although included as part of OEDs 2008 work program, these SESs were brought forward to 2006 to enable the updating of the safeguard policies. As a result, the evaluations had strict constraints on time and resources.

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4. Results from Case Studies and Consultations. Six ADB-financed projects were chosen for case studies in the PRC, all of which were category A projects. They accounted for 100% of the category A projects in the 16 sample projects selected from four DMCs. The projects were (i) Guangxi Roads Development, (ii) Guangxi Roads Development II, (iii) Southern Sichuan Roads Development, (iv) Gansu Clean Energy Development, (v) Dali-Lijiang Railway, and (vi) Jilin Water Supply and Sewerage Development (Appendix 5).3 5. A typical scenario for an ADB-supported project in the PRC is that the EIA has already been undertaken and approved by SEPA or the provincial EPB before ADBs involvement. The main tasks of ADBs project preparatory technical assistance (PPTA) environmental consultants are to translate the original EIA report into English and format it according to ADB requirements to produce a summary environmental impact assessment (SEIA) or a summary initial environmental examination report. ADBs main value added, as acknowledged by several executing agencies, has been to strengthen public consultations with affected people and stakeholders. Most officials interviewed felt that ADBs PPTAs had not contributed much to improving environmental safeguards and enhancement. Some felt that the resources should have been spent on examining one or more unresolved issues facing a particular project in a more in-depth manner, as identified by the original EIA, rather than through the current one-size-fits-all approach, whose main objective is to produce an SEIA for ADBs project approval process. 6. A related issue is the role, or lack of a role, of national consultants in the PPTA consultant team. According to the executing and implementing agencies, typically, ADBs PPTA engages separate international and national consultants who request inputs from original EIA consultants. If ADB continues to provide PPTAs on preparing SEIAs, ADB should consider giving preference to engaging the original EIA consultants if qualified, as the domestic environmental consultants in the PPTA team to reduce duplication of work. 7. Several other important issues have been identified. ADBs 120-day disclosure rule has increasingly become a deterrent for executing agencies to use ADB financing. As virtually all the EIAs have already included some form of public consultation before ADBs SEIA, the executing agencies felt that the 120-day rule is a double penalty and causes unnecessary delay. ADBs least-cost bid evaluation was blamed for causing implementation problems with several expressway projects, including a reduction in environmental protection measures because of low budgets, project delays, and quality-related issues. Finally, since ADBs reorganization in 2002 (which dissolved the original Environment Division), SEPA found it difficult to contact ADB for assistance. The good working relationship that the previous Environment Division had developed with SEPA, particularly at the macro policy and institutional levels, had been substantially lost. ADBs involvement with the PRCs environmental protection was now mostly confined to project-level assistance, which, as seen in this evaluation, has provided limited value added.
3

ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Guangxi Roads Development Project. Manila (Loan 1851); ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Guangxi Roads Development II Project. Manila (Loan 2094); ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Southern Sichuan Roads Development Project. Manila (Loan 1918); ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Gansu Clean Energy Development Project. Manila (Loan 2032); ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Peoples Republic of China for the Dali-Lijiang Railway Project. Manila (Loan 2116); and ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Jilin Water Supply and Sewerage Development Project. Manila (Loan 2175).

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8. Conclusions and Recommendations. Overall, the PRC has one of the most stringent environmental safeguards systems among ADBs DMCs. It has a strong institutional capacity for environmental assessment, monitoring, and implementation, thanks partly to support during the 1990s from major development partners, particularly ADB and the World Bank. All six of the projects reviewed have better than average performance in terms of environmental safeguards and enhancement, especially in the transport sector. However, ADBs value addition in terms of environmental assessment, monitoring, and implementation at the project level appeared to be moderate, except in the areas of public consultation and monitoring. 9. ADB should move away from its current focus on procedural compliance, particularly during loan processing, toward more balanced efforts during loan processing and implementation. ADB should move away from the present one-size-fits-all approach toward an increasing reliance on country safeguard systems. This should be done in a phased and concerted manner and should be backed up with more capacity building and certification for institutions in selected DMCs. There is potential for the PRC country safeguards system to be used more extensively, particularly for the transport sector. Harmonization of ADB, country, and other development partners environmental safeguard procedures will improve results on the ground and lower transaction costs for the executing agencies. 10. Placing greater emphasis on results achievement and assessing potential reliance on country systems would require additional ADB resources in the interim. ADB is currently severely stretched in terms of environmental personnel at both the Headquarters and the PRC Resident Mission (PRCM). The latter has had no environmental specialist and is in a great need for at least one such specialist or a consultant if ADB wants to improve its environmental safeguards on the ground. C. Key Findings of Special Evaluation Study on Involuntary Resettlement Safeguards

11. Involuntary Resettlement Safeguards System. Land in the PRC is owned either by the state (all land in cities, and much "wasteland elsewhere) or by collectives (agricultural land in rural areas). One law and two regulations govern compulsory land acquisition and involuntary resettlement. The Land Administration Law of 1998 includes land compensation and involuntary resettlement subsidies4 and deals mainly with rural farmland owned by collectives. In 2004, the convergence of the PRCs country system and ADBs resettlement policy improved. The upper limits of the compensation levels for rural land were reset to a maximum, which is theoretically equivalent to the replacement value of land (30 times the average annual output value of the land). 5 Contracts in collectives are for 30 years. The PRC has also made progress with regulations governing affected persons right to due process, and it is applied better at least in the context of ADB-supported projects. 12. The Ministry of Land and Resources promulgated the regulations on Land and Resources Hearings in 2004. These require the land expropriating agencies to inform affected farmers of their right to a hearing on compensation standards and the resettlement package. Such hearings must be held if requested within 5 days after the parties are informed. Document No. 28, also approved in October 2004, takes this further and states that, before the expropriation is submitted for approval, its purposes, location, compensation standards, and resettlement and rehabilitation measures should be made known to farmers whose land is to be

4 5

This actually refers to a rehabilitation subsidy; all those affected by land acquisition are entitled to it. It could well be argued that 30 times average annual output value exceeds by far the replacement value, as annual output value is a gross output value, from which the farmers labor and other costs are not deducted.

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taken. The results of the survey on the existing situation of the land proposed to be acquired should be confirmed by the rural collective and farmer households. 13. The Stipulations of Compensation for Land Acquisition and Resettlement of Large- and Medium-Sized Water Conservancy and Hydroelectric Power Projects were adopted in 1991, and the Urban Housing Demolition and Relocation Management Regulations were established in 1991 and implemented from November 2001. Two other regulations, one governing dams and one urban demolition, have upheld lower compensation rates and have been more controversial for this reason, but are currently under revision. For urban dwellers who have to be displaced, rehabilitation assistance can be provided but not in cash and not linked to the project causing the displacement. Actual rehabilitation programs are not mandated but are contingent upon local government interest and budgets available. The hydroelectric power regulations are also under review. These rely on post-resettlement plans for the rehabilitation of people displaced by dam reservoirs. Because of lack of enforcement, local authorities have made various rehabilitation efforts, many of which have been inventive. In some projects, farmers losing land were offered an option of obtaining town registration, a benefit that used to be highly valued, because of the advantages it provides the family with respect to work permits and opportunities, education for children, and other social security benefits. However, these advantages are now valued substantially less than before, as peri-urban land values continue to rise, while urban unemployment rises. 14. Compensation rates for expropriation of arable land in the PRC have improved steadily over the past few years; even in remote areas, they are often equivalent to between $15,000 and $50,000 per hectare of arable land. Around urban areas these values can be doubled easily. Almost always, cash compensation is relied on, which is invariably favored by the farmers who lose their land. Apart from land compensation and resettlement subsidies, the law provides for compensation for temporary use of land and loss of young crops. The approach is entitlement based: if the budget initially approved by the Ministry of Finance and the National Development and Reform Commission (NDRC) for land compensation and resettlement is not sufficient, the local governments will need to ask NDRC for more budget, and to ask the executing agency to certify this. Auditors involved in determining project acceptance at the time of project completion need to assess whether the budget was appropriately spent. 15. PRC Case Study Projects. In the PRC, eight project completion reports were used. Resettlement costs for these eight completed projects increased by 35% over estimated costs, whereas the total project cost went down by 6%. The average cost of compensation went up from an estimate of $6,646 per affected person to an actual expenditure of $9,882 per affected person. The resettlement cost in the two dam projects 6 (Appendix 5), both involving the relocation of nearly 40,000 people, was fairly close to the original estimate and was relatively low, as it was based on different legislation. The compensation in the transport projects7 in the

ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Fujian Mianhuatan Hydropower Project. Manila (Loan 1417-PRC, for $170 million, approved on 14 December); and ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Yellow River Flood Management Sector Project. Manila (Loan 1835-PRC, for $150 million, approved on 28 August). ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for Guizhou Shuibai Railway Project. Manila (Loan 1626); ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Southern Yunnan Road Development Project. Manila (Loan 1691); and ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Guangxi Roads Development Project. Manila (Loan 1851).

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sample increased considerably. The compensation for the two urban projects8 in the sample was particularly high and increased sharply, from an anticipated $12,000 to $19,000 per affected person for the Suzhou Creek Project in Shanghai and from $21,790 to $31,031 per affected person for the Fuzhou Water Supply Project. Relocation in urban areas is expensive because of the high cost of land and housing. For a family of four, compensation ranged from $15,000 to $124,000 in the eight projects. However, the land compensation was not distributed to the affected persons in all cases,9 as sometimes a portion was invested in rural collectives. 16. The PRC does not require comprehensive resettlement plans for cases where there are no actual relocation effects. It requires resettlement plans for reservoir projects, but does not yet require such plans in roads and railway projects. Only since recently, it requires land acquisition to be completed before the start of civil works. The PRC does not advocate publicly tendered external monitoring contracts as a matter of good practice. Resettlement practice in the PRC does not usually include arrangements for grievance redress beyond those already part of the local government system, and it does not specify public communication of plans with the same rigor as ADB prescribes. Although public consultation clauses are present in most regulations, they usually cannot reverse decisions or delay works, and they involve the substantial amount of documentation as compared to ADB requirements. 17. In the PRC, continuing divergence from ADB policy includes the absence of fixed rules for the calculation of compensation for the demolition of structures, crop losses, and loss of access to forested lands or grazing lands.10 Unlike ADBs involuntary resettlement policy, the PRC does not make special assistance for all vulnerable affected persons mandatory, although it provides a somewhat higher resettlement subsidy to rural households in reverse proportion to their access to land. The PRC does not necessarily adhere to ADBs principle of assisting the vulnerable as part of the project; it may give this responsibility on an as needed basis to government offices independent of the project. 18. It may be better to delink the resettlement subsidy completely from the land size criterion and replace it by a vulnerability criterion. The PRC does not use restoration of livelihood as a guiding principle. In fact, it does not adhere to ADBs principle of addressing resettlement and rehabilitation as part of the project (which implies that, ideally, it should be completed by the end of the project). The PRC projects compensate and relocate affected persons during the project, but the Government is broadly responsible for providing certain safety nets to ensure peoples livelihoods afterwards. The Ministry of Land and Resources is currently reviewing the land compensation system, aided by World Bank technical assistance, in order to systematize and unify this. The property law passed in March 2007 would help further clarification of user rights for land and other real properties and the compensation policy that will govern expropriation. 19. Conclusions. The SES on involuntary resettlement concludes that there is a need for (i) closer supervision in the early stages of resettlement that would help enable timely resolution of
8

ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Fuzhou Water Supply and Wastewater Treatment Project. Manila (Loan 1636); and ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Suzhou Creek Rehabilitation Project. Manila (Loan 1692). The third urban project was ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Zhejiang-Shanxi Water Supply Project (Phase I) Project. Manila (Loan 1544). 9 This was mainly the case in the Suzhou and Fuzhou urban projects, although affected persons obtained the compensation for the house structures on an individual basis, and this was sufficient for them to acquire good apartments elsewhere. 10 The PRC land policy has not been changed since 1998; instead, the operational procedures have been strengthened.

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funding problems and disbursements for livelihood rehabilitation; (ii) social safeguards to be clearly defined in loan and project agreements; (iii) compensation rates that reflect replacement values, and early endorsement by the executing agency and local governments; (iv) agreement by affected persons to compensation rates before project implementation; (v) a more effective role by ADB in resettlement supervision and monitoring; (vi) prioritization of resettlement monitoring and submission of monitoring reports; and (vii) consideration of the distance of the relocation sites from the original location of the affected persons to prevent or minimize livelihood problems. 20. ADBs involuntary resettlement policy is uniform and does not specify how it is to be applied in individual DMCs. However, the organization of public and private ownership varies from country to country. In the PRC, for example, all land is owned either by the state or by rural collectives; replacement cost cannot be calculated in the spirit of the policy, as farmers losing land cannot acquire it elsewhere. In the PRC, most farmers have access to small parcels (one third of a hectare per family), and many already have experience with off-farm employment. The PRC has had more experience than many DMCs with resettlement because until recently the government had exclusive responsibility for land, housing, and jobs. 21. Policies on land acquisition and resettlement operations are in a state of flux in a number of DMCs, including the PRC. The question of where, and to what extent, country systems can be adopted needs to be investigated and, if possible, the gap between country systems and the ADB involuntary resettlement policy narrowed. Pending more thorough investigations of country system commonalities by ADB, a cautious and preliminary conclusion of this CAPE is that the PRC is close to ADBs involuntary resettlement standards overall, but differences remain with regard to both principles and procedures. The situation for the PRC is rather less complex than for many other countries, as there are fewer squatters, and land ownership is less inequitable. Because of the land bureaus and, in many cities, resettlement offices, resettlement capacity is higher. Existing policy is better enforced, and legislation on compensation is improving. The PRC is currently restricting local governments acquisition of land around towns, because of the many reported cases of abuse of requisition powers (most of which are not connected with externally financed projects). The PRC has some social safety nets that provide limited subsistence allowances to some disabled, elderly, and otherwise seriously disadvantaged persons who do not have relatives to support them. 22. In conclusion, while the country systems for involuntary resettlement in the PRC appears to have areas of equivalence with ADB systems, these cannot be adopted as long as ADB insists on its current set of safeguards. Although the PRC allows compensation to be awarded for land at replacement cost under some circumstances, this is not prescribed, and it is up to the project to negotiate this with the land authorities. ADB then needs to apply pressure for this to happen. However, progress has been made in strengthening the country systems. With further progress, these systems could converge with the principles and objectives of ADBs involuntary resettlement policy. D. Key Findings of the Special Evaluation Study on Indigenous Peoples Safeguards

23. Background. ADBs poverty reduction strategy and current commitment to finance more infrastructure in Asia imply that an increasing proportion of ADB-supported projects will be located in areas where indigenous peoples live. Of the ADB-supported projects approved during the CAPE period in the PRC, 36% had indigenous peoples plans. This was higher than the ADB-wide average of 22%, but behind the Lao Peoples Democratic Republic (86%), Viet Nam (45%) and Nepal (41%). The reason for the high percentage in the PRC is because ADB is increasingly moving toward financing projects in the western and southwestern regions, which

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have the highest proportion of ethnic minority11 populations and poor areas. Another factor is the increasing due diligence on ADBs part with respect to indigenous peoples issues in projects. A relatively high proportion of ADB projects in the PRC construct roads and railways, and these are prone to affect both people and the environment. 24. There were two categories of ADB projects in the PRC during 19982005 with regard to indigenous peoples. Guizhou Shuibai Railway Project (footnote 7), which helped to develop the coal mining industry in a remote and mountainous part of southwest China, benefited the national economy but was not intended primarily as an area development project. Thus, it required a mitigation plan to deal with the costs to the local population, many of whom belonged to ethnic minorities. In this project, costs were borne by local people, who had to move for the construction of the railway, while the benefits accrued to the larger population of the PRC. Most other projects were either area-focused (and thus benefited local people, including indigenous peoples, and directly or indirectly benefited the nation at large). These were mainly road and rail projects that were complemented by significant rural or local roads rehabilitation components (or sometimes other components, such as education support and water supply investments). 25. An analysis of the risks identified in indigenous peoples development plans (IPDPs) for the PRC concluded that seven of the eight IPDPs had identified risks for indigenous peoples. In all but one of the seven cases, the main risks were related to both resettlement and the environment. In four of them, other risks were also acknowledged, relating to culture or health, such as greater exposure to HIV/AIDS as a result of road construction and better road access. As the resettlement and environmental risks were primarily and successfully addressed by project resettlement plans and environmental management plans, the SES concluded that, although ADBs wider safeguard system had worked well, the added value of the IPDPs had been relatively small.12 The added value of the indigenous peoples safeguards was further reduced by the fact that the PRC had relatively good affirmative action programs for indigenous peoples (or ethnic minorities, as they are called in the PRC), which meant that special safeguards in projects were less essential. 26. Country Safeguard Systems. The PRCs 1954 Constitution promotes equality and protects the rights of all minority nationalities to develop and use their own languages and characters, and to promote their customs, beliefs, and development. The rights of ethnic minorities have gradually expanded. By 2003, the PRC had established 155 autonomous governments, including five autonomous regions13 based on concentrations of ethnic minorities in the area. The areas have a higher degree of autonomy in decision making on development, use of local finances, type of schooling, and ethnic culture. Of the 55 ethnic groups in the PRC, 44 live in the autonomous areas, which are home to 71% of the countrys indigenous peoples. 27. The government provides special assistance to support the development of autonomous areas. It also provides special training for minority cadres.14 The assistance includes (i) a border affairs allowance to support infrastructure projects in frontier areas, especially those with large minority populations; (ii) a special minority development fund to support infrastructure projects; and (iii) poverty reduction funds for poor counties with large minority populations (supporting small- and medium-sized enterprises, clothing and food, and work for loans). Officially
11 12

In ADBs context, indigenous peoples are designated as ethnic minorities in the PRC. Because the PRC regulations do not stipulate that projects are responsible for many social impacts and risks that are not covered in summary EIAs or resettlement plans, the existence of overlapping mitigation measure for indigenous peoples does not automatically ensure adverse impacts caused by projects are mitigated. These impacts need to be identified and assessed, the mitigation measures formulated, and the institutional and budgetary arrangements have to be agreed upon within the project context. 13 Guangxi (Zhuang), Ningxi (Hui), Xinjiang (Uygur), Tibet (Tibetan), and Inner Mongolia (Mongolian). 14 The head of the county can appoint a cadre from a dominant minority group in every minority autonomous county.

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recognized ethnic groups receive tax subsidies for autonomous areas and are granted permission to set up their own tax regulations and tax collections. Indigenous peoples also receive (i) lower passing threshold in university entrance examinations, (ii) option to have three children, and (iii) special capacity building programs. Because of these benefits, some Han Chinese have converted to ethnic minority status through mixed marriages or when an ancestor belonged to an ethnic minority. 28. The PRC does not require a special consultation process be held to obtain prior consent from ethnic minorities for development projects in their areas. Instead, it relies on autonomous area governments, local government poverty bureaus, and ethnic minority bureaus to work out the arrangements. These bodies can also conduct some monitoring and redress of grievances. The PRC seems to have relatively few problems in providing financing for projects for indigenous peoples, although there is a need for commitments to be followed up. Substantial funds have been committed to ethnic minority programs and autonomous regions, a large proportion of which is spent. ADB-supported projects in areas with ethnic minorities could coordinate with these programs and support their role. IPDPs would then need fewer special measures and could be more integrated with the governments own programs. However, there remain some disparities between ADBs indigenous peoples and public disclosure policies and PRC procedures. The updated indigenous peoples policy would require ADB to institute some special consultation processes, disclosure arrangements, and strengthening of the monitoring system in the PRC to ensure the commitments are followed up and allocations spent. 29. PRC Case Study Projects. Two case studies from the PRC were used for the SES. They concerned completed projects and relied on a questionnaire survey of 475 households and a rapid field assessment. The projects were Southern Yunnan Road Development and Guizhou Shuibai Railway (footnote 7). In both, the impacts of the projects on the substantial indigenous peoples populations in the project zones was assessed as mainly positive, except for those groups of indigenous peoples whose access to land was directly affected or whose housing was affected by road or railway construction. However, even in such cases, the SES noted that indigenous peoples have recently been better treated and have obtained more compensation for lost land or housing. Because of rapid economic development in the PRC and government policies favorable to indigenous peoples, most or all indigenous peoples affected had not lost their livelihoods, and had significantly improved them over the implementation period of ADB-supported projects. These two factors appeared to have offset any negative impacts of loss of land or housing as a result of the project. 30. Conclusions and Recommendations. Compared with the three other countries studied for the SES (India, Philippines, and Viet Nam), it is clear that indigenous peoples issues in ADB projects are addressed more effectively in the PRC. Over the CAPE period, legislation for autonomous areas has been strengthened, and more funds, special budgets and programs have been made available. There is more implementation capacity now than in the mid-1990s. In the PRC, families of indigenous peoples are allowed to have three children, receive extra places in universities, and have several other benefits. Overall, there is lesser need for separate IPDPs, especially if there are also separate resettlement plans and environmental monitoring programs and the impact of the projects on indigenous peoples are mainly positive. Nevertheless, given that many budgets do not materialize, and consultation and public disclosure processes in the PRC are different from those that ADB promotes through the public consultation and indigenous peoples policies, there remains a need for some ADB safeguards covering indigenous peoples. In cases where social analysis identifies clear risk to ethnic minorities that is not related to resettlement or environmental change, a separate IPDP may be required if the risk of mitigation measures proposed cannot be addressed more usefully by the main project design. Appropriate measures for ethnic minorities need to be based on detailed

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equivalence analysis with the ADB indigenous peoples policy and to take into account national legislation and policy and practice, actual implementation, and international conventions signed by the PRC, which may emphasize certain rights of indigenous peoples that are not yet formally enacted. Given this, it is unlikely that the country safeguard system can be fully utilized in the short term in a way that would render ADBs safeguard system redundant.

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URBAN SECTOR A. Introduction

1. The special evaluation study on the urban sector1 reported that, during the reorganization of the Asian Development Bank (ADB) in 2002, the water supply, urban development, and housing divisions of ADB were abolished, leading to the distribution of urban sector expertise across the new regional departments. Water supply and sanitation projects, along with integrated urban development projects, were isolated from urban environmental projects and urban housing finance projects. In July 2004, ADB revised its sector and theme classifications for projects, which eliminated the macro-sector of social infrastructure (and with it, the urban development and housing sector). Integrated urban development projects were mixed with rural projects under the multisector category. It was not clear how water supply, sanitation, and waste management projects could now be distinguished from multisector projects. Within the new list of seven thematic clusters, there is no urban development cluster, and the new classification makes tracking of urban sector work difficult.2 2. During the 19982005 country assistance program evaluation (CAPE) period, ADB approved 10 loans equal to $1.2 billion related to the urban sector3 in the Peoples Republic of China (PRC). However, eight of these were under the water supply and wastewater subsector. Although ADBs lending operations in the PRC are still dominated by loans to the transport sector, the amount of loans approved for the water supply and wastewater subsector during this period increased by 220% compared with 19901997. This was much higher than the growth recorded in other sectors or subsectors. This strong increasing trend partly reflects a deeper commitment to ADBs country strategy and water policy of reducing water-related infrastructure bottlenecks in selected urban centers. Within the water supply and wastewater subsector, the 19982005 lending shifted toward waste management projects (53% of loan amount) and integrated projects (33%), in contrast to earlier lending that invested solely in water supply and sanitation. 3. Table A12.1 presents the sector issues and strategies behind the trends. Table A12.1: Features of and Strategies for the Urban Sector
Sector Characteristics The PRC has the largest number of urban residents in the world, with an urbanization rate of 43% in 2005. Metropolitan regions are expanding rapidly through undirected suburbanization, leading to conversion of agricultural land. Variations in urbanization across cities imply a need for adjustments to specific urban policies and investment operations.
1 2 3

PRC Government Strategy Promote town-based urbanization by (i) allowing rural residents to permanently relocate to towns within their counties; (ii) allowing farmers to sell their farming rights to encourage economies of scale in production; and (iii) promoting industrialization in towns.

ADB Sector Strategy Selectively pursue loans to improve water supply, conservation, and sanitation in rapidly expanding urban centers, targeting executing agencies with strong repayment capacity.

Lessons Identified in Previous Reports

The commitment of local government to the success of projects is the single most important factor.

ADB. 2006. Special Evaluation Study on Urban Sector Strategy and Operations. Manila. The World Bank has an urban cluster among the 11 themes that it pursues. Aside from those officially categorized under the water supply, sanitation and waste management sector, loans and advisory technical assistance (ADTAs) from multisector and energy sectors that relate to urban operations had been discussed in this appendix.

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Sector Characteristics Some 30% of populations in metropolitan regions are migrants. There is a high degree of seasonal or temporary migration, owing to secure tenure rights to rural land enjoyed by farmers. Squatter settlements are few and small because of the availability and affordability of urban land for lease. Pressure from rapid industrial growth and increased migration exceeded progress in building urban infrastructure and the local governments capacity to finance and deliver public services. Subsidization still exists in housing, water supply, and sanitation, leading to misallocation of resources, inefficient pricing structures, and crowding out of private sector investment. Urbanization has led to growing traffic congestion and air pollution arising from growth in motorized transport, as well as additional energy demands for electric power, heating, and construction.

PRC Government Strategy

ADB Sector Strategy Ensure that rural migrants have access to job opportunities and that urban poverty does not increase substantially by addressing issues such as the supply of clean water, water pollution, air quality, and solid waste management.

Lessons Identified in Previous Reports

Promote cost recovery through user charges and encouragement of private sector involvement. ADB assistance will focus on (i) water supply and distribution; (ii) sewage and wastewater treatment; (iii) water conservation and resources development; (iv) improvement of degraded water bodies; (v) solid waste reduction, recycling, treatment, and disposal; (vi) clean technologies; and (vii) industrial waste treatment and industrial recycling. Improve the urban environment (including air pollution abatement). Road projects will include highways complemented by feeder roads to rural communities and improvement of urban transport systems.a

Through policy reform assistance and investment support, ADB was able to demonstrate that investments in healthy urban environments can be financially viable.

ADB should continue its approach in the environment sector and extend this to green b issues, possibly with cofinancing from Global Environment Facility to address cost-recovery and ADF resource unavailability. The ADB environmental contribution was significant because of a judicious combination of the size and sequencing of TAs and loans, ADBs long-term relationship with SEPA, combined efforts of ADB departments, and the existence of an ADB focal point for overall management of TAs dealing with the environment.

Air and water pollution continue to be serious problems in cities and are spreading across suburban areas.

Improve the environment in 52 major cities where pollution is most severe, prevent further degradation of natural ecosystems, and integrate environmental protection into national economic and social development planning.

Address urban environmental problems and prevent contamination of drinking water, by reducing bottlenecks in water supply, wastewater treatment, solid waste, and air pollution control. Address air and water pollution and solid waste in urban areas.

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Sector Characteristics Supply constraints (mostly in central and southern PRC) arose because of a lack of quality management, and the unprofitability of water companies owing to insufficient revenue from tariffs. Available water is also too polluted to use.

PRC Government Strategy Government strategy focused on developing and managing water sources, controlling groundwater over extraction, introducing waterefficient technologies, and using pricing mechanisms to encourage conservation and fund generation. Government guidelines for urban water supply emphasized proper planning, mobilizing resources for new construction, full cost recovery from industrial/commercial users, and O&M cost recovery from residential users.

ADB Sector Strategy Operational strategy in the water sector would focus on (i) improving efficiency of water supply and distribution system, (ii) promoting improved corporate governance and management for greater private sector involvement, (iii) strengthening tariff systems for raw water and treated water, and (iv) continuing support of legislative and regulatory provisions governing water pollution and natural resources management.

Lessons Identified in Previous Reports In areas where populations are large and water is scarce, it is possible to price water at its scarcity value through a series of reasonably large tariff increases complementing water management measures.

Wastewater and Existing sources of water can be ADBs sewerage and sewerage subsector protected by controlling sanitation investments hampered by insufficient industrial, municipal, and nontend to be one-off treatment facilities to meet point pollution, increasing interventions instead of demand, inadequate wastewater treatment, and using integrated. funding to capital of recycled water by industries. investment, and need for tariff reforms. ADB = Asian Development Bank, ADF = Asian Development Fund, PRC = Peoples Republic of China, O&M = operation and maintenance, SEPA = State Environmental Protection Administration, TA = technical assistance. a The 2000 country assistance plan did not mention urban transport, urban air pollution, and urban energy conservation. b Green issues focus on the long-term preservation of the natural environment, especially living natural resources, as contrasted from brown issues, which refer to environmental degradation that have immediate health outcomes, particularly in an urban setting, like wastewater and air pollution. Source: Asian Development Bank.

4. Of the 10 loans approved during the CAPE period, two have been completed: Fuzhou Water Supply and Wastewater Treatment Project4 and Suzhou Creek Rehabilitation Project.5 Eight are ongoing and two became effective only in 2006: Fuzhou Environment Improvement Project6 and Henan Wastewater Management and Water Supply Project.7 ADB provided 13 project preparatory technical assistance (PPTA)8 to develop water supply and wastewater projects and five PPTAs for other urban concerns, totaling $11.3 million. 5. ADB has recognized the need to address cross-boundary water pollution at the river basin level through integrated river basin planning and management. Two advisory technical assistance (ADTA) grants were provided to improve environment planning and management for
4

ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Fuzhou Water Supply and Wastewater Treatment Project. Manila (Loan 1636PRC, for $102 million, approved on 30 September). ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Peoples Republic of China for the Suzhou Creek Rehabilitation Project. Manila (Loan 1692-PRC, for $300 million, approved on 29 June). ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Fuzhou Environmental Improvement Project. Manila (Loan 2176-PRC, for $55.8 million, approved on 29 July). ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Henan Wastewater Management and Water Supply Sector Project. Manila (Loan 2207-PRC, for $100 million, approved on 9 December). Including supplementary PPTA.

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two of seven river basins in the PRC: (i) Hai River Basin9 in central and northern PRC, and (ii) Songhua River Basin.10 Their outcomes led ADB to concentrate on these two river basins. Three loans were approved for the Hai River basin: Tianjin Wastewater Treatment and Water Resources,11 Hebei Province Wastewater Management,12 and Henan Water Project (footnote 7). Two loans were approved for the Songhua River basin: Harbin Water Supply13 and Jilin Water Supply and Sewerage Development.14 6. The Fuzhou Water Project (footnote 4) approved in 1998 and the Suzhou Creek Project (footnote 5) approved in 1999 represent ADBs classic lending operations in the sector, i.e., they deal with a single city and a small number of subprojects. However, the Hebei Water Project (footnote 12) in 2002 was a multicity pilot test and financed five wastewater treatment plants in four cities. The Henan Water Project (footnote 7) in 2005 represented a formal break from the classic model and had 19 subprojects (15 for wastewater management and 4 for water supply) covering 16 counties and 1 urban district. 7. ADB provided $10 million to finance 13 ADTAs from 1998 to 2005, six of which are related to water supply and wastewater ($4 million). These ADTAs performed important reform functions at the national level, and often jumpstarted capacity building of local institutions. These ADTAs were mainly focused on two themes: (i) tariff policy and service delivery guidelines of urban environmental infrastructure, and (ii) urbanization strategy and policies. These technical assistance (TA) grants also supported policy dialogue with core national government agencies, such as the Ministry of Construction, the National Development and Reform Commission (NDRC), and the State Environmental Protection Administration (SEPA). 8. Four TAs were implemented with the Ministry of Construction during 19972001. These were developed under a systematic approach to address priority urban environmental infrastructure issues. The approach of the Water Tariff Study II15 on the reform of urban water supply tariff policy was soon replicated and expanded to TAs on urban solid waste16 and wastewater tariffs.17 Building on these TAs on urban water supply and sanitation, ADB developed a TA in 2003 to address the reform and service delivery of water supply and

ADB. 1998. Technical Assistance to the Peoples Republic of China for Hai River Basin Wastewater Management and Pollution Control. Manila (TA 3095-PRC, for $570,000, approved on 10 November). 10 ADB. 2002. Technical Assistance to the Peoples Republic of China for Songhua River Water Quality and Pollution Control Management. Manila (TA 4061-PRC, for $1 million, approved on 19 December). This is discussed under the appendix on rural development and natural resources sector. 11 ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Tianjin Wastewater Treatment and Water Resources Protection Project. Manila (Loan 1797-PRC, for $130 million, approved on 11 December). 12 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Hebei Province Wastewater Management Project. Manila (Loan 1985-PRC, for $82.4 million, approved on 19 December). 13 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Harbin Water Supply Project. Manila (Loan 1995-PRC, for $100 million, approved on 11 March). 14 ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Jilin Water Supply and Sewerage Development Project. Manila (Loan 2175PRC, for $100 million, approved on 18 July). 15 ADB. 1999. Technical Assistance to the Peoples Republic of China for the Water Tariff Study II. Manila (TA 3250PRC, for $950,000, approved on 3 September). 16 ADB. 2000. Technical Assistance to the Peoples Republic of China for Strengthening Urban Solid Waste Management. Manila (TA 3447-PRC, for $600,000, approved on 25 May). 17 ADB. 2001. Technical Assistance to the Peoples Republic of China for Preparing the National Guidelines for Urban Wastewater Tariffs and Management Study. Manila (TA 3749-PRC, for $700,000, approved on 25 October).

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sanitation in rural areas.18 Recognizing the significant impact of rapid urbanization on the PRCs socioeconomic development, ADB also provided a couple of TAs on urbanization policy, with a 2004 TA focused on town-based urbanization policies19 and a 2005 TA on sustainable development of metropolitan regions.20 9. B. This urban sector assessment will be based mainly on these 10 loans and 13 ADTAs. Assessment of Loans

10. Relevance. Overall, the 10 loans are assessed highly relevant to both ADB and PRC strategies. They fully support ADBs water policy and are consistent with ADBs country operational strategy and thematic and sector priorities. Given the procedure of project identification for ADB financing, the loans are naturally in line with the Governments strategy and investment priorities, especially those on environment control and improvement programs of river basins. Henan Water Project (footnote 7) was one of the first water supply and wastewater projects to involve mostly county-level governments in the PRC. As a result, the physical size and cost of its subprojects are far smaller than those in previous water supply and wastewater.21 The majority of participating counties have also limited or no previous involvement with foreign-financed infrastructure projects. ADB recognized the challenges halfway through project preparation and decided to restructure this as a sector loan. The Henan provincial management office has been very satisfied with the sector loan approach and has encouraged lower-tier government and agencies to participate in the project. The project completed start up requirements and became active 5 months after approval, compared with the 11-month average for other ADB water supply and wastewater projects in the PRC. 11. Effectiveness. Based on their potential outcomes as described below, the urban sector projects are assessed effective. Only two of the 10 projects had been closed at the time of evaluation. The Fuzhou Water Project (footnote 4) achieved its immediate objective of improving the quantity and quality of water supply and reducing environmental contamination of the Min River and the inland creeks in Fuzhou city. The new water supply system diverted cleaner water from the Ao River to replace part of the raw water supply (120,000 cubic meter [m3]/day) from the Min River, and has increased the water supply to Fuzhou City from 740,000 m3/day at appraisal to 800,000 m3/day at project completion. The projects construction of the Yang Li wastewater treatment facilities has reduced pollution of the Min River and creeks in Fuzhou urban area by improving the quality of the water intake from the Min River from class IV to class III, and by gradually improving water quality from urban creeks from lower than class V to between class IV and V. About 50% of the wastewater generated in Fuzhou is now being treated as anticipated during appraisal, compared with 15% when the project began. All physical project facilities were completed before loan closing and are in operation. 12. The Suzhou Creek Project (footnote 5) may also be considered effective, having achieved most of its envisaged objectives. The immediate objectives of removing discolored and foulsmelling water, closing down night soil and solid waste collection wharves along the creek banks, and removing floating debris were achieved as scheduled. The short-term objectives of restoring
18

ADB. 2003. Technical Assistance to the Peoples Republic of China for Safe Drinking Water and Sanitation for the Rural Poor. Manila (TA 4215-PRC, for $400,000, approved on 12 November). 19 ADB. 2004. Technical Assistance to the Peoples Republic of China for the Town-Based Urbanization Strategy Study. Manila (TA 4335-PRC, for $750,000, approved on 6 May). 20 ADB. 2005. Technical Assistance to the Peoples Republic of China for the Study on Sustainable Urbanization in Metropolitan Regions. Manila (TA 4702-PRC, for $500,000, approved on 28 November). 21 For example, the average size of ADB subloans for the 19 subprojects is about $5 million, which is about 10% of the average scale of ADB lending per subcomponent in a regular water supply and wastewater project.

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class V and IV water quality standards in the lower and upper reaches of Suzhou Creek were achieved ahead of schedule. The long-term objectives are expected to be achieved by 2010.22 13. With regard to the substantially completed23 water supply and wastewater projects, their executing agencies consider them to be effective in achieving their physical performance objectives. While the newly-built water supply facilities under Harbin Water Project (footnote 13) are being operated at fully installed capacity, the wastewater treatment plants may not achieve full capacity within the first 2 years of operation as expected. However, the executing agencies are satisfied with the immediate outcomes, especially the improvement of the water environment at project locations. They have expressed confidence that these projects will also achieve their long-term objectives. 14. With the Acid Rain Control and Environmental Improvement Project,24 the relatively low cost of technological renovation offered through the project encouraged enterprises to shift to more environmentally-friendly systems. Half of the project enterprises have been privatized and the new owners have either opted to utilize the loan proceeds to implement the subprojects or to finance the environmental improvements themselves. As of October 2005, one of the (nonprivatized) subprojects still emitted pollutants, because of the enterprises decision not to replace furnaces. 15. Efficiency. Overall, the projects in the sector are assessed efficient. ADBs strong comparative advantage in financing water supply and wastewater facilities has been widely recognized. The good performance of the nine loans confirmed that ADB-financed water supply and wastewater projects are efficiently supervised and implemented, owing in part to generally well-prepared PPTAs. However, project implementation issues were still observed in these projects.25 (i) Start-up delay. The projects incurred an average delay of 10.2 months before loan effectiveness, owing to difficulties in obtaining approvals for onlending agreements26 and project feasibility study reports, borrowers continual modifications of project components or financing plans, executing agencies and implementing agencies lack of familiarity with ADB procedures, counterpart staffing delays, and general mismatches between ADB and the PRC project approval procedures. (ii) Delays in procurement. These have been caused by both ADB and PRC internal review and approval procedures (especially for bid documents), poor translation into English of nonstandard documents, and the inexperience of ADB staff compared with staff at some PRC international tendering companies.27 (iii) Loan savings and cancellations. The two closed projects (footnotes 4 and 5) recorded significant loan savings, totaling 41% of the $402 million loans
22

These involve restoring class IV water quality standards in the lower Suzhou Creek, restoring aquatic life to the creek, and extending the green space and parks along the creek banks. 23 Tianjin Wastewater (footnote 11), Hebei Water project (footnote 12) and Harbin Water Project (footnote 13) and ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Wuhan Wastewater Management Project. Manila (Loan 1996-PRC, for $83 million, approved on 25 April). 24 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Acid Rain Control and Environmental Improvement Project. Manila (Loan 1890PRC, for $147 million, approved on 19 December). 25 ADB and PRC agencies have been continuously working on measures to address these issues. Recently, an action plan had been drafted by the PRC Resident Mission (PRCM) in consultation with Ministry of Finance (MOF) and NDRC to improve portfolio performance. 26 From MOF through provincial and municipal finance bureaus down to the agency responsible for loan repayment. 27 ADB. 2005. PRC Water Supply, Sanitation and Waste Management Portfolio Performance Review. Manila (page 10).

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approved. These arose from actual contract awards being lower than the original estimates,28 overestimation of costs, inflation29 concerns, availability of additional low-cost funds,30 and discontinuation of project components, e.g., in the Suzhou Creek Project (footnote 5). 16. Although the Acid Rain Control Project (footnote 24) had a slow start because of reforms affecting the project companies and shortages of funds, it had recovered time by the beginning of the third year of implementation. Equipment for monitoring the environmental effects of the subprojects had mostly been installed,31 and provincial and county personnel had been trained on environmental monitoring. Environmental awareness activities had been held in cooperation with local communities and schools. 17. Sustainability. Based on the completed projects and potential of the ongoing projects, the urban sector projects are considered sustainable. The newly constructed assets under Fuzhou Water Project (footnote 4) and the Suzhou Creek Project (footnote 5) are considered to be financially sustainable because of the following factors: (i) ADBs extensive experience of and strong expertise in preparing and managing capital investments for water supply and wastewater facilities, as evidenced by the technically and commercially sound technology adopted for these project facilities; (ii) transfer of the newly-constructed facilities to existing water and sewage companies that have operated similar facilities for many decades and have extensive experience of operation and maintenance (O&M); (iii) measures taken by executing agencies to ensure smooth transition from construction to operation; (iv) project-financed training for more efficient operation of these new facilities;32 (v) setting water and wastewater tariffs based on market prices and regular increases aimed at full recovery of O&M costs, depreciation, and debt service of project facilities;33 and (vi) NDRCs insistence on the loan repayment capability of executing agencies required that the financed facilities be made financially viable, thus guaranteeing revenue streams to finance their O&M. 18. To the extent that the seven ongoing water supply and wastewater projects reflected similar arrangements for tariff reform and training, the sustainability of facilities operation beyond project completion will also be most likely. However, in the case of the Acid Rain Control Project (footnote 24), most of the industrial enterprises that assisted in the project opted to use only a small part of the loan funds for international training of O&M staff. They failed to see the need to adopt modern management techniques and were reluctant to spend money on foreign training. This lack of exposure to modern management techniques and limited amount of research and development could adversely affect prospects for sustaining project benefits.
28 29

Common throughout ADB-financed projects in the PRC. Prices in the PRC were relatively constant or even declined in some years over the CAPE review period. 30 In the form of ad hoc grants or state bond funds. 31 Unfortunately, while the loan built water treatment plants for key enterprises, the poor connection between plant drainage and transformer stations meant that wastewater and solid waste treatment ratios were comparatively low, requiring additional resources to construct the drainage and transformer station. 32 Under the Suzhou Creek Project, guidelines and manuals were produced, and a monitoring system was established to ensure proper O&M of the sewage facilities. Training programs were conducted to help improve technical and managerial skills of personnel. Training was provided under the Fuzhou Water Project for the establishment of maintenance policies and procedures for project facilities. 33 For the Fuzhou Water Project, the municipal government has assured ADB that community awareness campaigns and public consultations on tariff increases will continue and that tariffs will remain transparent, adequate, and affordable.

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19. Impact of Loans. Impact is evaluated by looking at actual and expected contributions to the sectors long-term development, institutional capacity building, and better use of resources. The assessment is, therefore, based largely on available information on trends in achieving immediate outcomes and improvement in institutional capability. During the CAPE period, ADB assistance contributed to knowledge transfer and capacity building in the sector through the introduction of modern information systems and technology, service and O&M standards, cost recovery and pricing, corporate governance, and regulations. Combined with the executing agencies own contributions, these are expected to ensure long-term benefits to urban sector development. The two completed projects (the Fuzhou Water Project and Suzhou Creek Project, see paras. 1112) have been making progress in achieving their immediate outcomes, e.g., additional water supply, pollution control through wastewater treatment, and successful completion of the physical facilities. The rest of the projects are likely to follow the same positive trend, given strong ownership and commitments from their respective executing agencies. Thus, the long-term impacts are modest. C. Assessment of Advisory Technical Assistance

20. Relevance. The ADTAs were usually provided by ADB at the request of government agencies. The TAs mostly concerned Government priorities and executing agencies had substantial involvement in TA design. The cluster TAs on water, wastewater, and solid waste tariff issues provided to the Ministry of Construction are a good example, as the relevant divisions of Ministry provided background information, reviewed the terms of reference, and commented on various aspects that improved the TA designs. NDRC also provided substantial input to the design of two urban policy TAs, helping to focus on issues of high priority to the Government. The ADTA on Town-Based Urbanization Strategy (footnote 19) was provided in 2004 to address NDRCs request for a review of policies that can strengthen towns absorption of rural-urban migration by establishing sound town development strategies in Shanxi and Liaoning as case studies. This was followed by a TA on sustainable development of metropolitan regions (footnote 20), which was ADBs response to government interest in promoting urbanization in metropolitan regions in order to generate a wide range of employment opportunities for rural migrants. However, local governments had less involvement in urban TA design, as in the case of the small-scale TA provided to a suburban district government.34 21. The 10 ADTAs are assessed as relevant to ADB strategies at the time. The TA on Strengthening Urban Solid Waste Management (footnote 16) was part of ADBs thematic activities focusing on policy dialogue with the Ministry of Construction. It was designed to establish and improve national guidelines for water, wastewater, and solid waste services, which are core environmental issues. The TA on National Guidelines for Urban Wastewater Tariffs and Management (footnote 17) conforms to ADBs water sector policy and country assistance strategies in the PRC. Modeled on the successes of three previous TAs (two on water tariffs35 and one on solid waste [footnote 16]), it sought to expand ADBs involvement in the urban service tariff policy dialogue, from water supply and solid waste subsectors to wastewater. The TA on Safe Drinking Water and Sanitation for the Rural Poor (footnote 18) was approved in 2003 under ADBs pro-poor strategy. Recognizing the need to expand ADBs lending operations on water supply from the urban centers to gradually cover the rural area, this
34

ADB. 2000. Technical Assistance to the Peoples Republic of China for the Assessment of Small and Medium Cities Urban Infrastructure Development. Manila (TA 3521-PRC, for $150,000, approved on 25 October). 35 ADB. 1997. Technical Assistance to the Peoples Republic of China for the Water Supply Tariff Study. Manila (TA 2773-PRC, for $600,000, approved on 24 March), which was approved prior to this CAPE period and the TA identified in footnote 15.

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TA tried to explore the potential policy impact that ADB could have on rural water supply and sanitation in the lead up to country strategy and program formulation. 22. Some of these conventional ADTAs were perceived to be one-off interventions, thus possibly leaving significant gaps in terms of policies and investments to which ADB can still contribute. In the case of the TA on strengthening solid waste management and (footnote 16), ADBs impact and involvement in policy dialogue with government could be scaled up after the TAs completion through follow-on TAs or PPTAs for potential loans. 23. The consultants terms of reference were mostly clear, comprehensive, and appropriate for attaining TA objectives. Their activities follow a logical sequence. However, in some cases, TA objectives were too ambitious, and potential constraints were not fully examined during design preparation. In the case of the TA improving environmental management in Suzhou Creek,36 the design of the dynamic water quality and pollution monitoring model incorrectly assumed that data would be available. These data deficiencies adversely affected the accuracy and value of the resulting water quality model. 24. Effectiveness. ADTAs during the second half of the CAPE review period were more selective and focused on key themes prioritized in both ADBs country strategy and the Governments policy initiatives. They also reflected the finding of the 2001 technical assistance performance audit report (TPAR)37 that urban development ADTAs were more successful if they focused on water supply and sanitation, where ADB has a comparative advantage. Given the small number of TAs in the urban sector,38 spreading assistance widely may have diluted their impact. Since ADB has provided limited assistance to the urban sector, it does not have a strong track record of responding to complex urban issues and the Government has tended to approach other multilateral development banks for policy advice on such matters. 25. The ADTA on Improving Environmental Management in Suzhou Creek (footnote 36) was provided in association with the related loan to assist the executing agency in exploring marketbased instruments for water quality management, particularly wastewater trading systems.39 This TA reflected one of the CAPE 140 recommendations to focus ADBs TA program to link directly with the lending program in PRC. The TA prepared basic procedures and guidelines to implement the wastewater permit trading system, but the executing agency has not been able to set up such a trading system. The technical assistance completion report (TCR) explained that this is a multistage process and that adequate time should have been allowed to develop the capacity and readiness of local environment managers before establishing such a permit trading system. The TCR also hinted at technical difficulties41 in implementing such a program. The
36

ADB. 1999. Technical Assistance to the Peoples Republic of China for Improving Environmental Management in Suzhou Creek. Manila (TA 3211-PRC, for $840,000, approved on 29 June). 37 ADB. 2001. Technical Assistance Performance Audit Report on Urban Development Advisory Technical Assistance to the Peoples Republic of China. Manila. This TPAR has been criticized as an unfair assessment because it did not take account of the historical context and priorities at the time. 38 Only 10 water supply and wastewater management ADTAs have been approved out of the total 148 ADTAs from 1998 to 2005. 39 A wastewater trading system is a mechanism for regional environmental pollution control adopted in many developed countries. Since water suppliers can face very different costs to control the same pollutant, trading programs allow facilities facing higher pollution control costs to meet their regulatory obligations by purchasing environmentally equivalent or superior pollution reductions from another source at lower cost, thus achieving the same water quality improvement at lower overall cost. Available: http://www.epa.gov/OWOW/watershed/ trading.htm. 40 ADB. 1998. Country Assistance Program Evaluation in the Peoples Republic of China. Manila. 41 For instance, since Shanghai is situated in a relatively flat plain, it was difficult to define the watershed and the basins assimilative capacity. Source: ADB. 2003. Technical Assistance Completion Report on Improving Environmental Management in Suzhou Creek. Manila.

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ADTA on Shanxi Air Quality Improvement42 was more successful in establishing an emissions trading system for sulfur dioxide in Taiyuan City. As a result of the TA, the Taiyuan Municipal Government passed a regulation for emission trading and designated a vice mayor to enforce the total sulfur dioxide emissions quota monitoring and trading program, which involved 26 enterprises. At least two emission trades had been reported at the time of TCR preparation, clouded only by the passage of a national law on good governance that cast doubts on the local government authority for emissions trading. Despite this, the success of the TA proves that emissions trading is feasible in the PRC. 26. The ADTA on Water Tariff Study II (footnote 15) was a continuation of the policy dialogue on national water tariff guidelines initiated by ADB under a previous ADTA (footnote 35) in 1997. The study was a logical next step in the PRCs water tariff reform. It was requested by government in 1999 to continue the momentum from the successful formulation of national guidelines on water tariffs. Water Tariff Study II outputs included preparations to implement the national guidelines in Zhangjiakou, issue NDRC orders promoting urban water tariff reforms in all PRC cities based on the lessons learned in Zhangjiakou, and develop new policies on tariff reform using feedback from the TA workshops and outputs. The water tariff reforms were so successful in Zhangjiakou that they were soon replicated in other cities, such as Chengdu and Fuzhou, and the PRC Premier directly acknowledged the TAs contributions. Completion of the project marked 4 years of successful ADB support for water tariff reforms in the PRC, establishing ADBs reputation in the PRCs water sector, and laying out a successful model for promoting policy dialogue with the Government through TA activities. The TA-proposed water tariff reforms were fully addressed in ADBs follow-up loans on the water supply. ADBs TA for water tariff reforms has been highly effective, and its achievements have been recognized within ADB and by the PRC. Similar approaches were followed in two ADTAs on wastewater and solid waste policies. 27. The major output of the ADTA on Strengthening Urban Solid Waste Management (footnote 16) was a detailed national strategy for strengthening urban solid waste management in PRC cities, which included tariff charges for and gradual marketing of waste services. National and municipal staff also gained extensive knowledge on solid waste management from the TA, while additional outputs from a supplementary study developed implementation guidelines on public-private partnerships for solid waste management. The Ministry of Construction was satisfied with the TA outputs and indicated that the Government is fully committed to the strategys implementation. 28. Two early TAs (Suzhou Creek [footnote 36] and Small City Urban Infrastructure [footnote 34]) had well designed and effectively implemented training and capacity building components. For instance, training received by staff and local engineers under the Suzhou Creek TA proved very useful in updating and recalibrating the water quality model after TA completion. Although there was no formal training component for the remaining eight ADTAs, some executing agencies mentioned that they benefited from staff capacity building through the TAs implementation, particularly the TA on a Town-Based Urbanization Strategy (footnote 19) regarding the preparation of development plans and investment programs, and the TA (footnote 9) on Hai River Basin involving planning capabilities in wastewater management and pollution control. 29. The cluster approach used under the TA on the Promotion of Clean Technology43 was rated largely successful in sequentially implementing its six subprojects and managing the tasks under
42

ADB. 1999. Technical Assistance to the Peoples Republic of China for the Shanxi Air Quality Improvement. Manila (TA 3325-PRC, for $700,000, approved on 7 December). 43 ADB. 1998. Technical Assistance to the Peoples Republic of China for the Promotion of Clean Technology. Manila (TA 3079-PRC, for $3.5 million, approved on 29 September).

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different agencies. After laying out the policy for clean production, the TA undertook an advocacy program to influence legislation that would enable the clean technology to be developed. Assistance to enterprises was postponed until late in the project period, after the environment had been set for township and village enterprises to adopt clean production techniques on their own. The TCR proposed that further integration of clean production technologies into government policy would require continued ADB engagement with NDRC, Ministry of Science and Technology, Environment and Resource Protection Committee of the National Peoples Congress, State Economic and Trade Commission, SEPA, and the Ministry of Agriculture over the long term. 30. ADB has provided valuable training and assistance on environmental impact assessment in the PRC, paving the way for the operation of 200 class A and 800 class B environmental impact assessment-licensed organizations, which play a role in managing industrial pollution and non-point pollution. 31. Efficiency. The TCRs available at the time of evaluation for four water supply and wastewater TAs recorded average delays of 15 months in terms of TA completion, which prevented the timely delivery and dissemination of TA outputs. For instance, one of the key objectives of the TA on Safe Drinking Water for the Rural Poor (footnote 18) was to prepare a medium-term rural water supply and sanitation sector plan and investment strategy for 2006 2010. The TA was originally scheduled for completion by March 2005 to support the preparation of the 11th Five-Year Plan by the end of 2005. However, the TA was not completed until March 2006 and the 1-year delay undermined the value of the TA outputs.44 32. Executing agencies are not involved in the selection of TA consultants (although they are informed of the consultant shortlist and ADB inquires whether an executing agency has had prior unsuccessful working experience with any of the shortlisted companies). While the executing agencies expressed general satisfaction with the engagement of consultants, one common complaint was that ADB international consultants often do not have previous experience of working in the PRC and thus have limited knowledge and understanding of the topics they are supposed to work on. This imposes an additional burden on the executing agencies in terms of time45 and effort46 required to educate them, and in many cases, the consultants unfamiliarity with the PRC situation led to TA outcomes and recommendations that were not relevant to the PRC. In such cases, the core research work and major outputs of the study may depend more on the contributions of national consultants hired by foreign consultant firms. 33. Although the TA on improving the Suzhou Creek environment (footnote 36) was completed within schedule and budget, the water quality modeling it developed could not be used because of data deficiencies. The model required a large amount of data that often did not exist or were restricted, prompting the TCR to note that, for future projects, the client should provide assurance that required data will be provided. The training component provided off-shore training to six officials from the municipal environmental protection bureau and was recognized as an excellent opportunity for knowledge transfer in water quality modeling. 34. The executing agencies expressed satisfaction with the supervision by ADB project officers, particularly during the early stages of the TA. Typically, ADB conducted three to four

44

Although initial findings and draft reports were presented earlier to the Government for incorporation in the 11th Five-Year Plan. 45 About 3 to 4 months in the case of Ministry of Construction TAs. 46 In fact, on average, the learning and orientation stage accounted for one-third of the international consultants time. International consultants would start report writing only after an extended period of doing research, effectively crowding out TA resources for more productive work.

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supervision missions for a TA during its implementation period, and most executing agencies considered this to be adequate. D. Key Issues

35. Overall, ADB has not been able to seize the opportunities offered by the extensive urbanization in the PRC during the CAPE review period to increase the size and quality of its urban operations significantly: (i) ADB does not appear to have a clear urban strategy for the PRC, except for the 1999 ADB-wide urban sector strategy and water sector policy. This contributes to the perception among the PRC clients that ADB is not an urban sector lender and it therefore gets a shorter shopping list from the NDRC (limited to urban water supply and wastewater projects). (ii) There is no natural home for urban issues at ADB, with urban operations being spread across ADBs various divisions. According to executing agencies, this slows down project preparation in contrast with the World Bank, which has an integrated urban sector unit in its country office. This absence of a focal point has limited ADBs urban lending to water supply and wastewater projects. (iii) ADB has very limited staff for the urban sector within the PRC Resident Mission (PRCM), with only one project officer assigned to water supply and urban development. Given the magnitude and significance of the PRCs urbanization, ADBs urban team is insufficient and the urban operations appear weak and opportunistic except for those concerned with water supply and wastewater. (iv) The CAPE 1 concluded that the long-term relationship with a niche agency contributed to satisfactory outcomes from ADBs highway and railway operations. While ADBs strong relations with SEPA and the Ministry of Construction enabled ADB to maintain policy dialogue on the urban environment at the national level, such links weakened during the second half of the CAPE period. 36. Added Value. Since funds are available from domestic capital markets and private investors, the real attraction in ADB loan financing will have to come from significant added value that domestic sources cannot provide. Additional knowledge transfer and capacity building through ADB PPTAs and information systems and technology are becoming less important for clients, because of the substantial reforms in the water supply and wastewater sector over the last decade. These reforms have covered technology, services and O&M standards, pricing, corporate governance, and regulations. ADB has to demonstrate that it can add value to the PRCs already quite developed water supply and wastewater sector. 37. PPTAs. Feedback on the PPTAs for the Fuzhou Water Project,47 Jilin Water Project,48 and Henan Water Project49 was mixed. As a newly-established project management office (PMO) with no previous experience of multilateral development bank projects, the Jilin PMO found the PPTA very helpful in transferring knowledge about preparing a proposal for ADB financing, the technical, institutional, social, financial, and administrative aspects of ADB requirements, and synchronizing ADB and domestic approval procedures. On the other hand, the Fuzhou and Henan PMOs, which had already implemented ADB projects, stated that the PPTAs for their second ADB projects no longer provided any additional value, as they had built
47

ADB. 1997. Technical Assistance to the Peoples Republic of China for Preparing the Fuzhou Water Supply and Wastewater Treatment. Manila (TA 2770-PRC, for $598,000, approved on 14 March). 48 ADB. 2003. Technical Assistance to the Peoples Republic of China for Preparing the Jilin Water Supply and Sewerage Development Project. Manila (TA 4227-PRC, for $650,000, approved on 26 November). 49 ADB. 2003. Technical Assistance to the Peoples Republic of China for Preparing the Henan Wastewater Management Project. Manila (TA 4233-PRC, for $800,000, approved on 3 December).

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sufficient staff capacity and were already familiar with ADB operations. Since the PPTAs introduced very few notable changes to technical designs, economic and financial costings, social and environmental impact assessments, or solutions prepared by executing agencies or local design institutes, the PPTA reports become largely translations of work prepared by the Government. Moreover, executing agencies generally have low ownership of PPTAs, given that TA consultants are directly selected by ADB, are often unfamiliar with local conditions, and rely on counterpart agencies for information and insights. The only areas where executing agencies consider that PPTAs added value involve ADBs resettlement safeguards and bid packaging. ADBs approach to resettlement and compensation is regarded as more stringent than locally prepared resettlement plans and therefore an improvement. However, ADB needs to guard against causing delays because of resettlement issues because some PMOs consider the PPTA as one of the key factors prolonging the period of project preparation. 38. One-Off Interventions. ADBs water supply and wastewater loans tend to be implemented as a series of one-off interventions.50 Sewage treatment facilities have been provided without adequate attention to sludge treatment or disposal. Water supply facilities have been provided without an adequate assessment of future raw water demands. Repeated one-off water supply and wastewater interventions reduce the efficiency of the project facilities and often demonstrate little differentiation from locally-funded projects. 39. Sector Loan Approach. During the CAPE period, ADBs urban lending focused mainly on provincial capitals where water-related environmental problems are most severe and improvements are most needed. With facilities in operation or under construction, most of these cities are ready to meet national targets for wastewater treatment before 2010. Therefore, the demand for water supply and wastewater infrastructure development will soon shift to secondary and tertiary cities, counties, and rural towns in the suburbs of large cities. This will result in higher total investment demand but much smaller investments. ADBs recent loans approved or under preparation for the provinces of Henan and Shandong confirm this trend. 40. In response to this emerging demand and the potential challenges associated with a new group of clients, ADB used a sector loan approach in the Henan Water Project (footnote 7). In this project, ADB loaned $100 million to support 19 subprojects in 15 counties. Given the large number of subprojects and the small size of each, ADBs decision to apply the sector loan approach51 was appreciated by the executing agency, but other central government agencies are not yet comfortable with this approach. However, ADBs sector loan approach seems to offer the best way of financing large numbers of small components that have high transaction costs and risks. 41. PRCM. A stronger and broader role for the PRCM would save time and money, and improve the effectiveness of lending and nonlending operations, especially in urban development and water supply and wastewater. In particular, ADB should delegate responsibility for procurement and payment control to Chinese-speaking officers within the PRCM in order to minimize delays associated with translation and transmission. 42. ADB Staff Turnover. A frequent turnover of ADB project officers was observed in several projects reviewed. For instance, ADB appointed four project officers for the Fuzhou Water Project52 (footnote 4) and four project officers for the Suzhou Creek Project (footnote 5).
50 51

ADB. 2006. Completion Report: Country Strategy and Program (PRC 20042006). Manila (draft, para 65). This approach will allow the decentralization of subproject identification and appraisal, flexibility in subproject addition or replacement, and adjustment in subproject funding. 52 One prepared the project, another started implementation, a third took over implementation some time through the project life, and a fourth oversaw completion.

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The Fuzhou Environment Project (footnote 6) had already gone through three project officers, while the Henan Water Project (footnote 7) was assigned to four different project officers within a period of 6 months from April to October 2006. Although the professionalism and commitment shown by ADB staff to the projects continue to be appreciated by executing agencies, these frequent changes undermined the stability and responsiveness of ADB administrative support to executing agencies. To some extent, it also affected the momentum of high-level discussions with local government leaders and, therefore, any expansion of ADBs involvement. 43. Loan Savings. There were substantial cancellations of loan amounts in the Fuzhou Water Project ($30.5 million, or 30% of the approved loan amount) and the Suzhou Creek Project ($135 million, or 45%). Reallocation of these loan savings was not considered, given a cumbersome process that required approval from top ADB management. Instead of tapping loan savings, Fuzhou Water Project used other sources for project-related expenses.53 While interest rates on ADB loans are low, its transaction costs tend to be high, especially during preparation, and the executing agencies felt that it was important to fully utilize loan proceeds in order to minimize the effective transaction costs from an ADB loan. The executing agencies said they would prefer more flexible loan reallocation procedures. In this regard, ADB is said to compare poorly with the World Bank, which authorizes its task team leaders to approve reallocations across project components. 44. Other recommendations that would improve utilization of ADB loan proceeds include the following: (i) Allow the reallocation of loan funds among major expenditures (civil works, equipment, training, etc.) or set a maximum amount that can be borrowed for these expenditures instead of fixed percentages. (ii) Finance more upfront and local costs, such as those related to resettlement. ADBs restrictions on covering land acquisition and resettlement costs constrains its expansion into urban roads development and solid waste disposal facilities where such costs account for most of the total project cost.54 45. Safeguard Policies and Requirements. ADBs requirements are not fully aligned with the PRCs, and enforcing parallel safeguard policies imposes an additional cost to both parties. The PRCs policies on land acquisition and resettlement were revised in 2004, which narrowed the gap, but problems regarding the calculation of compensation remain. In addition, ADB requires resettlement costs to be assessed during the PPTA stage, i.e., before actual resettlement requirements are known (by contrast PRC policies usually require these to be determined after the loan and the preliminary design are approved). Most of the projects reviewed here were delayed by resettlement issues, and, although it is true that resettlement problems also occur in ADB projects in other sectors, they are more challenging for urban projects because sites are more heavily populated and land values are much higher. ADBs resettlement policy of negotiating compensation directly with households has been criticized as unworkable in the PRC, where land is collectively owned and, therefore, the government system provides for negotiation and payment to village and town governments. ADB needs to continue working with government in further narrowing the gaps between both sides resettlement policies so that resources spent on enforcing the parallel policies can be minimized, making ADB lending more competitive.

53

Purchase of additional sewage treatment equipment needed by the project-financed plant to meet new national standards. 54 However, new instruments such as local currency financing under ADBs Innovation and Efficiency Initiative now enable ADB to finance land acquisition and resettlement costs, thus addressing a constraint to expanding its urban infrastructure portfolio.

188 E.

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Key Lessons and Recommendations

46. The PRC is ADBs largest urban client, and contained 42% of the urban population of all ADB developing member countries in 2005. Over the next 10 years, it will need to absorb an additional urban population of 160 million people, as the PRC becomes a predominantly urban nation. ADB has so far lent $1.2 billion since it started urban operations in the PRC in 1991, amounting to 2% of the PRCs annual urban investment requirement. The Government has expressed a need for innovation and knowledge transfer from ADB, not just low-cost financing. 47. Increasing Importance of the Urban Sector to ADBs PRC Operation. The PRCs top leadership has encouraged ADB to play a greater role in rural development, environmental conservation, and urban development.55 ADB has recently announced that, over the next 4 years (20072010), it will gradually reduce its lending for transport projects from 80% of its total PRC loan portfolio to 50%, and provide more lending to agriculture and rural development, energy, environment, and urbanization. However, given ADBs limited in-country expertise in urban infrastructure outside of water and sanitation and potential challenges for introducing hard loans in social sectors, promoting ADB lending in the full range of urban services might not be practical in the short term. If ADB is to maintain its position as Asias premier development institution, there needs to be a greater focus on urban development in the PRC, which would also address many poverty reduction and environment-related issues. 48. ADB Needs an Urban Strategy for the PRC. ADB needs to develop a PRC-specific urban strategy that closely reflects changing conditions and evolving demands. Unlike in the water sector, where many basic conditions and principles are universal, urban development reflects unique social, cultural, institutional, and economic conditions. Thus, an updated Asia-wide urban sector strategy may not be useful in guiding policy or operational support to the PRC. 49. ADB Needs Better Branding of Its Urban Capacity. A senior PRC official has observed that ADB is relatively new to urban lending in China, whereas in fact ADB has been providing urban loans to the PRC for as long as the World Bank has. Since government representatives do not perceive ADB to be particularly strong on urban issues, the Government has tended to propose single-sector projects for ADB financing. These projects comprise a relatively small portion of the PRCs annual borrowing for urban issues. The PRCM recently attempted to clarify ADBs branding by issuing an information document entitled Partnership in Urban Development. This initial effort needs to be expanded significantlydepending on which strategic position ADB decides to take on urban issues in the PRC, and the degree of commitment it attaches to that position. 50. PPTA Improvements. The current PPTA template should be replaced by a more project- or client-responsive model designed to address different project needs and situations. Instead of awarding all PPTA resources to a consulting company, there should be the option of releasing the PPTA budget in two tranches. The first would be used to hire consultants to review the preparation work and documents prepared by local counterparts, with a view to identifying weak or missing areas. The second would be used to hire consultants who can help the local counterpart to strengthen the studies or change the design if necessary. ADB should involve executing agencies and PMOs in PPTA design and selection of consultants to strengthen their ownership of the PPTA. ADB should also consider hiring more national consultants that meet
55

When President Hu Jintao met with ADB President Haruhiko Kuroda during his state visit to the Philippines, he suggested that ADB expand its operations in the PRC from traditional infrastructure sectors to the PRCs new development priorities. The same opinion was also expressed by Premier Wen Jiabao during his meeting with the ADB President at the Greater Mekong Subregion Summit held in Kunming, PRC in July 2005.

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ADB standards, since such consultants have demonstrated they can deliver more cost-effective services.56 51. Multisector Project. There is strong demand from cities for multisector projects, and there is growing support for more sector loans and multisector projects within the Ministry of Finance and the NDRC. The trend, therefore, is toward more complex projects that are responsive to each citys needs. There is considerable scope for policy reform and associated capacity and institution building.57 52. Table A12.2 presents these issues in a SWOT analysis. Table A12.2: SWOT Analysis: Urban Development or Water Supply and Sanitation
Strengths
1. 2. 3. 4. The Government has highlighted urbanization as a key initiative in its national strategies. Strong commitment of PRC clients, ensuring full ownership. Cities are experienced in planning and implementing urban infrastructure projects. Highly satisfactory loan portfolio performance of ADB in the PRC urban sector, much better than in other DMCs. ADB has broad knowledge of PRC urban issues through TAs in a range of areas (urban governance, municipal financing, urban infrastructure development, urban renewal, urban transport, urban poverty, and urbanization policy). 1.

Weaknesses
No urban sector strategy (except for a very general, Asia-wide, and outdated strategy), with no specific strategy on PRC urbanization. No urban sector roadmap. The ADB project preparation and administration model is not appropriate for complicated urban projects. ADB urban lending has been focused on water supply and wastewater, with very little involvement or lending experience in other urban subsectors. ADB organizational setup does not have a clear urban focus, with no dedicated urban division or urban sector classification to track and assess urban operations.

2.

3.

5.

4.

Opportunities
1. Potentially strong demand from cities for ADB loan 1. financing in the urban sector. 2. Formulation of Urban Sector Strategy II may provide directions for ADB urban operations in the PRC. 3. Rapid pace of change may require updating of environmental requirements. 2. 4. Increasing delegation of project administration mandates to PRCM. 5. ADBs strong performance in water supply and 3. wastewater projects may be a building block for expanding to other urban subsectors. 6. ADB can facilitate exchanges of urban experience between DMCs, and with member countries such as Japan, Republic of Korea, and Singapore toward supporting PRC urbanization initiatives with relevant Asian urban experience. ADB = Asian Development Bank, PRC = Peoples Republic of PRC Resident Mission, TA = technical assistance. Source: Country assistance program evaluation team.

Threats
PRC partners do not perceive ADB to be an urban lender and often approach ADB only for water and wastewater projects. This may constrain ADB from playing a more significant role in a broader urban context. There are a limited number of experienced and well qualified urban specialists and professionals in ADB. There is only one urban officer in PRCM. ADB may not have enough time and resources to identify large urban programs or to develop leadership in the complex urban sector.

China, DMC = developing member country, PRCM =

56

Domestic consultants can be engaged at much lower rate and entail a lower travel budget, and present no language barrier nor require orientation to local conditions. 57 For instance, the Shanghai model of auctioning long-term leases of land to companies may be a good case for replication.

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Appendix 13

RURAL DEVELOPMENT AND NATURAL RESOURCES A. Introduction

1. This appendix on rural development and natural resources (RDNR) covers the operations of the Asian Development Bank (ADB) in agriculture, water resource management, natural resource management, and rural infrastructure in the Peoples Republic of China (PRC). ADBs approach to RDNR during the country assistance program evaluation (CAPE) period appears to have been developed in response to a number of competing issues: (i) the need to respond to an increasing focus on agriculture and rural development in the PRC under the 10th Five-Year Plan (FYP)a sector in which ADB has traditionally not had strong comparative advantage, either in the PRC or elsewhere; and (ii) a perceived need to move away both from traditional lending for physical infrastructure (especially roads and railways) and from the coastal provinces toward a focus on rural development and the less developed central and western provinces. 2. Table A13.1 shows the sector characteristics. Table A13.1: Features of and Strategies for the Rural Development and Natural Resources Sector
Sector Characteristics
A. Agriculture Low overall productivity Infrastructure bottlenecks, particularly in the western region, due to inadequate fiscal capacity at provincial and subprovincial levels Decline in research expenditures as % of agricultural GDP

PRC Government Strategy

Increase farm productivity and value added

ADB Sector Strategy

Provide infrastructure for rural development to foster links between farm and nonfarm sectors Support research, promote linkages between national and provincial research institutions, and encourage innovations

Lessons Identified in Previous Reports

Until 1997, there was little change in ADBs sector portfolio. ADB commercial activities such as agroindustrial and agroprocessing projects tend to be unsuccessful. Since the PRC economy is in transition, ADB projects focused on production tend to pose higher risks if these have to rely on the capacities of untested private enterprises The PRC has been reluctant to borrow for agricultural projects on OCR terms, given insufficient financial rates of return and difficulties in servicing debt. Thus, proposed projects need to establish financial viability foremost

Shift in priority away from subsidies for the urban population Low and declining profitability as domestic prices fall to converge to international prices Continued subsidies to grain producers, including the 1999 green for grain program Limited arable land leading to conversion of fragile or unsuitable ecosystems into cultivated land with little concern for environmental

Redesign grain subsidy programs to promote food security and price stability Improved agricultural production capacity through assistance to impoverished areas Diversify crop production

Develop underutilized and waste land Adopt integrated approaches to farming that

Address green side environmental issues and promote sound natural resources management

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Sector Characteristics
limits Limited water resources Environmental conflicts

PRC Government Strategy

are friendly to the environment Implement new natural forest protection projects along parts of Yangtze and Yellow rivers Protect rural environment from pollution caused by farm chemicals Improve environmental, meteorological, and seismic monitoring system to reduce natural disasters

ADB Sector Strategy

Support approaches and technologies for clean agriculture, sustainable natural resources use, and integrated ecosystem management

Lessons Identified in Previous Reports

Declining sources of rural credit as established rural credit institutions have moved toward more commercial collateral-based lending that does not fit with the present land allocation system based on user rights Contradictions between policy objectives and legislation, poor links between legislation and statutory instruments, and weaknesses in enforcement and dispute resolution

Strengthen rural financial markets, institutional frameworks, regulations, and programs to provide financial services to disadvantaged areas

Onlending through the Agricultural Bank of China has been difficult because it has shifted toward more commercial activities ADB has had to channel funds directly to agroenterprises Implementing agencies often lack counterpart funds and capacity in project administration and monitoring Supervision requirements exceed ADB resources Procurement procedures are too complicated and lengthy Projects fail to achieve economies of scale despite numerous subprojects and project sites

Improve sector governance by helping improve policies, legislation, the regulatory environment and institutional arrangements, and by encouraging public participation and private sector involvement

B. Water Resources Frequent flooding due to weak embankments, lack of water and sediment controlling construction, and difficulty in using flood storage and detention zones High seasonal variations in water supply

Emphasize flood control system development in major river basins. 1. Dike development in Yellow and Yangtze rivers 2. Dredging of sedimentation in rivers and lakes 3. Strengthening of safety construction in flood storage and detention zones, urban flood control, and reservoirs repair and maintenance

Focus on natural resource management, including flood control management and projects aimed at ecological improvement

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Sector Characteristics
Large aggregate water supply but low per capita availability

PRC Government Strategy

Develop water sources and use appropriate pricing mechanisms to generate necessary funds for operation and maintenance Manage water resources based on river basin capacity, environmental protection, and balanced socioeconomic development Combine water resources utilization with disaster relief, drought resistance, and flood control

ADB Sector Strategy

Improve the efficiency of water supply and distribution systems through investments in physical infrastructure

Lessons Identified in Previous Reports

Severe water supply and demand conflicts between agriculture and industry, urban and rural, region and region, and cities and provinces

Worsening pollution of groundwater, aquifers, and river basins

The Government prioritized cleaning the seven major river basins and three lakes in the Ninth FYP Protect existing water sources by controlling industrial, municipal, and non-point pollution

Strengthen tariff systems and structures for raw and treated water Ensure environmental protection through continuing support of legislative and regulatory provisions governing water pollution

Previous efforts that focused on agriculture growth, poverty reduction, and the environment simultaneously have not been effective. ADB should extend its environment work a to green environment issues. ADBs success in using OCR funds for brownb issues cannot easily be replicated in the agriculture sector due to relatively lower financial rates of return, longer debt servicing periods, and unavailability of ADF resources

Fragile environment, with declining river, lake, and wetland functions due to drying up Prolonged droughts

Introduce water-efficient technologies and operations Use appropriate pricing mechanisms to encourage conservation Control over-extraction of groundwater resources Combine water resources utilization with disaster relief, drought resistance, and flood control

Ensure water resources conservation through continuing support of legislative and regulatory provisions governing natural resources management Improve the efficiency of water supply and distribution systems through investment in physical infrastructure (1997 COS) Improving the supply of clean drinking water should be part of any pro-poor development strategy; more investments are needed to increase the supply of clean drinking water

Overexploitation of groundwater leading to land subsidence and sea water intrusion Increasing demands for clean water supply as a result of rapid economic development

ADB = Asian Development Bank, ADF = Asian Development Fund, COS = country operational strategy, PRC = Peoples Republic of China, FYP = five-year plan, GDP = gross domestic product, OCR = ordinary capital resources. a Green issues focus on the long-term preservation of the natural environment, especially living natural resources. b Brown issues refer to environmental degradation that have immediate health outcomes, particularly in an urban setting, like wastewater and air pollution. Source: Country assistance program evaluation team.

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3. From 1998 to 2005, ADB approved nine loans amounting to $822 million to the RDNR sector. Five of them concerned flood safety and management1 and the other four focused on rural development, soil conservation, wetland management, and agri-waste management2 (Appendix 5). While ADBs sector strategy was broad enough to cover a wider range of agriculture subjects, there has been a significant focus on rural infrastructure investments, with $630 million (77%) being allocated to flood-related infrastructure (three on damage rehabilitation and two on flood management). Lessons from previous ADB experience may have compelled ADB to back away from traditional agriculture projects involving rural finance and agroprocessing.3 Of these nine loans, three of the emergency flood relief loans have been completed and the remaining six are ongoing. 4. ADB also allocated $18.6 million to finance 28 advisory technical assistance (ADTA) grants4 from 1998 to 2005. These cover a wider field, although they are concentrated on natural resource management, particularly water ($5.6 million or 30%); land ($2.9 million or 15%); and other environmental issues ($4.2 million or 23%). The environmental ADTAs included a $2.1 million technical assistance (TA) cluster5 on transjurisdictional environment management. Two ADTAs on rural finance ($2.8 million or 15%) were also approved. About half of these 28 ADTAs have been completed. The sector assessment will be based on primarily on these nine loans and 28 ADTAs. B. Relevance

5. ADB operations in the RDNR sector are assessed relevant. The three agriculture development loans and the agricultural wastes project all reflected the Government strategy and sector needs (footnote 2). However, there were weaknesses in the project designs. The elapsed time of nearly 3 years between project design and loan effectivity6 resulted in the design of one of three components of the West Henan Agriculture Development Project becoming out of date. During the first year of project implementation, the lack of market demand for project-specified products led to weak beneficiary interest in the horticulture development component. Project
1

ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Northeast Flood Damage Rehabilitation Project: Inner Mongolia Autonomous Region. Manila (Loan 1685); ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Northeast Flood Damage Rehabilitation Project: Heilongjiang Province. Manila (Loan 1686); ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Northeast Flood Damage Rehabilitation Project: Jilin Province. Manila (Loan 1687); ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Yellow River Flood Management (Sector) Project. Manila (Loan 1835); ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Songhua River Flood Management Sector Project. Manila (Loan 1919). ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the West Henan Agricultural Development Project. Manila (Loan 1814); ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the China for the Efficient Utilization of Agricultural Wastes Project. Manila (Loan 1924); ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for Fujian Soil Conservation and Rural Development II Project. Manila (Loan 2082); ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Sanjiang Plain Wetlands Protection Project. Manila (Loan 2157). ADB. 1998. Country Assistance Program Evaluation in the Peoples Republic of China. Manila (para. 94) mentioned implementation problems for agriculture projects. Aside from those formally classified under agriculture, the CAPE included ADTAs from the finance and governance sectors that touched on agricultural subjects. ADB. 2000. Technical Assistance to the Peoples Republic of China for Transjurisdiction Environment Management (TA Cluster). Manila (TA 3588-PRC, for $2.1 million, approved on 11 December). The previous CAPE on PRC proposed the use of cluster TAs to develop long-term relationships with niche agencies. This TA cluster in particular will allow ADB to address transjurisdictional pollution in the Yellow River Basin by implementing sequential activities executed by four different government agencies in a coordinated and integrated manner. The PPTA on West Henan Agriculture Development was completed in May 1998, while the West Henan Agricultural Development Project became effective in July 2001.

194

Appendix 13

managers did react in a timely manner, leading to a refocusing of project resources on the other two components during the following year. According to the back-to-office reports for another loan, the Efficient Utilization of Agricultural Wastes Project (footnote 2), the selection criteria used to identify beneficiaries had a bias against the poor, and two of the four project-proposed biogas technologies were not financially viable. 6. The five loans involving water resources (footnote 1) were also consistent with ADBs country strategy. All five projects were also relevant to the PRCs 10th FYP, and the most recent flood management loans (Yellow River approved in 2001 and Songhua River approved in 2002) anticipated the shift in policy formalized under the 2006 11th FYP by focusing on flood management instead of mere flood control. The Yellow River Flood Management Sector Project seeks to mitigate the impacts of floods in Henan, Shandong, Anhui, and Jiangsu, while Henan Agriculture Project will divert water from Yellow River to areas with water deficits in West Henan. The Songhua River Flood Management Sector Project7 introduces an integrated river basin management system to improve management of earlier ADB investments under the Northeast Flood Damage Rehabilitation loans for the provinces of Heilongjiang, Jilin, and Inner Mongolia. The Sanjiang Plain is the second major flood plain in the Songhua River basin and the largest contiguous wetlands in eastern Asia, so it seems a logical choice for a wetlands protection project that would protect its natural resources from continued threats. 7. Overall, the agriculture and natural resources ADTAs appeared to address leading government priorities and all broadly fitted with the national strategy as defined in the relevant FYPs. All executing agencies reported that the evaluated ADTAs had a high degree of importance for their agencies. With the exception of one TA, these were built either on a previous ADB loan or on previous ADTAs and were thus regarded by the executing agency as forming part of the overall reform process. There is a high level of executing agency ownership8 of the agriculture ADTAs, bolstered by the significant degree of executing agency involvement at all stages of the ADTA process, with executing agency senior management designating the TAs content. ADTA designs were generally satisfactory, although the following concerns were raised by executing agencies, project officers, and consultants surveyed. (i) Although design and monitoring frameworks were used, these do not always lead to measurable goals and objectives and, whenever such indicators were set, there was little evidence that they were subsequently measured to assess impact and sustainability. (ii) The design of several TAs was too inflexible9 to adapt to changing circumstances during implementation. (iii) Inputs and resources were fixed and allocated at the design stage before the ADTA outputs had been fully discussed, prioritized, and approved by the executing agency and government. This did not leave enough flexibility to fund additional activities to help implement the ADTA recommendations. (iv) The design placed great emphasis on writing reports10 rather than on capacity building support. Training requirements tended to be underestimated, and in two cases the ADTA design had no component for skills transfer. (v) None of the ADTA designs explicitly drew on ADBs knowledge from other countries or regions.
7

Para. 37 of the project document stated that this project will serve as the first stage of a long-term commitment to natural resources in the Songhua River basin. 8 Largely validated by consultants and project officers in the TA effectiveness survey. 9 For example, the financial resource allocated during the design stage was difficult to alter during implementation. 10 Inception, midterm, or final reports, although useful for monitoring purposes, distracts implementors from focusing on skills transfer.

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8. The water resources TAs were also highly relevant to the water sector strategy of the Government and coincided with the key operational areas of the Ministry of Water Resources during those years, e.g., flood management, soil and water conservation, the carrying capacity of water resources, and integrated water resources management legislation in the Yellow River basin. C. Effectiveness

9. Overall, ADB loan interventions in the RDNR sector are considered effective because their narrow focus on particular subsectors in the loanswater resources management and soil conservationallowed ADB to achieve clear outcomes. In addition, many of the ADTAs outcomes were significant as discussed below. 10. The agricultural wastes project (footnote 7) exceeded its training targets by 864% for technicians, 200% for extension workers, and 32% for farmers. With organizational and financing assistance from the project, some 3,025 households in the Hubei project area built biomass gas pits for cooking and heating, thus saving a total of 3,630 tons of firewood11 or 1,512 tons of coal each year, and 47,190 tons of sludge recycled as fertilizers. The demonstration effects may further increase benefits, as 67% of people in the Xiaokang municipality indicated willingness to use biomass gas as their major fuel. Women appreciated the fact that they no longer needed to cut wood, were able to keep their kitchens cleaner, and inhaled less smoke during cooking. Aside from household savings from sludge utilization, blood fluke disease was reduced. However, the excess demand for benefits created problems for the implementing agencies on how best to target poor households without creating jealousy within villages. The mechanism of providing subloans to farmers on a reimbursable basis,12 as well as selection criteria that included 8 years of education and anticipated capacity to pay, may have led to a bias toward better-off farmers. In addition, only 20% of the trainees were women, although traditionally such operations are managed by women in households. 11. Delivery of the Henan Agriculture Projects (footnote 2) physical outputs seems to be on target, but it may be too early to establish whether its intended outcomes will be achieved as the project is still in progress. One emerging issue is the increasing problem of finding markets for project-financed horticultural products. While a change was made to the project design in 2002 to increase the focus on dragonhead13 enterprises and livestock rather than on horticulture, investments on fruit trees made before this change continued to face marketing problems. The expanded livestock development component is proceeding satisfactorily and repayments for the subloans are being relent to new projects with ADBs consent. The water supply component has addressed part of the major demand for irrigation facilities, but overall benefits from this component have accrued mostly to industry and urban populations14 rather than to the agriculture sector. While this is still a positive outcome, the impact on the availability of funds for agricultural water supply should be assessed. 12. ADB assistance regarding soil management is anchored on the ADB-Global Environment Facility (GEF) Partnership on Land Degradation in Dryland Ecosystems (Appendix 14), which covers six provinces in the western region: Xinjiang, Inner Mongolia, Qinghai, Gansu,

11 12

Equivalent to 665 hectares of forests protected. It takes about 68 months before the funds are reimbursed, thus requiring the beneficiary to use savings or borrow funds from other sources. 13 According to the Dragonhead Enterprises policy, private entrepreneurs are given preferential policies in return for working directly with poor farmer groups, through management contracts, contract growing or sales contracts with technical support, to improve their management and technical skills, agricultural productivity and market access. 14 E.g., the provision of a continuous water supply to Yima City.

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Ningxia, and Shaanxi. An earlier regional TA on dust and sandstorms15 technically covered 18 provinces, although the Government decided to concentrate on demonstration sites within Inner Mongolia, while another ADTA16 tackled desertification in Gansu. These have yielded a number of important outputs. (i) Parts of the Integrated Ecosystem Management concept have been incorporated into the revised National Action Plan to Implement the United Nation Convention to Combat Desertification, local regulations on the Conservation of Wild Plants of Xinjiang Uyghur Autonomous Region, and the 11th FYPs formulated by the project provinces. (ii) The capacity of more than 500 government officials and national experts to combat land degradation through direct participation in project activities has been strengthened. (iii) The Capacity Building to Combat Land Degradation17 established cooperation with the World Overview of Soil and Water Conservation Methodologies and Technologies regarding the evaluation of various technologies and methods to conserve soil and water, as well as with the World Conservation Union in applying its provincial legislative and policy framework models. (iv) Based on management patterns and implementation measures developed by ADB, two proposals for GEF land degradation partnership programs are being developed: the United Nations Environment Programme project on Pamirs and Pamir-Alai Mountain Sustainable Land Management covering Tajikistan and the Kyrgyz Republic, and the ADB project on Central Asian Countries Initiative for Land Management covering Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. 13. Although the Fujian Soil Conservation and Rural Development II Project (footnote 2) also tackles land degradation, the projects location in the southeast part of the PRC separates it from initiatives to address the causes of dusts and sandstorms in their northeastern origins. On the other hand, ADB may have wanted to build on the gains of the highly successful Fujian 1 Project.18 However, it appears that the level of coordination evident in the Fujian 1 Project was not replicated in the Fujian 2 Project, which is currently facing implementation difficulties. This indicates the importance of coordination among provincial government agencies on complex projects of this nature, although ample time must be allowed for coordination mechanisms during project design. 14. ADB has directed most of its major interventions in flood management at the second and third largest river basins in the PRC, the (lower) Yellow River and Songhua river basins.19 The three northeast flood damage rehabilitation loans successfully restored the economic and social activities that were destroyed during the 1998 floods, with the major short-term benefit being the creation of 17,700 additional jobs in the project area during the implementation period. In the
15

ADB. 2002. Technical Assistance for Prevention and Control of Dust and Sandstorms in Northeast Asia. Manila (TA 6068-REG, for $500,000, approved on 11 December). 16 ADB. 2001. Technical Assistance to the Peoples Republic of China for Optimizing Initiatives to Combat Desertification in Gansu Province. Manila (TA 3663-PRC, for $610,000, approved on 5 June). 17 ADB. 2004. Technical Assistance to the Peoples Republic of China for Capacity Building to Combat Land Degradation. Manila (TA 4358-PRC, for $1 million, approved on 28 June). 18 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grants to the Republic of China for the Fujian Soil Conservation and Rural Development Project. Manila (Loan 1386-PRC, for $65 million, approved on 28 September). 19 There appeared to be an informal understanding with the Government that ADB would focus on flood issues in northern part of the PRC, while the World Bank would attend to those in the southern part. Nevertheless, World Bank, Japan Bank for International Cooperation, Australian Agency for International Development, and Canadian International Development Agency continue to support water resources and flood management in these same areas as ADB.

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longer term, the projects provided the rehabilitation (and expansion) of infrastructure capability to underpin the rapid expansion of the economy in the project areas. The Yellow River and Songhua Flood Management Projects will probably achieve their objectives of reducing flood damage, but to a lesser extent than envisioned during project design, because of implementation problems. 15. All executing agencies described TA effectiveness to be satisfactory, with the more effective ADTAs being in those areas where the government was clear on what it wanted. The TA20 on GEF Partnership on Land Degradation and the TA21 on Combating Desertification in Gansu achieved the outputs and outcomes defined in their respective TA reports. The other ADTA on land degradation, TA 3657,22 suffered from poor consultant performance but still contributed to the longer term development of the GEF operational program (OP) 1223 initiative. Phase I of this GEF partnership concludes by end-2006 and as yet, GEF has not committed to phase II. The partnership is at a critical stage with the various plans for coordination, capacity building, and training all in place. One executing agency noted that ADB had been successful in establishing this partnership and in defining its key program requirements. However, it also perceived ADBs role as a GEF executing agency to be increasingly bureaucratic and suggested that ADB clearly set out its future role in the partnership.24 16. Similarly, the high public ownership of agreed outputs under the TA on Rural Income and Sustainable Development25 suggests that its outcomes are likely to be achieved, even though the TA is still half way through implementation. This is because the TA has adopted a bottom-up approach to rural development whereby (i) stakeholders were actively involved in program design, and (ii) agricultural bureau officials and agents at the village level were made responsible for resource allocations for both infrastructure improvements and capacity building in villages. 17. Several ADTAs have led to policy reforms in flood management strategy, water and soil conservation, and river basin water resources management. For instance, the TA on Preparing National Strategies for Soil and Water Conservation26 provided support for water and soil conservation policy based on the natural recovering ability concept27 over traditional tree-

20

ADB. 2000. Small-Scale Technical Assistance to the Peoples Republic of China for Global Environment Facility (GEF) Partnership on Land Degradation in Dryland Ecosystems. Manila (TA 3497-PRC, for $100,000, approved on 5 September). This small-scale TA sought to establish a broad framework for a partnership on land degradation, which was subsequently endorsed by GEF. 21 ADB. 2001. Technical Assistance to the Peoples Republic of China for Optimizing Initiatives to Combat Desertification in Gansu Province. Manila (TA 3663-PRC, for $610,000, approved on 5 June). Done in parallel with TA 3657, this reviewed land degradation issues in Gansu, including capacity and coordination requirements for dealing with degradation. Its findings were inputted into TA 3657 and the subsequent capacity building TA 4358. 22 ADB. 2001. Technical Assistance to the Peoples Republic of China for the PRC-GEF Partnership on Land Degradation in Dryland Ecosystems. Manila (TA 3657-PRC, for $1.15 million, approved on 25 May). The successor to TA 3497, it sought to further develop the framework into a formal country programming framework, which was also approved by GEF. 23 OP12 is a GEF concept relating to Integrated Ecosystem Management, wherein cross-sectoral projects address ecosystem management in a way that optimizes ecosystem goods and services in at least two GEF focal areas, within the context of sustainable development. 24 Due to the inherent bureaucratic procedures in processing of GEF projects, a recent joint process evaluation of GEF projects was conducted by GEF implementing and executing agencies at the suggestion of the Operations Evaluation Department in ADB. See ADB. 2006. Special Evaluation Study on the Performance of Selected Global Environment Facility Projects and ADBs Role in the Joint Process Evaluation. Manila (draft). 25 ADB. 2004. Technical Assistance to the Peoples Republic of China for the Rural Income and Sustainable Development Project. Manila (TA 4401-PRC, for $900,000, approved on 30 September). 26 ADB. 2000. Technical Assistance to the Peoples Republic of China for Preparing National Strategies for Soil and Water Conservation. Manila (TA 3548-PRC, for $800,000, approved on 20 November). 27 The concept refers to the use of natural mechanisms rather than human interventions to recover vegetation.

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planting. The TA on Strategic Planning Study for the Preparation of the Yellow River Law28 led to the State Councils issuance of the Yellow River Water Resources Regulation. The TA on Flood Management Strategy Study29 facilitated a policy approach to flooding from flood control to flood management. The TA on the Study of Carrying Capacity of Water Resources30 promoted the sustainable development of water resources in river basins. During implementation, local staff were informed about international experience in water resources management, and they are likely to apply and disseminate this knowledge to other stakeholders. Their exposure to ADBs social policy requirements will allow them to appreciate the importance of resettlement and land acquisition impacts. D. Efficiency

18. Because of the complexity of agriculture and natural resources issues, implementation of projects in this sector has been difficult, and the efficiency of the sector loans is assessed as less efficient. The project management office (PMO) for Henan Agriculture noted that the project had too many small subloans. Moreover, the PMO discussed its lack of control over the size of these subloans and the selection of household beneficiaries. In the Fujian 2 Project, ADB and the provincial finance bureau appeared to exert the same effort in preparing feasibility studies regardless of the size31 of the subloans, suggesting that their procedures have not adapted to the often complex and small-scale requirements of rural finance. Moreover, the translation of documents required to process the big number of subloans to and from Chinese and English was a drag on project, government, and ADB schedules and resources.32 19. In some cases, ADB experience indicated long gestation periods in developing projects and subprojects for this sector. The Fujian2 Project became effective more than 4 years after the idea for this follow-up project had been introduced, but because of delays in implementation, including delays in safeguard clearances, subprojects had not been approved even after 6 years. In the case of the Henan Agriculture Project, the PMO observed that it takes about 2 years to complete adjustments for a single subproject.33 In terms of ADB project supervision, executing agencies felt that ADB Headquarters sometimes take too long to respond to critical issues reported by executing agencies, although this was not seen as a major problem. 20. ADBs terms of engagement with its government partners, particularly local governments, have also changed because of personnel changes. The risk of this happening becomes higher the more the time there is between loan conceptualization to approval. The Fujian 2 Project demonstrated very little physical progress because of the Fujian Provincial Finance Bureaus changed stance on onlending to the private sector, as compared with its approach in the previous project. The Bureau is now perceived to be very cautious about approving the involvement of private enterprises in subprojects, causing serious problems for emerging agricultural and agroprocessing firms.
28

ADB. 2001. Technical Assistance to the Peoples Republic of China for the Strategic Planning Study for the Preparation of the Yellow River Law. Manila (TA 3708-PRC, for $970,000, approved on 28 August). 29 ADB. 2004. Technical Assistance to the Peoples Republic of China for the Flood Management Strategy Study. Manila (TA 4327-PRC, for $500,000, approved on 14 April, followed by the approval of supplementary resources of $50,000 on 28 September 2005). 30 ADB. 2002. Technical Assistance to the Peoples Republic of China for the Study on Carrying Capacity of Water Resources. Manila (TA 3963-PRC, for $600,000, approved on 04 November). 31 For instance, requirements are the same whether the subloan will be used to buy 20 chickens or a cold storage plant. 32 Moreover, translation are not always accurate, resulting in time and effort being wasted on communications to correct faults. 33 It was not clear if these adjustments were required by central government or by ADB or whether such adjustments were unique to the agriculture sector.

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21. The implementation delays for the water resources loans ranged from 12 to 24 months, because of the outbreak of severe acute respiratory syndrome from April to August 2003, the limited period within each year for construction without the risk of flooding, recent policy changes affecting land acquisition,34 and differences between administrative procedures in PRC and ADB. The reasons specific to the delays for each loan include the following and are at times beyond the control of the government: (i) Songhua River Flood Management, delays in government approval of predesign reports; (ii) Yellow River Flood Management, 7-month gap between loan approval and loan signing; multiregion coverage resulting in heavy preparatory workload for the design, resettlement, and initial environmental examination for the review and approval of three institutions (Ministry of Water Resources, National Development and Reform Commission, and ADB); and (iii) Northeast Flood Damage Rehabilitation Projects, limits on counterpart fund availability because of a succession of natural disasters; emergency nature of the projects meant limited preparatory work at appraisal, leading to subsequent revisions in key documents; and delays in obtaining ADB approvals on subproject documents owing to staff constraints. 22. The technical design problems with some biogas technologies, proposed under the project preparatory TA of the Agricultural Wastes Project,35 suggests inadequate project preparation. During implementation, it had been quite difficult to manage reimbursements for thousands of farmer beneficiaries that need to be supported by receipts, thus representing a significant amount of PMO work and time. 23. Efficiency of ADTAs in agriculture projects was mostly satisfactory, but there were implementation issues. All surveyed executing agencies made counterpart staff available at the outset and, in all cases, these were the people who would continue the ADTA work following completion. At the time of the survey, most of the counterpart staff who were trained as part of the ADTA still worked with the respective executing agencies. Unfortunately, since the executing agencies were often understaffed, counterpart staff often had significant non-TA work as well, which distracted them from devoting proper attention to the ADTAs. The water resources projects (footnote 1) also exhibited good financial control, with all projects staying within estimated costs. 24. Another concern was consultant selection and inflexibility during implementation. All of the surveyed executing agencies except one complained that their lack of involvement in consultant selection had resulted in problems regarding consultant attitude and suitability to the TA tasks. Many of the executing agencies believed they know of available national consultants who could have performed better than the consultants engaged by ADB. In some cases, ADB project officers themselves noted that the consultants did not work efficiently or submitted poor reports deemed unacceptable by ADB and government, thus requiring substantial inputs from ADB staff to complete the work. Although technically competent, some team leaders were unable to lead their teams effectively. On the positive side, the executing agencies believed that consultants were helping the government to do the TA work rather than doing the work for them. 25. Several consultants working on the agriculture development loans reported variable quality of supervision by the PRC Resident Mission (PRCM), with confusion arising over responsibility for responses to technical issues. There were instances where Headquarters staff
34 35

The central Government took back certain approval rights and increased compensation standards. ADB. 1999. Technical Assistance to the Peoples Republic of China for the Efficient Utilization of Agricultural Wastes. Manila (TA 3370-PRC, for $703,000, approved on 26 December).

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still handled technical inquiries in the absence of technical expertise at the PRCM. All executing agencies assessed ADBs responsiveness to be satisfactory or very satisfactory, but felt that ADB needed to show more flexibility in making resources available during TA implementation. As with loans and project preparatory TAs, there was an undue focus on consultants delivery of reports that were often long, needed to be translated at a cost by the executing agency, and probably would not be read or used. The executing agencies observed that what they needed was fewer and shorter reports, and more capacity building and implementation advice over a longer period. While the PRCMs management of the ADTAs on water resources was perceived to be efficient because of fluent communication, easy understanding and quick response, the implementing and executing agencies agreed that ADB in general does not pay enough attention to technical issues. They thought this was either because these were not the focus of ADB operations or because ADB staff lack the ability to handle such technical issues. 26. With regard to environmental ADTAs, the executing agency for the TA on provincial legislation on environmental protection and natural resources conservation36 wished it had played a greater role in selecting consultants (as it had with the World Bank), which would have enhanced the accountability of such consultants to the executing agency. On the other hand, the executing agencies for the TAs on Songhua River Water Quality and Pollution Control Management37 and Evaluation of Environment Policy and Investment for Water Pollutions Control in the Huai River Basin and the Taihu Lake Basin38 were satisfied with consultant selection but criticized the limited time allotted for consultants to deliver their outputs. While the performance of the cluster TA on transjurisdictional environment management (footnote 5) was still positive, it was suggested that ADB should select a single government agency to coordinate with the organizations involved in the cluster, since ADB in itself was not able to manage the different agencies. E. Sustainability

27. Overall, the sustainability of the loan operations in the RDNR is assessed as likely. In the case of Henan Agriculture Project (footnote 2), significant progress has been made and it is likely that many of the investments will be sustainable. However, the eventual closing of the project will leave a credit gap for farming households as the established agricultural lending institutions are focused increasingly on commercial lending. The water resources projects (footnote 1) will probably be sustainable given the delegation of operation and maintenance of embankments and dikes to special agencies, while requiring the residents and village commissions to maintain the village platforms. The flood forecasting system will be operated by professional staff. The biomass gas pits under agricultural wastes projects (footnote 2) are expected to last for 20 years, thus sustaining the environmental benefits. The link to blood-fluke disease reduction has also prompted the Hubei governments decision to build biomass gas pits for 400,000 households in 12 counties with serious disease incidence, allocating CNY50 million for this purpose. While farmers in other counties are eager to construct more pits, commercial banks seem unwilling to transact loans with individual farmers, prompting the Hubei provincial government to consider applying for a loan that can be relent to these small-scale borrowers to build pits. In such a case, ADB has played a catalytic role in rural biomass development, resulting in dramatic uptake from farmers and local officials, adoption of policy reforms that support biogas development, and demonstration effects attracting direct private investment. In
36

ADB. 1998. Technical Assistance to the Peoples Republic of China for the Provincial Legislation on Environmental Protection and Natural Resources Conservation. Manila (TA 3123-PRC, for $300,000, approved on 15 December). 37 ADB. 2002. Technical Assistance to the Peoples Republic of China for the Songhua River Water Quality and Pollution Control Management. Manila (TA 4061-PRC, for $1 million, approved on 19 December). 38 ADB. 2004. Technical Assistance to the Peoples Republic of China for the Evaluation of Environment Policy and Investment for Water Pollution Control in the Huai River Basin and Taihu Lake Basin. Manila (TA 4447-PRC, for $500,000, approved on 25 November).

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addition, the active engagement of project implementing offices and sharing of learning materials have paved the way for post-project innovations39 that encourage replication and longterm sustainability. 28. Several of the agriculture ADTAs reviewed were specifically targeted at building institutional capacity. When executing agencies reported that training had taken place, all perceived a long-term improvement in the performance of trained staff, ascribing this to the TAs approach to technology and skills transfer and the high quality of training. The executing agencies regarded the training periods as being too short. At the time of the survey, all the executing agencies confirmed that the trained staff still work for their respective agencies. The sustainability of ADTA outputs may be more lasting than loan outputs since the results of four ADTAs had been incorporated into different Government water sector policies (footnote 17). In terms of the environment-related ADTAs, most of the executing agencies performed better environmental assessment and management than other executing agencies in the sector. F. Impact

29. ADB assistance has contributed to achieving the sectors intended impacts in terms of construction and rehabilitation of physical facilities, as well as strategic mechanisms and institutional arrangements to prevent or minimize damage from floods and storms. Several ADTAs resulted in policy reforms and increased public awareness of flood management strategy, water and soil conservation and river basin water resources management. The short-term impacts were job creation (17,700 jobs) and better public health outcomes because of the reduction in blood fluke disease incidence. Other short-term impacts included (i) savings of 1,512 tons of coal each year and 47,190 tons of sludge recycled as fertilizers; (ii) reduced coal and firewood consumption due to the use of biogas produced from crop and animal wastes for cooking; and (iii) skills enhancement through training of technicians, farmers and extension workers to ensure the longterm impact of interventions. Given the strong Government commitments, strengthened capabilities of executing agencies, and increased public awareness, it is very likely that long-term development impacts of ADB assistance to the rural development and natural resource management sector will be realized. The potential impact is, therefore, assessed as modest. G. Key Issues

30. The main issue in this sector is whether ADB should diversify its portfolio toward the rural development and natural resources sector based on the importance given to it in the 11th FYP and ADBs development mandate and overarching goal of poverty reduction. Such a direction is constrained by (i) ADBs poor performance in the sector, (ii) the relatively high financial risks inherent in the sector, (iii) the lack of emphasis given by ADBs Medium-Term Strategy II (MTS II) to certain subsectors,40 (iv) relatively small loan amounts in these sectors and higher resource intensity in terms of designing and implementing the projects, and (v) the relevance of the previous country strategy and programs go inland policy (given that a substantial number of the poor live in highly populated coastal regions and their urban centers). 31. Experience shows that ADTAs are more likely than loans to generate progress through policy formulation in the water resources subsector. Also, because they require less financing, ADTAs are more cost-effective. However, there needs to be a closer match between the technical requirements of an ADTA and the skills available within PRCM.
39

For example, printing of biogas information at the back of playing cards for distribution to farmers, studies on digester liquid and slurry, provision of 3-year warranty on biodigesters, etc. 40 While rural infrastructure is prioritized in group I (core operational sectors), agriculture and natural resources is in group II (noncore operational sectors), and livestock in group III (operational activities to be wound up).

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32. ADB tends to determine performance based on the completion of specified outputs and reports and does not collect information relating to the longer-term effects and impact of the ADTA after implementation, even when such indicators were identified in the TA report. Such information can assist in the design and implementation of future ADTAs and ensures that past experience is fully brought to bear on new programs. G. Lessons and Recommendations

33. If the goal is to align ADB assistance with the PRCs 11th FYP priorities, a key pillar of which is the development of the socialist countryside, ADB will have to gradually diversify its portfolio toward agriculture and rural development. In addition, ADBs traditional markets in physical infrastructure development are becoming increasingly competitive as commercial banks are playing a bigger role. However, any shift in focus toward this sector would require a significant change in the present ADB approach since (i) ADB does not have a recognized comparative advantage in this sector; (ii) MTS II fragments the agriculture sector by prioritizing rural infrastructure over natural resources and livestock; and (iii) current ADB procedures for project appraisal are inappropriate for smaller, more complex loan subprojects that are typical in the sector. 34. Other constraints include (i) rural areas often do not have established institutional infrastructure; (ii) the areas and populations that are most in need of support are those that are least able to make loan repayments; (iii) some executing agencies believe that ADB should not get involved in softer areas like research and extension; and (iv) a rural credit gap is left after ADB completes its intervention, as existing credit institutions are unwilling to take over (Table A13.2). Thus, it is unlikely that ADB will succeed in pursuing pure agricultural operations, i.e., primary production agricultural activities. The opportunity lies in capitalizing on experience gained by ADB from GEF OP12 activities and pursuing agriculture as part of an integrated rural development approach, perhaps initially focused on the six provinces where land degradation is a major issue. 35. ADB should increase the scale of its assistance to water resources management. It should support such areas as rural water supply and irrigation improvements. In the context of declining public expenditures in the water sector, ADB resources could play a more important role. Given the rapid pace of change in the PRC, current environment and natural resource requirements could be 2 years out of date, especially with regard to environmental strategy and regulations. Small-scale TAs and quick response mechanisms would provide timely and responsive assistance. 36. ADB should seriously consider the use of country systems instead of some of ADBs preparatory requirements or an accreditation method in which specific government agencies that had successfully managed previous ADB projects may be considered to go through an express approval line. ADBs cost-based procurement policy may be exploited by companies that win contracts by offering very low bids but then offer substandard implementation. This happened with the Songhua River Flood Management Project (footnote 1). Given the large number of subproject approvals in this sector, ADB should consider accepting summaries, tables, or checklists translated in English for each subproject, instead of complete documentation, as long as these documents are duly certified by the PMO. However, ADB should have the prerogative to require the submission of other English-translated documents if necessary for post-review purposes. 37. ADB loans and ADTAs should build on ADBs experience and knowledge from other countries or regions, if it is to develop its reputation as a knowledge bank. Executing agencies should become involved at all stages of the consultant selection process, from the initial screening of candidates to possible interviews with those shortlisted or at least with the preferred candidate.

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Since an ADTA is designed for the executing agency and is built around its objectives and services, ADB weakens this link when it negotiates and signs contracts directly with consultants. Moreover, given the unique characteristics of the PRC provinces, it may be reasonable for executing agencies to select more Chinese consultants. The advantage of international consultants may lie only in sharing how similar projects were designed and implemented in their respective countries. International consultants should not be considered at all in policy reform TAs given their lack of knowledge of the PRC legal processes and the possible adverse implications of the acceptability of their recommendations. Moreover, TA reports should be written in Chinese for wider circulation and adoption among policymakers (unlike the current practice where the report is written in English and a low-quality Chinese translation is produced that executing agencies find difficult to understand). 38. The PRCM should be given more decision making authority, given the finding that communication with government is easier, more accurate and cordial if done from Beijing, especially from the perspective of provincial agency counterparts. ADB should also develop the capacity of its own staff on technical issues so they can better guide and manage operations in this sector. Table A13.2: SWOT Analysis: Rural Development and Natural Resource Management
Weaknesses 1. Poor knowledge management in terms of collection, analysis, reuse and learning from experience 2. Lack of flexibility with regard to resources and timing 3. Focus on written products rather than on implementation assistance 4. Mismatch between staff expertise and the requirement for TA and loan formulation, supervision and delegation to the PRCM 5. Use of consultants with poor cultural fit 6. Poor sector roadmap 7. Need for simpler project designs with more manageable subprojects and locations 8. Inappropriate loan appraisal procedures Opportunities Threats 1. ADB could use position of influence to play a role as 1. MTS II downgrades and fragments the importance of a trusted advisor agriculture 2. It could offer sectoral support based on identified 2. ADB may become known for too broad an approach needs and road maps to TA 3. It could build on previous sector support, e.g., GEF 3. ADB has few experienced and well-qualified senior OP12 programs staff 4. Rapid pace of change may require updating of 4. The future program may be constrained by the size environmental requirements, for which ADB can help of the PRCM build capacity. 5. ADB staff agricultural expertise could be matched with country sector requirements, including at the PRCM 6. More of the PPTA process can be delegated to EAs 7. Continued ADB support for flood management could further establish its comparative advantage and build critical mass of assistance. 8. Inland development strategy provides more opportunities for ADB to reduce poverty ADB = Asian Development Bank; PRC = Peoples Republic of China, EA = executing agency; GEF = Global Environment Facility; MTS II = Medium-Term Strategy II; PPTA = project preparatory technical assistance; PRCM = PRC Resident Mission; OP = operational program; SWOT = strengths, weaknesses, opportunities, and threats; TA = technical assistance. Source: Country assistance program evaluation team. Strengths 1. Program addresses high government priorities 2. Mostly strong PRC ownership 3. Good relationship between TA program and overall strategy 4. Some recognized sector knowledge, particularly in rural infrastructure and provincial coordination (GEF OP12) 5. TAs (especially in water resources) able to influence policy change 6. Some flexibility in responding to changing government needs

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Appendix 14

ASIAN DEVELOPMENT BANK-GLOBAL ENVIRONMENT FACILITY ACTIVITIES IN THE PEOPLES REPUBLIC OF CHINA A. Introduction

1. Of the 177 countries participating in the Global Environment Facility1 (GEF), the Peoples Republic of China (PRC) has the largest number of projects. It accounts for 4.3% of the total number of approved2 GEF projects or 10.6% if global and regional projects are excluded. Within the Asian Development Bank (ADB)-GEF portfolio, the PRC has been the most important recipient, with 6 of the 10 GEF-related projects approved3 by ADB and the GEF since 1999 (Table A14.1). In terms of amounts, the PRC projects accounted for 64% of total ADB financing for GEF-related projects until 2005 and 54% of total GEF grants approved for such ADB projects. Table A14.2 presents the portfolio. The assessment in this appendix covers only five approved activities (excluding the regional technical assistance [RETA] on the Greater Mekong subregion) and a GEF proposal that was subsequently dropped.4 Table A14.1: GEF-Related Projects Approved by ADB and/or GEF: PRC vs. Non-PRC
Status Number of GEF-related project approved by ADB Amount of ADB financing approved (in $ million)a b Amount of GEF financing approved (in $ million) Share of GEF to ADB financing (%) Number of GEF-related projects cancelled, dropped, or withdrawn Year 19992005 PRC 6 108 32 29.7 1 NonPRC 4 61 27 44.4 4 Share of PRC to Total (%) 60.0 64.1 54.4 20.0

Number of GEF-related projects being proposed for as of 5 2 71.4 GEF and/or ADB Board Approval Nov 2006 ADB = Asian Development Bank, PRC = Peoples Republic of China, GEF = Global Environment Facility. a Excluding project preparatory technical assistance. b Excluding project development facility-B. Source: ADB Environment and Social Safeguard Division, GEF.

2. Relevance. ADB-GEF cofinanced activities in the PRC are relevant but not highly relevant because of design and ownership issues, especially in the case of earlier proposals that were poorly received by the Government. The project preparatory technical assistance (PPTA) for Yunnan Comprehensive Agricultural and Biodiversity Conservation Project (footnote 4) was supplemented by a GEF project development facility (PDF)-B worth $350,000. The ADB component of the proposed loan aimed to support high-value crop cultivation through contract farming, while the GEF component sought to establish a protected area in the northwest region and to promote agrobiodiversity. The resulting loan proposal was dropped at the Governments request, because of the lack of a financial intermediary within the PRC willing to onlend ADB funds. However, both the Government and the GEF retained interest in the biodiversity component.

3 4

GEF is an international financial entity that provides grants and concessional funds to address global environmental issues, by financing the incremental costs of making planned projects friendly to the global environment, funding regional approaches to environmental problems, and helping developing countries to meet the objectives of international environmental conventions and other environmental treaties or agreements. Defined as those projects which were approved by the GEF Council, endorsed by the GEF Chief Executive Office, cancelled after approval or endorsement, or completed. This excludes the ADB-approved PPTAs for the development of the GEF proposal into a loan. ADB. 1999. Technical Assistance to the Peoples Republic of China for the Yunnan Comprehensive Agricultural Development and Biodiversity Conservation. Manila (TA 3372-PRC, for $1.3 million, approved on 23 December). This TA only reached the PPTA stage.

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3. The biggest GEF-PRC project was the $58-million loan for the Wind Power Development Project,5 with $12-million GEF cofinancing. Despite its tremendous environmental benefits, the basic concept behind the loan ran counter to Governments policy of cost recovery. Wind power is considered more costly than conventional energy sources, thus requiring provincial power companies to charge higher-than-usual tariffs. Since it was not possible to pass on the additional cost of wind power to consumers, the loan was terminated prior to effectivity upon the Governments request. 4. The other three loans (including the advisory technical assistance on capacity building under the Partnership on Land Degradation in Dryland Ecosystems,6 which was a hybrid loan) and two RETAs were deemed consistent with government, ADB, and GEF strategies. Two of these, the Prevention and Control of Dust and Sandstorms in Northeast Asia7 and the capacity building hybrid loan (footnote 6) sought to address land degradation and the worsening desertification in northeast Asia. The Prevention and Control of Dust and Sandstorms in Northeast Asia was rated relevant but not highly relevant, because the design focused more on addressing symptoms of the problem rather than the causes. Nevertheless, the approach is still consistent with Government and ADB strategies. ADB initiated this effort by supporting the preparation of a programmatic approach to land degradation through the earlier TA on PRC-GEF Partnership on Land Degradation in Dryland Ecosystems.8 The resulting PRC-GEF Partnership on Land Degradation in Dryland Ecosystems program is a 10-year, three-phase plan (with $1.5 billion for the three phases) to help the Government strengthen its enabling environment, improve operational arrangements, establish a monitoring and evaluation system, and implement pilot demonstration projects. ADB secured approval for the capacity building hybrid loan as the first project under the Partnership. This project is helping six PRC provinces prepare strategic plans for land degradation control, review policy and regulatory conditions, and support capacity for future investments.9 The country assistance program evaluation team assessed this technical assistance (TA) as a highly relevant follow-up to earlier ADB efforts on land degradation.

ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Wind Power Development Project. Manila (Loan 1818-PRC, for $58 million, approved on 20 December). ADB. 2004. Financial Arrangement for a Proposed Global Environment Facility Grant and Asian Development Bank Technical Assistance Grant to the Peoples Republic of China for the Capacity Building to Combat Land Degradation Project. Manila (TA 4358-PRC, for $1 million, approved on 28 June). ADB. 2002. Technical Assistance for Prevention and Control of Dust and Sandstorms in Northeast Asia. Manila (TA 6068-REG, for $1 million, approved on 11 December). ADB. 2001. Technical Assistance to the Peoples Republic of China for the PRC-GEF Partnership on Land Degradation in Dryland Ecosystems. Manila (TA 3657-PRC, for $1.15 million, approved on 25 May). This TA was approved outside GEF financing. ADB. 2006. Special Evaluation Study on the Performance of Selected GEF Projects and ADBs Role in the Joint Process Evaluation. Manila (draft).

Table A14.2: ADB-GEF Activities Involving the People's Republic of China (19992005)

206

Loan/ ADTA/ RETA No.

Country

Project Name

Date of GEF Date of Council GEF Focal ADB Type Approval/ Area Approval CEO Endorsement

Date of Completion

ADB Loan/ Grant Amount ($ '000) 108,220

GEF Grant ($ '000)

Status

Appendix 14

A. Approved by ADB 1818 PRC Wind Power Development Efficient Utilization of Agricultural Wastes FSP Climate change Climate change Multi-focal areas Multi-focal areas 1-Nov-02 20-Dec-00 13-Feb-04

32,151 Loan 1818 was terminated before effectivity, without any disbursements, due to insufficient repayment guarantee from lower12,000 than-expected wind power tariff levels, and the borrower's view that foreign financing for the windfarms will be too costly. 6,361 Loan 1924 is ongoing. Activities had been completed but the United Nations Environment 800 Progamme requested for RETA extension to allow for the editing and publication of outputs. 500 RETA 6068 was closed in April 2006 and its TCR was prepared in May 2006.

58,000

1924

PRC

FSP

30-May-02 22-Oct-02 30-Jun-08

33,120

6069

National Performance Assessment Greater and Subregional Strategic MSP Mekong Subregion Environment Framework PRC, Mongolia Prevention and Control of Dust and Sandstorms in Northeast Asia MSP

1-Nov-02 11-Dec-02 30-Jun-07

800

6068

1-Nov-02 11-Dec-02 25-Apr-06

500

4358

PRC

PRC-GEF Partnership on Land Degradation in Dryland Ecosystems: Project 1 - Capacity Building to Combat Land Degradation

FSP

Multi-focal 25-May-04 28-Jun-04 areas

4-Aug-07

800

First project under a $1.5 billion 10-year GEF program, ADTA 4358 is ADB's first "hybrid" project, financed by grants but prepared and administered through loan procedures to give government maximum responsibility. It is scheduled to close in August 2007. ADB leads this 350 program, with the Country Programming Framework being approved by GEF in October 2002 with assistance from ADB ADTA 3657. The framework involves 2 phases and 3 multilateral agencies (ADB, WB and IFAD). 12,140 Loan 2157 is ongoing.

2157

Sanjiang Plain Wetlands Management B. Cancelled, Withdrawn or Dropped Yunnan Comprehensive PRC Agricultural Development and Biodiversity Conservation Project C. Not yet Approved by ADB and/or GEF PRC Regional (Central Asia) Central Asian Countries Initiative for Land Management (CACILM)

FSP

Biodiversity Biodiversity

7-Feb-05

14-Mar-05 31-Dec-10

15,000

FSP

TA 3372 failed to develop into a loan proposal because borrower could not find a suitable financial intermediary to onlend ADB funds. Preparatory work ongoing, with GEF approval of PDF-B in January 2005 and RETA 6236 preparatory activities approved by ADB in March 2005. The Country Programming Framework had been approved by GEF in August 2006. Being prepared as Project 2 of ADB under the PRC-GEF Partnership on Land Degradation in Dryland Ecosystems. GEF approved the PDF-B proposal in July 2005, while preparatory activities under PPTA 4640 was approved by ADB in August 2005, status is ongoing.

FSP

Land degradation

PRC

Ningxia/Yinchuan Integrated Ecosystem Management Project

FSP

Multi-focal areas

D. Proposals PRC Integrated Ecosystem Restoration and Biodiversity Conservation of the Baiyangdian Lake Catchment Shaanxi-Qinling Mountains IEM Project Dryland Farming in Northern Region Support for Establishing a Regional Monitoring and Early Warning Newtork for DSS in NE Asia FSP Technically cleared but the PDF-B had been withheld due to the lack of funds. Project originally proposed by UNEP, but later subsumed upon PRC request into a redesigned joint ADB/UNEP concept proposal. Technically cleared but not yet approved. Recommended for GEF CEO approval but not yet approved due to lack of GEF-3 funds.

PRC PRC

FSP FSP

Regional

MSP

ADB = Asian Development Bank, ADTA = advisory technical assistance, CEO = Chief Executive Officer, FSP = full-sized project, GEF = Global Environment Facility, IFAD = International Fund for Agricultural Development, MSP = medium-sized project, RETA = regional technical assistance, TCR = technical assistance completion report, WB = World Bank. Source: Asian Development Bank database.

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5. Effectiveness. The GEF-cofinanced activities were effective. The promotion of biomass technology10 under agricultural wastes project11 has allowed each project household to save 1.2 tons of firewood each year (equivalent to 0.22 hectare of forest protection per household), use 15.6 tons of sludge that otherwise would have been thrown away, reduce smoke pollution from cooking with wood, minimize the transmission of blood fluke disease (caused by the burning of animal waste), and increase the productive time of women. The Shanxi provincial government compared ADB activities under this project to those of government programs and found ADBs initiative to be more effective because of the larger investments, greater focus on womens involvement, availability of GEF funds, and potential for long-term final support through the certified emission reduction system. However, because of stringent beneficiary selection criteria and the provision of the subloans on a reimbursable basis, there was built-in bias toward involving better-off households. Thus, while environmental benefits were delivered, the poverty reduction impact may not have been substantial. In the absence of an operational monitoring and beneficiary assessment system for the project, ADB has had to rely mainly on anecdotal evidence. 6. To a lesser extent, the dust and sandstorms RETA (footnote 7) was also effective. Although its outcomes were not sufficiently ambitious, it did achieve its expected outputs: facilitating meetings for stakeholders within the PRC and other Northeast Asian countries, and with associated United Nations agencies; preparing a program to establish a regional monitoring and early warning network for dust and sandstorms; and outlining an investment strategy. Subsequent to this RETA (though not directly related to it), bilateral agreements are being developed between the PRC and Japan, the Republic of Korea, and Mongolia to support the monitoring stations. However, the RETA did not establish an operational capacity for the regional cooperation mechanism to coordinate interventions and mobilize support of stakeholders for combating dust and sandstorms beyond TA completion, as expected in the TA framework. The monitoring or early warning system being proposed also did not add much value to those provided by existing weather satellites. 7. On the other hand, the capacity building hybrid loan on land degradation and previous ADB TAs supporting the Partnership were highly effective. The Partnership is GEFs first longterm program for land degradation as well as the first time the integrated ecosystem management (IEM) approach12 has been applied in the PRC. Not only are the six project provinces major sources of dust storms, they also cover 30 important ecosystems, and land degradation prevention there would contribute to great environmental benefits. Through phase 1 activities,13 Government officials and staff now recognize that land degradation cannot be addressed by any one sector, law, policy, or technology. The ensuing establishment of a highly functional management system, spanning several sectors, disciplines, and regions, with a complete set of implementation measures, therefore represents an excellent model for emulation or extension. The Partnership has also evolved as a global coordinator of land degradation prevention and control by conducting broad cooperation and exchange between government sectors at all levels

10

To produce cleaner biogas for cooking and lighting by promoting the use of biogas digesters and biogas and gasification plants. 11 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Efficient Utilization of Agricultural Wastes Project. Manila (Loan 1924-PRC, for $33.1 million, approved on 22 October). 12 IEM is defined as a holistic approach to addressing the links between ecosystem functions and services (like carbon uptake, watershed protection, etc.) and social, economic, and production systems. Thus, IEM recognizes that people and natural resources are inextricably linked. 13 These focused on converting IEM policy into provincial strategic frameworks and IEM guidelines at the central and provincial levels, putting into place an IEM-based legal action plan, and identifying demonstration projects in six priority provinces in the western region.

208

Appendix 14

and at least 14 international partners,14 on financing, fund utilization, project implementation experience, and various technologies and methods to conserve soil and water. It is too early to assess the efficacy of the project on the Sanjiang Plain Wetlands Management. 8. Efficiency. These GEF-cofinanced activities are assessed efficient. The dust and sandstorms RETA (footnote 7) may be considered highly efficient, as most project activities have been implemented according to plan and generated savings, despite involving four countries and four key agencies, and incurring delays due to the severe acute respiratory syndrome outbreak. The implementation of the capacity building project on land degradation (footnote 6) may be less efficient because of its hybrid nature, which constrained ADB from hiring individual consultants. The Government estimated that the recruitment of consulting firms under this TA delayed mobilization by 3 to 5 months. The firm that was contracted then viewed ADB as its client, which reduced its accountability to the executing agency.15 Since this TA was concerned with planning, coordination, and reporting, the location of the project officer in Manila instead of in Beijing placed the ADBfinanced activities at a disadvantage. Similarly, the training conducted under the agricultural wastes project (footnote 11) may be less efficient because of poor targeting,16 timing,17 and the rote of delivery of some training. ADB was also not very responsive to the Governments initial request to devote more funds for capacity building over consulting services18, leading to extensive discussions and delays in the implementation of the credit fund. Since the Sanjiang Plain Wetlands Protection Project became effective only in December 2005, there are not enough activities to assess. 9. Sustainability. The outputs generated by the dust and sandstorms RETA (footnote 7), particularly the investment strategy, could not be implemented without further support and therefore, its sustainability is less likely. In addition, varying incentives for the different countries,19 which have a range of financial capabilities, do not encourage equal participation in the RETA activities, thus requiring continued external support. Moreover, since the RETA did not establish a direct link between the dust and sandstorms effect and the land degradation cause, the approach should not be viewed as a long-term solution. 10. New Proposals. Of the seven proposals currently being developed by ADB for GEF cofinancing, five involve the PRC. In fact, GEF is becoming a very important source of cofinancing for programmed loans in the agriculture and natural resources sector of ADB in the PRC, as four of the five loans in the pipeline for 2007 have GEF components. The Government has noted delays in getting GEF approval for these proposed projects20 and suggested that ADB explore other possible sources of cofinancing whenever possible.
14

Including World Bank, Food Agriculture Organization, United Nations Environment Programme, United Nations Development Programme, Kreditanstalt fr Wiederaufbau, International Fund for Agricultural Development, United Nations Industrial Development Organization, European Union, Japan International Cooperation Agency, Australian Agency for International Development, Canadian International Development Agency, Conservation International, The Nature Consevancy, World Wildlife Fund, etc. 15 This posed difficulties when the consultants opinions differed from those of the project managers, or when the executing agency perceived that they could have hired domestic consultants of a higher quality. 16 While digester operation is almost completely managed by women, only 20% of the trainees were women. 17 Coming months before or after the biogas digesters had been physically completed. 18 Government had made the request during loan negotiations, which ADB did not support. As a temporary measure, parties agreed to augment the training fund by reducing the contingency fund, with the understanding that the consultants services category will not be fully utilized, thus serving as the effective buffer for the project. Only then did the PRC become willing to sign off on the GEF Financing Agreement between ADB and World Bank. 19 Upstream or source countries are the PRC and Mongolia, while the downstream countries are Japan and Republic of Korea. 20 In September 2005, the GEF adopted a new system for allocating resources to countries based on the countrys potential to generate global environmental benefits (in terms of biodiversity and climate change issues) as well as its capacity to implement GEF projects. As a result, the GEF Secretariat required those proposals that were pipelined for GEF approval to be resubmitted for consideration using the revised criteria.

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209

ENERGY SECTOR A. Introduction

1. Asian Development Bank (ADB) lending to the Peoples Republic of China (PRC) energy sector had been reduced to a third of initial levels, falling from 25% of the total ADB portfolio during 19901997 to 8% from 1998 to 2005. This followed a shift in sector strategy from one that is based mainly on power generation to a broader-based approach, given the sustained increase in the PRC installed capacity (Table A15.1). ADBs energy operations in the PRC, therefore, moved from second largest to third during the country assistance program evaluation (CAPE) period with water supply, sanitation, and waste management sector capturing a larger share of total loan amount to the PRC. The loan amounts were reduced mainly in the conventional energy and hydropower generation subsectors as well as energy sector development subsectors, but transmission and distribution and renewable energy generation were augmented. Table A15.1: Features of and Strategies for the Energy Sector
Sector Characteristics
The power sector is growing rapidly, largely compensating for the slower growth in 1995 2000. There is a need for an integrated energy sector strategy to address long-term concerns on energy supply, security, and sustainability issues. Higher transport demand and efforts to diversify the fuel mix have increased use of petroleum. The PRCs oil consumption more than doubled during 19922004. Energy intensity is high at 0.78 ton of oil equivalent, twice the average for other ADB members. The PRC is in the middle of implementing structural reforms aimed at creating more competitive, market driven, and efficient power sector.

PRC Government Strategy

Energy, oil in particular, is of strategic importance. There is increasing imbalance between oil supply and demand as domestic development and production of oil can no longer keep pace with countrys needs. Take all possible measures to conserve oil, accelerate exploration and exploitation of oil and natural gas resources, and make effective use of overseas resources. Institute a system for preserving strategic resources like oil as soon as possible.

ADB Sector Strategy

Sustained economic growth required expanding and diversifying energy sources and reducing energy intensity

Lessons Identified in Previous Reports

ADB played an effective role in the PRC energy sector, with successfully completed projects and TAs.

Support energy conservation and resource management. Improve the efficiency of energy production and utilization.

ADB redesigned traditional power projects to address its crosscutting objectives; most of its 1986 to 1997 projects aimed to improve project efficiency and institutional development, including transmission projects and more environment-friendly power projects. Build-operate-transfer projects undertaken at same time as competition reforms pose higher risks. It is preferable to proceed with investment projects after the enabling policy framework is already in place.

The PRC had massive increases in generating capacity overcoming the chronic shortages in mid-1990s. There are weaknesses in transmission and distribution Rural grid development (using outdated equipment and weak networks) has not kept pace with power generation.

Strengthen power transmission systems to transfer electricity from the west to the east. Promote the interconnection of power grids. Transport natural gas resources in the west to consumers in the east.

Energy projects will be designed to support propoor growth, including rural electrification and provision of energy efficient lighting for the poor, targeted in the poorer interior regions, and with affordable electricity tariffs. Support interregional power transmission capacity and power system efficiency.

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Appendix 15

Sector Characteristics
Thermal power contributes 74% of installed capacity, hydropower 25%, nuclear power 1%, and renewable energy an insignificant amount. While there are abundant wind and solar resources, the enabling environment and commercial incentives to encourage their development are lacking.

PRC Government Strategy

Adopt clean coal technologies for power generation and develop hydropower and renewable energy (10th FYP). While making full use of existing capacity, develop hydroelectric power and build large-scale thermal power plants near coal mines, reduce small thermal power stations, and moderately develop nuclear power. Renovate large coal mines, construct highly productive and efficient mines, and place special emphasis on the exploitation of clean coal.

ADB Sector Strategy

Focus on renewable energy (small-scale hydropower, biomass, solar water heating, solar voltaic technologies, geothermal energy, and wind power) to reduce air pollution. Finance thermal power generation in the context of introducing advanced technology and promoting energy conservation. Help reduce air pollution by financing projects designed to promote the use of natural gas, coalbed methane, clean coal and clean production technologies, and pumped water storage facilities for power generation. ADB projects since 1996 have included programs to close small, inefficient, polluting power plants; rural electrification components in poor counties; and large-scale tree planting to absorb emissions from new thermal power plants. Support improvements in sector governance, including energy sector restructuring; put in place an enabling framework for private sector involvement; improve access of the poor to reliable electricity supply and address biases against poverty in tariff structure and levels; and regional cooperation. Build on previous successful work on restructuring the power sector and developing competitive power markets.

Lessons Identified in Previous Reports

Savings in energy and other costs associated with environmental pollution can be large enough to repay loans on commercial terms.

There is limited investment in appropriate environmental abatement technology.

Energy efficiency in the PRC is well below that in most developed countries, because of above average international values of energy consumption a by major industrial sectors in the PRC. This was the offshoot of governments prioritization of supply management over demand management, relatively weak program enforcement, and lack of clarity and consistency of regulations.

EAs have made effective use of ADB training. Greater efforts are required to implement policy-related covenants. Portfolio issues include start-up delays, large loan savingsb and changes in project implementation arrangements due to sector reforms. Short appraisal periods resulted in frequent scope variation, component cancellation, and premature re-appraisal. Future projects should pay more attention to tariff projections and resettlement cost and implementation. ADB = Asian Development Bank, CSP = country strategy and program, PRC = Peoples Republic of China, EA = executing agency, FYP = five-year plan, TA = technical assistance. a Accounting for 80% of energy consumption. b The large savings are due to the intense competition during procurement particularly when domestic bidders win the supply contracts; the substitution of lower-cost domestic financing for subcomponents planned to be funded from the loan; actual contingencies being lower than appraisal estimates; and overestimation of costs at appraisal. Source: Country assistance program evaluation team.

Increase efficiency by relying more on market forces and competitive markets. Further reform the power management system, gradually allow power plants and grids to operate separately and institute bidding for power supply.

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211

2. A total of eight loans were approved for the energy sector during the CAPE review period. (Appendix 5), equivalent to $726 million. Most of this went to four energy sector development loans ($433 million), while three loans were approved for transmission and distribution projects ($235 million) supporting the shift in focus away from conventional power generation toward more diverse interventions1 in the energy sector, as envisioned under the country strategy and program (CSP) for 2004 to 2006. Two of the eight loans approved during the CAPE period, Yunnan Dachaoshan Power Transmission Project2 and Shanxi Environment Improvement Project3 have been closed. The Wind Power Development Project4 was terminated before the loan became effective. The average loan amount for the energy sector is $91 million, the lowest of the ADB sectors in the PRC for the CAPE review period. 3. From 1998 to 2005, ADB approved 14 energy-related advisory technical assistance (ADTA) grants5 totaling $8.5 million. About six of these ADTAs involved capacity building, while the remaining ones deal with policy or strategy formulation or studies. B. Assessment of Loans

4. Relevance. The eight loans are assessed as highly relevant. They are highly compatible with the energy initiatives of the PRC and with ADBs general and sectoral objectives. The scope of the Liaoning Environmental Improvement Project6 and the Coal Mine Methane Development Project7 relating to the development of coal-bed methane technology, governance improvement and capacity-building support, and promotion of private sector participation, all fall within ADB and Government strategy for reducing greenhouse gas emissions and improving energy efficiency. The increase in heating demand within the Liaoning province made the timely completion of the Liaoning Environmental Project important, and subproject selection was closely linked with city targets. While the Coal Mine Project secured cofinancing from other institutional partners, it failed to mobilize private sector financing despite widespread interest in the commercial uses of coal mine methane (CMM), the appeal of emissions trading, and government incentives for CMM capture and use. The Yangquan Coal Group Company subproject provided concrete evidence of such interest when it opted to arrange private sector financing to use CMM for methanol production instead of borrowing from ADB. The Wind Power Project (footnote 4) was responsive to the Governments need to develop non-coal energy alternatives that will reduce environmental damages from coal use but still meet energy demand. The Shen-Da Power Transmission and

Energy conservation, diversified energy sources, and regional power integration through expansion of transmission system. ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Yunnan Dachaoshan Power Transmission Project. Manila (Loan 1644-PRC, for $100 million, approved on 27 November). ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Shanxi Environment Improvement Project. Manila (Loan 1715-PRC, for $102 million, approved on 7 December). ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Wind Power Development Project. Manila (Loan 1818-PRC, for $58 million, approved on 20 December). Aside from those officially categorized under the energy sector, ADTAs from the multisector and law, economic management, and public policy sectors that relate to energy are included. ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for Liaoning Environment Improvement Project. Manila (Loan 2112-PRC, for $70 million, approved on 25 November). ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Coal Mine Methane Development Project. Manila (Loan 2146-PRC, for $58 million, approved on 20 December).

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Appendix 15

Grid Rehabilitation Project8 aimed to strengthen the regional network and maximize the utilization of the northeast power grid (serving Liaoning, Heilongjiang, Jilin and the Inner Mongolia Autonomous Region), thus holding off plans to construct new coal-fired generating units and enabling the closure of about 10 old polluting ones. This loan followed up on an earlier ADB project that connected the northern Liaoning to the power surplus provinces in the northeast power grid, by extending the grid to the southern part of Liaoning. 5. The designs for renewable energy and clean technology activities, while technically sound in some respects, unrealistically assumed that the Government could apply tariffs to such projects that were higher than those for conventional energy sources. The Wind Power Project (footnote 4) was terminated without any disbursements because of insufficient repayment guarantees from executing agencies for three proposed wind farms. This arose from the decision by one central ministry to set a cap on wind power tariffs that is lower than the tariff envisaged and agreed to at appraisal with another central ministry.9 This demonstrated that it is necessary to ensure buy-in from all major stakeholders during project processing, although the first-best solution would have been to support initially the adoption of a national policy identifying who pays for the cost of clean and renewable energy. 6. Effectiveness. The projects are assessed as effective. Outcomes for loans were generally obtained as planned in terms of installed capacity and interconnecting grids. For instance, the ShenDa transmission project (footnote 8) added 2,000 megawatts (MW) of transmission capacity to the northeast grid, thus improving grid efficiency. The loans were also effective in delivering environmental benefits: cleaner technologies were adopted, better connection and distribution networks minimized the need to set up more plants, and harmful emissions were reduced with the closure of old coal-fired plants. Aside from their main components, some of the loans required the closure of polluting sources as loan covenants. For instance, Yunnan Project (footnote 2) paved the way for the closure of three coal-fired power generating units with a total capacity of about 282 megawatts (MW). Shen-Da transmission project closed 10 units with a capacity of 437 MW, thus allowing for a reduction of 12,000 tons of sulfur dioxide emissions10. The ongoing Hebei Zhanghewan Pumped Storage Project11 is expected to close 20 units totalling 505 MW ahead of schedule. The Shanxi Project (footnote 3) is estimated to reduce coal usage by 793,000 tons12 and emissions in the Shanxi cities of Taiyuan, Datong, and Yangquan in 2005, resulting in significantly improved air quality despite accelerating urbanization. 7. The capacity building and institutional impacts of the projects were mixed. In the case of Gansu Clean Energy Development Project,13 the executing agencys top management felt overlooked when training focused mainly on medium-level management. This shows the demand for TA benefits. On the other hand, Shen-Da project implementers felt they could have
8

ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Shen-Da Power Transmission and Grid Rehabilitation Project. Manila (Loan 1901-PRC, for $100 million, approved on 20 December). 9 The State Power Corporation was supposed to provide the guarantee, but a 2001 restructuring (carried out about 1 year after the loan was approved) mandated that its guarantee be limited to its shareholding. 10 ADB. 2007. Project Completion Report for the Shen-Da Power Transmission and Grid Rehabilitation Project. Manila (draft as of March 2007). 11 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Hebei Zhanghewan Pumped Storage Project. Manila (Loan 1922-PRC, for $144 million, approved on 18 October). 12 This was slightly lower than the 837,000 tons per year reduction estimated during project inception, which the project completion report attributed to minor variations in project scope. 13 DB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Peoples Republic of China for the Gansu Clean Energy Development Project. Manila (Loan 2032-PRC, for $35 million, approved on 5 December).

Appendix 15

213

managed the project more effectively without ADBs involvement, especially since ADB requirements (that they deal with nonresponsive international suppliers and distribute energyefficient lamps to poor families) created more problems.14 8. Efficiency. ADB operations in the sector are assessed efficient. The project completion reports for the two closed loans (footnotes 2 and 3) contained estimates of good internal rates of return. Although there were some significant delays in loan implementation in the other projects, the implementing agencies (IAs) were able to deliver the outputs in time, demonstrating their competence in construction management. For instance, the Hebei Power Project (footnote 11) registered a 27-month delay between loan approval and effectiveness, yet all outputs are on track for completion by 2009. Despite the restructuring of the company in 2002, the implementation of the Yunnan Project (footnote 2) was also smooth. With regard to the environment-related loans in the Shanxi, Liaoning, and Coal Mine projects, implementation was slower than anticipated but all three were completed on time. The effectivity of the Shanxi Project (footnote 3) was delayed because of the late approval of the subproject feasibility studies and problems with arranging the local financing. Both the Shanxi and Liaoning (footnote 6) projects had to contend with the severe acute respiratory syndrome (SARS) outbreak, while the Coal Mine Project (footnote 7) start-up was stalled by the executing agencys delay in setting up an official project management office and a Ministry of Finance delay in securing the effectivity of Japan Bank for International Cooperation (JBIC) cofinancing15 (8% of project cost). Procurement under the Shen-Da power transmission project (footnote 8) was delayed by 10 months owing to differences in the ADB and executing agency criteria for consultant recruitment and discrepancies between national and international standards for certain materials. Despite these contractual problems and the restructuring of the executing agency16 soon after loan approval, the project was completed generally on time and within projected cost17 and has been operating at full capacity. 9. Sustainability. The energy sector operations are considered sustainable because of a PRC policy that ensures that investments are identified and selected on their cost effectiveness and, therefore, will stay in operation for economic and technical reasons. The financial internal rates of return for the completed projects are 150300% higher than the cost of capital. Given the high demand for energy in the PRC, they are expected to be maintained over a long period. While the financial performance of the Yunnan Electric Power Group (YEPG) was not satisfactory until May 2005 (when the cost unbundling took effect), the sound financial management system developed for it under an institutional reform TA18 will help contribute to its long-term viability. The operating facilities for the Shanxi Project (footnote 3) were designed and installed properly and are functioning well. The incremental financial benefit from the capture of methane is being reinvested in the coal mine company, providing an incentive to others to undertake similar environmental projects.
14

According to the draft project completion report (footnote 10), ADB did not endorse the country-specific nonstandard insulation level used in the bidding documents in order to ensure that equal opportunities are provided to all potential bidders, implying that its disagreement was based on a procedural matter rather than a technical or structural concern. As for the complaint on the social rider, the same report explained that ADB did recognize impracticalities in implementing the specified energy efficient lighting and agreed to an alternate and comparable proposal by the executing agency, which was not specified in the draft completion report. 15 The Government had initial concerns that the total donor financing may exceed the maximum permissible percentage for foreign debt financing, and requested ADB and JBIC to adjust accordingly. JBIC was interested in financing the project through the Japan Carbon Finance to help meet its obligations under the Kyoto Protocol. 16 Liaoning province was one of the two provinces in the PRC selected to pilot test the restructuring of the power sector into competitive electricity markets. One of the reforms required the separation of power generation from the transmission and distribution business. 17 The executing agency requested ADB in July 2005 to cancel the $37 million loan savings, which came from unused contingencies, design optimization and competitive bidding. 18 ADB. 1998. Technical Assistance to the Peoples Republic of China for the Institutional Reform of Yunnan Electric Power Group Corporation. Manila (TA 3105-PRC, for $790,000, approved on 27 November).

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Appendix 15

10. Impact of Loans. ADB assistance to energy sector development in PRC contributed to achieving a number of immediate and long-term objectives. For example, its partnership with central and local agencies contributed to (i) introducing modern technologies; (ii) improving mine safety in coal-based energy projects; (iii) reducing greenhouse gases; (iv) improving corporate governance and efficiency through company restructuring and cost unbundling; and (v) pioneering energy efficiency projects, such as the Gansu project (footnote 13). These projects have a very high probability of improving environmental and public health conditions, in addition to providing an increased and reliable supply of electricity for industrial activities. Given the enhanced institutional capabilities and strong executing agency commitments, long-term impacts are modest. C. Assessment of Advisory Technical Assistance

11. Relevance. The ADTAs are assessed relevant to ADB strategies and are in line with the PRC policies, priorities, and strategies at the time of approval. However, the two TAs on market reform and tariff reform19 were too optimistic about the anticipated adoption of the policies they proposed. The ADTA on Heating Supply for Urban Poor in Liaoning provided good training in tariff policy to the Liaoning Development and Reform Commission, but the training ought to have been expanded to include more agencies given that the commissions main mandate is to manage external assistance. 12. Like many earlier renewable energy activities, the ADTA supporting the construction of the pilot stalk gasification plant in Gansu20 focused only on technology aspects without paying sufficient attention to the fact that renewable sources of energy tend to be more expensive than conventional power. Thus, this issue needed to be addressed before the technology can be offered for adoption and replication. Being an innovative solution at the time, ADB may have been too proactive in pushing for renewable energy even when the TA explicitly called for leastcost options for supplying energy to poor and rural customers in Gansu. In the case of the gasification plant, project managers tried to negotiate activity-specific tariff increases and guaranteed purchase agreements for the generated power, but this led to long delays and reluctance on the part of the local government to absorb the cost difference. In hindsight, it would have been better if ADB had supported the formulation of a national policy on renewable energy that would clarify national and local policies before projects were designed. Under the Renewable Energy Law that was approved in February 2005 and took effect in January 2006,21 the Government has agreed to grant tax and interest subsidies to renewable energy power projects, to offer them guaranteed access to grids, and to clarify pricing policies. The environmental ADTAs focused on policy dialogue and support for policy reforms and legal updates. They are considered highly relevant because they are responsive to the countrys current environmental needs and their designs are satisfactory. 13. Effectiveness. ADTAs activities all were successfully completed. The ADTA on the establishment of a regulatory agency (footnote 19) for the sector was effective in providing assistance to set up the State Electricity Regulatory Commission (SERC). Building on a previous power restructuring ADTA, this ADTA recommended separation of regulatory from policy-making roles, decentralization of such roles, and the building of institutional capacities. The ADTA supported the design of a regulatory body to formulate price control mechanisms, carry out
19

ADB. 2002. Technical Assistance to the Peoples Republic of China for Establishing the National Electricity Regulatory Commission. Manila (TA 3931-PRC, for $500,000, approved on 24 September); and ADB. 2004. Technical Assistance to the Peoples Republic of China for Heating Supply for Urban Poor in Liaoning Province. Manila (TA 4402-PRC, for $500,000, approved on 5 November). 20 ADB. 2002. Technical Assistance to the Peoples Republic of China for Renewable Energy for Poverty Reduction. Manila (TA 4309-PRC, for $600,000, approved on 19 December). 21 TA 4309 was approved on December 2003, at least 1 year ahead of governments decision to subsidize the additional cost of generating power from renewable sources.

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dispute resolution, and implement competition law and market rules, in the transition to a wholesale electricity market. The SERC was established in March 2003 with the functions recommended22 in the TA, but tariff-setting remained with the National Development and Reform Commission (NDRC) due in large part to the ongoing power shortage in PRC. The TA completion report for this TA23 suggested that ADB should refrain from giving SERC further technical advice given the limited scope of its functions and expertise. 14. This suggestion was made after a follow-up TA24 has already been approved in May 2003 to help SERC formulate a power pricing strategy and a reform action plan on tariff setting and regulation. This was an indirect approach given that SERC was empowered only to propose tariffs settings and adjustments to NDRC. The TA developed SERCs capacity to act as a tariff secretariat, processing tariff requests from power companies, analyzing them, and submitting recommendations to NDRC for approval. This improved SERCs credibility with NDRC, persuading it to seek SERC advice on such topics as transregional tariff setting, transprovincial tariff monitoring, and capacity tariffs for base loads. Therefore, ADB support for the follow-up ADTA, helped to rationalize the pricing recommendations that SERC submits to NDRC. 15. A less-obvious synergy may be observed for the two TAs developed for the State Grid Corporation of China (SGCC). The first25 of these helped the SGCC formulate a regional interconnection strategy intended to optimize current power generation, while the second26 sought to strengthen its capacity for power sector planning, leading to the identification of a priority list of least-cost power generation projects for consideration under the 11th FYP. Another TA (footnote 18) on the institutional reform of the YEPG was approved in conjunction with the Yunnan Power Project and helped to strengthen its managerial skills after being unbundled and restructured under the loan. 16. Efficiency. The implementation of the ADTA on the rural electricity supply study27 was extended by over 3 years because of the lengthy consultant recruitment process (which suffered from lack of participation and firms poor qualifications), relatively slow executing agency decision making (caused by its internal reform process and institutional changes), changes to consultant team leadership as requested by the executing agency, and the travel ban related to SARS. Difficulties in data collection in the pilot provinces were encountered under the ADTA on Pro-Poor Urban Heating Tariff Reforms28, leading the TA completion report29 to propose that, for future TAs, the selection of pilot cases should be discussed carefully during the TA fact-finding stage in order to avoid implementation delays.30 A similar data collection problem arose in the ADTA on

22 23

Development of the electricity distribution and retail code, power grid code, and decentralization to regions. ADB. 2005. Technical Assistance Completion Report on Establishing the National Electricity Regulatory Commission. Manila. 24 ADB. 2003. Technical Assistance to the Peoples Republic of China for the Power Pricing Strategy: Tariff Setting and Regulation (TA 4117-PRC, for $500,000, approved on 21 May). 25 ADB. 2002. Technical Assistance to the Peoples Republic of China for the Interregional Power Transmission Network Development Strategy (TA 3547-PRC, for $800,000, approved on 16 November). 26 ADB. 2004. Technical Assistance to the Peoples Republic of China for the Capacity Strengthening of Power Planning Process (TA 4416-PRC, for $500,000, approved on 20 October). 27 ADB. 1999. Technical Assistance to the Peoples Republic of China for the Rural Electricity Supply Study (TA 3369-PRC, for $700,000, approved on 26 December). 28 ADB. 2001. Technical Assistance to the Peoples Republic of China for the Pro-Poor Urban Heating Tariff Reforms (TA 3673-PRC, for $850,000, approved on 19 June). 29 ADB. 2005. Technical Assistance Completion Report for the Pro-Poor Urban Heating Tariff Reforms. Manila. 30 The other reasons for the TA delay include delayed identification of pilot cities by the Government late consultant selection, additional work requested by the executing agency to supplement the ongoing heating sector reforms, and SARS-related travel ban to the PRC.

216

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improving environmental management in Suzhou Creek,31 where the required data did not exist or could not be made available because of confidentiality rules. Feedback from ADB on issues raised by the environmental ADTAs was said to be slow, normally taking 2 months, and the executing agencies often did not know who to communicate with. The frequent changes in project officers, ranging from two to six per TA, had an adverse impact on TA coordination, although the project officers were complimented for focusing on project results and not just project progress. 17. Sustainability. ADB TAs have been supporting evolving institutions amid sector restructuring or improving the existing institutions through specialized advice and training to their personnel. They have, therefore, contributed to sustainability. Capacity building under the ADTA on developing opportunities for the clean development mechanism (CDM)32 in the energy sector was quite helpful in promoting CDM strategies within the Ministry of Science and Technology. The China Clean Development Mechanisms Fund33 was established in October 2005, to support domestic activities that address climate change. This Fund will be financed from a levy on the revenues from the sale of carbon emission reductions by existing CDM projects in the PRC, donations from international financial institutions, and other sources approved by the State Council.34 D. Key Issues

18. Designing and implementing projects in a sector that is undergoing major restructuring pose policy and institutional risks that cannot be fully anticipated at appraisal. To cope with such uncertainties, close consultation is needed among ADB, the Government, and executing agencies at the sector (rather than the project) level. ADB should also exercise flexibility in loan covenants to ensure that they remain practical and relevant. 19. Two different types of clients seem to be emerging for the energy sector in the PRC. One group is in the more advanced and affluent provinces, such as Liaoning, which can easily receive credit from local banks, without many conditions being imposed. The other group is in remote provinces for whom the knowledge transfer included in ADB projects is a crucial advantage that is not available from domestic sources of credit. This was the case with Gansu Energy Project (footnote 13) for Gansu Province, where the IA praised ADB assistance for supporting its modernization and exposure to international best practices. ADB could orient its lending strategy toward this market segment. The agencies involved in the energy-environment projects noted that they had limited knowledge about ADB loan processes and requirements, a deficiency that they ascribed to lack of marketing by ADB. One way of addressing this gap would be for ADB to design a Chinese language website that discusses its loan and TA procedures, and, for approved projects and TAs, to provide access to detailed financial guidelines and procedures. E. Key Lessons and Recommendations

20. Expanding ADB operations in energy efficiency, clean development, renewable energy and projects addressing climate change would serve to achieve both PRC and ADB objectives.
31

ADB. 1999. Technical Assistance to the Peoples Republic of China for Improving the Environmental Management in Suzhou Creek. Manila (TA 3211-PRC, for $840,000, approved on 29 June), which is also discussed under Appendix 12 on the urban sector. 32 ADB. 2002. Technical Assistance to the Peoples Republic of China for the Opportunities for the Clean Development Mechanism in the Energy Sector. Manila (TA 3840-PRC, for $780,000, approved on 11 March). 33 The Fund will be managed by a group consisting of seven agencies, including the National Development and Reform Commission, Ministry of Finance, and Ministry of Science and Technology (which is the executing agency for the ADB TA). 34 The Funds current President had earlier served as a member of the ADB Board of Directors, thereby presenting an excellent opportunity for an expanded ADB role in the promotion of CDM.

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Especially in a sector undergoing rapid and significant change, ADB should support the formulation of policies and regulations to clarify the rules before designing projects. This would minimize risks, a lesson evident from the two CAPE review periods. Areas for reform where ADB can participate include: (i) establishing policy and regulatory frameworks for competitive power markets (including tariff setting), particularly on creating an enabling environment for private sector participation; (ii) supporting tariffs, legislation, regulation framework, and technology transfer to increase the transition from low efficiency-carbon based power stations to more efficient technologies that will bring energy savings and improve the environment; and (iii) reviewing energy efficiency policy supporting the drafting of national regulations (covering building efficiency, electric motors, and residential equipment) and evaluating the financial, technical, and educational resources necessary to achieve energy efficiency targets35 (ADB has committed $1 billion to energy efficiency). 21. ADB should build and maintain cooperation with key central institutions dealing with energy, such as the State Energy Office,36 a new organization that may need support in building up and implementing its energy sector strategy to address long-term concerns about energy supply, security and sustainable issues. 22. ADB may consider dealing more actively with local, municipal, and provincial governments. For instance, Zhangye, Datong, and Yangquan cities have expressed appreciation for positive impacts on their communities gained not only from specific energy projects, but also from their exposure to international consultants and study visits. These local governments would like to expand their relationship with ADB and are keen to share the experience of their successful projects with other local governments. They want to learn more about energy efficiency, the environment, renewable energy, and CDM, and to interact with ADB energy experts. A preliminary step to expand such relationships would be to inform these local institutions how ADB operates and why, to eliminate possible confusion on procedures. 23. The ADTAs provided by ADB to PRC in the period 19982005 have supported power sector reform and tariff reform. These reforms had helped move the power industry and tariffs toward greater efficiency and cleared the way for private investments in power production. 24. ADB needs to strive to sustain policy dialogue with its project and TA stakeholders even after completion of an activity. As well as demonstrating staff commitment to the activity goals and objectives and strengthening rapport with sector players, this enhances the sustainability of outputs and outcomes. In the case of the stalk gasification project in Gansu Province, local partners interviewed were not aware of the new renewable energy law (para. 12) and its favorable implications for the viability of the stalk gasification plant. 25. It would be useful for PRCM to develop and manage projects for the sector to improve coordination, communication, and appreciation of local constraints.

35

The 11th FYP targets quadrupling the economy while only doubling energy needs from 2000 to 2020, thus requiring a mandatory target of 20% improvement in the energy intensity. 36 Prior to State Energy Offices creation, while NDRCs State Energy Bureau had oversight on energy matters, regulatory power was divided between various ministries and state-run corporations. The State Energy Office was established in April 2005 to secure foreign gas and oil, manage domestic coal supplies, resolve electricity shortages, and force factories to raise efficiency and cut pollution.

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Table A15.2: SWOT Analysis: Energy

Strengths 1. The PRC and ADB strategies converge toward renewable energy, energy efficiency, and resource conservation. 2. ADBs energy portfolio is the best performing sector in the PRC, with more than 90% of projects having a satisfactory rating. Its in-depth sector experience, familiarity with high-risk technologies and recourse to innovative financing will allow ADB to make a more effective contribution in the future. Opportunities 1. Sector conditions are not yet conducive for private investments, so there is a gap in power capacity and energy efficiency and clean energy investments that ADB can help fill. 2. Further reforms are needed to establish standards, market-based pricing and institutions and incentives to encourage capacity addition. 3. Energy security may be improved through power imports from neighboring countries. 4. ADB could incorporate energy efficiency and environment requirements into future lending and nonlending activities. Weaknesses 1. Growth in electricity demand outpaced economic growth, an unsustainable trend requiring demand-side interventions. 2. Coal-based energy sources, which represent 81% of total electricity supply, require cleaner technologies and coal mine methane capture to minimize damage to the environment. 3. ADB TAs have failed to reinforce current reforms and institutions or to support further improvements because of a lack of follow-up. Threats 1. Because of the size of the PRC its actions present significant implications on the global environment. 2. The power sector will require investments of $50 to $70 billion each year for the next 5 years in order to meet demand.

ADB = Asian Development Bank, PRC = Peoples Republic of China, TA = technical assistance. Source: Country assistance program evaluation.

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PRIVATE SECTOR OPERATIONS1 1. During the transition of the Peoples Republic of China (PRC) to a market economy, the private sector has been developed in parallel with the reform of the state sector, but this has happened incrementally in different localities instead of nationwide. This approach allowed the central Government to monitor problems closely, and to take time to replicate successes. It has brought the role of local governments to the forefront. This has been the context of the private sector strategy from the economic reforms in 1992 until the PRCs entry into the World Trade Organization in 2001.2 2. The 2003 Private Sector Assessment3 (PSA) of the PRC referred to a survey that highlighted the following impediments to private sector development (PSD): (i) policy bias against private sector market entry and exit, including licensing and registration hurdles and arbitrary application of fees; (ii) weak legal environment, including ambiguous property rights and inconsistent enforcement of the rule of law; (iii) lack of financing options; (iv) infrastructure4 constraints; (v) human resource constraints and lack of management know-how; and (vi) poor access to reliable information and professional services. 3. Asian Development Banks (ADB) strategy for PSD, as proposed in the PSA, is based on the premise that the right policy environment is key to the long-term vitality of private businesses, but given ADBs small share in the inflow of foreign investments, it may need to further refine and determine strategic criteria for private sector interventions. Using the public sector window, ADB should continue to support small- and medium-sized enterprises (SMEs) from the supply and demand sides, help establish a comprehensive social security system, strengthen governance of financial market supervisors, enable sustainable microfinance programs and address infrastructure constraints. As for the private sector window, it should explore investment opportunities in infrastructure, capital markets, financial sector and environment industry. Since the bulk of foreign investments are concentrated in manufacturing, industrial and real estate sectors (wherein public sector reforms may already have enhanced companies access to commercial financing), ADB has no catalytic role to play in these sectors. Table A16: Features of and Strategies for Private Sector Operations
Sector Characteristics
It is the private sector that would create most of the jobs necessary to move people out of poverty.

PRC Government Strategy

A key strategic theme under the 10th FYP is the promotion of the non-state sector. The Government wants domestic and foreign companies to be treated in the same way and to end policy biases that favor state companies. Legal protection will be provided for income whether it is derived from labor or from investment.

ADB Sector Strategy

To make markets work better: (i) promote good governance, the rule of law and transparent regulation; (ii) develop an enabling environment for the private sector; (iii) remove infrastructure constraints to improve business environment; (iv) support financial sector reform; (v) support SME development; and (vi) expand ADBs private sector operations.

Lessons Identified in Previous Reports

ADB should add value by introducing institutional and policy innovations in public sector operations, and help the private sector to scale these up. ADB should add value to projects and not merely substitute for private capital in projects that the private sector can do equally well or better. ADB should look for projects

3 4

In order to protect confidential information, this appendix did not provide activity specific information and, therefore, sections on relevance, effectiveness, efficiency, and sustainability are not discussed. However, such information is presented in a supplementary appendix that may be released upon request. While there are still debates within the National Peoples Congress against further liberalization, the passage of laws on private property and corporate income taxes in 2007 confirm the PRCs continuing commitment to economic reform. ADB. 2003. Private Sector Assessment: Peoples Republic of China. Manila. Including land and office space, transportation, power supply, water and sanitation, and telecommunications.

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Sector Characteristics
Surveys of private firms identified five impediments to the emergence of private companies: (i) weaknesses in the policy environment including lack of transparency, restrictions on market entry, and problems in the legal environment; (ii) lack of financing options; (iii) infrastructure constraints; (iv) human resource constraints; and (v) lack of access to reliable information and professional services. One of the main constraints facing most SMEs in PRC has been very limited access to bank credit and capital markets due to their limited scale. As a result, they are not economically efficient. SMEs also have low credit grades and fewer collateral assets. Financial intermediation services are underdeveloped.

PRC Government Strategy

A constitutional amendment in March 1999 ensured the states guarantee of legal rights and interests of the private sector, with the exception of property rights. In 2002, the Communist Party opened its membership to private entrepreneurs and businesspeople. In 2005, the State Council issued Opinions to Promoting and Guiding the Development of Private Sector, which outlined and emphasized the central Governments strategies in seven areas: market entry, financial support and tax treatment, intermediary services, rights of employees, capacity of private entities, government supervision, and policy coordination.

ADB Sector Strategy

Lessons Identified in Previous Reports

that maximize its catalytic role and leverage of capital. The CSP should develop strategic objectives for private sector operations, with a welldefined strategy and measurable indicators. Accelerate private sector operations in a more strategic manner, and foster positive synergies between public and private sector operations. The relationship between public and private sector operations could be achieved by (i) incorporating reforms to facilitate public-private sector partnerships in public sector operations into transport and energy projects; (ii) incorporating plans for innovative private sector operations in ADB support for provincial development strategies; and (iii) assisting provincial governments and local business leaders to identify potential private investment opportunities in provinces where ADB already has a number of public sector lending operations. Performance of ADBs private sector operations has been hindered by limited integration with ADBs public sector operations and a high degree of geographic and sectoral dispersal of existing operations.

To reduce constraints to private sector development: (i) promote conditions favorable to non-state led growth; (ii) strengthen the legal and regulatory framework for investment, and financial and capital market development; (iii) promote BOT/BOO and joint ventures for infrastructure; (iv) promote foreign capital inflows and investments through capital market operations; and (v) strengthen the financial management and commercial orientation of SOEs. Private sector lending will be focused on infrastructure development, capital market operations, and support for enterprise and financial sector reform. To expand private sector operations: (i) substantially increase ADBs private sector operations and focus them on infrastructure, financial sector (and investment funds) and environment; (ii) explore issuance of yuan-denominated bonds; (iii) help raise local currency debt funds; (iv) support investment funds for SMEs, agribusiness, environment and instruments to address NPLs; (v) take equity positions in banks, insurance companies, and domestic financial institutions to promote reforms and good governance; (vi) explore trade and housing finance; and (vii) help create public-private sector partnership projects in road, rail, power, and water sectors. To support expansion of private sector operations, ADB should strengthen the staffing of its PRCM.

ADB should reevaluate its current institutional structure, particularly staffing and other resources, to better improve implementation of its private sector strategy.

ADBs private sector operations have been hindered by limited staff presence in PRCM (particularly compared with the number of staff at the IFC). More private sector staff resources will need to be devoted to the PRC if synergies between private and public sector operations are to be achieved. ADB = Asian Development Bank, BOO = build-own-operate, BOT = build-operate-transfer, CSP = country strategy and program, PRC = Peoples Republic of China, FYP = five-year plan, IFC = International Finance Corporation, NPL = nonperforming loan, PRCM = PRC Resident Mission, PSD = private sector development, SME = small- and medium-sized enterprise, SOE = state-owned enterprise. Sources: 1998 country assistance program evaluation; 1997 country operational strategy; 2003 country strategy and program (CSP); 2003 PRCs private sector assessment; 2006 draft CSP completion report.

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4. Private Sector Operations. Compared with the five private sector loans approved from 1988 to 1997, ADB accelerated its private sector operations (PSOs) during this country assistance program evaluation (CAPE) period (1998-2005), with approved amounts rising to almost seven times the value of approvals in the earlier period. This surge happened mainly in 2004 and 2005, possibly in response to the improved legal and regulatory environment for PSD and to the resumption of investments in the aftermath of the severe acute respiratory syndrome outbreak. ADB also pursued a clearer strategic concentration in the financial and infrastructure sectors (including some energy projects) during the CAPE period. Among the 11 projects approved from 1998 to 2005, one was on environment, six were in the financial sector5 and four were in the traditional infrastructure6(Appendix 5) sector. In summary, while ADB has focused its interventions on fewer sectors7 (financial and infrastructure) where it has comparative advantage, it also adopted a more comprehensive approach to building the capacity of its clients that went beyond its regular instruments of loans and technical assistance (TA) grants and extended to equity investments and complementary financing. 5. Key Issues. While ADBs PSOs during 19982005 were modest (coming on the heels of the Asian financial crisis and its associated project failures), they have in fact accelerated in number and in volume since 2004.8 In the context of the wider sectoral opportunities provided by the government, ADB PSOs were focused on the financial and infrastructure sectors, where ADB had a comparative advantage. This sectoral concentration was supplemented by more comprehensive capacity building9 through ADTAs, thus indicating some level of integration with ADBs nonlending portfolio. However, PSOs approved during this period did not receive specific guidance from the PRC country strategy and program (CSP) and had no formal link to actual infrastructure loans approved. In the absence of specific targets based on the country strategy and program, it was difficult to assess whether objectives for the countrys PSOs were achieved. 6. The draft special evaluation study (SES) on PSOs10 found that, in general, the overall strong development impact of ADBs PSD portfolio had been diminished due to missed investment opportunities. The present model has not realized synergies from public and private sector interventions, especially in middle income countries with increasing demand for PSOs like the PRC. CSPs tend to lean heavily on macro-level and therefore public operations issues, since private sector assessments were prepared by regional departments with practically no inputs from the Private Sector Operations Department (PSOD). The draft SES inferred that CSPs often do not contain details of PSOs on grounds of confidentiality. Unfortunately, the result is that there is very little interaction between the regional departments and PSOD. At the very least, PSOD should develop a sector road map for PSOs in the CSP jointly with the CSP country team to ensure that its resources can match the private sector mandates identified for the country. PSOD will then use these private sector road maps in preparing its annual country business plans. Resident missions ought to be given greater responsibility and accountability to promote ADB business as a whole (and not just the public sector), to allow PSOD to make full use of such opportunities. This would require a review of resident mission roles and responsibilities, staffing and skills mix, and overall
5

Although ADB did pursue individual projects with big financial institutions to improve their corporate governance, most projects were given to financial institutions supporting SMEs. 6 In contrast to the previous focus on electricity and road projects toward the late 1990s, water-related projects slowly gained prominence beginning 2000 (One of these loans were eventually cancelled). In 2006, ADB private sector operations started to shift toward cleaner energy sources and environment protection. 7 ADB resisted going into other sectors that were opened to foreign investors. 8 According to the draft SES on PSOs, it took time before the 2000 PSD strategy and the organizational changes in PSOD had a visible impact on business volume. 9 Given ADBs recognition that funding alone does not represent the only solution to supporting private sector enterprises, especially SMEs. 10 ADB. 2007. Special Evaluation Study on Private Sector Operations. Manila (draft).

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business orientation, particularly for countries with economic and business environments that are conducive for growing the demand for PSOs. 7. At the operational level, PSOD needs to be given resources to make it more competitive11 with other international financial institutions having mainstream PSO businesses. Strategic alliances with these institutions, as well as with domestic institutions having provincial presence, would also be critical in business promotion, market intelligence and project monitoring. Project monitoring is especially critical given the large number of project cancellations12 noted in the draft SES on PSOs. 8. The draft SES notes the following ADB-wide issues: (i) Problems coordinating operations across ADB because of weaknesses in the CSP process, which needs to be addressed so PSOs have a basis for preparing annual country business plans and for upgrading skills in such areas as publicprivate partnership procurement and property laws; (ii) The need to clarify the strategic direction of PSOD, possibly under the direction of a vice president who focuses exclusively on the private sector; (iii) Lack of responsibility and accountability for PSOs, which could be addressed by assigning this function and associated PSD specialists to PSOD; (iv) A narrow role for PSOD that could be broadened and deepened to encompass public-private partnership procurement units, property rights systems, eGovernment, the restructuring of state-owned enterprises as a precursor to privatization and making strategic investments that will help extend PSODs reach within countries; (v) ADBs organization structure, constrained by conflicting geographic, sector and thematic priorities, which could be addressed through a matrix structure and by making PSOD a center of excellence; (vi) The role of the resident missions, which do not adequately represent PSD interests; (vii) PSODs continued excessive reliance on debt and equity at the expense of financial instruments such as cofinancing and mezzanine forms of finance; (viii) ADBs safeguard policies are not sufficiently harmonized with other international financial institutions such as International Finance Corporation (IFC); (ix) Credit appraisal procedures are weak and a much stronger credit culture needs to be developed; and (x) Report structures do not provide for a systematic assessment of objectives and performance throughout the project lifecycle, and information systems continue to be distributed across many systems that are not secure and prone to error. Lessons and Recommendations

A.

9. Improve Integration with Public Sector Operations. The draft SES on PSOs notes that ADB needs to refine strategic criteria for PSD interventions in the context of the broader 2000 PSD Strategy.13 The strategy identified three core strategic thrusts for increasing private sector participation, the first two of which are the responsibility of public sector operations:
11

Despite the fact that PSOD staff positions doubled in number from 1995 to 2005, PSOD remains understaffed compared to IFC and European Bank for Reconstruction and Development (EBRD), in terms of business volume and the number of transactions. Further progress toward bolstering staff resources for private sector operations had been made for the PRC. In 2006, PSOD posted a professional staff and a national officer at the PRCM to directly handle private sector operation issues. Within PSOD, two professional staff was dedicated to the PRC private sector operations, although one was asked to devote only three-fourths of the time. 12 The cancellations are also due to prepayments, so the portfolio quality remains excellent in the absence of defaults. 13 ADB. 2000. Private Sector Development Strategy. Manila.

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(i) developing an enabling environment, (ii) generating business opportunities, and (iii) catalyzing private investments. Thus, as a starting point, private sector assessments should determine whether sector road maps in the CSPs embody specific and tangible actions that would promote a policy and regulatory environment conducive to, and would identify opportunities for, private sector participation. ADB can sharpen its strategic criteria by responding to needs in provinces in the western region or in the transport and water supply and wastewater management sectors in which ADBs has comparative advantage. 10. Enhance Communication between ADB and the PRC Authorities on Innovative Projects. In order to minimize political and commercial risks from policy or regulatory reversals or decisions affecting private sector investments, it may be necessary to keep open communication channels between ADB and regulatory bodies, a vital part of careful due diligence. During this CAPE period, ADB tended to communicate more with the borrower or investee private sector firms rather than with regulatory bodies. The PRC Resident Mission or Headquarters staff assigned to public sector operations should use their rapport with the regulatory authorities to explain what ADB is trying to accomplish in its private sector interventions and win their support for an environment conducive to private sector participation. 11. Deepen ADBs Strategic Involvement in the PRCs Private Sector Enterprises. In addition to their lack of access to the formal financial system, another factor constraining the rapid expansion of private sector enterprises is weak internal corporate governance. While ADB has made some progress toward improving internal controls and managerial skills of the companies it has invested in, it should strengthen this role in coming years. ADBs relatively neutral, not necessarily profit-maximizing, position facilitates acceptance of its recommendations by the PRC authorities and private enterprises. Thus, ADB will not be seen as adversarial to any party, and instead will be perceived as neutrally seeking the optimal solution, thus providing a shield for management and other investors to pursue reforms.

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Appendix 17

FINANCIAL SECTOR 1. The financial sector belongs to the core operational sectors identified under the MediumTerm Strategy II 20062008 (MTS II) of the Asian Development Bank (ADB). It is considered as a sector where ADB had built up a critical mass of expertise that enables it to become a key provider of development assistance. At the same time, MTS II recognized the limited success of ADB in respect to assisting development finance institutions and proposed a gradual exit from this subsector. 2. Recent ADB interventions in the financial sector of the Peoples Republic of China (PRC) had taken the form of advisory assistance,1 as ADB sector strategy shifted from direct credit assistance through loans to one of financial infrastructure building through nonlending assistance. Technical assistance (TA) amounts approved for the financial sector jumped by 64% from $9.7 million from 19901997 to $16 million from 19982005 (Table A17.1). Table A17.1: Features of and Strategies for the Finance Sector, 19982005
Sector Characteristics
Rapid growth and structural changes created new challenges, including the potential for macroeconomic instability stemming from incomplete reforms (i.e., a weak financial system and inefficient SOEs.) .

PRC Government Strategy

The main measures under the PRCs financial reform included (i) capital infusion, (ii) reconstruction, (iii) public listing, and (iv) strengthening of regulatory agencies.

ADB Sector Strategy

Promote market-oriented reforms to enhance operational efficiency in the financial sector. Policy advice through TA and economic and sector work will continue to constitute ADB assistance in the sector, supplemented by selective lending assistance. WB will play lead role for larger banks, while ADB will focus on NBFIs, smaller banks, and the Agriculture Bank of China.

Lessons Identified in Previous Reports

ADB did not make a major contribution to strategic reforms in financial sector or in enterprise reform. TAs in these sectors had experienced mixed performance. In practice, WB has not been able to undertake any major operations in financial sector for the last 7 years and ADB has gradually replaced WB as main source of multilateral assistance to PBC. The challenge will be for ADB to monitor the evolving financial sector reform agenda and identify niches where it can have strategic impact. The major part of ADB assistance to the financial sector will be through provision of policyoriented TA (rather than through lending) The program will be subject to risks like political, economic, financial, and operational. Although the 1997 country operational strategy provides support to smaller commercial banks and NBFIs, no such projects were included in forward pipeline.

In context of rapid economic growth, the absence of welldeveloped instruments for monetary or credit control has resulted in three major cycles of excessive expansion and austerity over the last 15 years. Strong inflationary pressures in 1994 highlighted the need for stable macroeconomic management and sound monetary policy. Further financial reforms are linked closely with restructuring of enterprises and fiscal reforms.

Deepen the reform process by (i) developing indirect monetary policy instruments; (ii) liberalizing and rationalizing interest rates; (iii) transforming PBC into an independent central bank with powers to control monetary policy and curtailing its role in indirect financing of Governments budget deficit; (iv) expedite commercialization of four large state banks into competitive, autonomous, and accountable commercial entities; (v) develop and further deepen capital markets; (vi) improve regulation; supervision; and final

Strategic ADB interventions will cover (i) strengthening the role of PBC, with corollary loans for financial sector infrastructure; (ii) development of regulatory framework and institutional strengthening of smaller banks and NBFIs, capital markets, and related institutions; (iii) financial sector reform and promotion of competition and efficiency in finance sector; and (iv) provision of credit lines for relending to subprojects that address ADBs crosscutting concerns and strategic objectives of environment protection and growth in poor inland provinces.

During the past 2 decades, there was only one ADB public sector loan to the PRC to the financial sector. This was Loan 1477-PRC: Everbright Bank of China, approved on 5 November 1996 for $60 million. It was accompanied by a parallel equity investment, which was treated as a private sector operation.

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Sector Characteristics

PRC Government Strategy

disclosure of banks, NBFIs, and capital markets; (vii) improve conditions under which foreign financial institutions operate; and (viii) develop a transparent and equitable policy, legal, and regulatory frameworks, and incentive structure for entry and operation of financial institutions. The goal of financial reform is to establish sound policy, legal, and institutional framework and efficient financial market infrastructure by (i) restructuring state-owned financial institutions; (ii) strengthening regulatory and supervisory frameworks; (iii) enhancing corporate governance in financial institutions and publicly listed companies; (iv) strengthening policy banks; (v) preparing for intensified competition brought about by WTO accession; (vi) reforming rural credit cooperative system; (vii) deepening equity and bond markets; and (viii) moving toward interest rate liberalization and capital account convertibility.

ADB Sector Strategy

Lessons Identified in Previous Reports

Despite reforms, the (i) Strengthen poverty impacts of In general, ADB assistance to financial sector does not financial sector operations by development finance meet the needs of a supporting social security and institutions and NBFIs (based market economy. rural financial system and on three completed PCRs) Indirect monetary policy microfinance reforms; (ii) have been less than fully instruments are not fully improve financial environment for satisfactory. Thus, ADB is developed and interest private sector and SMEs; (iii) moving away from onlending rate policy remains enhance governance by operations toward inflexible. Capital encouraging government infrastructure building for markets are agencies, SOEs and financial financial sector. In particular, underdeveloped and not institutions to adopt sound assistance is to be provided to adequately regulated corporate governance standards PBC to develop its payments and supervised. and strengthening capabilities of system and regulatory and Weaknesses in financial market regulators, supervisory system. banking, high levels of supervisors and industry NPLs, incomplete SOE associations; and (iv) promote ADB financial sector TAs had reforms and incomplete sound and orderly growth of been dispersed among various pension reforms remain capital markets by strengthening agencies, and their feedback causes of concern. The oversight, market surveillance suggested little sustainable PBC, China Securities and enforcement functions of impact from such TAs. Regulatory China Securities Regulatory Commission, China Commission, developing Cluster TAs in support of niche Insurance Regulatory governance and regulatory agencies could include those Commission, and China standards and other best in support of financial sector reforms with PBC and social Banking Regulatory practices, etc. security reforms with Ministry Commission have of Labor and Social Security. emphasized improved corporate governance. ADB = Asian Development Bank, PRC=Peoples Republic of China, NBFI = nonbank financial institution, NPL = nonperforming loan, PBC = Peoples Bank of China, PCR = project completion report, SOE = state-owned enterprise, SME = small- and medium-sized enterprise, TA = technical assistance, WB = World Bank, WTO = World Trade Organization. Source: Country assistance program evaluation team.

3. Asian Development Bank Operations. While no ADB loan was approved for the PRC financial sector from 1998 to 2005, 20% of total advisory technical assistance (ADTA) for the period (representing values of 25 TAs) was allocated to the financial sector. This TA program was aimed at supporting policy, legal, and regulatory reforms to develop efficient financial markets and build capacity in the sector institutions. ADB had gone into rather broad fields in seeking opportunities to partner with the PRC Government (the Government) ranging from development of asset-backed securities market to improvement of social insurance administration. Among such diverse fields, ADTAs can be categorized into four themes: social security system ($4.8 million), regulatory framework building ($4.3 million), corporate governance ($3.5 million), and microfinance ($3.3 million).

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4. ADB assistance on social security reform was bolstered primarily by approval of the TA on Pension Reform,2 which is thrice the average amount3 approved for TAs in this sector. This TA was designed to support formulation of a new pension system and facilitate financial and insurance markets development in support of pension reform. As a follow-up, the TA on Social Security Reform4 sought to address implementation difficulties experienced by provinces in the collection, coverage, pooling, and funding of individual accounts under the pension system. The subsequent TA on Social Insurance Administration5 intended to strengthen institutional capabilities of the social insurance administration (SIA) system, which had constrained implementation progress of social security reforms. Because of the latters success, the National Council for the Social Security Fund (NCSSF) requested for a TA6 to also strengthen its capability by establishing a sound risk management framework and an efficient management information system. This will help NCSSF manage more prudently its selection and evaluation of external investment managers and custodians. 5. In terms of regulatory support, ADB has focused on strengthening the capacity of then newly-established institutions to handle banking, capital and insurance markets supervision.7 The TA on the PRC Securities Law8 was a small-scale TA that supported the drafting of the 1999 Securities Law, which led to the establishment of a separate securities market regulator, the China Securities Regulatory Commission (CSRC). The PRC then requested for the TA on Capital Markets Regulatory Reform9 to strengthen CSRCs oversight, surveillance and enforcement functions and capacity, as well as develop governance and regulatory standards for securities, and futures exchanges or self-regulatory organizations. At the same time, a TA was provided to help China Insurance Regulatory Commission (CIRC)10 align its framework and guidelines with international standards; establish an internal solvency rating system for insurance companies; and develop financial, professional, and management standards for the insurance industry. 6. TA involving the Peoples Bank of China (PBC) 11 sought to overhaul the architecture of banking laws and regulations to harmonize and align these with the countrys World Trade Organization commitments. As an offshoot of ensuing reforms, China Banking Regulatory Commission (CBRC) was established in 2003 to focus on banking supervision. ADB provided
2

ADB. 1998. Technical Assistance to the Peoples Republic of China for Pension Reform. Manila (TA 3148-PRC, for $2.4 million, approved on 28 December). 3 If TA 3148 is excluded, the average financial ADTA amounts to $750,000. The pension reform TA was given large resources because of the magnitude of the reforms. According to the TCR for TA 3148, its timing also coincided with policy dialogue during loan preparation for a proposed Social Security Reform Program Loan. Although this did not progress into a loan, the TA provided ADB with the opportunity to work closely with key policymakers in the State Council Task Force on Social Security and the National Council for the Social Security Fund (NCSSF), as well as the Liaoning provincial government. 4 ADB. 2001. Technical Assistance to the Peoples Republic of China for Policy and Institutional Support for the Social Security Reform Pilot Program. Manila (TA 3733-PRC, for $1 million, approved on 2 October). 5 ADB. 2003. Technical Assistance to the Peoples Republic of China for Policy and Institutional Support for Social Insurance Administration. Manila (TA 4201-PRC, for $700,000, approved on 21 October). 6 ADB.2003. Technical Assistance to the Peoples Republic of China for Advisory Support for the National Council for the Social Security Fund. Manila (TA 4206-PRC, for $500,000, approved 27 October). 7 These regulatory functions were previously lodged with the Peoples Bank of China, but were later removed to avoid conflicts with the policy-making functions. 8 ADB. 1998. Technical Assistance to the Peoples Republic of China for Legislation Drafting Support for PRC Securities Law. Manila (TA 3032-PRC, for $150,000, approved on 24 June). 9 ADB. 1999. Technical Assistance to the Peoples Republic of China for Capacity Building of the Capital Markets' Regulatory System. Manila (TA 3304-PRC, for $1 million, approved on 24 November). 10 ADB. 1999. Technical Assistance to the Peoples Republic of China for Capacity Building for the Insurance Sector Regulatory and Supervision System. Manila (TA 3302-PRC, for $700,000, approved on 23 November). 11 ADB. 2002. Technical Assistance to the Peoples Republic of China for Banking Laws and Regulations. Manila (TA 3890-PRC, for $800,000, approved on 25 June).

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critical support to CBRC through the TA on Foreign Bank Rating12 regarding supervision of foreign banks, and through the TA on Statistical System13 regarding design and adoption of a risk-based supervision system that will facilitate off-site surveillance and on-site inspection, risk assessment, early warning, and information disclosure for more than 100 commercial banks. 7. Two of the four governance-related TAs focused on improving financial viabilities of institutions with regard to nonperforming loans (NPLs). The TA on Strengthening Risk Management14 was a follow-up to a pre-country assistance program evaluation (CAPE) capacity-building TA for Agricultural Bank of China (ABC). Being the second largest TA approved for this sector at $1.8 million, the TA on Strengthening Risk Management sought to address ABCs main problems of poor loan quality and high arrears owing to lack of policies and procedures for Asset Liability Management (ALM) and Credit Risk Management (CRM). Similarly, the TA on Cinda Asset Management Company15 was designed to help the PRCs first asset management company (AMC) manage and dispose of some $52 billion worth of NPLs acquired from China Construction Bank and China Development Bank. 8. Six TAs totaling $3.3 million were approved in relation to small and medium-sized enterprise (SME) financing. These TAs had focused on national policies, with the exception of two. The TA on SME Credit System16 was one of the earlier TAs, and it was designed to help the Shanghai Municipal Government (SMG) assess the SME credit support system in the province as well as develop policies, procedures, and systems of the China Economic Technological Investment Corporation that was set up by SMG. The other province-level TA17 financed the expansion of sustainable financial services to the rural poor in Guizhou and Inner Mongolia. This was to be done mainly by providing restructuring models for rural credit cooperatives, improving regulatory and supervision systems for such cooperatives, and developing a sound framework for microfinance in these provinces. 9. The national-level SME grants included the TA on Development of Financing Policies,18 which aimed to formulate appropriate SME credit and equity financing mechanisms and policies, through a range of advisory support, a survey, domestic workshops, and international study tours. The next SME TA, the TA on Private Sector Development,19 follows up on earlier assistance provided by the International Finance Corporation, by helping All-China Federation of Industry and Commerce20 (ACFIC) conduct a national survey on the status of private sector development in the PRC and identifying needs for external finance and business support services. The outputs of this TA were later incorporated in ADBs private sector assessment for
12

ADB. 2003. Technical Assistance to the Peoples Republic of China for Foreign Bank Rating and Risk Management System. Manila (TA 4240-PRC, for $400,000, approved on 8 December). 13 ADB. 2004. Technical Assistance to the Peoples Republic of China for Strengthening the Statistical System of the China Banking Regulatory Commission. Manila (TA 4349-PRC, for $400,000, approved on 18 June). 14 ADB. 1998. Technical Assistance to the Peoples Republic of China for Strengthening Risk Management of the Agriculture Bank of China. Manila (TA 3026-PRC, for $1.8 million, approved on 4 June). 15 ADB. 1999. Technical Assistance to the Peoples Republic of China for Institutional Strengthening of the Cinda Asset Management Company. Manila (TA 3303-PRC, for $800,000, approved on 24 November). 16 ADB. 2000. Technical Assistance to the Peoples Republic of China for Development of a Small and Medium-Sized Enterprise Credit System. Manila (TA 3493-PRC, for $750,000, approved 30 August). 17 ADB. 2004. Technical Assistance to the Peoples Republic of China for Rural Finance Reform and Development of Microfinance Institutions. Manila (TA 4430-PRC, for $1 million, approved on 9 November) 18 ADB. 2000. Technical Assistance to the Peoples Republic of China for Development of Financing Policies and Mechanisms for Small and Medium-Sized Enterprises. Manila (TA 3534-PRC, for $700,000, approved 10 November). 19 ADB. 2000. Technical Assistance to the Peoples Republic of China for Private Sector Development. Manila (TA 3543-PRC: Private Sector Development, for $600,000, approved on 14 November). 20 ACFIC is the official chamber of commerce and is the PRCs largest nongovernment organization representing private enterprises.

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the PRC. The TA on SME Credit Guarantee Companies21 was approved to help Government formulate strategies and implement concrete programs to facilitate SMEs financial access by expanding the business scope of SME credit guarantee companies (CGCs) and establishing an effective policy, regulatory, and operational framework for SME CGCs. 10. ADB TAs for the financial sector are highly relevant, representing a significant response to the Governments emerging needs while remaining consistent with ADBs own objectives. In the aftermath of the 1997 Asian Financial Crisis, when the PRC established three regulatory commissions (the CSRC and the CIRC in 1998, and the CBRC in 2003) to absorb the regulatory powers of PBC, ADB responded quickly to the huge needs for institutional capacity building within each Commission through four TAs (footnotes 9, 10, 12 and 13). These TAs were also relevant to the ADB strategy of improving economic efficiency, through financial sector modernization and rationalization of its legal and regulatory frameworks. The TAs on SME financing were also responsive to the needs of the PRC, as evidenced by the 2003 decision22 to address the reconstruction of SME financial institutions, and integrates well with ADB's strategy of making markets work better. 11. The five TAs focused on social security reform, including the seminal effort to develop a new pension system, also supported ADBs objectives of promoting equitable and inclusive growth. The TAs were reasonably formulated and their designs appropriate and in line with their respective TA scopes. 12. Although the TAs were provided across a number of financial-related themes, they were focused dynamically on ADBs core sectoral objective of supporting policy, legal, and regulatory reforms to develop efficient financial markets. The TAs supporting the themes of regulatory framework building and social security system reforms present examples of the manner in which the TA designs were adopted in a dynamically-focused strategy. From 1998 to 2005, at least four TAs had been provided to each of the above two themes. For each theme over time, early advisory assistance was aimed at helping agencies build basic capacities, awareness, and frameworks. Subsequent TAs were then provided to support the development of additional operational capacities such as a risk control system or a statistical system, while end-stage TAs addressed enforcement capacity at the provincial level. 13. Given the rapidly evolving financial sector agenda in the PRC, designing TAs with narrowly-defined scopes may be not the best way to utilize ADBs limited resources. For instance, due to long start-up delays, some of the focus of the SME credit system TA (footnote 16) became irrelevant because the executing agencys policy priorities had already changed by the time the TA started. Moreover, TAs driven solely by local government demand tended to be less successful than those TAs that carefully integrate the interests of both central and local governments. The policy priorities of local governments may change more rapidly than central governments due to uncertainties in local economic reforms and new directives from central government. B. Effectiveness

14. The TAs are deemed effective in contributing to stronger legal and regulatory frameworks for the different financial subsectors. ADBs continued and in-depth engagement in the social security and regulatory reform processes in the PRC enabled it to build substantial knowledge and
21

ADB. 2004. Technical Assistance for Development of Small and Medium-Sized Enterprise Credit Guarantee Companies. Manila (TA 4350-PRC, for $550,000, approved on 18 June). 22 "Decisions on Issues Regarding Improvement of the Socialist Market Economy," promulgated at the Third Plenary Session of the 16th CPC Central Committee in October 2003.

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gain the respect of the Government, stakeholders, development partners, and international financial community. With advisory support from ADB, the PRC authorities have understood the importance of financial sector reform and have made much progress in a relatively short time. The Government had crafted financial laws and established regulatory institutions where, in essence, none had existed before. Many TA recommendations had been included in enacted laws and pilot-tested policies. By introducing international best practices, the TAs had covered almost all financial industry subsectors, including banking, securities, insurance, and social security. 15. ADB had only one financial sector TA that incorporated a pilot program,23 and the positive experience under the TA on Social Security Reform (footnote 4) suggests a wider role for pilot-testing in the future. This TA sought to assist the Government in evaluating a pilot program developed by the State Council to replace the pay-as-you-go pension scheme with a more sustainable multi-pillared system (based on social pooling of individual accounts, enterprise-sponsored schemes, and individual market-based insurance). Liaoning was selected as the pilot area, and the TA helped assess the collection, pooling, and funding of the individual accounts under the new system. The TA will also help in replicating the experience nationwide if proven successful. The TA completion report described the pilot program as successful in improving organizational and operational capacities of the Liaoning Social Security Department, including the development of an actuarial model. 16. In 2005, ADB used a more flexible, quick-response knowledge product to the Government, recognizing the rapidly-evolving policy agenda in the country. Entitled Observation and Suggestion Notes, these consist of policy briefs prepared in Chinese and targeted toward senior policy makers (Appendix 8, para. 17). So far, these have covered a diverse range of topics on rural financial market development and social sector financing. Senior Government officials have cited several of these policy briefs as having a major influence on their views, particularly social policy reform. C. Efficiency

17. ADB TAs are efficient in achieving the expected outputs, and tend to be well-managed and implemented. The TA budgets were adequate to accomplish assigned tasks, and their terms of reference were met through good implementation and monitoring by ADB staff. The consulting teams successfully completed tasks specified in their terms of reference (TOR) according to schedule, except for seven TAs whose completion dates were extended by 6 months at the least. The delays stemmed from the need to modify the TOR. Sometimes, the TA scope and consultant TORs had to be changed to reflect the rapidly changing policy agenda of the PRC authorities. This required ADB staff to renegotiate new TA scope with executing agencies. In the rapidly changing environment and given the PRCs capacity to learn new instruments and techniques, the original scope of the TA determined under the 3-year rolling plan for ADTAs was not relevant by the time the consultants were on board. Time delays also occurred to replace consultants (as in the case of pension reform, capital markets regulation, and banking law TAs), and additional time was needed to allow time for the revision and translation of the final reports (which happened under TAs on the insurance sector, SMEs, SME credit system, and banking law) and to accommodate postponements owing to the severe acute respiratory syndrome outbreak (TAs on social security reform pilot and banking law). 18. Some of the delays could have been aggravated by changes in assigned ADB project officer or consultants without a proper hand-over of outstanding issues. For example, the executing agency for the banking law TA was dissatisfied with some of the individual
23

The first of two TA components of TA 3733.

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consultants work and the change in project officer that it requested additional TA inputs to meet their needs. Coordination and delivery of outputs could have been improved had ADB been more proactive in obtaining the executing agencys consensus for consultants selection and replacement. On average, international consultants were more susceptible to having misunderstandings with the executing agencies, possibly because of language or cultural differences. In contrast, the most successful TAs always had a high degree of local consultant participation. 19. Despite the uneven performance of individual consultants, majority of the TAs also produced high-quality reports, with the exception of TAs on the capital markets and banking law. Due to conflicts internal to the consultant team, the final report of the capital market TA was faulted for lacking a proper framework and presenting recommendations in a fragmented manner. The reports under the banking law TA did not provide sufficient analysis for the root causes of existing problems and measures to prevent recurrence of such problems when these outputs were part of TOR requirements. The unfinished assignments were attributed to (i) the lack of consultant access to senior policy makers, compelling consultants to adopt a more generic approach to problem resolution instead; and (ii) consultants difficulties in accessing information and data from executing agencies. For instance, under the capital market TA, the Shanghai Stock Exchange was unable to provide direct access to its trading facilities and systems given confidentiality concerns, making it very difficult for consultants to fully pursue specified tasks related to enforcement activities and market surveillance systems.24 20. Majority of TA reports contained useful information, quality analysis, and recommendations, which were appreciated by almost all executing agencies. Most TA reports were also translated into Chinese for easy reading of executing agencies s. The conferences successfully disseminated their findings to high level officials, while the training seminars and workshops that followed the conferences exposed legal and regulatory staff to international best practices and tools for regulating financial institutions. The quality of foreign study tours and overseas training events were also rated very highly. D. Sustainability

21. TA outcomes are rated likely to be sustainable since most recommendations had been effectively incorporated into enacted laws and development plans. For instance, many of the recommendations under the banking law TA were incorporated in the Banking Supervision Law, amended PBC Law, and Commercial Bank Law. The enactment of these three laws substantially strengthened the legal framework for the financial sector. In the case of TA supporting social security reform under the 10th Five-Year Plan (FYP),25 although its final report was completed after the finalization of the 10th FYP, many of its preliminary recommendations were still reflected in the FYP because TA consultants had opportunities to exchange views with the National Development and Reform Commission (former State Planning and Development Commission). 22. The analyses conducted and recommendations by the other TA reports were extensively debated at various workshops, and these were well attended by various Government agencies, donors, and other stakeholders. In addition, some TA reports on specific themes (such as rural medical health insurance) had received wide policy and media attention. As such, benefits from the TAs will be sustainable.
24

According to CSRC, some of the requests for confidential information were not necessary to implement the assigned tasks. 25 ADB. 2000. Technical Assistance to the Peoples Republic of China for Policy Support for Social Security Reform under Tenth Five-Year Plan. Manila (TA 3607-PRC, for $150,000, approved on 21 December).

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E.

Key Issues

23. Progress in PRC Reforms in the Financial Sector. Among several challenges which the PRC faces further strengthen the economy and deepen past reforms is the need to continue to move toward an efficient and market-based financial sector and reducing the potential for nonperforming loans. The financial sector is constrained by the inefficient state-owned banks, which are in turn affected by weak state-owned enterprises. It will also be important for PBC to establish and articulate an appropriate monetary policy framework to underpin market expectations about inflation, interest rates, and exchange rate. Further to this, in line with its World Trade Organization accession agreement, the PRC also needs to open its banking system to foreign competition. ADB had built up a critical mass of expertise and experience to be a key provider of development assistance for the PRC in this regard. 24. Province-Level TAs. Experience from the few provincial level TAs in the sector that were approved during the CAPE period suggest that relatively less policy influences emanate from TAs focused on specific provinces compared to TA that had both central and local governments as clients. A better approach could involve support to province-level programs initiated by central government on a pilot basis if parties agree to the recommendations. 25. Pilot Programs versus Best Practices. The practical and results-oriented manner which underlie progress in the PRC reforms during the past decades suggest that pilot experiences in the country context may influence policymakers much more than directly applying international best practices and advisory recommendations. F. Lessons and Recommendations

26. Experience with financial sector TAs during the CAPE period suggests that ADB had successfully delivered a diverse array of outputs and outcomes that are generally in line with expectations from the PRC authorities and ADB itself. These TAs effectively contributed to strengthening the efficiency of the financial sector by contributing to good governance in financial markets and improving institutional capacity for financial regulation and supervision. 27. Support Actively More Pilot Programs. In order to effectively maximize policy impacts, ADB should keenly participate in more province-level pilot programs initiated by central government agencies. Concrete results from pilot experience will definitely carry more sway over policymakers relative to international best practices and advisory recommendations, in the context of the PRCs unique circumstances. It also responds more effectively to the practical and results-oriented manner underlying the countrys reforms. 28. Dual-Track Strategy (Focused and Opportunistic) Should Be Continued. Most financial sector TAs represent clusters that revolve around the themes of regulatory framework building, social security system reform, corporate governance, and SME financing. This strategy of delivering a mix of strategic26 and opportunistic27 TAs to the PRCs financial sector has proven to be effective during the CAPE period. The former had focused on long-term development challenges in financial markets and kept continuous support in core areas. The latter had been low-cost facility TAs focused more on providing rapid responses to Government queries. Sector experience with such facility TAs suggests that, although they have small amounts and short implementation periods, these can be useful tools in addressing well26

Comprising of in-depth knowledge products in the fields of banking reform, capital market, corporate governance, and social security system. 27 An array of TA products responsive to the central and local government demands.

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targeted policy issues in a timely manner. Both types of ADTAs are extremely important in catalyzing changes in policy and institutional practice. This may be used to guide future TA operations in this sector and also serve as model for operations in other sectors. Past operational experience suggests ADB can make important contributions by providing in-depth TAs on banking, capital market, and social security systems, together with a broader array of knowledge products responsive to central and local government demands. 29. Delivering More Projects on Social Security. With the 11th FYP signaling a shift from industrial and export-led growth to one based on a harmonious society, the Government may make further efforts to improve social security systems involving pension, basic medical care, industrial injuries, and safety net for migrant farmer workers in cities, etc. Owing to its sustained engagement in the countrys social security reform process over the past years, ADB has built substantial knowledge and network in the subsector, a good position for ADB to explore further involvement, especially with regard to opportunities at the local government level. Table A17.2: SWOT Analysis: Financial Sector
Strengths Weaknesses 1. Finance is a core operational sector under MTS II, 1. ADB has no comparative success with regard to assisting providing basis for larger involvement in the PRC development finance institutions and should gradually exit financial sector. from such involvement, per MTS II. 2. ADB sector support was focused (social security 2. Mixed performance in ADB lending operations and reform, regulatory framework building, corporate changed country priorities led to lack of demand for governance for financial institutions, and SME financial sector loans. financing). 3. Priority placed on pension reform also supported ADBs poverty reduction objective. 4. The TAs addressed not only regulatory reform but also enhanced institutional and enforcement capacity, thus giving effective follow through. Opportunities Threats 1. The 11th FYP advocates corporate governance and 1. TA tend to be subject to more risks like political, internal control of state-owned commercial banks, economic, financial, and operational risks, especially for a develop diverse forms of ownership of financial rapidly-evolving sector like the financial sector. institutions, enhance directly-financing channels, 2. ADB may need to exercise greater sensitivity in dealing promote rural development finance, and improve with confidential information (translations needed by management of social security funds. international consultants create a risk in this context). ADB = Asian Development Bank, PRC = Peoples Republic of China, FYP = five-year plan, MTS = medium-term strategy, SME = small- and medium-sized enterprise, TA = technical assistance. Source: Country assistance program evaluation team.

MANAGEMENT RESPONSE TO THE COUNTRY ASSISTANCE PROGRAM EVALUATION ON THE SUCCESS DRIVES DEMAND FOR MORE INNOVATIVE AND RESPONSIVE SERVICES FOR THE PEOPLES REPUBLIC OF CHINA

On 3 May 2007, the Director General, Operations Evaluation Department, received the following response from the Managing Director General on behalf of Management:

I.

General Comments

1. We welcome OEDs Country Assistance Program Evaluation (CAPE) for the Peoples Republic of China (the PRC). We find it analytically sound and well prepared. The CAPE is timely and will provide an important input into the preparation of our Country Partnership Strategy (CPS) for the PRC. 2. We note the CAPE finding that ADBs program for the PRC has been successful overall, and that ADBs development strategies and priorities have been well-aligned to those of the country. We are also pleased to note the finding that the country assistance program for the PRC has brought in successful development experiences and value-added technical, financial and management expertise under various lending and non-lending operations. 3. We agree in principle with all the recommendations made in the report. Though we have some specific comments as presented in Section II below, we are encouraged to note that the recommendations made in paragraph 216 of the report generally validate the importance of the on-going ADB-wide reform initiatives such as the middle income country initiative, the innovation and efficiency initiative, and the on-going review of resident mission (RM) policy. II. Comments on Specific Recommendations

4. Diversification of the Lending Program. We agree with the suggestion that in a country like the PRC, with a wide range of development challenges, an assistance program which perhaps has focused too narrowly on transport should be broadened. A few more carefully selected sectors could be added, with focus on certain geographic areas. This will be part of our discussions with the Government as we prepare a new CPS for the PRC for 20082010. 5. Quality of Nonlending Operations. We agree that while the vast majority of the advisory technical assistance (TA) projects are rated as satisfactory, there is room to improve the quality of TA operations. We note that these issues are currently being reviewed as part of the ongoing ADB initiative on TA management. 6. We also agree that it is important to ensure efficient allocation of TA resources to the areas of highest priority. However, we believe that it would be inadvisable to further reduce the allocations of project preparatory technical assistance (PPTA) in infrastructure sectors (as proposed in the CAPE report) since (i) PPTA allocations have already fallen in real terms while project complexity has increased; (ii) PPTA funds are being used for bringing safeguards and economic and financial analysis to the required ADB standards, and for

innovative project design, rather than for engineering design as in the past; and (iii) many of the projects are in new subsectors and thus not repeat projects, due to change in inter-sectoral balance in the lending program. 7. Increasing Private Sector Operations. We agree that ADB needs to increase private sector operations in the PRC and should have a clear strategy to support private sector operations. A joint team from our East Asia Department and Private Sector Operations Department has been constituted to develop a private sector operations strategy for the PRC as part of the new CPS preparation process. Staff skills mix in PRC Resident Mission (PRCM) will be assessed against the emerging operational requirements under private sector and non-sovereign operations as part of the on-going RM policy. 8. Deepening Regional Cooperation Initiative. We agree that PRC can play a strategically important role in regional cooperation initiatives. The proposed CPS for 20082010 will therefore include regional cooperation as one of its strategic pillars. Guided by ADBs regional cooperation and integration strategy and the Governments own strategic priorities, it will focus on: easing institutional constraints to regional integration, building regional infrastructure to promote trade and transit, promoting regional financial integration, and supplying regional public goods. 9. Increasing ADB Responsiveness to Client Concerns. We agree in principle with the suggestion that ADB should delegate more authority to PRCM and strengthen PRCM staff capacity. However, such decentralization/delegation also involves additional costs which need to be considered. The ongoing review of the RM policy will inform these recommendations. We agree with the suggestion that ADB should move toward the use of country systems for safeguard policies. However, this will be further considered after the forthcoming safeguard policy update is completed, which will define the criteria under which country systems may be considered for pilot testing and application.

DEVELOPMENT EFFECTIVENESS COMMITTEE (DEC) Chairs Summary of the Committees Discussion on 23 May 2007 of the: (i) Country Assistance Program Evaluation for Peoples Republic of China: Success Drives Demand for More Innovative and Responsive Services (ii) Sector Assistance Program Evaluation of Asian Development Bank Assistance for Roads and Railways in the Peoples Republic of China (iii) Technical Assistance Performance Report for Selected Technical Assistance Projects in Public Administration (Peoples Republic of China)

Background 1. The Operations Evaluation Department (OED) prepared its second Country Assistance Program Evaluation (CAPE) study for the Peoples Republic of China (PRC), * covering the Asian Development Banks (ADB) project and program assistance to PRC from 1998 to 2005. The CAPEs findings and recommendations were derived from the review of how past lessons have been used in formulating strategies, and from the assessment of how effective ADBs assistance to PRC has been during the period. 2. The formulation of the CAPE also utilized the findings and recommendations of two OED reports completed earlier: (i) Sector Assistance Program Evaluation of Asian Development Bank Assistance for Roads and Railways in the Peoples Republic of China; and (ii) Technical Assistance Performance Report for Selected Technical Assistance Projects in Public Administration (Peoples Republic of China). 3. The three evaluation studies for PRC were conducted in order to identify lessons learned and make recommendations, particularly for the preparation of a new country partnership strategy (CPS) by ADB. Summary of Discussion 4. Director, OED2 confirmed that the overall assessment rating for the PRC country assistance program is successful. The ADBs program for the PRC is strong in terms of its portfolio quality and the relevance of its strategy and sectoral programs. ADBs partnership with PRC has played a key role in PRCs rapid economic growth, and ADB has consistently added value as a trusted and long-term partner. OED noted how ADB has introduced many new ideas to PRC in the areas of project management systems, project economics, finance, sector governance, and safeguards compliance. Director, OED2 highlighted PRCs influence on ADBs portfolio in terms of size and quality and regional economic activities, and PRCs ability to provide lessons from its own development experiences to other countries.

On 4 April 2007, the CAPE and its circulation were approved by Director, OED2, in strict compliance with the Guidelines to Avoid Conflict of Interest in Independent Evaluations of the OED. In accordance to these guidelines, Director General, OED, delegated the responsibility of the studys approval to the concerned director, since Director General, OED was involved in ADBs operations in PRC for many years.

5. The CAPEs key message is that success drives demand for more innovative and responsive services. At the current state of its economic development, PRC requires more knowledge, new ideas and international best practices for further economic progress and social welfare. The CAPE notes that ADB could improve its institutional effectiveness, responsiveness to client concerns, private sector operations and regional cooperation. 6. Director, OED2 highlighted the CAPEs issues and recommendations covering ADBwide issues related to decentralization of resident missions (RM), technical assistance (TA) management, and safeguards policy implementations. Director, OED2 acknowledged that ADB has ongoing work in these areas. 7. Director General, EARD presented the Managements Response, which generally agreed with all the recommendations made in the report. Management found the evaluation analytically sound, well prepared, and timely in providing important inputs to the preparation of the CPS for 2008-2010. Management recognized the expectations from ADB with regard to innovation, knowledge transfer, and client responsiveness, and acknowledged that these will be needed to drive successful assistance programs in the future. Management will ensure that these areas constitute an integral part of ADBs operations for PRC. 8. On the CAPEs recommendations related to delegation of responsibility to RMs, delegation of TAs to the country, and use of country systems, Management advised that EARD would have to be guided, among others, by the ongoing ADB-wide reviews on these issues. 9. The Committee generally endorsed the findings and recommendations of the three evaluation studies. DEC members emphasized the following key points: 10. Value Addition. The Committee acknowledged that ADBs operations in PRC added value to the different stages of PRCs economic development and continued support to some sectors over the years which produced tangible development results. However, the CAPE could have mentioned the extent of ADBs influence in designing and implementing ADBs reform agenda in its PRC operations. 11. The Committee suggested that determining PRCs stage of development, whether as a low-income or middle-income country, would help define ADBs value addition to PRC. Although PRC is recognized by ADB as a middle-income economy, a lot of people still live in absolute poverty, and a lot of poor areas still require financial support from ADB, particularly in the social sectors. 12. Knowledge Transfer. The Committee agreed that ADB could add value to PRC in the area of knowledge transfer. However, DEC clarified that PRCs need for knowledge transfer includes learning how to use the already available knowledge and technology in drawing lessons and experiences from other countries, and implementing the experiences in its own culture to suit their needs. 13. Capacity Development/Technical Assistance. DEC recognized the success of ADB capacity building efforts in PRC. Lacking an overall assessment in the CAPE of ADBs contribution to capacity development in PRC, the Committee suggested that the new CPS align TAs with ADBs strategic priorities by including a strategic framework, and that the accountability framework be clarified. Several issues and recommendations that are longstanding should be addressed and implemented. More pilot-tests of TAs implemented by EAs with strong capacity would be encouraged.

14. A DEC member noted the ongoing debate on whether ADB should be sector-focused or assist on a wider scope, and suggested that ADB should provide assistance based on a countrys need. Another DEC member emphasized that ADTAs provided to PRC should primarily target knowledge transfer of international best practices, and not for lending purposes later on. 15. Institutional Effectiveness. DEC emphasized the need to change ADBs institutional culture and to mainstream change management more thoroughly. In all CPS, ADB should be aggressive in meeting expected results. Referring to the issues raised in the Eminent Persons Group report, specifically on inclusive growth, would be very useful. 16. ADB could also do more in the area of knowledge management (KM). The Committee acknowledged Managements commitment and efforts in improving the coordination among ADBs KM units. However, clarity should be provided on how these efforts translated into improvements in the capacity of DMCs. 17. A DEC member recommended the minimum engagement of consultants and the employment of more staff linked to KM, in order to maximize retention of knowledge in ADB. 18. Diversification of Lending Program. A DEC member requested clarification on the areas in which PRC would like to have a partnership with ADB, including the volume of lending that could be available to PRC. Another DEC member suggested adequate consultation process with PRC and stakeholders in order to identify which areas would require priority and are appropriate. The argument should also be beyond diversification versus focus. Instead, ADB should focus on areas where it could deliver the best results. Another DEC member supported the CAPEs recommendation that ADB can address social and environmental issues through the urban sector, but proposed softening the OCR lending terms, especially since PRC is not an ADF borrower. ADB could provide a window to support PRC, like providing concessional financing for PRC. In addition, PRC has been reluctant to avail of ADBs new products and modalities, hence, ADB should increase sophistication of its partnership with PRC by making PRC more comfortable in using such instruments. 19. Use of Country Systems for Safeguards Policies. The Committee asserted that increasing the countrys capacity is pertinent to the effective use of country systems. ADB could start applying such an approach in the area of procurement and environment, as efforts on this were already undertaken, and thereafter, draw lessons that would be applied to the other safeguard policies. 20. A DEC member noted that too much emphasis is given to transactions costs, with very limited consideration on the benefits of implementing safeguard systems, and one recommendation was made that the benefits should be valuated more in order to have a balanced view of the safeguard systems. 21. Private Sector Operations. The Committee expected to have a more comprehensive articulation of ADBs private sector operations in PRC. A joint strategic approach between ADB and PRC on both public and private partnerships should be drawn up. And since private sector participation is quite difficult to predict, a more general strategy may be appropriate rather than detailed plans. Areas of focus may be the infrastructure and financial sectors. ADB should also determine whether it can meet PRCs demands given its available resources.

22. Regional Cooperation. The Committee felt that ADB should do more on both regional and subregional cooperation. There are a lot of opportunities for ADB and PRC to work together on this. Regional cooperation activities may also translate into knowledge transfers among participating countries. 23. Strengthening the Capacity of the PRC Resident Mission. The Committee acknowledged the need for additional resources in the resident mission. A business model should be established for ADB which clearly defines where ADB wants to go, and what it needs to get there in terms of technical resources and authority to successfully implement the CPS. 24. A DEC member emphasized that PRCM is relevant in raising ADBs partnership with PRC to a higher level. He agreed to build up skills and capacity of PRCM to have a better understanding of PRC for designing programs and strategies. However, this approach can be multifaceted, as it would shift the whole focus of ADB operations. The challenge would be keeping the optimal level of central control. 25. ADB-PRC Partnership. The Committee also discussed the broad issues of the ADBPRC partnership, which is built on very strong country ownership, mutual respect for learning, and the ability of ADB to adapt to PRCs development needs. However, the relationship needs to be re-negotiated a little on both sides, in a manner that would give ADB a bit more room to maneuvere.g in overall program design, sectors/projects location, geographic elements, and financing issues. There should be more dialogue in order to get the right balance and strike the optimal set of arrangements. 26. A DEC member noted that PRCs financing needs have diminished, but ADB needs to reinvigorate its lending relationship with PRC. PRC will still have financing needs, although not at the traditional level (probably on private sector operations, with greater cost-sharing, etc.). It will be useful to soften the terms for social sector borrowing for PRC. 27. Another DEC member clarified that PRC still has great financing needs. Being a low and middle income country, PRC still has many people living in absolute poverty, and has lots of poor areas needing support from ADB. ADBs continued involvement would be good for PRC and other DMCs as well, as even a small lending level becomes a linkage between PRC and ADB, and may be a knowledge sharing mechanism, which small countries can benefit from. 28. The DEC Chair asked OED how the lessons mentioned would be shared with other DMCs. To the Management, he also referred to the previous DEC recommendations that CPS should include sections explaining: (i) how the strategies are translated into operational programs; (ii) how lessons learned from past portfolio performance are taken into account in the CPS; and (iii) how the CAPE and DEC recommendations are taken into account in the CPS. 29. Lastly, on the overall presentation of the CAPE, DEC members recommended improving OEDs report template to avoid presenting repetitive information that only buries the analytical work. The Committee also sought clarification on where to draw the line between the CAPEs recommendations and the role of the Regional Departments in proposing different approaches to the CPS. Further, a DEC member found the recommendations to the PRC government inappropriate, and suggested that recommendations be restricted to ADB. The CAPE, instead, may include recommendations on issues that ADB may raise to PRC. 30. Director, OED2 appreciated the Committees views which would serve as guidance for developing similar studies in the future. OED is making efforts to improve the presentation of its

reports, taking into consideration good practices of other MDBs and international financial institutions. Further, limitations in the presentation of the PRC CAPE are also the result of the objectives of the study, namely, to make assessments, present issues and offer recommendations, all requiring an enormous amount of information. OED clarified that the CAPEs recommendations are mainly directional inputs towards further specific recommendations and action plans to be developed by regional departments. On value addition, OED acknowledged that the attribution was a bit limited, given the very small ADB operations compared to PRCs total public investment, and mentioned other areas in which ADB operations added value in PRCs development, both through lending and nonlending activities, such as assimilation of knowledge in the transport sector, poverty reduction, public governance and the financial sector. This relates to the CAPEs recommendation on gradual diversification, which intent is not to make ADBs programs spread thinly, but to be more focused in areas where value could be clearly added. On the scope of delegation to PRCM, OED suggested delegation in the areas of policy dialogue, project administration, and knowledge services. 31. On the issue of reforms, OED further clarified that ADB could only add very little to the margin as PRC has already made a lot of reforms. This is the basis for ADB to diversify. Another key point of the CAPE is the recognition that a great deal can still be done for PRC, and ADB needs the expertise to be able to deliver more. 32. Director General, EARD appreciated the recognition of PRCs success as also ADBs programs success. PRC is a very discerning development partner and its continuous partnership with ADB is based on ADBs ability to add value to PRCs development. ADBs value addition has evolved and adapted well with the different stages of PRCs development. EARD also appreciated the DEC members guidance on what areas of focus the new CPS should consider. ADBs diversification strategy also aims to address inclusive growth, in order to address income inequality, and also respond to other priorities of both ADB and PRC, such as environmental sustainability, regional cooperation and governance. On the issues of delegation of responsibility to the RM and TA effectiveness, EARD will seek guidance also from the ongoing reviews of these two areas. 33. OED responded that knowledge sharing mechanisms such as workshops, seminars, conferences, and networking with other DMCs and institutions are currently being developed and will be implemented. In addition, regional departments, for example EARD, which is participating in a study on PRC and India experiences, will engage further in disseminating the lessons learned to other DMCs. 34. Director General, PSOD emphasized that PRC continues to be a high priority in PSOD, representing roughly 20% of ADBs private sector operations. PSOD noted the difficulty of planning private sector operations as it is dependent on the sponsors requiring ADBs assistance. PSOD suggested a more proactive stance by ADB at a very early stage of projects to link government priorities. This will naturally entail increased resources. PSOD is continuously networking with the communities of practice in ADB to identify areas of participation. Country Director, PRCM supported these points, and mentioned that there is ongoing work on a joint strategy for private sector development for PRC and ADB, which will be incorporated in the new CPS.

Agus Haryanto Chair, Development Effectiveness Committee 15 June 2007