Creating Poverty:The ADB in Asia

Contents

The ADB: Shape Up or Ship Out

ADB 2000: Senior Officials and Inter-nal Documents Paint Institution inConfusion

Coopting Cooperation: The AsianDevelopment Bank and Sub-regionalEconomic Zones

Why Consumers and Citizens ShouldPull the Plug on the Asian Develop-ment Bank

Philippine Power Scandal IllustratesFlaws in ADB’s Privatisation Strat-egy

Banking on Women: The ADB Policyon Gender and Development

A Critique of the ADB Private SectorDevelopment Strategy

A Primer on the Multilateral Develop-ment Banks (MDB) Campaign

Cofinancing: Debt and DependentDevelopment

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The ADB: Shape Up or Ship Out

By: Shalmali Guttal*

and the key producer and disseminator ofknowledge about poverty and development in theregion. Through such a discourse it can exerciseinfluence about how poverty is perceived andapproached, and in the design of anti-povertyprograms. The poverty discourse thus serves theADB in two critical ways. One, it provides a moral-ethical cloak for it’s poorly conceived and destructivedevelopment policies and practices. Second, itensures that there will always be a steady supply of“poor” to keep it in business.

The ADB defines poverty as a state ofdeprivation of essential assets and opportunitieswhich arise from a shortage of capital by whichthese assets and opportunities can either beproduced or purchased.3 Accordingly, povertyreduction calls for the creation of a situation in whichthe poor are enabled to acquire the assets requiredto achieve a “minimally acceptable level of exist-ence. But this too is not new. Set into motion morethan fifty years ago by the United States, GreatBritain, the Bretton Woods Institutions and theUnited Nations, the “shortage of capital” approach todevelopment has so completely dominated anti-poverty programs that today, the theory has becomea morbid reality: the poor are indeed deprived ofassets and opportunities; there is a perpetualshortage of capital investment in areas critical to thepoor; and worst of all, despite the billions of dollarsthat have been channeled into so-called povertyreduction programs, the poor do not appear to be ina better position than before to acquire those assetsand opportunities they need to redeem their condi-tion of deprivation.

The picture is indeed dismal. The 1999UNDP Human Development Report reveals thatworldwide, an estimated 1.3 billion people live onincomes of less than $1 a day. More than a quarterof the 4.5 billion people in developing countries stilldo not have what the world considers some of life’smost basic choices such as survival beyond the ageof 40, access to knowledge and minimum publicservices. More than 880 million people lack accessto health services, nearly 1.3 billion people do nothave access to clean water, and 2.6 billion people

lack access to basic sanitation. About 840million people in the world are malnourishedand the richest fifth of the world consume 16times more than the poorest fifth.4

What’s New at the ADB?The Asian Development Bank (ADB) now

asserts that poverty reduction is its overarchinginstitutional goal. It claims that all its other strategicobjectives—economic growth, human development,sound environmental management and improving thestatus of women—will henceforth be pursued insuch a way that they directly contribute to povertyreduction.1

But the ADB has no clue how to reducepoverty. In adopting the poverty reduction rhetoric, itis merely following the lead of the World Bank andits other multilateral peers who successfully negoti-ated the transition in their rhetoric a long time ago.A relative “laggard” in the development business, theADB is the last of the multilateral institutions todeclare full and complete dedication to the reductionof poverty. And in so doing, it hopes to divertattention away from emerging evidence and criticismof its abysmal failure as a bank as well as adevelopment institution. It now talks aboutsustainable human development, gender equality,environmental protection and participation, but it isclearly at a loss as to how these terms can betranslated into action.

The ADB’s Poverty Reduction Strategyproposes nothing new in terms of understanding, ortackling poverty. What it does is use povertyrhetoric to dress up the only business it knows:market based economic growth, liberalisation oftrade and investment; deregulation, or minimisingthe role of the State in governing the economy andprivatisation, with an ever expanding role for theprivate sector in the production and delivery of goodsand services. The strategic goal of these initiativeshas not been poverty reduction, but the rapidintegration of local and national economic activitiesinto the global market economy. Far from reducingpoverty, the ADB’s version of development hascontributed greatly towards the impoverishment ofpeople in the Asia and Pacific.

The poverty rhetoric is important to the ADBfrom the point of view of institutional survival. TheADB needs the discourse of poverty. By committingitself to research and documentation aboutpoverty (“expanding the knowledge base”)2 itattempts to sets itself up as a poverty expert, 1

Close to 900 million of the world’s poor (i.e.,those who survive on less than US $1 a day) live inthe Asia and Pacific region, and nearly one in threeAsians are poor using this same standard.5 Morethan half of world poverty is concentrated in theAsia and Pacific region. And the ADB—along withits mentors, the World Bank and the InternationalMonetary Fund (IMF)—has played a significant rolein bringing this situation about. The combinedpolicy demands of these three institutions haveentrenched social, economic and politicalinequalities, increased absolute poverty for many,weakened the economic sovereignty of countries byincreasing dependency on external financing, andled to widespread environmental degradation in theregion. Further, the increasing domination of theirneo-liberal vision of the world has narrowed opportu-nities for the emergence of local, national andregional development alternatives.

An Institution for Asia and thePacific

The Asian Development Bank (ADB) wasestablished in 1966 as a regional MultilateralDevelopment Bank (MDB) to finance activities thatwould foster economic growth, development andcooperation in the Asia-Pacific Region. Althoughits primary founding members were Japan and theUnited States, it now consists of 57 membercountries—41 from Asia and the Pacific, and 16non-regional. The ADB’s top stockholders areJapan, the United States, the Peoples’ Republic ofChina, India, Australia, Indonesia, Canada andKorea.6 Interestingly, the majority of the ADB’smembers—Developing Member Countries [DMCs]are debtors to the ADB. The ADB is a publicsector institution supported by taxpayers in all itsmember countries, either in the form of directfinancing of the institution’s portfolios, or in the formof debt repayment.

Established in the image of the World Bank,the ADB currently enjoys unprecedented economicand political power in Asia. Between 1996 and1998, the ADB’s commitment to assistance in theregion was US$ 20.6 billion, second only to theWorld Bank at US$ 28.7 billion.7 Since the start ofits operations in 1966, the ADB has poured morethan US$ 111 billion into the region, of which atleast US$82 billion are in direct credits from theBank itself, and another US$ 30 billion through co-financed capital, much in the form of non-concessionary loans. In 1997, the totalaccumulated external debt in the Asia Pacificregion was US$ 805.4 billion.8 Compared againstthe total ADB lending and co-financing todate of US$ 111.9 billion, it can be assumedthat more than ten percent of the totalexternal debt of the Asia Pacific is owed tothe ADB.9

The eight largest debtor countries to the ADBare Indonesia (US$ 16,008 million), Pakistan (US$9,471 million), China (US$ 8,166 million), ThePhilippines (US$ 7,286 million), India (US$ 7,253.3million), Thailand (US$ 4,984 million), Malaysia(US$ 1,987 million) and Vietnam (US$ 1,655million). The top eight countries with more than athird of their total external debt owed to the ADBare Bhutan (73 %), Nepal (68 %), Samoa (62 %),Mongolia (52 %), Solomons (51 %), Bangladesh (37%), Malaysia (33 %) and Pakistan (32 %).10

The ADB’s activities range from providing loans(concessional and ordinary), facilitating capitalinvestment, and technical assistance togovernments and private companies in its devel-oping member countries (DMCs). Its approach todevelopment is based on a fundamental belief inrapid modernisation, market capitalism, and theintegration of all economic activity into the globalmarketplace. While these beliefs are no differentfrom the neo-liberal agendas promoted by otherInternational Financial Institutions (IFIs), the ADBhas sought to promote an “Asian” identity for itselfby claiming to be rooted in the region, and byclaiming to advance regional understanding andcooperation through programs designed to respondto the particularities of the region.

The ADB has mobilised both public andprivate capital for financing development activitiesthrough co-financing schemes with multilateral,bilateral and private financial institutions. Centralto this has been the promotion of public-private“partnerships” between governments and privatecompanies in physical infrastructure projects inwhich the ADB has provided loans for governmentequity and partial risk guarantees to the privateinvestors. Another notable feature of the ADB hasbeen its role in facilitating technical assistance toits DMCs through multilateral and bilateral funds.However, the majority of the ABD’s “assistance” toits DMCs has been in the form of loans and evenpre-paid technical assistance is usually contingentupon concurrent loan regimens.

Whose Interests?The ADB insists that it has always been

concerned with poverty alleviation and that itsapproach to development encompasses a widerange of social and environmental concerns,including women’s empowerment, civil societyparticipation and environmental protection.11

However, in the footsteps of its institutional peers—the World Bank and IMF—financing from the ADB,whether in the form of grants or loans, is generallyaccompanied by conditionalities that undermine the

very issues it claims concern for.ADB conditionalities range from the

introduction of new policies and laws to protectspecific investments (as in infrastructure

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projects) to reforms of entire sectors (as in the caseof the agriculture sector in Thailand and the energysector in Indonesia). Some of the more commonelements of these conditionalities are:liberalisation of trade and investment; increasedcontrol by the private sector over the productionand delivery of goods and services; full costrecovery of all investments whether public or private;dismantling of state subsidies for public goods andservices; privatisation of state enterprises; transferof resource use and tenure rights from public andcommon pool to private ownership; deregulation ofpricing and markets; and an overall withdrawal of thestate in direct economic activity and governance.Reforms of the financial and legal sectors, and theintroduction of new, market-friendly regulatorymechanisms have been particularly important to theADB’s strategy of increasing foreign and domesticprivate investment in infrastructure, economic andsocial development.

Until the early nineties, the ADB was quitesuccessful in avoiding public scrutiny about itspolicies and operations. Unlike the World Bank orthe IMF, the ADB’s sphere of influence is regionallylimited. And the Asia-Pacific region is a geo-graphically, economically, culturally and politicallydiverse region. While intense pockets of povertyexist in its different sub-regions, it is also overall aregion of significant wealth accumulated throughgenerations of capital and resource appropriation,and a buildup of domestic savings. Asian coun-tries have pursued distinctly different paths to-wards modernisation and development which havebeen financed through a multitude of sourcesranging from domestic and foreign private invest-ments to bilateral, and multilateral developmentassistance and credits. Consequently, the influ-ence of MDBs on the various countries in theregion has also been varied owing to differences intheir respective political and economic capacities.

But as more evidence emerges about thedestructive impacts of its projects and interven-tions, the ADB is facing growing region-widecriticism of its policies and operations, as well as ofthe manner in which it does business. Despite itsclaims to the contrary, the ADB is a highlycentralised and unaccountable institution whichdoes not serve broad-based public interest. At aninstitutional level, the Bank’s key policy andprogram decisions are taken by its Governors andBoard of Directors, who also determine the directionof its operations and relations with borrowingcountries. At the country level, Bank andgovernment negotiations about programs proceedwithout broad based, inclusive, public input andparticipation.

Neither the Board of Directors nor ADBstaff represent the interests of majority of theregion’s people. ADB policies also have littleto do with addressing the problems or

challenges faced by the poor in borrowing countries.On the contrary, these policies reflect a gross andundifferentiated view of diverse conditions, andfurther the interests of its wealthy Asian and non-Asian stockholders and financial contributors. TheADB pays no penalty for bad decisions on loans orprojects. These impacts are disproportionatelyborne by the very people who the Bank is notresponsible to but uses to justify its existence, i.e.the poor.

It fact, it is difficult to understand what theADB means when it refers to “gender and develop-ment” and “participation.”12 The urban or rural poorcertainly did not participate in the design ofprograms or policies that have led to the displace-ment and dispersion of families, environmentaldegradation, the alienation of entire communitiesfrom natural resources and livelihood means,increased household and public debt, decreasedaccess by vulnerable populations to clean water,sanitation and basic healthcare, and exacerbation ofphysical, economic and social hardships on women.

“Thinking Poverty”By its own admission, the ADB is moving

away from its former project oriented role towardsbecoming a broad based development institutionthat promotes policy and institutional reform,regional cooperation and private sector develop-ment.13 These policies provide the broad frameworkfor operationalising its poverty reduction strategywhich consists of “pro-poor” sustainable economicgrowth, social development and good governance.

A noteworthy aspect of the ADB’s povertyreduction strategy is its commitment to strengthenits own knowledge, capacity and skills, and toensure that all its departments acquire the requisiteexpertise in anti-poverty activities.

Just as salesmen are encouraged to think“sales” at all times, ADB staff shall “think poverty” atall times. New staff and consultants shall be hiredand training will be provided for all personnel inpoverty reduction methodologies and techniques.Country and region wide studies on poverty will beundertaken, poverty research indicators and data willbe developed, handbooks and manuals on povertyinterventions will be produced, and conferences andfora on poverty reduction will be organised. Newpolicy tools and lending instruments to financepoverty operations will be developed, and of course,new lending targets will be established.14

There will also be new partnerships in thisendeavour. The ADB claims that in more than fiftypercent of its past loans, it has used NGOs toimplement specific initiatives or projects. Its current

poverty reduction strategy is also based onconsultations with NGOs and other civilsociety organisations in selected countries.Such collaboration will be strengthened so

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that future ADB loans and projects (all pro-poor, ofcourse) will have the endorsement and support notonly of governments, but also of civil society.

In other words, by setting itself up as theexpert institution on poverty in the region, the ADBwill consolidate its power on the discourse of povertyand development in the Asia and Pacific. It will thenbe better positioned to shield itself from critiques ofits methods of operation, projects and lendingpractices, and also have a new platform from whichto solicit funds to finance its future existence.

The Poverty Reduction Strategy:New Packaging for an Old Prod-uct

The poverty reduction strategy reiterates theADB’s firm belief in markets as the primary sourceof assets and opportunities that the poor, and infact all in society, need in order to grow towards abetter future. According to the ADB, markets mustbe nurtured and allowed to reach their full potentialby the removal of market distorting interventionssuch as public service and credit subsidies, pricingcontrols, state owned enterprises, import-exportrestrictions and overvalued exchange rates. Itclaims that competitive markets can do better whatgovernments have attempted to do in the past: theproduction of public goods and services.Liberalising markets and dismantling all forms ofcontrol or regulation over market operations (asthe assertion goes) would increase efficiency ofproduction and stimulate economic growth, whichin turn would provide employment and incomes,and eventually reduce poverty.

Private sector development (PSD) is centralto the poverty reduction strategy and will receiverenewed support.15 The ADB claims that given thelimited capacity and mixed track record of thepublic sector, the private sector must become the“engine of growth.” PSD is, of course, not new tothe ADB and encompasses a range of activitiesfrom support for domestic entrepreneurs to regionwide economic cooperation programs. Many PSDefforts are couched in the language of public-private partnerships, whereby public funds areused to provide sufficient incentives and guaranteesand ensure an appropriate “comfort level” for privatesector expansion

The ADB advocates expanding the role of theprivate sector from its present involvement inphysical infrastructure projects (such as energy,water, transport and telecommunication) into thedomain of public goods and services, economic andsocial infrastructure, and basic services such aseducation, health, nutrition, water andsanitation. The ADB plans to use its privatesector assistance window to strengthen thefinancial, institutional and managerial

capacity of the private sector through activities suchas co-financing, technical assistance and capacitybuilding. At the same time, the ADB will use itspublic sector assistance window to enforce ahospitable macroeconomic, policy, legal andregulatory environment (an “enabling environment”)for the “flourishing” of the private sector, such asmore open trade and investment policies, deregula-tion of pricing, and other market favouringinterventions. The agriculture sector will receivespecial attention. According to the ADB, increasingthe market orientation of agriculture, all the way frompricing of inputs to management of natural resourceswill have tremendous impact on poverty reductionsince the majority of Asia’s poor derive theirlivelihood from agricultural production

And what of governments? The ADB has arole for them too as outlined in their policy of “goodgovernance.” Good governance in ADB parlancemeans re-orienting the work, capacity and resourcesof government to support economic restructuring andthe private sector. This would be achieved throughthe development of new legal, regulatory andinstitutional frameworks for the development ofmarkets, competition, market pricing, predictability,stability of operations, etc. The commercialisationand privatisation of state enterprises are highlightedin the ADB’s idea of good governance. Theargument goes that a combination of privatisedproperty rights and competitive markets will lead tothe efficient utilisation and redirection of assets.This will also miraculously reduce corruption. Sincefull cost recovery and profits will replace publicservice and responsibility as motivating factors,privatised enterprises will necessarily create moregoods and services for public consumption, and thepoor will of course benefit. But here too, the ADB isquick to point out that these gains can only bepossible within a wider institutional setting which inturn can only be achieved through the neo-liberalreforms that it has proposed all along.

The majority of the ADB’s policy experimentsare brought together in its program for sub-regionaleconomic cooperation. Central to its core mandateof fostering regional economic development, sub-and regional economic cooperation was unable totake off in the ADB’s early years for a number ofreasons. Deep rooted political-ideological divisionswithin Asia and the prevalence of nation-buildingsentiments resulted in countries focusing efforts onstrengthening their respective national political andeconomic spheres. Given geopolitical conflicts andlimited opportunities for trade within the region,neighboring countries often viewed each other aseconomic competitors or security threats. Thissituation changed considerably in the eighties associalist countries started to open up, export

oriented economic models gained favour inEast and Southeast Asia, and new opportuni-ties for trade and investment started to emerge4

within the region. Intra-regional economic coopera-tion started to elicit particular interest amongindustrialising countries, since it was seen asoffering countries wider markets close to homewhich would allow Asian corporations to becomestronger and compete more successfully in globalmarkets. There was also the hope that as theregion became less dependant on trade andinvestments from the West, opportunities tostrengthen regional peace, security and stabilitywould increase.16

Well positioned to respond to these changes,by the end of the eighties, the ADB launched itsstrategy for regional economic cooperation anddevelopment. Thus far, this strategy has largelyconsisted of two elements: 1) loans and grants forRegional Technical Assistance (RETA) for project/program feasibility studies, project/program prepara-tion, training of project/program personnel andregional conferences to promote project/programs;and 2) direct loans and co-financing for specificprojects such as dams, roads and telecommunica-tions through programs such as the Greater MekongSubregion (GMS) and the BIMP EAGA.17 Interest-ingly, the original idea of regional growth “polygons”was not entirely an ADB invention, but wasdeveloped by early Asian Tigers such as Singaporeand Malaysia. The ADB subsequently adopted andexpanded the idea to the level of sub-regional“masterplans,” which involve huge financial outlays,technical inputs, management capacity andregulatory frameworks.18 The ADB also reserved foritself the role of a catalyst or third party facilitator ofprivate capital by reducing the risks to investorsthrough co-financing, direct loan guarantees and thefacilitation of government guarantees for returns oninvestments.

The GMS brings together the countries ofMyanmar, the Lao PDR, Thailand, Cambodia,Vietnam and the province of Yunnan in SouthernChina in a masterplan of cooperation on transport,energy, tourism, human resource development,telecommunications, trade and investment, andenvironment projects. A primary attraction of theGMS for planners and investors is the vast and asyet unexploited potential of natural resources in theregion ranging from water, fisheries and forests tocoal, gas and petroleum reserves. The BIMP EAGAbrings together the countries of Brunei, Indonesia,Malaysia and Indonesia (BIMP) in an East ASEANGrowth Area (EAGA). Initiatives under thismasterplan range from policy frameworks tofacilitate cross border movement of goods, capital,technology and labour, and commercial investmentsin agriculture, fisheries, agro-processing, skillsdevelopment, tourism and export orientedmanufacturing. In both cases, the exploitation ofnatural resources are central motifs and theexports of timber, forest resources, rawmaterials and energy have priority.19

The ADB proudly touts the advantages of thesub-regional cooperation models that make themmore attractive to private investors and acceleratebusiness opportunities: lower risks and costs to theinvestors, no discrimination against sources ofcapital (i.e., foreign firms get at least the sameprivileges as domestic firms), no cumbersomenational laws or regulations to hamper investmentopportunities, participating countries agree toessential infrastructure and special policies that aremore liberal than national policies to attract capital,and natural resources are used not to contributetowards national self-sufficiency, but to respond toregional imperatives.20 According to the ADB, theabove will accelerate development through increasedtrade and investment, and since many of theseprograms involve “lagging parts” of national econo-mies, they could “potentially” contribute directly topoverty reduction.21

Keeping the Poor in their PlaceThe ADB claims that it has learned much from

its past efforts about how to address the variousdimensions of poverty. With all the billions spentand parallel debt incurred, someone certainly shouldhave learned something, but what are theselessons? And how have they informed the Bank’sfuture plans?

The model of development promoted andfinanced by the ADB has not reduced poverty in anyabsolute sense. On the contrary, it has served toperpetuate the fiction that poverty can be reduced bythe infusion of large amounts of capital along thelines prescribed by the ADB and other believers inmarket solutions to poverty. As some groups ofpeople succeed in raising their incomes to surviveabove the minimum standard of US$1 a day, moretake their place. And what of those who cross theline anyway? Are they able to exercise their “rightto be reasonably rewarded, as well as have someprotection from external shocks?”22 Recentexperience in the region does not bear this out.

The policy reforms insisted upon by the ADBhave contributed to serious setbacks for the poor inborrowing countries. The withdrawal of the Statefrom the provision of social infrastructure and thedismantling of government subsidies for basicservices have severely constrained the access of thepoor to food, basic education, healthcare andsanitation, and with current policy trends, this willlikely get worse. Privatisation and corporatisation ofstate enterprises have led to the retrenchment ofworkers whose opportunities for re-employment arecurtailed by simultaneous downsizing of otherenterprises in order to keep production streamlined

and efficient. The burden of external debtrepayments and the need to maintain upwardgrowth figures have further restricted govern-ments’ abilities to provide and maintain

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safety nets for the most vulnerable populations.The rush to orient domestic agricultural

production towards export markets, the removal ofpricing controls for agricultural products, and theinfusion of local markets with external goods havereduced the competitiveness and stability of localagricultural producers in their own societies. Theirability to benefit from the so-called “economicvibrancy” of market based production has beenweakened rather than strengthened by deterioratingterms of trade resulting from sudden shifts tounregulated, open markets, and lack of domesticsupports for production and distribution. With risingproduction costs resulting from dependence onexternal (and often costly) agricultural inputs, aswell as new levies and taxes on resources such aswater and land, small farming and fishing families incountries such as Thailand, India, the Philippinesand South Korea have grown deeper in debt and inmany instances, have lost their assets altogether.Rural to urban migration has increased asimpoverished farming and fishing families aredisplaced from traditional occupations.

In a number of Asian countries (India,Bangladesh, Thailand, Cambodia, and the Philip-pines are only some examples), rapid liberalisationof trade and investment, and the obsession witheconomic growth have led to the establishment ofsub-contract factories and sweatshops whereworkers are paid less than the minimum wage andwork 12 to15 hour work-days. It is often to thesefactories that rural migrants and family members ofretrenched workers come to find the employmentthat results from the “pro-poor” economic growththat the ADB promotes. Children drop out ofschool—if they had enrolled to begin with—because their labour is essential for their families tobe able to inch towards that invisible poverty line.Governments withhold increases in minimumwages, workers’ insurance and welfare benefitssince the extra costs of protecting this “humancapital” would make economic growth moreexpensive, thus reducing revenues anddiscouraging investors.

The ADB’s promotion of private sector expan-sion has generated its own special problems. Insupport of public-private partnerships, the ADB hasargued that through the involvement of the privatesector, economic risks can be better distributedamong those who can best absorb them. A win-win situation in which capital deficit governmentscan access resources to build, operate andmaintain infrastructure and production capacitywithout its attendant challenges or risks. But inpractice, the opposite has happened. In order toattract private capital, governments have enteredinto agreements through which economic risks andresponsibility are unevenly borne bygovernments and eventually by the publicthrough levys, taxes, price increases, debt

repayments, etc. The private sector, in most cases,has got away with a disproportionate share of profitsand privileges. Infrastructure projects such as roads,dams, energy production units and waste manage-ment plants have externalised social and environ-mental costs, which again have been transferred ontothe public realm in the form of social, environmentaland long term economic mitigation. The conflictingrole of governments as owners/investors as well asregulators in public-private partnership schemes haveresulted in governmental inability to protect the publicinterest in an effort to recoup investments. In manyinstances (such as energy projects in Thailand,Malaysia, Indonesia, Vietnam, the Lao PDR andPeoples’ Republic of China), land, water and forestrights of local residents have been violated withoutadequate compensation or legal redress.

The sub-regional economic polygons promotedby the ADB are essentially large scale exportprocessing zones, where private companies havedisproportionately more power than the participatinggovernments about the nature and direction ofinvestments. At the heart of these zones are themost coveted resources of the region—land, mineral,coal and natural gas deposits, water, forests and bio-diversity—which offer numerous profits for outsideinvestors and those countries that are economicallypowerful enough to promote and protect their owninterests (A major road project in the East WestCorridor of the GMS that links Vietnam, the Lao PDRand Thailand has already been sharply criticised byLao officials as heaping costs on the Lao PDR whileproviding benefits to Vietnam and Thailand). Thesemodels also widen internal disparities among theparticipating territories, and disrupt nationaleconomic and social cohesion by creating pockets ofhigh capital and infrastructure investment in anotherwise under-serviced region.23

Under the special rules that operate in thesesub-regional economic zones, the rights of localpopulations to natural resources such as land, water,fish and forests have been critically threatened.Customary resource tenure and use systems havebeen frequently over-ridden by governments in favourof privatised ownership leading to decreased food andeconomic security among local communities. Largescale energy projects and clearing of forests forcommercial logging, plantations, roads, mining,industry and commercial agriculture have displacedsubsistence farmers and indigenous communities,usually with little compensation. The Mekong riverbasin is a vast, complex and rich ecological systemthat provides sustenance for millions of people in thesub-region. But under the GMS cooperation pro-gram, natural resources and people are reduced tolittle more than raw materials and cheap, dispens-able labour.

The ADB’s conceptualisation of goodgovernance has and certainly will be good forlarge private interests and national elites who6

will benefit from easy access to natural resourcesand cheap labour, and the transference ofcommercial risks to the public at large. But thisconceptualisation will not address deeply rootedeconomic and social inequities, or support for basichuman rights to resources, safe environments andfreedom of expression, the rights of labour toorganise and negotiate better deals for workers, therights of indigenous peoples to self determination,the rights of peasant farmers to own and protect theland they farm, and the rights of women to a safesocial environment. Good governance will do littlefor the poor, particularly women, as governments areincreasingly unable (and often unwilling) to protectand ensure their rights to decent livelihoods, socialservices and economic security.Admittedly, the ADB is not single-handedly respon-sible for the creation or entrenchment of poverty inthe region. It has had plenty of help from the WorldBank, the IMF and country governments both withinand outside the region. And a lesson that none ofthem seem to have learnt is that the private sector isnot the messiah of development, nor do benefitsnecessarily accrue to all from open, deregulated,private sector led and market based development.The private sector has its role, and an importantone, granted. But without strong public oversightand the counter-veiling power of civil society, such amodel serves to entrench inequity, injustice andpoverty. The Asian economic crisis was a crisis ofgross mismanagement of the private sector, theresult of which has been the transference of privatesector risks and financial burdens on to the public atlarge and increased public debt.One lesson that the ADB seems to have learnt onlytoo well is that it needs the poor as much, if notmore than the poor need the ADB. The magic of themarketplace works best for the magicians them-selves. For the ADB, this magic is contingent onensuring that despite the vast amounts of financialresources that are poured into poverty reductionprograms, there will always be a significant number

of poor in the region.

Shape Up or Ship OutThe true experts on poverty are not the ADB

and their cohorts, but the ordinary people of Asiaand the Pacific who have survived despite main-stream development and poverty reduction pro-grams. Rooted in diverse and complex realities,people in the region have been able to develop theirown ethical, cultural and political solutions toimposed forms of material poverty. They haveattempted to rebuild their social and political fabricthrough solidarity movements, sharing, protectionand re-generation of common resources, andrevival of diverse, traditional forms oflivelihoods. They have argued and showed

through their actions that solutions to modernpoverty lie not in increased consumption of materialriches by a few, but in political, social and economicjustice, and in fair and equitable access to re-sources and knowledge by all.

There is a lot that the ADB can learn aboutpoverty from these other discourses, which are farmore advanced, progressive and sophisticated thanwhat the ADB is capable of producing. But theADB’s commitment to learning is driven by theimperative of institutional immortality, and not by adesire to understand or address the conditions thatcause poverty to begin with. Its reason for exist-ence is to keep itself in business and povertyprovides it with an effective justification.

Unless it can radically restructure its ownideology, principles and practices, the ADB shouldput an end to this expensive pretence that it callspoverty reduction and just let people get on withtheir lives.

* Shalmali Guttal is Coordinator of the Micro-Macro Issues Linking Programme at Focus on theGlobal South, a program of research, analysis andadvocacy based at Chulalonkorn Unviversity inBangkok. She works on development policy issues inSouth East Asia.

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ADB 2000: Senior Officials and InternalDocuments Paint Institution in Confusion

By: Walden Bello*

pines in 1999 to nearly zero—certainly a far cry fromthe $300 to $500 million annual outlay usuallyearmarked for the country.

“Goal Congestion”It is, however, not only scandal that dogs the

ADB but confusion in the ranks. For staff members,the days of funding and implementing physicalinfrastructure projects that could be subjected tonarrow cost-benefit analysis are over. According to asenior staff member who spoke on condition ofanonymity, people in the field are suffering from “goalcongestion,” that is, trying unsuccessfully to inte-grate the various objectives that donor governmentshave attached to lending in the last few years:poverty reduction, social development, sustainabledevelopment, promoting women’s welfare, and goodgovernance. “People are lost and bewildered, andmost have no clue of how to even begin,” he said.

“The problem is very real,” he continued.“You have all these new goals, but the old baggage,the old goals, have not disappeared. You’ve some-how to get ‘women and development’ into the projectdesign, and you get scolded if you don’t know how tosneak it in. The result is incoherence.”

The confusion and failure to integrate goals intoproject and program design is reflected in internalevaluations. Thus the Draft Asian Development FundReport to the Donors states that although povertyreduction has been a central concern and is now the“overarching vision and goal,” “few projects have beendesigned specifically to address this objective.”Moreover, “there has been little lending directlytargetted at women or the environment.”

High Project Failure RatesFailure to integrate stated goals into the so-

called “country operational strategies” (COS) is partof a broader pattern of failure. “Almost all forestryprojects have failed—that is well known within theBank,” noted one official knowledgeable of the Bank’senvironmental projects. Indeed, only 36 per cent ofprojects in the Agriculture and Natural Resources

Sector are rated “generally successful.” Butthis is not as bad as the record in the SocialInfrastructure Sector (33 per cent) and theFinance Sector (15.2 per cent).

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The Asian Development Bank approaches itsYear 2000 meeting in the highland city of ChiangMai, Thailand, fearful of protesters, dogged byscandal, beset with confusion, burdened with anunimpressive record, and with relations with theBretton Woods institutions at an all-time low.

The Bank has quietly abandoned plans tomake Seattle as the site of next year’s meeting,fearful of provoking the same sort of protests thatdid the World Trade Organization (WTO) in. But itcannot do anything about changing this year’svenue, which will certainly be filled with hundreds ofdemonstrators from Thailand and the rest of theregion.

ScandalTrailing the Manila-based Bank to Chiang

Mai is probably the biggest scandal that has hit anADB-supported project: the wholesale bribery ofthe Philippines House of Representatives to pushthrough the privatization of the National PowerCorporation (Napocor). Two representatives ofCongress revealed that they each received 500,000pesos ($12,500) despite their having voted againstthe bill, leading to strong suspicions that themajority that voted for the bill each received agreater payoff.

Critics of the privatization initiative are lookingat a $1 million technical assistance grant from theADB earmarked for lobbying the Philippine govern-ment for privatization of state enterprises as apossible source of funds. This is not preposteroussince the Bank has admitted to investigating 55allegations of corruption involving its staff andexecuting agencies in the Asia Pacific region as ofDecember 1999.

But the main accusation being laid at thedoorstep of the Bank is that its pressure on thegovernment to rush privatization might haveprompted the administration of President JosephEstrada to take short cuts to gather the necessaryvotes. The ADB had conditioned further disburse-ments of its energy loan and an associatedMiyazawa loan to the Philippines on passage of theNapocor privatization bill. Indeed, to pushthrough its whole program of privatization,liberalization, and deregulation, the ADBreduced loan disbursements to the Philip-

While the success rates in the Energy,Industry, and Transportation and CommunicationsSectors are high, an assessment by the Strategyand Policy Department says that across the board,“in most instances…operational performance was farshort of projections.” This was due to “weaknessesin project design, particularly where there was weak

MOF Colony?While the US may be the most vocal when it

comes to promoting new policies from povertyreduction to good governance, it is Japan thatcontrols the institution. “The ADB is an institutionfunded by the Japanese, controlled by the Japa-nese, and run by the Japanese” was the way onecountry representative to the Executive Board put it.Japan in this case means Japan’s Ministry ofFinance (MOF). The Ministry of Finance virtuallydetermines who will be president—the current chiefTadao Chino is a graduate of the MOF—and who fillsthe key position of head of Budget and Staffing.

The MOF’s control of strategy is said to havehad detrimental consequences for innovation for tworeasons. One is ideological: the MOF is probablythe most conservative of Japan’s economicagencies. The other is structural: the chief of theBudget and Staffing Department, for instance, isreplaced every three years by the MOF, “whichmeans the occupant has no incentive to innovateand all the incentive to carry on as usual.”

Ironically, Japanese control of the Bank hasnot resulted in the adoption of the bottom-up,participatory management that Japanese firms arenoted for. Instead, the ADB has reproduced theover-centralized, hierarchic structures of the MOF.Said one senior informant: “The hiring of the lowliestprogrammer for a small project of the Bank must beapproved by the president. And any travel by anyBank staff out of the [the Asia-Pacific] region musthave the personal approval of the president.” Saidanother official: “Hierarchy is everywhere; qualitycontrol is nowhere. This is, let’s face it, a mediocreorganization.”

Proliferating ConditionalitiesDespite its Jurassic characteristics, the Bank

has not been immune to internal pressures andexternal events. For instance, pressure from somedonor countries has pushed the Bank to devotemore of its lending portfolio to program or“adjustment” lending, where loans for individualprojects are made contingent on macroeconomicpolicy changes, like accelerated privatization,deregulation, and liberalization.

However, an internal review of the Bank’sprogram lending dated Nov. 22, 1999, decries the“proliferation of policy conditionalities” in programloans, noting that the average number of condition-alities per program loan is 32! Practically admittingthe failure of the Bank’s conditionality-burdenedprogram lending, the document states that “besidesthe issue of proliferation of conditionalities is the

more basic issue of the efficacy of the policyconditionality approach.”It moves on to list the “shortcomings” of theconditionality approach: “(i) undermining

9

institutional capacity and there were inappropriatepolicies. Implementation of most projects tended tofocus on completion of their physical infrastructurecomponents rather than institutional developmentand support service components and policy re-forms.”

The poor record in agricultural projects reflectsthe fact that the ADB, according to another seniorstaff member who refused to be identified, has beentrying to get out of agriculture lending. The reasonfor this was that assessment of costs and benefitsand project management were not as simple andstraightforward as in energy and infrastructureprograms. The resulting lack of a track record inagriculture poses a major problem, he commented,since “the future of Asia lies in solving the foodsecurity problem, not in providing more and morephysical infrastructure. The Bank may have made astrategic mistake.”

Good Governance: More Hypethan Substance

Among the new considerations that donorswant to bring into lending decisions is “good gover-nance” on the part of the borrower. The ADB pridesitself with being the first multilateral lending agencyto have a Board-approved policy statement on goodgovernance, which it defines as governance markedby “accountability, participation, predictability, andtransparency.” Many Bank staff members are,however, very cynical about the new policy. Saysone senior person, “It’s a question of practising whatyou preach. There’s a lot of discontent inside theBank, precisely because it is one of the most non-accountable, non-participatory, and non-transparentinstitutions around.”

As an example, she pointed to informal rulesthat reserve certain positions to the dominantcountries, in particular the US and Japan. The USspeaks loudest when it comes to good governance,she said, but it considers key positions in the Bank“its private property, and no talk about democracyand transparency will change that.” A good case isthe position the General Counsel of the Bank. TheUS has locked up this position, an attitude that hasbrought it criticism from the Board for “lack oftransparency.” Mindful of criticism, the US last yearpushed to have a US citizen continue to fill the postbut chose a US citizen from Hawaii who has aJapanese name.

ownership by the recipient government; (ii) a ten-dency to compensate for perceived lack of commit-ment/weak administrative, technical, and institution[sic] by increasing the detail and number of condi-tions in adjustment operations; (iii) an incentive forborrowers to exaggerate the difficulty of undertakingreforms; and (iv) partial reform syndrome—reform isacceptably implemented only at the expense ofwatering down the original requirements.”Conditionalities have alienated most client govern-ments. The most controversial has been the case ofMalaysia. After the outbreak of the Asian financialcrisis, the ADB offered to lend to Malaysia, but onlyif that country undertook policy reforms demandedby the IMF. Malaysia refused and followed its ownstrategy to surmount the crisis, which was the exactopposite of the fiscal and monetary repressionpromoted by the IMF. Now that Malaysia hasproven both the IMF and ADB wrong with its suc-cessful effort to bring about a vigorous recovery,ADB officials are wondering if Malaysia will ever

again borrow from the Bank.

Resenting the Fund

The subordination of the ADB’s approach tothe IMF’s overall strategy to deal with the Asianfinancial crisis still rankles within the Bank. Staffmembers resent the way that under IMF pressure,the ADB leadership in 1998 disregarded the usualloan approval process, which usually takes a year,to push through a massive $1 billion loan for Koreain less than a week! This might have been toleratedhad the ADB contribution been part of a programthat succeeded. Yet the IMF’s harsh monetary andfiscal approach merely made the Korean financialcrisis worse in 1998, leading many in the ADB staffand leadership to seriously question the relevance ofthe Fund’s paradigm and the Fund itself as aninstitution.

The ADB’s Japanese elite, in particular, issaid to be particularly resentful of the way the IMF,with US support, killed the Japanese-initiatedproposal to set up an Asian Monetary Fund (AMF)to deal with the crisis in late 1997. Now that theIMF has been proven wrong, there is strong supportfrom within the Bank and its member governments inAsia to revive the AMF proposal, according to asenior official. “And if it is set up,” she noted, “it willbe a Fund that will look into each country’s particu-lar situation instead of applying a standard blueprint

to all countries like the IMF does.”

Competing with the World Bank

If relations with the Fund are bad, theADB’s relations with the World Bank are“fiercely competitive,” says a member of the

Programs Department. It was not always so, sincefor years the World Bank was regarded as somesort of “Big Brother,” whose programs, projects, andorganization were models for the ADB. Whatchanged the relationship was World Bank PresidentJames Wolfensohn’s articulation of the “Comprehen-sive Development Framework,” which ADB officialssaw as an effort to subordinate the ADB and theother regional development banks to the WorldBank, both organizationally and agenda-wise.When Wolfensohn proposed moving the whole EastAsia-Pacific Division of the World Bank to Singaporein 1999, the ADB saw that as an effort on the part ofthe World Bank to marginalize it or make it irrel-evant. From then on, the World Bank has beenperceived as a threat. Which is why, according toseveral staffers, the ADB was cheered by therecommendation of the International FinancialAdvisory Commission (the “Meltzer Commission”)appointed by the US Congress that the World Bankdevolve most of its functions to the regional develop-ment banks.All these developments are creating strong pres-sures from the Asian member countries of the ADBfor the institution to define and structure itself as aninstitution that is really responsive to the needs ofthe region. “One school of thought gaining momen-tum questions whether we really need the US andEurope in the Bank,” said one official. “Unlike theother regional development banks, the ADB derivesthe major part of its resources from the region itself,particularly Japan. The idea is to bring in resourcesfrom Taiwan and China to replace that now contrib-uted by the Americans and Europeans.” Theproblem with this approach, he noted, was theapprehension of some members about Japan’sagenda once the countervailing power of the US andEurope is removed.The region is changing, and the ADB is beingbuffeted by the pressures of change. Will it suc-ceed in adapting itself to the changing needs of thecountries and peoples in the Asian region?Most of the senior staff members interviewed wereskeptical.“The projects will continue to be really traditional inapproach, though there will be the necessary icingof pro-poor rhetoric to get the donors to loosen thepurse-strings,” commented one. Another laughed,saying, “This is really a conservative institution.Asking it to change is like asking Japan’s Ministry

of Finance to change.”

* Walden Bello, PhD, is Professor of Sociologyand Public Administration at the University ofthe Philippines as well as the ExecutiveDirector of Focus on the Global South, aprogram of research, analysis and advocacy10

based at Chulalongkorn University inBangkok. He is the author or co-author of 10books and numerous articles on global andAsian economics and politics.

11

Coopting Cooperation:The Asian Development Bank And

Sub-regional Economic ZonesBy Jenina Joy Chavez-Malaluan*

12

In Asia, subregional economic zones (SREZs)have gained currency as a mode of internationaleconomic cooperation. SREZs represent anattempt by neighbor countries to initiate deepereconomic cooperation at a subregional level, amechanism that has proven expedient whenintegration of entire economies and regions proveslimited and fraught with difficulties. Through SREZsgovernments of neighbor countries work together tomake a particular transnational but contiguousarea, also known as growth polygons24 ,

attractive platforms for enhanced economicactivity. Jointly they design incentives – in the formof policies that are more liberal than nationalpolicies, the coordination of such policies, and theprovision of essential infrastructure – to attractinvestments into the polygons. Particularly, ASEANgovernments have embraced the SREZ concept asa way of promoting regional integration withouthaving to change national trade policies.25 SREZscan also serve as testing grounds for policies thatimply political risk for possible national implementa-tion.26

In Asia, there are close to a dozen growthpolygons in existence, with more triangles beingthought up. Following are some of the more popularones:

(1) South China Triangle which connectsHong Kong, Taipei and Southern China.

(2) Tumen River Delta Triangle whichintegrates the capital and technology of Japan andSouth Korea with the natural resources of NorthernChina, Siberia in Russia and North Korea.

(3) Northern Growth Triangle (now calledthe Indonesia-Malaysia-Thailand or the IMT GT)involving Southern Thailand, northwestern Malaysia,northern Sumatra.

(4) Southern Growth Triangle, also knownas SIJORI links Singapore with the Johor State ofMalaysia, and Riau and West Sumatra of Indone-sia.

(5) BIMP-EAGA Polygon which joinsBrunei; Kalimantan and Sulawesi provinces ofIndonesia; Sabah, Sarawak and Labuan in Malay-sia; and Mindanao and Palawan in the Philippines.

(6) Golden Quadrilateral whichgroups Northern Thailand, Myanmar, Laos,and the Yunnan Province of China. Thispolygon has since evolved into the Greater

Mekong Sub-Region, and now includes Vietnam andCambodia.

(7) South Asia Growth Quadrangle (SAGQ)which involves Bangladesh, Bhutan, India and Nepal.

(8) Central Asian Republics (CARs)Regional Cooperation Program, grouping togetherformer Soviet Central Asian republics of Kazakstan,Kyrgyz Republic, Uzbekistan, and (upon theirmembership in the ADB) Tajikistan andTurkmenistan, and Xinjiang PRC; and the

(9) South Pacific Regional CooperationProgram which groups the Pacific Islands DMCs.

The success of SREZs is said to be contingentupon three related factors27 : a highly developed city(area) that has run out of land and labor, a surround-ing area plentiful in both land and labor, and politicalwill to reduce the visible and invisible barriers separat-ing the city from the other areas. In SIJORI, forexample, Singapore is the land- and labor-scarcecity, and Johor and Riau the complements. Toillustrate the importance of land and labor in thetriangle, consider this: Tourism and real estateprojects accounted for more than half of the over $500million in foreign investments in Batam between 1980and 1990, and nearly all of this originated fromSingapore. Johor is a favored host location for labor-intensive manufacturing investments from Singapore,given its close proximity, land-bridge connection,infrastructure, and long established close historical,cultural and business ties.

SREZs satisfy real needs at the same time thatthey minimize occasions of potential tension. Thedifferent growth triangles have facilitated more opendiscussion and adjustment of economic policies,albeit on a limited scale. This is a necessary step intackling difficult trans-border issues the resolution ofwhich has proven difficult in the past.

Enter the Asian DevelopmentBank

In the 90s the dynamics of growth polygonschanged considerably. Whereas before, a leadeconomy took the challenge of selling the polygon

idea, today multilateral development bankshave come into the picture. The Asian Develop-ment Bank is the most prominent player in thisrespect. It has taken the lead in the masterplan

for three SREZs: the GMS, the IMT GT and theBIMP-EAGA. It has also supported initial studies forthe SAGQ, the CARs, and the Pacific CooperationProgram. The prominent role now being played byADB in determining the direction SREZs takepresents new issues that undermine the integrity ofSREZs as a potential socially relevant developmenttool.

First, while there is agreement even within theADB that “regional cooperation studies are relativelyexpensive and complex”28 , there is little, if at all,attempt to make them more inclusive. Developmentand cooperation are not the exclusive mandate ofthe ADB, or any multilateral institution for thatmatter. It is not something way above the heads oflocal peoples and communities, and local thinkersand activists – a fact that is conspicuously under-recognized in giant development institutions.

The participation of communities and non-government organizations in the drawing up of sub-regional plans is nil. No space is left for them tooccupy in the supporting structures that were set upto implement, monitor and plan SREZ efforts. Issuesraised by communities and NGOs are dealt with,case by case, using different yet still limited ADBpolicies on Cooperation with NGOs, InspectionFunction, and Resettlement.

Second, the ADB’s involvement has producedvery expensive SREZ plans exhibiting glaringimbalance in sector focus. Masterplans ultimatelymake for more ambitious programs and hugefinancial requirements, way beyond the need and thereach of local populations. For the Greater MekongSub-Region, costs figure in the order of (more than)200 billion dollars for energy development alone.29 Inthe Indonesia-Malaysia-Thailand Growth Triangle,immediate projects and policies are laid out, and areexpected to generate $20 billion in business oppor-tunities for private investors.30 Thirteen energyprojects in Central Asia total $12 billion in potentialinvestments. The same trend holds true for theother SREZs.

The seemingly integrated approach to develop-ment facilitation is proving to be little more thanpretensions. Tackling the social sectors in themasterplans is nothing if not matched by equalemphasis in practice. The ADB sticks to its projectfinance, particularly infrastructure and intensiveagriculture, mentality. For the GMS, SAGQ and theCARs focus is on energy development. For BIMP-EAGA and the Pacific, it is transportation.

The heavy slant toward infrastructure demon-strates how very limited the ADB’s idea of sub-regional cooperation is. Certainly, infrastructure isthe biggest need and the peskiest bottleneck inmost sub-regional arrangements ADB supports.While it is true that at least for the three earliermasterplans (IMT-GT, GMS, and BIMP-EAGA)other sectors are given space, in practice mostfunding efforts (and almost all of cofinancing)go to infrastructure.

The continued emphasis on hardware projectscan be explained by an underlying motivation knownas ‘project pushing’. Regional and sub-regionalcooperation programs supported by the ADB dependon its cofinancing activities, done mostly with richmember governments. More than sixty percent ofBank cofinancing in the 1990s was taken up byenergy projects. And since cofinancing is almostalways tied money, the heavy concentration oninfrastructure project indicates similar heavy subsi-dies to domestic industries of contributing countries.Note for example the substantial exposure of Nordicand Australian companies in ADB supportedhydroelectric power generation projects. Closerexamination will reveal that their governments arebig contributors to ADB cofinancing funds.

A graver concern yet is ADB’s record ofsupporting infrastructure projects that performedpoorly in terms of social sensitivity as exemplifiedby resettlement of affected communities under poorconditions (Phnom Pehn to Ho Chi Minh CityHighway Project), sub-standard environmentalimpact assessment (Nam Leuk HydropowerProject), and unmitigated environmental impacts(Theun Hinboun Hydropower Project), all resulting inthe varying degrees of displacement and impoverish-ment of affected communities. Moreover, even with asupposed strict policy against corruption, the ADBnevertheless continues to deal with private entitiesthat were involved in controversial transactions.31

Third, what is being downplayed in all this isthe huge debt expected to be created in the pursuitof SREZ projects. For instance, by ADB’s projec-tion, the realization of the Kyrgyz Republic’s hydro-power potential depends on the Government or anybuyer country ability to shoulder a $3.5 billion debt.Obviously the governments of the participatingcountries do not have enough funds to supportSREZ initiatives. The ADB is there to help thesegovernments attract the funds, a big chunk of whichis being provided through different loan financingschemes.

Another way by which the ADB mobilizesfunds is through the Complementary FinancingScheme (CFS) where commercial banks provide thefunds but the ADB is the lender of record. A bor-rower under the CFS has to pay the ADB a flat feeof $10,000-$30,000 (for public sector borrower) or ½-¾ percent of loan amount or $20,000 minimum (forprivate sector borrower) per loan, and an annualadministration fee of $5,000-$10,000. On top of this,the borrower has to pay the participating commercialfinancial institutions a management fee, underwritingfee and agency fee. Not to mention the debt has tobe repaid too.32

The basic issue is not whether or not govern-ments or private companies should contract debts,

but whether the amount of loan isconsiderably pushed up by less thanjudicious project design. Must SREZ projects13

always be big?Fourth, it is quite clear that the ADB wants to

steer policy direction in the region, getting tiredperhaps of playing second fiddle to more estab-lished institutions like the World Bank and theInternational Monetary Fund. Nothing describes theADB’s move away from merely project financingbetter than its pronouncement that its “influenceover policy and the reform process is more readilyeffective when a loan is being processed” because“when a loan is given, policy and institutional reformwill be included as a substantive component of theloan.”33 The policy piloting role of the ADB isoriented towards the attraction of foreign invest-ments and trade via an enhanced (read: liberalized)policy environment. The ADB’s philosophy thereforefollows the same vein as that of the World Bank’sor the IMF’s. The major difference is that unlike theother two, the ADB has claimed a niche in pushingfor this agenda even at the sub-national level. Thisis possible because SREZs do not necessarilyinvolve whole countries and hence, national policiesneed not be re-oriented immediately, giving rise tofewer conflicts.

Fifth, even as the ADB is positioning itself formore prominent development policy role, it does nothave enough resources to bankroll the different sub-regional initiatives. It had to redefine its role fromdirect fund provision to facilitation, much like actingas a sales manager for the sub-regional programs.

In line with its new role and the belief thatprivate creditors will be most encouraged by lendingto similar private entities, the ADB also enhancedits private sector operations with a new strategy topromote private sector development. This meansmaking sure that “in its public sector projects,business opportunities will be generated for theprivate sector.”34 Heavy reliance is placed oncofinancing and CFS for the ADB’s private sectoroperations. Non-traditional schemes like the BOOT(build-own-operate-transfer) are also vigorouslypromoted, with the ADB providing economic andpolitical risk guarantees to BOOT investors.

The privatization ideology is being extensivelypushed in the SREZs of transition economies inAsia (the Greater Mekong and the Central AsianRepublics). This brings forth apprehensions over theabsorptive capacity and efficacy of the privatesector in the transitioning economies, assumingemphasis is placed on the development of thedomestic private sector. Particularly for the CARs,the ADB encourages fast-track privatization even asthere is admission that the culture of privateenterprise in the sub-region is very weak if notvirtually non-existent.35

Other ConcernsYet it was not just the ADB’s involve-

ment that gave rise to uncertainties in the

SREZ model. Even at the onset, there were alreadyglaring concerns surrounding SREZs.

The first concern has to do with the centralityof hub points that pull the SREZ together. This hubpoint represents either a source of funds and invest-ments or a market for the SREZs’ exports.

The SIJORI triangle is strongest because ofSingapore. In Johor and Batam, more labor-intensiveinvestments were located since 1990, but investorsare mainly Singapore companies (including govern-ment linked companies), Hong Kong and Taiwancompanies, and some multinationals with long-established operations in Singapore. So dominant isthe position of Singapore that the SIJORI triangle istouted to constitute “borrowed economic space” andmay even become a “mega resort” for Singapore.36

The GMS attracts considerable interest be-cause of Thailand as a focal point. For BIMP-EAGA,Brunei and Labuan are being developed as thetransport and financial hubs. We could only expectIndia to be a key factor in the SAGQ. The naturaltendency is that SREZs identify the most advancedareas as the hubs.

The centrality of a hub is problematic becausethe pace of progress in less developed areas of theSREZs is hinged almost undeservedly upon thehubs. Designs of projects/programs are greatlyinfluenced by the hubs’ priorities, and that anyfluctuations in the hubs’ economies and/or internalaffairs affect the programs/projects even if they donot directly involve the hubs. Thailand and the GMS,especially in light of the Asian financial crisis, is acase in point. Thailand is expected to be the mainenergy export destination in the sub-region. Energyprojections for the country have already beendownscaled by more than ten percent, therebyaffecting newly completed energy projects and thosewhich are in the pipeline. The crisis has also effec-tively dimmed the chance of growing Thai invest-ments focused on the Mekong, at least in the short-to medium-term.

A second issue is the centrality of naturalresource exploitation. In SIJORI, it is land andtourism for Singapore. It is also water. Singapore haslong been dependent on Johor for its water supply. In1990-91, Indonesia and Singapore agreed to the jointdevelopment of water resources in Riau.37 Thus saidG. Naidu: “By providing a pretext for an agreementwith Indonesia to obtain water from the Riau islands,the triangle has enabled Singapore to diversify itswater sources.”38

The GMS and the CARs Program are organizedaround the joint exploitation and development of thetwo sub-regions vast energy potentials. The stillnascent SAGQ, whose members agreed to use aproject-based ‘building block’ approach, is startingwork on the possibilities of energy and power link-

ages.The Pacific is targeted for intensive

fisheries development. Both the GMS and the14

BIMP-EAGA gives priority to the export of timberand wood resources. Indeed foreign currencyearnings may prove significant, but net earnings(correcting for the cost to the environment and thepayments made for imported machinery andconsultants, not to mention debt payments) may beway below gross receipts. Unfortunately, main-stream calculation of benefits fails to fully recognizethe cost to the environment and human displace-ment.

The third and most complex issue revolvesaround the distributional conflicts unleashed by theSREZs. These conflicts are experienced betweenpoints in the SREZs, and internally by local popula-tions in areas included in the SREZ.

Uneven distribution of benefits is unavoidableeven if there are no hubs that take primary roles.Distributional conflicts among points of SREZs arebound to happen and affect their position in andsupport to the SREZs. For instance, because of theperceived disparity in the gains within the SIJORI,support from members is uneven. It is strongest inSingapore, and weakest in Malaysia.

The triangle picture also misleads becausethere is no real link between Johor and Riau. Thereis little interaction between the two points, exceptfor an Indonesian proposal to develop tourismfacilities in Johor, and the proposal for Indonesianand Malaysian interests to jointly explore palm oilplantation possibilities in the Indonesian sub-region.Thus, while Singapore is able to overcome itsproblem of resource scarcity by exploiting its linkswith both Johor and Riau, Johor and Riau stillcompete with each other.

Moreover, the influence of Singapore exertsupward pressure on the cost of living in Johor andRiau. This is made possible by the migration ofskilled labor to Singapore, pushing up wages, andthe increase in Singaporean tourists on shoppingtrips to Johor and Riau. Naturally, it is the localpopulace who are most affected.

In the GMS, the entry of Thai and Chinesegoods are big concerns for domestic farmers andproducers. The increase in human traffic and theease in transport facilitated by trans-border roadprojects also exert pressure on prostitution andrelated concerns like the spread of HIV/AIDS.

Internally, growth polygons might widenregional disparities within member territories andreduce national economic integration. They mayalso give rise to political conflict between differentlevels of governments. They can cause conflictsbetween national/federal and provincial/stategovernments over granting of concessions thatmight be at odds with national policies or inimical tothe interests of other states/provinces. Concentra-tion of development on areas included in growthpolygons might also affect the level of publicand private investments that go into these andother areas.

The distribution of costs and benefitsinternally between sub-regions of the polygon viz. thecountry represents a major challenge. For instance,employment gains and income increases may belimited to the sub-regions included in growth poly-gons even as said sub-regions receive inordinatelylarge amounts of public investment from the nationalor federal government.

Rising costs of living and migration also lead toincome disparities within the sub-regions. Slumcommunities develop or grow. Of course, there arealso those who are directly affected by projects andprograms implemented under the growth polygonconcept. This includes people displaced and dislo-cated by energy, plantation or tourism projects.

Lastly, because sub-regional economic zonesimply conferring of benefits and privileges in terms ofpolicy and access to financing, there are validconcerns about the monopolization of economicopportunities by a few interests. For instance inIndonesia, the Salim and Bimantara businessgroups, both closely tied to the Suharto family, havevast interests in the SIJORI, particularly in theBatam duty free zone. The same concern is valid inall the other growth polygons.

ConclusionEven in their simplest form, SREZs are already

faced with many issues that need to be addressed.The ADB’s entry has not made the resolution ofthese issues easier. Instead it has made them evenmore complicated.

As a principle regional economic cooperation isa noteworthy exercise. It is when factors such asdifferential motivations viz. costs, balancing ofstakeholders interests, scope and scale, and controlcome in that the whole picture becomes muddled.

Asia has contributed a lot in developmentthinking. Notwithstanding the late-90s crisis, itsexperience, including the impressive string of miracleeconomies, is an indictment of traditional westerneconomic thinking. There is more to growth anddevelopment than just merely opening up.

The growth polygon concept is yet anotherproduct of Asian ingenuity, albeit also of its fiercecompetitive nature. But when big institutions like theADB enter the picture, with big private investors intow, one gets the uncomfortable feeling that a vehicletoward limited cooperation is being co-opted toblindly serve the paradigm of liberalization,privatization, and big business interest.

* Jenina Joy Chavez-Malaluan is a ResearchAssociate at Focus on the Global South, a program of

research, analysis and advocacy based at

15

Chulalonkorn Unviversity in Bangkok. She works onregional economic initiatives in South East Asia.

16

Why Consumers and Citizens ShouldPull the Plug on the Asian Develop-

ment BankA critique of the ADB’s role in the electricity sector

By: Grainne Ryder*

17

SummaryThe Asian Development Bank should exit from

the electricity business. Without market discipline orpublic oversight, the ADB is a financial and environ-mental menace, providing a breeding ground forelectricity investments that destroy the environment,create poverty, sink Asian citizens in debt, costtaxpayers in donor countries money, and depriveconsumers of cheaper, better generating options.The Bank promotes electricity investments withoutresponsibility by transferring the risks associatedwith electricity investments onto the public sector. Ithas no enforceable standards for promoting soundinvestments because it does not respect the rightsof citizens and consumers.

The Legacy of Electricity AidThe electricity systems that generate and

distribute electricity in much of Southeast Asia are aproduct of three decades of foreign aid. Publicly-funded lending institutions, particularly the AsianDevelopment Bank and the World Bank, teamed upwith governments to finance large centrally-operatedpower plants and transmission networks. Theyadvised governments on the policies, laws, andinstitutions needed to govern electricity production,transmission, electricity prices, on the fuels andtechnologies to develop, and created the monopolypowers and privileged state utilities mandated toprovide cheap and reliable electricity supplies toconsumers, whatever the real costs of generationwere. The conventional economic wisdom at thetime was that governments were best placed toprovide the cheapest and most reliable electricitysupplies to fuel industrialization and stimulate ruraldevelopment.

The world expected that with billions of dollarsworth of aid capital, free technical assistance,training, and policy guidance, these publicly-ownedutilities would be shining examples of sustain-able development, in sound financial shape,providing high-quality service to all consumers,

large and small, urban and rural, using state-of-the-art generating technologies, operating to the highestenvironmental standards, and charging reasonablerates for service. But that is not the case.

Instead, these utilities are debt-ridden, owingbillions of dollars to their international patrons, theAsian Development Bank, the World Bank, and theJapanese government,. and having difficulty servicingthose debts. These utilities have built or madecommitments to billion-dollar power schemes thatconsumers either don’t need, don’t want, or can’tafford. Electricity service, in many places, iscrippled by aging, polluting, and inefficient powerplants. Expansion plans are opposed by localcommunities and environmental groups who objectto environmentally-damaging power projects.Consumers are being hit with rate increases yetthey have no control over the services they pay for,or their source of power and how much they pay forit.

Governments have also allowed state utilitiesto take away people’s resources without consent orfair compensation. Citizens whose health, re-sources, and livelihoods have been harmed ordestroyed by polluting power plants are powerless tohold power producers accountable or liable fordamages. Rural communities are powerless to stopgovernments and utilities from taking their resourceswithout their consent or fair compensation. In thelast decade or so, unable to finance the uneconomicmega-projects they have become famous for,governments in the region have struck secret dealswith Western utilities and companies – extending tothem the same powers and privileges that stateutilities have always had – allowing them access toother people’s resources without local consent, topollute with impunity, and to profit from electricityproduction without taking responsibility for the realcosts and risks of their schemes. Some Asianutilities now allow large or politically connectedconsumers to generate their own power using cleanand small-scale generating technologies that can be

financed and operated independent of thestate-owned system. But millions of ordinaryhousehold consumers, meanwhile, remain

consigned to buy electricity from costly, massive-scale, and polluting coal plants, or large hydrodams that drown land, destroy fisheries, andimpoverish riverine communities. Tens of millions ofpeople still have no electricity service at all.

How did the electricity sector get into such amess, creating private fortunes for some whiledraining public finances and impoverishing others?The Asian Development Bank and the World Bank(MDBs) will tell you that there will always bewinners and losers in development. They will tellyou that past mistakes will be avoided in future.They will tell you that the debt-ridden electricity

should direct funds away from the massive-scalepower projects that governments have long favouredto the new technologies that provide greater benefitsto consumers and the environment.

This assumes that the ADB would do the rightthing if only it received proper guidance about whichtechnologies to support. But the real obstacle toproductive electricity investments is the institutionitself: the ADB is incapable of promoting soundinvestments in the energy sector (or any other sector)because it is not subject to market discipline orpublic oversight. Nor does it respect the rights ofcitizens to decide the fate of resources upon whichthey depend.

The Bank is incapable of evaluating whichpower projects are productive investments becauseits clients externalize costs and fail to respect therights of citizens. For example, the ADB financed an$80 million waste water treatment plant in Thailandthat, if completed, would collect industrial wastewater from factories near Bangkok and releasetreated water into the sea. The ADB and its clientgovernment consider this to be an environmentallyacceptable project while local communities want theproject scrapped because it threatens coastalmangrove forests and hundreds of fishing-basedlivelihoods.

The ADB is a government-run institution thatborrows money on the good faith and credit oftaxpayers in donor nations and lends it to govern-ments in Asia. It is protected from lawsuits and courtinjunctions so there is no way that citizens can stopits activities or seek compensation for damagescaused by projects it has financed. It is not subjectto democratic political controls although its invest-ment decisions are often politically motivated andhave little to do with economic viability. Its appear-ance of profitability comes not from its funding ofsuccessful projects – which is the measure of anycommercial bank’s success – but from the fact thatits loans are guaranteed by governments in the Northwhile its borrowers in the South are propped up by anendless stream of new loans.

Unlike a commercial bank, when an ADBproject fails, the Bank itself suffers no penalty. Itsborrowers, on the other hand, not only have to repaythe project loans but they usually borrow moremoney to do so and also to correct project failures.Taxpayers in the borrowing countries, not only sufferthe consequences of the failed project, but eventuallythey have to pay back all the debts incurred by theirgovernments.

Despite the Bank’s stated commitments to theprinciples of market economies, private enterprise,and competition, the Bank knows monopolies andcronyism best. It dispenses loans and grants togovernments in the South to create friends abroad

and in the North to award contracts to favouredcompanies in order to win votes at home. Theborrowing governments, in turn, used ADBmoney to setup state utilities and a host of

sector is the result of government incompetenceand corruption. They may even tell you that theproblem is Asian culture.

But the problems in the electricity sector aremuch more fundamental and have little to do withAsian culture. Utilities around the world haveexperienced the same problems but it has onlybeen in the last decade or so that consumers andcitizens have begun to understand why and de-mand changes.

The Asian Development Bank isPart of the Problem, Not theSolution

The problem is investment without responsibil-ity. Electric utilities and their international finan-ciers, such as the Asian Development Bank andthe World Bank, are not subject to market disci-pline or public oversight. Unaccountable aid institu-tions have lent money to unaccountable govern-ments that, in turn, have given electric utilitiesextraordinary privileges and powers in the name ofpublic service. The result has been financial andenvironmental wreckage, costly and unreliableelectricity service, and citizens sunk in public debt.

For years, citizens groups and rural communi-ties across Asia have urged the ADB to stopfinancing environmentally damaging power plantsand hydro dams that flood people off their land,create poverty, and destroy people’s resources andlivelihoods. They have demanded that the Banktake its share of responsibility for the damagesinflicted on communities and environments by ADB-backed power producers.

Citizens groups in the Philippines have alsoargued that ADB lending for obsolete and uneco-nomic power projects has discouraged privateinvestment in cleaner, lower-cost generatingtechnologies such as small-scale renewable energysystems (i.e. fuel cells, solar, and biogas systems)that are commercially viable and ideally suited forrural communities and islands (i.e. in Indone-sia, Malaysia, Lao PDR, Philippines, andTibet). They argue that the ADB and othermultilateral development banks (MDBs)

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other state enterprises. So while the ADB champi-ons the private sector, it has more in common withAsian governments operating centrally plannedeconomies than with private enterprises. It knowsnothing of commercial risk-taking, self-reliance,technological innovation or accountability to share-holders. The ADB has promoted electricity invest-ments without responsibility, thus providing abreeding ground for unproductive investments thathave destroyed the environment, victimized ruralcommunities, sunk Asian citizens in debt, and costtaxpayers in donor countries money.

Monopoly PowerThe utilities the Asian Development Bank

financed suffer from the same debilitating condi-tion. Without market discipline or public oversight,utilities across Asia have become bastions ofcronyism and inefficiency. Investment decisionswere driven by central planning and politicalpatronage rather than the needs of ordinarycitizens.

As British energy expert Walt Pattersonwrites, Third World electricity structures “echoedthe political power structure, and the financialimplications were likewise profound. Patronage,influence, and corruption figured significantly instaff appointments, investment, and procurementdecisions, permits, licences and tariffs. Central-station electricity was a potent lever to steerpolitical processes to the advantage of those inpower. In due course the legacy of these begin-nings was to prove crippling.”

Insulated from the scrutiny of credit markets,utilities were able to ignore many of the financialand technical risks associated with the investmentsthey undertook, and borrowed excessively frommultilateral development banks (MDBs), includingthe ADB. Because they did not depend on consum-ers to finance their investment budgets, invest-ment proposals were not subject to local or na-tional scrutiny. With easy access to other people’smoney (foreign aid) and captive customers, theutilities became reckless spenders and borrowers.Those responsible for planning and operating thesystem were insulated from the risks of failure, of ill-advised investments, under-performing technologies,overpriced contracts with suppliers, or systembreakdowns.

Unlike a commercial entity, electric utilitieswere never required to recover costs from consum-ers and they could always count on taxpayers athome or in donor countries to bail them out. Justlike the ADB, if a project failed, the utility and itsproject managers suffered no penalty. Profitabilitywas not determined by successful invest-ments or customer satisfaction but by theability of utilities to capture foreign aid andever larger shares of the state investment

budget.One of the most destructive and discredited

policies upon which all MDB lending for theelectricity sector rested was the idea that sellingelectricity for less than its worth was essential forstimulating economic growth and rural development.Keeping rates below the actual cost of production –as a way of stimulating investment and electricitydemand – has been the undoing of utilities acrossNorth and South America, not just in Asia. Whilegovernments saw this as a way of currying favourwith business cronies and the general electorate, inthe end it thwarted economic efficiency in theelectricity sector and undermined the long-terminterests of citizens. It encouraged wasteful con-sumption of electricity which, in turn, drove updemand for new power plants, thus inflicting moreenvironmental damages upon rural communities.

In the name of providing cheap power,governments conferred on the utilities sweepingpowers of the state which forced costs and risksonto others. They expropriated resources (i.e. land,water) upon which local communities depended,without local consent or compensation. Theydestroyed resources and livelihoods with impunity.

Governments used the state utilities as aone-company industrial strategy, promotingindustrial expansion in certain regions by offeringdiscount electricity or investing in large-scalepower projects to stimulate economic growth andcreate jobs in others. The ADB would finance largecapital-intensive hydro schemes and coal plantsthat provided ‘cheap’ electricity to consumers,often hundreds of kilometers away, but providedlittle or no benefit to local communities. Large orpolitically favoured groups of consumers benefitedfrom this policy while the needs of the politicallyweakest or poorest communities were oftenoverlooked. The combined effect of these powersand privileges has been wasteful electricity con-sumption by some while others went without basicservice, environmental degradation, and over-expansion of supply. For a time, the aid-financedutilities were able to conceal their real costs fromconsumers and taxpayers but inevitably, inefficiencypervaded the utilities and public support for electric-ity monopolies began to crumble.

Utilities in CrisisBy the late 1980s, after a decade of rapid

expansion in many parts of Southeast Asia, stateutilities owed billions of dollars to the MDBs,governments were on the hook because they hadguaranteed the utilities’ borrowings, electricity rateswere not covering costs, and utilities didn’t have the

capital needed to upgrade and maintain theirsystems. The ADB expected the region’selectricity demand to double during the 1990s,requiring an additional 300,000 megawatts –19

equal to about 500 large power plants – at a cost ofroughly $50 billion a year until 2000. China, Malay-sia, Philippines and Thailand all had ambitiousinvestment programs but didn’t have the capitalreserves they needed to finance the projects them-selves, nor were they considered creditworthy bycommercial lenders.

The MDBs, by this time, were worried aboutthe excessive borrowing and spending habits ofstate utilities which put an enormous strain onpublic finances. The specter of utilities across Asiadefaulting on their loan payments loomed large. Atthe same time, the MDBs were under pressure tolaunch privatization in borrowing countries whenexperience in donor countries (i.e., Great Britain andthe United States) was demonstrating that theprivate sector was capable of raising capital forelectricity investments and lowering costs.

The Introduction of PrivatePower

The MDBs began promoting private invest-ment in power plants as a fast way to get newgenerating capacity “when the lights are going out,incumbent power enterprises are financiallyunviable, and the public purse is nearly empty,”according to Karl Jechoutek and Ranjit Lamech,energy finance experts at the World Bank.

A typical private power deal would involve alocal company, usually set up and owned byforeign investors, that would sign a contract withthe host government under which the companywould then agree to finance, build, own andoperate a power project. The host government inreturn would agree to pay or guarantee revenuesto the local company sufficient to repay the capitalcosts and provide a reasonable rate of return to theinvestors. In theory, the government gets themuch-needed power project without having toborrow or drain its own limited foreign currencyreserves to build it.

Private Profit at Public RiskSo advised by the MDBs, state utilities began

licensing private power producers to supply thestate-owned grid while keeping their position asmonopoly buyers of electricity, controlling all sales,deciding which power producers would have accessto the state grid, which fuels and technologies wouldbe used, where, and at what price. To cajole privateinvestment, state utilities accepted certain risks onbehalf of the private power producers supplyingelectricity to the state grid. For example, utilitieswould often assume “demand risk” whichobliged the utilities to pay the private powersuppliers even if the utility had no customersor market for the power produced. The

National Power Corporation of the Philippines, forexample, accepted political risks and foreigncurrency risk on behalf of private power producers,which meant that the state would have to compen-sate private investors if any such problems arose.

By assuming financial risks that privateinvestors would not assume, the utilities underminedthe very reason for introducing private power in thefirst place – to cap public debt and force privatepower producers to take the financial risks insteadof governments. Private power deals that weresupposed to relieve the host country of many of theliabilities associated with financing and buildingpower projects did just the opposite. As projectfinance expert Kent Rowey explained in theFinancial Times, “The reality is that many of therisks of the project remain with the host governmentunder the support contracts they enter into.”

Utilities allowed private power producers toexternalize environmental costs and liabilities,which encouraged investment proposals foroversized power plants that use the cheapestavailable fuel (usually coal). And because utilitiesguaranteed revenues and negotiated deals withoutan open and competitive bidding process, theprivate power producers had little or no incentiveto keep costs down. The first so-called Indepen-dent Power Producers (IPPs) in Asia could markup costs because they didn’t have to worry aboutfinding enough customers to buy their output or therisk that customers would opt for cheaper powerelsewhere. They knew that the state utilities wouldbe there to force their uncompetitively pricedpower onto captive consumers and force otherrisks and costs onto taxpayers and rural communi-ties. Nor did private investors have to worry aboutwinning public approval for their schemes orcontrolling pollution because they were supplyingelectricity to utilities empowered to making deci-sions without public scrutiny or consent.

Under such terms, the response from theprivate sector was overwhelming. Giant state-owned utilities and multinational energy companiesfrom the industrialized countries flocked to theregion in search of new business opportunities.Thailand, Indonesia, and the Philippines quicklyapproved a string of oversized and polluting coal-fired plants, to be developed mostly by Americanand Japanese companies and their local counter-parts.

· Before the region’s economic collapse in1997, the Indonesian utility, PLN, signed 26 over-priced and politically-linked deals with Americanpower companies, including a 4,000 MW coal-firedcomplex on the East Java coast. Most of thesedeals were canceled or shelved indefinitely in thewake of the economic crisis.

· The first private power deal approved byEGAT, Thailand’s utility, was the $1.2 billion1400-MW coal-fired Hin Krut power project to20

be developed by a politically connected Thai com-pany, Union Power, and two major energy compa-nies from Finland and the United States. The privateproponents assumed that the buyer, EGAT, wouldbe able to externalize environmental costs (i.e.,pollution of air and water, destruction of marineresources, and local tourist-based economies). Butthe environmental protests provoked by the projecthave caused delays and made it difficult for thecompanies to attract commercial financing. Accord-ing to Thailand’s National Energy Policy Office,potential investors are also nervous about EGAT’sability to honour its commitments to buy privatepower, given its financial woes and the country’selectricity demand slowdown.

· In the Philippines, the National PowerCorporation, a state-owned utility, approved a 345-MW hydro scheme to be built by a consortium ledby Marubeni of Japan and Sithe Energy of theUnited States. With guaranteed revenues from thestate utility and loans totaling $702 million fromJapan’s Export-Import Bank, developers arepreparing to build the 195-metre high San Roquedam on Luzon Island. If completed, the dam willdestroy the river-based livelihoods of thousands ofindigenous Ibaloi people while generating powerthat is at least twice as expensive as power fromcombined cycle gas plants. The developers haverefused to take responsibility for environmentaland other risks (i.e., drought, siltation, and earth-quakes) that could cause the project to fail.

· After a decade of excessive borrowingfrom MDBs, China approved its first privately-financed power project in 1987, a 700-MW coal-fired project in Guangdong province which wasdeveloped by the Hong Kong-based companyHopewell (now known as Consolidated ElectricPower Asia (CEPA)). CEPA later financed an evenlarger coal-fired plant (1980 MW) in Guangdongprovince for $1.87 billion.

New Generation TechnologyWith few exceptions, the first wave of private

power deals in the early 1990s were for oversized,outmoded, and polluting power plants that theMDBs have traditionally financed. Elsewhere in theworld, wherever competition and private powerproducers have been introduced, big hydro dams,along with nuclear power stations, and big coalplants, are being replaced by a new breed of powerplant: clean and efficient combined cycle gas turbineplants and small-scale renewable energy systems.Technological advances have made it possible toprofitably generate electricity on a smaller scale atlower costs, making the old-style megaprojects andlong-distance transmission lines obsolete anduncompetitive.

Private investors prefer combined cycleplants because an average sized plant (50 to

200 MW) can be installed in under a year forone-third to half the capital cost of a conventionalpower plant. They can be installed close toconsumers so they don’t require additionalinvestments in transmission lines. They burnlow-cost natural gas which produces no smog oracid rain. And they can be easily switched on andoff, generating electricity and heat, depending on thecustomers’ needs.

Some utilities in Asia have granted licenses toindustrial and municipal power consumers with largeelectricity and heat requirements, allowing them totake advantage of this generating technology. Byinstalling and operating their own combined cycleplants (in sizes ranging from 5 to 50 MW, and 100 to200 MW range), sugar mills, pharmaceuticalcompanies, oil companies, and fertilizer factorieshave been able to lower their production costs whilereducing demand on the state-owned grid.

In Thailand, for example, a semi-conductormanufacturer, Alphatech Electronics, set up its ownpower generating company and installed a 210-MWcombined cycle plant that supplies electricity andsteam on-site and to housing and commercialfacilities in the vicinity, and sells its surplus toEGAT. By generating its own electricity, Alphatechexpects to save approximately US$40 million a yearon its electricity bill. The plant also includes agas-fired cooling system to produce chilled bottlewater as a byproduct. (Alpha Power is 20 percentowned by the U.S.-based power company Sight,and it bought the plant technology from France,Japan, and Switzerland.)

The main constraint on these high-efficiency,cost-effective, cleaner power plants are the mo-nopoly utilities themselves. The utilities decide whocan become “self-generators” while licensing othersmall power producers as supplemental suppliers tothe grid. Small power producers are not allowed tobypass the utility and enter into contracts withconsumers directly. In fact, more small-scale powerproducers could be displacing costly and inefficientpower plants (utility-owned and private) if only theywere allowed direct access to consumers.

The ADB knows that private investors prefercombined cycle plants to large hydro schemes. Inits 1995 study of hydropower potential in the six-country Mekong region, the ADB described the firstprivate power deal in the Philippines – a 210-MWcombined cycle plant built and financed by the HongKong-based Hopewell (now CEPA) for $41 millionwithin a twelve month period. Compare that to theADB’s newest hydro dam in Lao PDR, the 210-MWTheun Hinboun project, which was financed by theADB, Nordic state utilities, and Nordic export creditagencies, cost $260 million, and took six years tobuild. As for the payback period, the dam’s develop-

ers are hoping they will break even after 10years of operation (weather permitting).Unlike Hopewell’s plant, the Theun Hinboun21

dam in Lao PDR took almost a decade of planningthat cost the Norwegian government more than $12million worth of aid grants.

The Alternative Electricity Model:Competition in a DecentralizedMarket

If all consumers are to have access to cheaperand better generating technologies, a new institu-tional structure is required. Now that new generatingtechnologies (i.e., combined cycle plants, micro-turbines, fuel cells, and small-scale solar systems)have made decentralized power production commer-cially viable, there is no longer any reason to have amonopoly entity controlling the electricity system.Only the transmission and distribution networks,which are natural monopolies, need a centralcoordinator to maintain grid stability and allow powerproducers access to the grid. Transmission linescan be operated much like a public highway, that is,open to anyone, provided users pay an access fee,and conform to basic rules of the road. In this way, adiversity of power producers can use the grid to sellpower directly to customers or setup small powerplants to supply customers independent of the stategrid.

As the number of self-generating consumersand private power companies offering crediblealternatives increases, the market uncertainty for theutilities’ traditional large-scale power plants in-creases. As such, there is no valid public policyreason to risk public funds in the electricity sectorany longer or to support monopolies in electricitygeneration. This does not mean that governmentsmust give up control of the electricity sector, butrather that the public interest can be more effectivelysafeguarded through regulation than through publicownership. (If governments want to provide assis-tance to low-income or rural consumers for electric-ity services then they should do so by giving them adirect subsidy rather than subsidizing electricityrates and power producers. Deciding whether andhow to protect the poor and provide subsidies tothem should be the responsibility of governmentsnot power producers.)

Peddling an Obsolete ElectricityModel

The institutional alternative for cheaper, cleanerpower is competition in a decentralized market. TheADB knows this. In Vietnam earlier this year, MikeBristol, an ADB project engineer, told the WorldCommission on Dams (partly financed by theADB) that the introduction of combined cycleplants in Thailand, and the growing

availability of low-cost natural gas in the Mekongregion, is driving electricity prices down, leaving hydroschemes less competitive, and a regional transmis-sion grid unnecessary. In other words, the ADB’svision of giant hydro schemes connected by asix-country transmission grid to serve Thailand’selectricity market – a vision the Bank has promotedfor the last decade – no longer makes economicsense now that decentralized power production iscommercially viable.

Bristol also reported that investments in large-scale power plants and long distance transmissionlines are increasingly at risk of becoming stranded –that is, the investment cost is unrecoverable fromratepayers as cheaper and better generating optionsbecome more available in the region. Yet the ADB willcontinue to finance large hydro schemes in theregion, he said, as long as governments want to buildthem.

Shortly after the World Commission on Damsmeeting in Hanoi, the ADB announced an $80 millionloan to the Vietnamese government for its first public-private partnership in dam building. The 260-MW SeSan 3 dam on the Se San river – a Mekong tributaryflowing from Vietnam’s central highlands downthrough Cambodia – is expected to cost $300 million.If completed, Se San 3 will be the second dam onthis river blocking the seasonal migration of dozens offish species that move back and forth between theMekong mainstream, Cambodia’s Great Lake, andother tributaries. Prior to the Se San 3 loan, the ADBprovided a $1.2 million grant to the Vietnamesegovernment for packaging Se San 3 as a “modelproject” and another $150,000 grant for developingprocedures for forced resettlement (“Strengthening ofResettlement Management Capacity in the Ministryof Agriculture and Rural Development”).

In a recent policy announcement, the ADBclaimed that such private-public partnerships “bal-ance development goals with commercial interests.”But the truth is that public-private partnerships aredesigned to protect private investors from the realcosts and risks associated with their schemes. Theydo not serve electricity consumers or citizens wellbecause they are based on monopoly deals betweenstate utilities and private investors that put their owninterests before those of consumers and citizens.The ADB is simply cajoling private capital intouneconomic hydro ventures with uncreditworthygovernments, allowing investors to secure theprofitability of their schemes by forcing costs andrisks onto taxpayers and ratepayers. The ADB isencouraging governments to risk public funds onhydro dams that make for unreliable anduncompetitive power providers.

Creating Moral HazardBy promoting power deals between

governments and the private sector, multilateral22

lenders, such as the ADB, have created a fatalcondition economists call “moral hazard.” The ADBworks with governments and state utilities toconvince private investors to take risks theyotherwise would not – by relieving them of thefinancial and environmental risks associated withtheir schemes. With captive markets, predeterminedrates of returns, prices set by decree, and guaran-teed revenues, private investors were able to takefinancial risks with little fear of a loss. This weakensthe integrity of investment decisions and the scrutinythat contracting parties would otherwise apply toeach other. The ADB encourages private investorsand power producers to proceed with schemes thatare uneconomic because they know that if the utilitycan’t pay for the power, governments would bailoutthe utilities, and the governments would, in turn, bebailed out with loans from the ADB and the WorldBank (called “Public Sector Reform Loans” and“Power Sector Restructuring Loans.”) By protectinginvestors from the risks of doing business, instead ofencouraging effective regulation, the MDBs havereinforced or bankrolled inefficient electricitysystems.

Setting the Rules for SustainableElectricity Investments

After a decade of public-private power debaclesin Asia, energy analysts (at Canada’s Energy ProbeResearch Foundation, China’s Energy ResearchInstitute, the World Energy Council, Britain’s RoyalInstitute of International Affairs, the Bangkok-basedInternational Institute for Energy Conservation, andthe Lawrence Berkeley National Laboratory at theUniversity of California, to name a few) agree that themajority of consumers won’t have access to high-efficiency, low-cost generating technologies andrenewable energy systems until monopolies aredismantled, competition is introduced, and electric-ity markets are designed to safeguard the rights ofconsumers and citizens through open and account-able regulation.

The institutional alternative for cheaper, cleanerpower is competition in a decentralized market. Tothis end, Probe International recommends thefollowing principles for restructuring the electricitysector:

1. Internalize costs and risks2. Dismantle electricity monopolies3. Introduce customer choice4. Enforce property rights5. Establish regulation that is subject to

legislative and judicial review6. Establish public oversight of the electricity

reform process· Internalize costs and risks. Power

producers must be forced to take responsibil-ity for their actions. They must internalize the

health, social, environmental, financial, and politicalcosts and risks associated with their schemes, andnegotiate fair deals for the resources they wish touse. In this way, destructive investments wouldquickly be replaced with productive ones, andeconomies would thrive. The ADB and its clientgovernments do not understand that externalizingcosts is an economically inefficient strategy fordevelopment. They do not believe that citizens areentitled to fair compensation for their losses. If theydid, fair compensation would be built into powerprojects, either making them uneconomic, andtherefore not worth investment, or acceptable tothose who must live with the project’s conse-quences.

· Dismantle electricity monopolies. This isnecessary to allow all power producers fair and openaccess to the state transmission grid and to elimi-nate the government’s conflict of interest position asan investor and a regulator which has preventedeffective regulation of power producers (state andprivate).

· Introduce customer choice. Giving consum-ers direct responsibility for electricity purchases –that is, giving consumers the right to generate theirown power or buy from the supplier of their choice –will improve investment decisions by creatingaccountability between the producers andconsumers. Similarly, the distribution companies ormunicipal utilities that supply electricity to small orhousehold consumers, in urban and rural areas,should be allowed to choose their own supplier.

· Enforce property rights. Citizens needeffective laws that recognize private ownership(individual and community) and uphold propertyrights (i.e. customary rights to land, water, fisheries,and forests). Citizens also need equitable access toa judicial system that will uphold their propertyrights. If property rights were enforced, the onuswould be on hydropower developers to win theapproval of all potential victims rather than onpotential victims to defend themselves againstenvironmental aggressors. Only when citizens havetheir rights to water, land, fisheries, forests, andclean air protected by enforceable laws will powerproject developers be obliged to make fair deals forthe resources they use. Enforcing property rightswould put the onus on project proponents to properlyinternalize costs and win the approval of potentialvictims, or risk court action and higher costs lateron. Property rights holders should have the right tostop a project (i.e., by getting an injunction from acourt) before or after the project has been approved.They should also have the right to sue power produc-ers (public or private) for damages to their health,property, resources, and livelihoods.

· Establish regulation that is subject tolegislative and judicial review. Citizensneed a system of regulation that formalizesand makes public the rights and responsibili-ties of electricity investors, consumers, power

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producers, and the role of the regulator in enforcingthose rights and responsibilities. Citizens need aregulatory body to license power producers, tospecify power producers’ rights and obligations,enforce standards (i.e., for transmission anddistribution service, service quality, operatingcodes, and environmental performance), and toprotect consumers from monopoly pricing. Theregulator should be empowered by law to enforce alicensing procedure to ensure, for example, thatlicence applicants invite all potentially affectedindividuals and communities to voice their opinionsand concerns to the regulator and the proponents.Proponents should have to demonstrate to theregulator that, for example, they have met withpotentially affected individuals and communities todetermine whether or not they were likely toachieve informed local consent or if there wereinsurmountable obstacles to the project (i.e.,opposition from local residents and resource users,refusal from property rights holders to sell theirland, bear other project risks, or to negotiatecompensation).

To ensure that all potential victims are able toobtain justice, the powers of the regulator and thelicensing procedure itself must not override orextinguish citizens’ property rights (individual orcommunal). All rules pertaining to power producersshould, at a minimum, recognize that citizensretain their right to recover full damages in the eventof harm to their resources, property, and livelihoods.With strong property rights, the licensing procedureis likely to proceed smoothly because citizens willknow their interests are protected and that theyhave several avenues for protecting those interests.Once notified, they may let the proponents and theregulator know they do not want to sell their land ornegotiate compensation for other losses and risks.Or they can decide to participate in the licensingprocedure and negotiate a compensation packageto their satisfaction.

Not all citizens will be protected by theregulatory procedures. There may be people whofeel that, even after mitigation and compensation,the power project imposes unacceptable risks onthem. There may be people who are wronglyexcluded from the decision-making process. Theremay also be people who voted for the project but

experience unforeseen – and thus uncompensated –problems with it. Or, problems may arise, conditionsmight change, or unexpected events might occur.The practice of the power producer might deteriorateor the regulator might fail to enforce its own operat-ing and environmental standards. As such, citizensmust have the right to appeal to the courts fordamages. Knowing that citizens are protected bylaw will give licence applicants the incentive theyneed to reach agreement with all affected citizens orface the risk of costly delays, injunctions, andcourt-assessed damages later on.

· Establish public oversight of the electric-ity reform process. Establishing new rules forpower producers, particularly ones that threaten oldvested interests, has proven to be a technically andpolitically demanding task elsewhere in the world. Itrequires good democratic procedures and publicoversight. It requires a well-functioning legal systemthat can uphold contracts and respect the propertyrights of all citizens. And it requires honest andopen government. Such conditions for reform simplydon’t exist in many parts of Asia in part becausegovernments have relied on aid institutions forfinancing and policy direction for so long that theyare unaccustomed to accounting to citizens whenthey set new policy directions.

Certainly, the ADB has no credibility foradvising governments in the region about shaping anopen, accountable, and competitive electricitymarket. It is an institution above the law, it is notpart of any local economies, cultures, or politicalsystems, and it has a track record of settingpolicies and rules that protect private investors andpower producers at the expense of consumers andtaxpayers. An institution that knows no marketdiscipline or public oversight is not well placed topreach to Asian governments or power producersabout such practice.

It is time for the ADB and other aid institutionsto exit the electricity sector so that consumers andcitizens can drive the reform process.

*Grainne Rdyer is the Policy Director of ProbeInternational. She has lived and worked in mainlandSoutheast Asia for several years with a particular focuson water resources and energy. For more informationsee http://www.ProbeInternational.org

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Appendix A: ADB-Financed PowerProjects That Have Created Poverty andDestroyed the Environment

displaced by Nam Ngum are still impoverished,trying to eke out an existence on surroundinghillsides, without access to safe drinking water,schools, and other basic facilities. In the last fiveyears, the ADB has financed construction of twosmaller dams, Nam Song and Nam Leuk, designedto divert water to the depleted Nam Ngum reservoir.

1995 – Masinloc Coal-FiredPower Station, Philippines

The ADB loaned the National Power Corpora-tion $254 million for transmission lines and asecond 300-MW generating unit at Masinloc coal-fired power station. The first unit was financed by theWorld Bank in 1990 despite opposition from localcommunities and environmental groups who fear thatthe project will poison century-old mango orchards,fisheries, and farmland upon which nearby communi-ties depend.

1994 – Theun Hinboun HydroProject, Lao PDR

The ADB loaned $60 million to the state utility,Electricity du Laos, for its 60 percent stake in theTheun Hinboun Power Company which owns andoperates a 210-MW dam for exporting electricity toThailand. The project is 20 percent owned by Nordicutilities, Statkraft and Vattenfall, and 20 percentowned by MDX, a Thai real estate developer. Com-pleted in 1998, the $260 million dam destroyedriverine fisheries in two rivers upon which dozens ofrural communities – or about 6,000 people – de-pended for their livelihoods. The ADB approved thedam contracts which have restricted the powercompany’s obligation to pay for compensation andenvironmental mitigation. Villagers are still waitingfor compensation and environmental mitigationmeasures promised by the power company and theADB.

The ADB’s commitment to defending daminvestors from the real costs of their schemes isevident from its handling of the Theun-Hinbounproject. When citizens’ groups exposed the fact thatthe Theun Hinboun Power Company in Lao PDR had

ignored and underestimated environmentalcosts in order to inflate the company’sprofitability, and failed to provide compensa-tion to people harmed by the company’s

25

1970 - 1999 Mahaweli Hydro andIrrigation Project, Sri Lanka

The ADB and a host of other aid institutionsfinanced the five-dam multi-billion dollar Mahawelihydro and irrigation scheme which displaced andimpoverished 60,000 families since it began in 1970.In 1999, the ADB approved a $250,000 grant to theSri Lankan government for developing “a policyapplicable to involuntary resettlement in public andprivate sector development projects,” based on therationale that past resettlement schemes havefailed. In its description of the proposed grant, theADB notes that the current rate of suicide amongpeople resettled by the Mahaweli scheme is fourtimes higher than the world average.

1998 – Meizhou Wan Coal-FiredPower Plant, Fujian province,China.

The ADB loaned $50 million to the state-ownedFujian Pacific Electric Company for a 720-MW coal-fired project now under construction on theZhongmen Peninsula. Co-financed by French andSpanish export credit agencies, and four commer-cial banks, the project cost $828.5 million. The ADBreports that Meizhou is expected to alleviate chronicpower shortages in Fujian province due to inad-equate investment and an over-dependence onunreliable hydrodams that depend on seasonalrainfall.

1975 –1996 Nam Ngum HydroDam, Lao PDR

The ADB loaned $24 million to Thailand’s stateutility, EGAT, for the transmission line from the NamNgum dam in Lao PDR to Thailand. The bank alsopartly financed construction of the 150-MW NamNgum dam which flooded several hundred squarekilometers of forest, wiped out riverine fish stocks,and opened up the watershed to logging. The bulk ofthe dam’s electricity is sold cheap to Thailandbecause drought and siltation in the dam’sreservoir have reduced the dam’s generatingcapacity by one-third, making it an unreliablesource of power. Dozens of communities

dams, they demanded that the company takeresponsibility for these costs. The ADB respondedwith a warning that efforts to force its client, theTheun Hinboun Power Company, to pay additionalcosts would damage the confidence of foreignlenders and investors in Lao PDR. The ADB alsoinsisted that it is up to the Lao government, not thecompany, to either use its revenues or seek out

1981 – Batang Ai HydropowerProject, Sarawak, Malaysia

The ADB loaned $40.4 million to the SarawakElectricity Supply Corporation, a state-owned utility,for a 108-MW hydro dam. Completed in 1986, theBatang Ai dam displaced 21 Iban longhouse commu-nities, close to 4,000 people. Fourteen years later,many of those people are still waiting for replacementland or cash compensation promised them by theauthorities. Some left without land or enough replace-ment income to survive have left their onceself-sufficient communities to find jobs in Kuching orat industrial sites elsewhere in the country.

1977 – Mae Moh Power Project,Thailand

ADB loaned about $150 million for lignite mineexpansion, transmission lines, and the first generat-ing units at this lignite-fired power station in the1970s. And since 1980, the Bank has loaned EGATanother $390 million for new generating units at MaeMoh, one of the largest point-sources of poisonoussulphur dioxide emissions in Southeast Asia. TheBangkok-based environmental group, TERRA, hasdescribed Mae Moh as “one of the most seriouspublic health disasters in Thailand’s history.” At least42,000 people near the plant suffer chronic respira-tory diseases, breathing problems, and skin disor-ders; livestock regularly fall ill and die; large orchards,vegetable gardens and rice crops wilt from acid rain;streams and waterways are blackened by theemissions as well as by the run-off from the lignitemining operations nearby. In 1996, six villagers fromthe Mao Moh valley died of blood poisoning, sus-pected to be caused by sulphur dioxide emissionsfrom the Mae Moh plant.

References available upon request fromGrainneRyder@nextcity.com

Probe International225 Brunswick AveToronto, Ontario, M5S 2M6 CANADAwww.ProbeInternational.org

26

new aid sources to pay for long-term environmentalcosts. As for the ADB’s responsibility, projectengineer Mike Bristol explained recently in Hanoi,the ADB “is not a social and environmentalagency,” and as such it has “little influence overproject outcomes.”

1994 – Lingjintan Hydro Dam inHunan Province, China

The ADB loaned $116 million to the state-owned Hunan Electric Power Company for a 240-MW hydro dam which is also expected to regulatereleases from the 1,200 MW Wuqiangxi hydroscheme, situated 41 kilometers upstream on theYuanshi river. Still under construction, the dam isexpected to cost $367 million. Displaced 4,060people not compensated. ADB reported last yearthat people are still waiting for compensation.nearby communities were forced by the authoritiesto share their rice land with the people displaced,reducing their rice harvests by half; blocked fishmigrations in the Yuanshui river which could alsoadversely affect fish stocks in Lake Dong Ting;displaced people were promised income fromplantations but it could take five to 20 years beforethe plantations generate any income; people haveless land to produce food and no income to buyfood; people have left the area to find jobs else-where.

1990 – Singkarak HydropowerProject, West Sumatra, Indonesia

The ADB loaned $185.8 million to Indonesia’sstate utility, PLN, for a 175-MW hydro dam.Completed eight years later, the dam devastatedfisheries and fishing communities around theSingkarak lake and Ombilin river, disrupted watersupplies in two river systems. It also opened up theproject area to logging, threatening local wildlifepopulations, including the endangered Sumatrantiger; the dam also wiped out fish stocks anddrastically reduced flows which led to increasedincidence of skin and intestinal sickness, andwaterborne disease.

Philippine Power Scandal IllustratesFlaws in ADB’s Privatisation Strategy

By: Walden Bello*

conditions simply were not there for a cleanprivatisation to take place. Splitting Napocor into afew private oligopolies (“Generating Companies”) inthe climate of uncontrolled crony capitalism thatnow pervades the government-business partnershipunder Estrada was asking for trouble.

The ADB should have heeded its own “Anti-Corruption Policy Memorandum” issued in June1998: “Particular care must be taken in dealing withissues of privatisation…Preliminaryresearch…indicates that, when done properly,privatisation can…help to lower the level of corrup-tion. However, in many countries the privatisationprocess has often been fraught with allegations ofbribery, theft and embezzlement.”

It continued: “To avoid this problem, it iscritical that transparent, unbiased and fully contest-able procedures be utilised in the sale of stateassets. When the sale involves a natural monopoly,it is also important that capable, independentregulatory agencies be established to provideadequate oversight prior to privatisation. Issues ofbest practice involving corporate governance will alsobe an important component of Bank loans and TA[technical assistance] grants addressing issues ofprivatisation, corporatisation and public enterprisemanagement.”

None of the above-mentioned anti-corruptionsafeguards or others were put in place prior topushing the legislation for privatisation.

The Bigger PictureThe corruption surrounding the Napocor

privatisation is, however, merely the tip of theiceberg. According to critics, the whole project wasquestionable from the very start, for a variety ofreasons.

First of all, the planned privatisation was anoverreaction to a conjunctural crisis in the agency’sfinances. Even the ADB admits that Napocor had agood financial management record between 1992and 1997. The current financial crisis is largely aspin-off of the weakening of the peso owing to theAsian financial crisis, which brought about a deterio-ration of the agency’s foreign debt service burdenand a hemorrhage of dollar-denominated payments

to independent power producers (IPPs) thathad been contracted to co-generate electric-ity during the power shortages of the late27

What was supposed to be a milestone in thehistory of privatisation in the Philippines has nowbecome a massive scandal. In mid-April 2000, twoparliamentarians, Etta Rosales and RenatoMagtubo, revealed that after the recent vote by theHouse of Representatives to privatise the NationalPower Corporation (Napocor), their offices receivedan unsolicited contribution of 500,000 pesos($12,500) each.

The two representatives had voted against theprivatisation, leading to speculation that those whovoted for it received much more in payoffs.

The Napocor scandal cannot, however, be seenas simply another case of corrupt politics. It mustbe viewed against the background of the tremendouspressure to privatise the state-owned energy enter-prise coming from external donors, in particular theAsian Development Bank (ADB).

As a condition to the government’s accessinga $300 million energy sector loan from the Bank anda $400 million loan from the Miyazawa Fund, theADB wanted the state energy enterprise privatisedas quickly as possible. The ADB’s Power SectorRestructuring Program document dated Nov. 25,1998, was blunt. Release of the second tranche ofthe loan was contingent on the condition that the“Borrower shall have enacted a law, the OmnibusPower Industry Law, to govern the power industry.”From the ADB’s perspective, the government wasway behind schedule; it had wanted the law passedby June 1999.

Was the ADB Involved?Did the administration of President Joseph

Estrada resort to short-cuts—that is, buying thevotes of Batasan members—to satisfy the ADB?How much did the ADB know about the bribery? Infact, the question must be asked: did ADB staffparticipate in the bribery attempt to clear awayobstacles to its most ambitious program in thePhilippines? This question is by no means prepos-terous since the Bank itself has admitted to investi-gating 55 allegations of corruption involving its staffand executing agencies in the Asia-Pacific region asof December 1999.

Even if the ADB is cleared of direct complicityin the bribery, it cannot be absolved of creatingthe situation that led to what now appears tobe a wholesale effort to buy Congress. The

eighties and early nineties.The IPP contracts, which provided exceed-

ingly good terms to the private sector, had beennegotiated as a “quick fix” to the power crisis bythe preceding administration of President FidelRamos without serious thought as to their long-term financial consequences. Indeed, the ADBplayed a vital role in bringing about reliance on theIPPs; as one internal document boasts that “ADBefforts to support the Philippines install power

initiatives turned out to benefit mainly the big privatepower companies and their large industrial andcommercial consumers.

The fact that this rush to privatisation is built onflimsy data and sketchy analysis is hard to deny. Asone critic noted, with such a shoddy rationale, nowonder it took such a massive bribe to convincelegislators to swallow their hesitations and vote forprivatisation!

What is to be Done?It is ironic that an ADB project is now trapped in

a massive corruption scandal since the agencyprides itself with being the first multilateral develop-ment agency to have a Board-approved policystatement on good governance. The Bank, notes onedocument, “affirms that corrupt and illicit behavior is aserious brake upon the development process. TheBank rejects the argument that corruption’s beneficialeffects outweigh its negative consequences…TheBank welcomes the growing focus upon anti-corrup-tion issues as part of its broader effort to advance theprinciples of transparency, predictability, accountabil-ity, and participation under its governance policy.”

Now is the time for the Asian DevelopmentBank to put its money where its mouth is. It shouldlaunch an immediate investigation of its staff to see ifthey were involved in the bribery of the PhilippineCongress.

It should also immediately signal the Philippinegovernment that passage of the power bill will notguarantee delivery of its loan and the Miyazawa loanowing to the gross violation of the Bank’s anti-corruption policy involved in the payoffs.

But equally important, the ADB should ceasepressuring the Philippine government to secureimmediate passage of the power bill and allowindependent agencies to conduct a more comprehen-sive and thorough investigation of whether or notprivatisation will really benefit Filipino consumers ormerely deliver state assets at fire-sale prices to well-connected local and foreign monopolists.

This is an attitude that the ADB should alsoadopt in its relations with other countries in theregion. For it is becoming clear by now that themedicine of privatisation may oftentimes be moredeadly than the disease of public inefficiency it ismeant to cure.* Walden Bello, PhD, is Professor of Sociology andPublic Administration at the University of thePhilippines as well as the Executive Director of Focuson the Global South, a program of research, analysisand advocacy based at Chulalongkorn University inBangkok. He is the author or co-author of 10 books andnumerous articles on global and Asian economics and

politics.

28

generating capacity through private sector participa-tion have been hugely successful...” Now, amongthe conditions that both the government and theADB accepted in this “hugely successful” effort wasthe IPPs’ demand that a considerable portion offuture payments to them be denominated in foreigncurrency. Not surprisingly, when the peso col-lapsed at the beginning of the Asian financial crisis,Napocor was stuck with skyrocketing debt pay-ments that drove it to the brink of bankruptcy.

Now the Estrada administration is on theverge of making the mistake of administeringanother quick fix to the Philippines’ energy situa-tion—this time, by privatising Napocor and abdicat-ing the right and duty of government to provide anessential service simply in order to pay off onerouscontracts.

Second, the costs of a large part of theplanned privatisation will e borne by the taxpayer.This comes from the very candid ADB loan docu-ment itself: “Two of the biggest problems facingNPC and the Government are how to deal with theNPC’s existing debt and IPP obligations uponprivatisation. The magnitude of NPC’s existing debtis such that it cannot be fully allocated to thecompanies after privatisation.” It goes on to statethat the government’s plan is “to approve a levy onall electricity end-users, which will recover, amongother things, NPC’s stranded debt and abovemarket IPP costs.” In other words a levy on allconsumers to subsidise the sale of NPC assets tothe private sector. It has been estimated that this“universal levy” will amount to 27 to 30 centavos perkilowatt hour until the year 2032.

The third major flaw in the Napocorprivatisation is that, amazingly enough, as the ADBdocument admits, “the impact of the restructuringand privatisation process on electricity consumershas not yet been quantified, nor has the need toretain safety nets to protect the poor and underprivi-leged.” For an agency that is said to be on top ofenergy economics, it is amazing that the ADB didnot prioritize the conduct of such a study prior toproposing the privatisation of Napocor since manyprevious efforts to privatise or deregulate powerended up with the consumer being screwed. InCalifornia and New England in the US, forinstance, residential consumers who wereexpecting to shave 10 per cent from their billswere outraged to discover that deregulation

Banking on Women:

The ADB Policy on Gender and Development Siriporn Skrobanek and Chanida Chanyapate Bamford*

worsened their health and their quality of life ingeneral. The ADB review of the WID policy in 1995prior to the Fourth World Conference on Women inBeijing, however, still recommended that, to improvetheir WID objectives, more careful analysis be madeto ensure that its projects address and respond tothe specific needs of women.

The tell-tale part in the review was theacknowledgement that the shortage of womenprofessional staff and gender specialists in higherpositions in the Bank’s structure was one of theconstraints that prevented the Bank from achievingits WID policy objectives. This shortage is probablythe reason why it took the ADB more years thanother aid agencies to rethink the WID approach andreorient its policy toward gender equity.

The 1998 ADB Policy on Gender and Develop-ment (GAD) stated that the overall lending opera-tions aiming at improving the status of womenseemed modest when seen in the context of theBank’s project classification system. In 1993, 1994and 1996 only one project per year was classifiedwith WID as a primary objective. The policy arguedthat the project system classification does not fullyreflect efforts and resources directed to addressingand mainstreaming gender concerns in Bankactivities.

The key elements of the current ADB Policyon GAD will include gender sensitivity, genderanalysis, gender planning, mainstreaming andagenda setting. To operationalise this policy, theBank’s focus of activities will be to:

· provide assistance to its developing membercountries in the areas of policy support, capacitybuilding, GAD awareness, and formulation andimplementation of policies and programs directed atimproving the status of women;

· facilitate gender analysis of proposedprojects, including program and sector loans, andensure that gender issues are considered at all theappropriate stages of the project cycle, includingidentification, preparation, appraisal, implementationand evaluation;

· promote increased GAD awareness within theBank through training workshops and seminars,development of suitable approaches and staffguidelines to implement the policy on GAD;

· assist its Developing Member Countries(DMCs) to implement commitments made atthe Beijing World Conference on Women;

· explore opportunities to directlyaddress some of the new and emerging29

The Asian Development Bank is definitely alate-comer in the area of gender. The Bank onlycame out with a Policy on Gender and Development(GAD) last year, in 1998, to replace its Policy on theRole of Women in Development (WID), which hadbeen in operation for 10 years since 1985 . TheBank actually admitted in 1995 that theoperationalisation of its WID policy and strategicdevelopment objectives in 45 Bank projects inagriculture, education, population, health andsanitation, and industry that were under reviewneeded substantial improvement. Can we expectthe new GAD policy to make a difference?

In 1985, the year that the Third World Confer-ence on Women was held in Nairobi, the ADB firstadopted a Policy on the Role of Women in Develop-ment (WID). It was principally aimed at supportingprojects that would directly benefit women orfacilitate their participation in development, while atthe same time promoting WID awareness among itsstaff. In 1992, WID was included as one of theBank’s five strategic development objectives along-side economic growth, poverty reduction and humandevelopment, including population planning, andsound management of natural resources and theenvironment.

Between 1992 and 1996, the Bank approved 22advisory technical assistance grants and 10 regionaltechnical assistance grants focussed exclusively onwomen and 33 project preparatory technical assis-tance grants for projects that substantially ad-dressed women’s concerns. Technical assistancegrants have been provided for capacity and institu-tional building of the national machinery for women’saffairs to many countries such as Cambodia,Indonesia, Pakistan, Fiji and Papua New Guinea. Anumber of loan projects have included the improve-ment of women’s health, education and economicstatus as their principal objectives. But like otheraid agencies, the ADB’s WID approach was toimplement a range of activities within its regularoperational programme that emphasized women asa special target group.

It seems that the ADB had missed out on thedebates concerning the appropriateness of the WIDapproach that was occurring in the early 1990’s.Particularly, it became known at that time thatintegrating women into the economy through incomegenerating activities, which was what multilat-eral development banks such as the ADB setout to do, not only did nothing to changewomen’s economic and social status but also

issues for women in the Asia Pacific Rregion.Operational approaches of the GAD policy will

be in two areas: macroeconomic and sector work,and loans and technical assistance. To ensuremainstreaming of gender cconsiderations, acountry briefing paper on women will be preparedas a background document to the country opera-tional strategy study and the country assistanceplans will specify the means by which the Bank’soperational program will address and support thegender strategy. The Bank’s loan and technicalassistance operations will actively promote genderissues.

To achieve the Bank’s policy on GAD, theBank will establish an umbrella regional technicalassistance through which small GAD initiatives ofthe Bank and those of governments and non-government organizations can be funded on a grantbasis. Further the Bank will have two genderspecialists to assist in the operation of GAD policy.The Bank also prepares a manual on GAD toprovide guidelines for staff and consultants inimplementing the policy and designing projectsaddressing GAD. External fora on gender similarto the one of World Bank will be established toenable the Bank to maintain dialogues with externalgroups including NGOs.

The Bank’s concern for women stems fromthe belief that investing in women yields economicbenefits either directly, through increased participa-tion of women in the formal work-force, or indirectlyby women’s contributions to “social capital forma-tion.” For example it argues that investing inwomen’s health has positive impacts on reducingthe country’s population growth, improving thehealth and welfare of children and families; andinvesting in the education of girls will benefit notonly the girls themselves, but also society at large.However, according to the Bank Policy paper onGAD, the allocation of Bank’s resources to improvethe status of women and girl children in the pastdecade is limited. Further the Bank’s structure,size and scale of loans make it difficult to achievegender equity. Rather than redesigning the funda-mental structure and operations of its programmesto address the root causes of women’s inequalities,the ADB has chosen to add on an umbrella regionaltechnical assistance facility to further GAD objec-tives since it has the potential to provide the Bankwith large social returns for a minimal investment.

It might be too early to offer a comprehensivecritique on the ADB’s GAD policy since it was onlyrecently formulated in 1998. Nonetheless, a fewpoints can be made about the policy using theThailand Country Assistance Programme (CAP)from 1999-2001 as a case study. In the section onGender Dimensions of Bank Operations in theThailand CAP, a “gender equity” concern is toimprove the competitiveness of women in thejob market particularly in government service

or managerial positions and as entrepreneurs/employers. It also states that gender equity con-cerns will be a major focus of operations in thesocial sector programme, which has educationcomponents.

The Social Sector programme is financed by aUS$ 500 million loan and used to support initiativesin three main areas: education and humanresources development, health, labour and socialwelfare. Eight projects have been approved in April1999 for a total of four billion baht. Ninety-six percent of the total loan is allocated to four projects:assistance to students, voluntary health cardscheme, employment of new graduates in villagecrisis centers and new theory agriculture. However,efforts to strengthen the skills of workers in theinformal sector, eighty per cent of who are women,receives only 0.5 per cent (15.09 million baht) of thetotal loan.

The asymmetrical distribution of money amongthe different elements of the loan and the lack ofoperational guidelines to ensure that women benefitproportionately from the loan raises the questionwhether the gender concerns stated in the ThailandCAP and the overall GAD policy can be through theSocial Sector Loan. Further, it is questionablewhether training by itself can enhance the vulnerableposition of women workers in the informal sectorwho have no labour protection or social security.

Perhaps the most fundamental flaw in theADB’s gender and development strategy is theunderlying assumptions of the strategy. Genderinequalities have social, economic and politicalhistories which need to be addressed as much as, ifnot more than, the lack of basic needs such as jobskills and healthcare. How does the ADB proposeto increase the “competitiveness of women in the jobmarket” when the market itself discriminates againstwomen? For that matter, how many women havebeen “competitive” enough to occupy senior decisionmaking positions in the ADB itself (and genderspecialists do not count)? And finally, the ADB’sGAD policy will definitely not lead to an improvementin the status of women as long as the Bank remainsblind to the manner in which its own loans entrenchand perpetuate long standing inequalities amongwomen and men.

*Siriporn Skrobanek is the founder of theFoundation for Women, Thailand and the GlobalAlliance Against Trafficking in Women. She hasbeen a leading organiser and advocate for the rightsof women and social and political justice for over 20years.

*Chanida Chanyapate Bamford: is a SeniorAssociate at Focus on the Global South, a programof research, analysis and advocacy based at

Chulalongkorn University in Bangkok. Shecoordinates Focus’ Thailand program and hasmany years experience in social development30

with a particular focus on gender.

1131

A Critique of The ADB Private Sector

Development Strategy39

By: Nurina Widagdo*

implementation of the recently approved privatesector development strategy will further enhance theBank’s capacity to facilitate private sector develop-ment through a range of means including: support forgood governance and financial sector reform, theopening up new business opportunities, labor marketreform, support for small and medium enterprisedevelopment and regional cooperation.

There is nothing wrong with the ADB playing arole in strengthening the private sector. However,there are at least two critical areas of concern withthe private sector development strategy. First, theassumed beneficial link between private sectordevelopment and poverty reduction. This is particu-larly important as the ADB – together with otherMDBs – claims that poverty reduction is itsoverarching goal and raison d’être. Second, prob-lems with transparency, accountability and participa-tion that must be addressed in all of the ADB’soperations and practices, including its work with theprivate sector. These issues are extremely importantas the ADB assumes the private sector will be anincreasingly important “pillar of development”

The Private Sector and PovertyAlleviation

The Asian financial crisis resulted in shortagesof financial resources, increased poverty and gravesocial and environmental impacts for the hardest hitcountries. While the majority of analysts identifiedprivate sector speculation as the trigger for the crisis,there are also underlying problems in the publicsector such as corruption, market distortions, weakregulatory frameworks and poor enforcement in thedomestic financial market and weak governance thatdiscourage private sector growth and sustainability.As a result, the financially deprived, crisis-hit govern-ments are being advised by the IMF, World Bank andthe ADB to turn to the private sector to lead eco-nomic development.

For the private sector to assume new or biggerroles in economic recovery and development, thereneeds to be some adjustment and improvement inthe private sector environment at the national level.The ADB, together with other international financial

institutions, believes that poverty can only besolved when there is a strong economy withhigh growth rates, which in turn can only be32

BackgroundOn March 30, 2000, the Asian Development

Bank (ADB) released a new private sector develop-ment strategy. The Bank claims that the strategywill strengthen the role of the private sector as theengine of growth in Asia. According to the ADB,the strategy aims at promoting the Bank’s role inhelping member governments create enablingconditions for business through its public sectoroperations. It further claims that the strategy willalso guide the Bank to ensure that its public sectoractivities do not crowd out the private sector;instead, the Bank will take all possible steps toopen up and increase opportunities for privatesector participation. Through the strategy, theBank intends to continue to catalyze privateinvestments by the provision of direct financialassistance to private sector projects that have cleardevelopment impacts and/or demonstrable effects.From the perspetive of private investors, thiscatalyzing role is particularly important because theADB’s presence is seen as a “source of comfort”by other lenders and investors.

The facilitation of the private sector by themultilateral development banks (MDBs)40 is nothingnew. The World Bank has been involved in privatesector promotion through two of its arms for manyyears: its private investment agency, the Interna-tional Finance Corporation (IFC), since 1956 and itspolitical risk guarantee agency, the MultilateralInvestment Guarantee Agency (MIGA), since 1988.The ADB has invested in private sector projects forabout two decades. The MDBs’ investments inprivate sector projects have been widely criticisedfor their lack of direct, measurable benefits ondevelopment and poverty reduction, as well asproblems with adverse social and environmentalimpacts.

What is new in the MDB - private sectorrelationship is the increasing importance of MDBprivate sector facilitation. The most critical rolesplayed by the MDBs are in restructuring countrypolicy and facilitating greater private sector partici-pation rather than the actual financing of privatesector projects. In addition to committing their ownfunds to private sector projects, the MDBs mobiliseand provide guarantees for other privatefinancing, and sometimes bail-out problem-atic loans to secure further investment. The

achieved when there is a strong private sector. TheBank’s Poverty Reduction Strategy argues that theprivate sector can play a key role in pro-poor growth.According to the Bank, the private sector cangenerate employment and income, which, in turn,addresses poverty indirectly. However, there areexamples in many countries where despite signifi-cant private sector growth and employment genera-tion, poverty remains and in some cases worsens.In addition, the benefits of economic growth do notnecessarily trickle down to the poor. Economicgrowth does not necessarily lead to a more equi-table distribution of income and assets in theabsence of specific measures addressing equityissues.

The ADB is also promoting the direct involve-ment of the private sector in a number of sectorse.g. in the provision of physical and social infrastruc-ture and the provision of basic services that willbenefit the poor. In the past, ADB private sectoroperations have been concentrated in capital-intensive areas, particularly telecommunications,power generation and chemicals. In contrast, thenew strategy puts an emphasis on small andmedium enterprise (SME) development and cata-lyzing private sector involvement through public-private partnership in traditionally non-economicallyviable sectors such as education, health and basicservices.

The ADB’s vision of fostering pro-poor growththrough the private sector necessitates the promo-tion of economic activity that responds directly tothe needs of the most disadvantaged sections ofsociety. Unfortunately, the strategy does not elabo-rate on how each component will address the overallobjective of sustainable poverty alleviation, nor doesit detail how the Bank will identify and prioritizethose areas where the linkage between privatesector development and poverty reduction is stron-gest. There should be, for example, a screeningmechanism to ensure that ADB-facilitated policyreforms or funded projects contribute to environmen-tal, social, and poverty reduction goals rather thenthe current narrow focus on mitigation. This in-cludes, for example, identifying how poor ormarginalised communities can gain access to andbenefit from commercially viable projects. The ADBwill also need to develop more rigorous means ofassessing the environmental and social impact ofprivate sector programs.

Transparency, Accountability andParticipation

In spite of business concerns about confidenti-ality in a competitive commercial environment,the enhancement of private sector involvementin areas traditionally occupied by the publicsector should not reduce public transparency

and participation. Private sector projects should, ata minimum, comply with the same standards asADB-supported public sector projects. This in-cludes compliance with Bank policies on informationdisclosure, participation, and impact assessment.In addition, the ADB will need to develop privatesector-specific safeguards as its portfolio andoperations shift toward enhancing private sectorinvestment. For example, the ADB will need todevelop policies covering the assessment andmitigation of the environmental, labor and socialimpacts of ADB-mandated or supported privatisationand sectoral adjustment programs.

The ADB does not discuss the issue ofaccountability in its private sector developmentstrategy. When responsibility for the provision ofgoods and services shifts from the public to theprivate sector then it is important that the privateprovider’s accountability to the recipients of thosegoods and services is maintained or strengthened.In cases where the private sector will take over themanagement of a sector from the government, thenit is necessary to establish a regulatory body withclearly defined authority and clear lines of account-ability.

ConclusionThe implementation of the private sector

development strategy may benefit a country andparticularly the poor if the changes mentioned aboveare made and if certain conditions are met. Theseconditions include:

· The strategy builds on a detailed analysis ofthe determinants of poverty and marginalisation ineach country or region, identifies specific pro-poorinterventions which add value to existing povertyalleviation efforts and is integrated in a broad baseddevelopment strategy in which the private sectorplays an important but not necessarily the predomi-nant role in poverty reduction.

· The development and implementation ofredistributive measures which enhance equity andprevent concentrations of power, wealth, and deci-sion making.

· Enhanced monitoring of and participation inprivate sector development by civil society andenhanced oversight by parliaments. This is particu-larly important in terms of increasing accountability,promoting equity, ensuring environmental protectionand minimising adverse social impacts.

· Ownership of the strategy by borrowingcountries. The successful implementation of thestrategy will depend on effective action againstcorruption and enhanced support for good gover-nance and strengthening institutional capacity. This

cannot occur if governments and citizens feelthat the strategy is being imposed by externalactors. As a result, the ADB needs to build abroad-based constituency in support of the33

strategy. This may prove difficult because govern-ments, the private sector and citizen groups do notnecessarily share the same interests nor do theyperceive the role of the ADB in the same way.

34

* Nurina Widagdo works with the Bank Informa-tion Center (BIC), an independent, non-profit, non-governmental organisation that provides information andstrategic support to NGOs and social movementsthroughout the world on the projects, policies andpractices of the multilateral development banks (MDBs).BIC advocates for greater transparency, accountabilityand citizen participation at the MDBs. BIC is not affiliated

with any of the MDBs.

ADB PRIVATE SECTOR OPERATIONS IN THAILANDThe Asian Development Bank (ADB) has a relatively small amount of private sector investment in

Thailand. As of October 31, 1999, the ADB has approved $56.98 million for direct financial support for sevenprivate sector projects, compared to a total of $5.3 billion for 80 public sector projects in Thailand. Aboutone-third of the private sector investment was provided in equity and two-thirds in the form of loans withoutGovernment guarantees.

Recipients of ADB private sector loans in Thailand in the past include:1990: Thai Farmers Bank ($2 million)1990: Bangkok Expressway Co. Ltd. ($40 million)1993: Thai Petroleum Pipeline Co. Ltd. ($50 million)1993: Thai Rating and Information Services Co. Ltd. ($0.20 million)1994: Bangkok Expressway Co. Ltd. ($7.10 million)However, ADB’s support to the private sector development in Thailand is more influential than just its

direct financing. Through a number of public sector project and program loans, the ADB has influenced theGovernment’s policies and institutions to provide an environment conducive to opportunities for the privatesector. For instance, the recent Agriculture Sector Program Loan ($250 million) covers key reforms in theareas of agricultural research and extension, natural resource management, rural micro-finance, cropdiversification, pricing and subsidies, and market reforms. These ADB-mandated agricultural reforms havedirect effects – positive and negative - on farmers and agriculture-related small, medium, and large privatesector entities in Thailand. ADB loans for the Financial Markets Reform Program ($300 million, approved inDecember 1997) and Export Financing Facility ($50 million, approved in March 1998) are other examples ofpublic sector loans that facilitate private sector development.

The ADB’s Private Sector Group (PSG) is now looking at more possibilities to support the privatesector in Thailand. The PSG is proposing a $25 million Small Investment and Restructuring Fund (SIRF) toprovide a vehicle to mobilize financial assistance in the form of equity capital and advisory services for thesmall and medium enterprise sector, and expedite the corporate restructuring process. They also plan tosupport Thailand’s private sector power projects, private banks, wastewater treatment and solid wastemanagement in 2000-2002.

Source: ADB Country Assistance Plan (2000-2002). Thailand. December 1999.

35

Multilateral Development Banks (MDB)Campaign

By: Antonio B. Quizon*

What are the Multilateral Develop-ment Banks?A. Brief History

YEAR EVENTS1944 Bretton Woods Conference gives birthto the “twin sisters”:

· IBRD: for post-war reconstruction· IMF: for global monetary stability1950s Priority shifts from “reconstruction to “develop-

ment”; lending to developing countries;1950s-60s Regional Banks are formed1970s Oil crisis; rising debt issues, start of structural

adjustment programs (SAPs)1990 End of Cold War; rise of market liberalization;

privatization90’s & beyond What next?

B. Who are the MDBs?World Bank Group: the “five fingers” Re-

gional Banksa) International bank for Reconstruction &

Development (IBRD, 1944)* a) In-ter-American Development Bank (IADB, 1959)

b) International Development Association (IDA,1960)* b) African Development Bank(AfDB, 1964)

c) International Finance Corporation (IFC, 1956)c) Asian Development Bank (ADB, 1966)

d) International Center for Settlement of Invest-ment Disputes (ICSID, 1966) d) Eu-ropean Bank for Reconstruction and Develop-ment (EBRD, 1990)

e) Multilateral Investment Guarantee Agency(MIGA, 1988).

* What is commonly called the “WorldBank” refers only to both IBRD and IDA.C. The Bigger Picture: The “triple alli-ance”

1) World Bank2) International Monetary Fund3) World Trade Organization

Why do we advocate with theMDBs?

A. They are public institutions1) Use of taxpayers’ money

2) Accountability questions- Tax free operations- Immunity from suits and liabilities- Financial liability only to governments &

financial corporations, no legal recourse foraffected communities.

3) They are outside the United Nation’s LegalSystem

4) Lack of information accessB. They are global financial powers1) Comparative picture:- WB: 50 years; $300B; 6,000 projects- ADB: 27 years; $50B; 1,300 projects2) Influence and control over development

priorities3) Public funds for private investmentsC. They are instruments of North-South domina-

tion1) Control: 1992: 70% of global GDP ($12 trillion

out of global $17 trillion) controlled by 7countries

2) Issues of “tied aid”- Conditionalities- Procurement- Opening new marketsD. They impact on poor communities1) 800,000 displaced in Indian sub-continent

(WB study)2) numerous examples of social and environmen-

tal impacts.E. They increase long term debt of poor coun-

tries1) “Subsidy for the Rich”? Since 1987, there has

been a reverse flow of resources, from Southto North

2) Costs: impact on environmental damage,cheap labor

3) Who really pays? All of us. Our children.

What are the characteristics

36

of the MDBs?

A closer look at the Asian Devel-opment Bank (ADB)A. In the beginning: MDBs were created by

governments1) Role of UN ECAFE (ESCAP), 19662) Entry of non-regional (non-Asian) mem-

bers3) Public funds: initial capitalization4) 1960s ADB created to fund rural develop-

ment, rather than industryB. Legal Status of ADB1) Immune from suits and damages (ADB

Charter)2) Exempted from taxes & customs duties3) Status of “international civil servants”C. Capital Structure: Where do ADB funds come

from?1) Ordinary Capital Resources (OCR): $54.2Ba) paid in capital : $3.3B (10%)b) callable capital : $35.2B (90%)2) Special Fundsa) Asian Development Fund (ADF)b) Technical Assistant Fund (TASF)c) Japan Special Fund (JSF)3) Co-financing with private sector funds & gov’t.:- Ratio: 1 : 1.5D. Governance and voting structure: who’s the

real boss?1) ADB is run like a corporation2) Voting is according to subscribed capital

shares- “shares of stock”, not ‘one-nation, one-vote”- Japan: 16% ; US 16%- 18 developed countries: 59.8 %3) How the 12 members of the Board of Directors

are elected- according to voting shares- geo-politics plays a role- automatic seats: Japan, US Australia, India,

China, Europe (2 seats)4) Annual Board of Governors: a meeting of

stockholders

Three Beginnings of the ADBCampaignA. EnvironmentalismB. Development work of middle-class NGOsC. People’s own struggles against displacement- 1970s : Struggle against mega-projects eg:

Polonoestre Project, Brazil, Chico RiverBasin, Philippines, Bataan NuclearPower Plant, Philippines

The ADB CampaignA. How we began in 1988

- “Debt-for-nature” swap through ADBs smallEnvironment Unit

- ADB commissioned ANGOC to prepare 8country studies and 2 regional studies, the purposeof which was to seek NGO inputs for implementingthe policy framework on ADB-NGO relations in thefield of NGO institutional strengthening on environ-ment and natural resource managementB. What issues we raised (see attached sheet,

1989-95)C. Our approach - the five areas of our campaign:1) NGO participation in ADB Annual Meetings;

bringing stakeholders to confront stockhold-ers;

2) Ongoing dialogues with ADB officials; interveningin ADB policy;

3) Regular information: building public awareness4) Networking: building a public constituency5) Policy researches & case studies: sharpening

the debateD. The impact of the campaign?1) Shifts in Bank-wide lending priorities: 50-50

project mix for review2) Debt and structural adjustments (no gains

made);- Stronger Social and environmental Impact

Assessment guidelines, but still weak socialassessments framework;

- Policy on access to information, but fundamentalframework and application still very weak

3) Policy on participation but little experience withinADB

4) Creation of an Inspection Function5) Bank initiative on “Improving Project Quality”6) Conditionalities attached to the General Capital

Increase, 1994- Seven Sectoral Policies (women in development,

energy, agriculture, forestry, involuntary resettle-ment, indigenous peoples, population)

7) Bank-NGO relations: definite improvements

37

Concerns raised by NGOs during the seven-year campign (1989-1995)

38

Some practical lessons from ex-perience

· Give primacy to local communities on-the-ground.

· Build a movement, not an organization.· Include everyone who wants to work.· Focus on Annual Meetings.· Have a clear message. Develop communica-

tion skills.· Don’t sing to the converted· Find natural allies within the Bank· Use information, but respect and protect

confidential sources· Keep a broader view· Involve the affected communities in the

debates.· Money talks.· Use governments. Borrow political space.· Combine a hard and soft approach, when

needed.· Understand the system.· Present concrete demands, not just com-

plaints.· Always put everything down in writing.

The ongoing debate: should wework to “abolish” or “reform”the MDBs?

The debate is likely to continue for somemore time, and is not likely to be permanentlyresolved even among those of us already involved inthe ADB campaign. There are arguments of howrealistic the prospects are on both sides.

In the course of our interventions, we havelearned much in particular about how the systemworks. In the process, we have also realized how inthe light of the rapidly changing global economyand institutions, we must find additional means andstrategies for empowerment, especially whenconfronted by “faceless” institutions. And althoughwe have shared some of our lessons here, we areall really just beginning.

Practical Tips for Negotiationswith Bank Officials

Note: Corporate cultures are a world apartfrom NGOs. And Bank negotiations usually centernot only on “ideas” but also on underlying issues of“power” relations. Here are some practical tipswhich I’ve found useful, based on personal experi-ence. The intention here is not to teach “one-upmanship”, but to help NGOs put theirmessage across, and to get their desiredresponses in meeting.

Dress Up. It is part of corporate culture. Dress-ing up will help you avoid unnecessary hassles likebeing stopped by security personnel or being deniedappointments by over-protective bank staff. Unlessthis is precisely the point you’d like to raise, accessto officials should the least of your worries.

Set-up Appointments. Be kind to secretaries.They also serve as gatekeepers and confidants.Leave them your calling card or contact address andphone. The boss will likely forget; but secretarieswon’t. In any case, always be ready for “walk-in”meetings or “corridor-lobbying” Give room for sponta-neity. Small informal meetings over lunch or coffeebreaks are best, because you will have the officialsundivided attention.

Come early for Appointments. It makes thestrongest first impression. While waiting review yournotes. Keep busy.

Talk about the right issue to the rightperson. Know who in the Bank is in charge of what,whom you should talk to. No use wasting eachother’s time. If the Bank official just sends his juniorrepresentative, or if you find out that you are talkingto the wrong person, just state your message, cutyour meeting short, and then leave.

Be clear about your specific purpose, andplan your message well. Are you: searching forinformation? Protesting a Bank project? Proposing anaction plan?

Know how much meeting time you have inadvance, and the official you are speaking to. If youare in a group, role-play who will speak first, and act-out what each one will say. Better still prepare apage-written summary of your message, which youcan leave behind after the meeting.

Try to emphasize just one central message.Busy bank officials are likely to forget all the details.Introduce yourself and what/whom you represent.Clearly state your purpose, what your issues are, andwhat you would like the Bank to do.

Know your facts. Bank officials are likely tojump on the smallest wrong detail or statistic yougive, and to wrestle you to the ground on this. If youmake a mistake, quickly get back to your mainmessage.

If you wish to present a set of documents,include a one-paged summary up-front. Try usingcolored/tinted paper. With so much paper lyingaround, busy officials have very short attention spans.

Try to start by saying something that thebank would like to hear, capture their attention.Then proceed to state your issues. For instance: youmay start by acknowledging the Bank’s effort towardsreforms. After that, state your issues, and what youexpect the Bank to do. Remember that there isalways some initial hesitance on the part of the Bankofficials to meet with NGOs.

Speak out loud and clear. Never mindif your English is bad. It is the confidence thatcounts. sound convinced and convincing. Donot be intimidated.

former Executive Director from 1990 to 1998. Thisarticle was written over several years of ANGOC’sexperience in dealing with MDBs to advocate socialequity, people’s participation and transparency.

39

Present concrete demands, not just com-plaints. Always pin down your demands to specificfollow-up actions, i.e. funding questions, target datesand deadlines, and measures of compliance.Explain how it is in the “best interest” of the Bank toact on the issues. If you can translate your issuesinto monetary terms, then you are likely to be moreconvincing. Money is the language that the bankunderstands. You can point out , for instance, howthe Bank could have avoided the costs of a failedproject if the Bank had only consulted with theaffected local community, in the first place. Or elseyou could mention how a thoroughly-done EIA couldsave environmental costs and damage in the longer-run.

Know where to sit. The physical lay-out in ameeting suggests underlying power relations. Adesk for instance, is a symbol of power; and so isan official surrounded by his assistants. Try to avoidsitting opposite an official who is positioned behindhis desk. If there are options, choose to sit around aneutral table, or place chairs around in a circle.

Never take “no” for an answer. Often, Bankofficials will put the blame on governments, and saythat it is governments, not the Bank which decideson projects. Or else, they will say that they will “dotheir best”. Don’t take these answers at face-value.Always be ready to propose concrete workablesolutions. Try not to leave a meeting without a clearnext step.

Do not embarrass an official in front of hiscolleagues or superiors. Try to keep the broaderview that Bank officials who are willing to meet withNGOs are also likely to be the more open ones.Other officials may not want to meet with NGOs atall.

Don’t accept patronizing statements fromBank officials. Statements that suggests pity forNGOs and locally affected communities have noplace in negotiations. You are seeking justice notsympathy.

Put things down in writing. Take notes ofyour meeting. Bureaucracies value paperwork. Bankofficials invariably respond only to written arrange-ments, and to ignore verbal agreements. To them,what is not written does not exist at all. if thecommitments are made through meetings or phonecalls, take time to write this down, and send back tothe official concerned, as proof of reminder that acommitment has been made. If a commitment isdeemed very important, furnish a copy to his col-league or superior.

Toward the end of the meeting, brieflysummarize your central message, thank theofficials and shake hands. This will leave lastingimpression that an agreement has been reached.

** Use of the male pronoun here for Bankofficials is deliberate. Most Bank officials aremen.

* Mr. Antonio B. Quizon was ANGOC’s

40

References

1 Reducing Poverty: Major Findings andImplications, Asian Development Bank,September, 1999

2 ibid and Fighting Poverty in Asia and thePacific: The Poverty Reduction Strategy,Asian Development Bank, November, 1999

3 Reducing Poverty: Major Findings andImplications, Asian Development Bank,September, 1999

4 Human Development Report 1999, UnitedNations Development Programme

5 Fighting Poverty in Asia and the Pacific:The Poverty Reduction Strategy, AsianDevelopment Bank, November, 1999

6 Concessional loans at the ADB are madethrough the Asian Development Fund(ADF); the largest contributors to the ADFare Japan, the United States, GermanyAustralia and Canada.

7 Working in Partnership with the WorldBank, The Department for InternationalDevelopment (DFID), Great Britain, January2000

8 Total external debt is the sum of public,publicly guaranteed and private non-guaranteed long and short term debt anduse of IFM credit; it owed to non-residentsand repayable in foreign currency, goodsand services.

9 All figures derived from the ADB AnnualReport, 1998

10 World Development Report 1998/1999, TheWorld Bank

11 Fighting Poverty in Asia and the Pacific:The Poverty Reduction Strategy, AsianDevelopment Bank, November, 1999

12 Fighting Poverty in Asia and the Pacific:The Poverty Reduction Strategy, AsianDevelopment Bank, November, 1999

13 Social Development, Asian DevelopmentBank. 1999

14 ibid.; See also Fighting Poverty in Asiaand the Pacific: The Poverty ReductionStrategy, Asian Development Bank,November, 1999

15 Private Sector Development Strategy:promoting the Private Sector for Growthand Poverty Reduction, Asian DevelopmentBank working paper, September, 1999

16 The Asian Development Bank’s Models forRegional Cooperation in Asia, JanneJokinen, Euroseas 98 Conference, 1998

17 ibid.

18 An interesting discussions of the “growthpolygon” growth model is provided in From‘Flying Geese’ to ‘Cog and Wheel’ by JeninaJoy Chavez- Malaluan in Asian Exchange,Volume 14, No.1, 1998

19 ibid.20 For a comprehensive critique of the GMS,

see The Greater Mekong Subregion and itsPlace in the Sun by Violeta Q. Perez-Corralin Asian Exchange, Volume 14, No.1, 1998

21 Private Sector Development Strategy:promoting the Private Sector for Growth andPoverty Reduction, Asian Development Bankworking paper, September, 1999

22 Fighting Poverty in Asia and the Pacific:The Poverty Reduction Strategy, AsianDevelopment Bank, November, 1999

23 From ‘Flying Geese’ to ‘Cog and Wheel’ byJenina Joy Chavez Malaluan in AsianExchange, Volume 14, No.1, 1998

24 Because SREZs often involve threetransnational areas, they have been morepopularly referred to as growth triangles.

25 Richard Pomfret, ASEAN: Always at theCrossroads?, March 1995.

26 Min Tang and Myo Thant, ‘Growth Triangles:Conceptual and Operational Issues’, in MyoThant, Min Tang and Hiroshi Kakazu,Growth Triangles in Asia: A New Ap-proach to Regional Economic Coopera-tion (ADB, 1998)

27 Far Eastern Economic Review, Asia Year-book 1995.

28 Myo Thant, ‘The Indonesia-Malaysia-ThailandGrowth Triangle’, in Myo Thant et al., op cit.

29 J. C. Malaluan, op cit30 ADB News Release No. 23/95, 21 March

1995 (from the Internet)31 NGO Letter to President Chino, 3 August

1999.32 Sangme Coghlan, “Financing Potential:

Cofinancing and Guarantees” in AsianDevelopment Bank, Challenges andOpportunities in Energy: Second Work-shop on Economic Cooperation inCentral Asia, 1999.

33 ADB, Strategy for the Pacific: Policies andPrograms for Sustainable Growth, 1996.

34 ADB News Release No. 30/00, 30 March2000

35 For details, see Asian Development Bank, APrivate Sector Strategy for Central Asia,March 1998.

36 G. Naidu, ‘Johor-Singapore-Riau GrowthTriangle: Progress and Prospects’, in MyoThant et al., op cit.

37 Richard Pomfret, op cit

38 G. Naidu, op cit.39 This critique is partly derived from “Review of

the Asian Development Bank’s PrivateSector Development Strategy” by a numberof Washington DC-based NGOs. November19, 1999. Available at www.bicusa.org.

40 The Multilateral Development Banks (MDBs)include the World Bank, Asian DevelopmentBank (ADB), Inter-American DevelopmentBank (IDB), African Development Bank(AfDB), and the European Bank for Recon-struction and Development (EBRD).

41

Cofinancing: Debt and Dependent Development

By Chris Adams*

domestic sources. Official Development Assistance(ODA) is also in decline both in absolute terms andas a proportion of global capital flows. As a result,DMCs are increasingly reliant on private capitalinflows to finance infrastructure development.However, private capital flows are unevenly distributedacross the region, largely concentrated in middleincome countries and in the larger low-incomecountries such as China and India. Even states withrelatively high rates of domestic savings have beenunable to translate this into long term investmentcapital because of weak domestic capital markets6 .Heightened perceptions of risk have also reducedDMC’s access to international capital markets in theaftermath of the financial and economic crises inEast Asia in the last three years. As a result ofDMC’s uneven capacity to attract and managedevelopment finance both from domestic and externalsources, the ADB is taking a lead role in mobilizingfinancial resources to its DMCs through cofinancingand guarantee operations.

DMCs are not only reducing their role in thepublic financing of physical infrastructure but they arealso reducing their role in the implementation andoperation of infrastructure projects. This, from theperspective of the Bank, is necessary given the poorperformance of the public sector in the developmentand management of large-scale infrastructure in thepast7 . The Bank is encouraging DMCs to create anenabling environment for private sector-led infrastruc-ture development particularly through public-privatepartnerships; the commercialization, corporatizationand eventual privatization of public utilities; changesin policy and regulatory frameworks which supportprivate sector investment and support for build-operate-own (BOO) or build-operate-transfer (BOT)infrastructure projects.

The Bank’s role in catalyzing private investmentand in creating both an enabling environment forprivate sector-led development and specific opportuni-ties for private sector investment in public infrastruc-ture projects are key strategic thrusts in the Bank’s

private sector development strategy8 . Thisaims to create an enabling environment fordomestic and foreign private investors and shiftthe role of government from that of owner-

1.IntroductionThis background briefing paper was prepared

for distribution to NGOs and people’s organizationsin the lead up to the Asian Development BankAnnual General Meeting in Chiang Mai, Thailand inMay 2000. The paper provides background informa-tion on the definition, scope, rationale and mecha-nisms for cofinancing which is largely written fromthe perspective of the ADB. The paper then devel-ops a critique of the ADB’s cofinancing operationswith a particular focus on the implications ofcofinancing for debt, institutional capacity, respon-siveness to local needs, indigenous technologies,national development strategies and policy sover-eignty.

2. Definition

The ADB is increasingly involved in mobilizingfunds from other sources for Bank supportedprojects. This is known as “cofinancing”. Thesefunds usually come from bilateral and multilateralaid agencies (official cofinancing), export creditagencies and market institutions such as privatebanks (commercial cofinancing). These institutionsare known collectively as “cofinanciers”. The fundsmay be in the form of loans, grants or equityinvestment. Funds from different sources can bepooled with cofinanciers agreeing to follow theBank’s procurement guidelines (joint funding) orcomponents of a project budget can be dividedbetween cofinanciers who each follow their ownprocurement and polices and procedures (parallelfunding). Co-financing from official sources isusually on grant or concessionary terms and isalmost exclusively for Developing Member Coun-tries (DMCs) eligible for Asian Development Fund(ADF) lending.

Rationale for Cofinancing

The ADB estimates that infrastructureinvestments required in the Asia Pacificregion are of the order of $13 are unable orunwilling to raise funds on this scale from 42

producer-provider of public goods to that of facilitator-regulator of private and public goods deliveredprimarily through the private sector.

5. Purpose

The Bank’s support for cofinancing is not justabout securing adequate funding for specificprojects. The objectives of cofinancing according tothe ADB are to:a Assist DMCs and the private sector to

secure debt financing for developmentprojects with a particular focus on physicalinfrastructure.

b Use Bank funds as a catalyst for increasingofficial and commercial capital flows toDMCs.

c Assist DMCs gain sustained access tointernational capital markets and to estab-lish and expand domestic capital markets.

6. ADB Strategies

The Bank aims to achieve these objectivesthrough a variety of means:

6.1 Support for private sector involvement ininfrastructure development:

More then 50% of the Bank’s loans go topublic infrastructure projects, particularly in power,communications, water supply and waste disposal.The Bank is increasingly involved in mobilizingofficial and commercial cofinancing for theseprojects. In particular, the Bank is promoting com-mercial cofinancing for the potentially profitableenergy and telecommunications sectors. The Bank’srole in mobilizing commercial cofinancing involvesmore then identifying and recruiting cofinanciers. Inparticular, the Bank offers incentives to investorsthrough credit enhancement, particularly the provi-sion of guarantees and through the ComplementaryFinancing Scheme (see section 5.4 below).

The Bank is also promoting and supportingBuild-Operate-Own (BOO) and Build-Operate-Transfer (BOT) schemes. Under these public-privatepartnership schemes, the private sector builds andoperates infrastructure which would have traditionallybeen publicly funded and managed e.g. a powerstation or a toll-way. The private company or consor-tia is responsible for raising the finance for theproject and for debt service. In BOT schemes, theprivate sector operates the infrastructure for anagreed period, usually between 15 and 30years, and then transfers ownership to the

government. The rights and responsibilities of thevarious parties involved are set out in a series ofcontracts and agreements. These allocate risks,costs (including social and environmental costs) andprofits between the private and public sectorproponents and financiers of the project. The ADBsupport for BOO/BOT projects includes policy andregulatory reform (see 5.2 below)); assistance withfeasibility studies, project design and appraisal;drafting contract and licensing agreements; loansfrom its own sources and mobilizing commercialcofinancing from banks and export credit agencies.

6.2 Policy Reform

The Bank is assisting DMCs with formulatingpolicies and regulations and with strengtheninginstitutions that will facilitate foreign capital inflowsand private sector development. This typicallyrequires changes both at the macro level and inparticular sectors. The Bank provides technicalassistance grants or loans to support policy reformand/or includes changes in policy and regulatoryframeworks as conditions of ADB project/sectorloans. The Bank’s overarching emphasis is oneconomic liberalization and allowing market forcesto function more freely9 . Key aspects of the macro-policy framework promoted by the Bank10 are:

! Stable macro-economic management.

! A strong debt service capacity and accept-able sovereign credit rating

! Investment, trade and price liberalization.

! Reduced barriers to competition

! Flexible labor and land markets

! A credible and transparent legal framework,particularly in relation to land use rights,intellectual property rights, foreign invest-ment rules, contracts and dispute resolu-tion.

! Laws that allow ownership and operation ofinfrastructure by the private sector.

! Protection against nationalization andprovision for the repatriation and freeconversion of local currency profits anddividends.

Although sector specific policy reform will varybetween sectors and over time and place, the

underlying approach usually involves some orall of the following:

43

! Commercialization of government services,particularly the introduction of full costrecovery and user fees.

! Contracting out of public services.

! The unbundling, commercialization andeventual privatization of public utilitiesincluding water, electricity and gas.

! Establishment and strengthening ofregulatory frameworks and independentregulators.

! Decentralization of fiscal and administrativefunctions of government departments.

! Enhanced private sector participation in thedesign, establishment and management ofphysical and social infrastructure.

! BOO/BOT policy statements and en-hanced DMC capacity in the managementof BOO/BOT projects.

6.3 Support for the development of domesticcapital markets and enhanced access tointernational capital markets:

The Bank aims to increase DMC’s access tocapital not only through cofinancing but alsothrough support for the development of domesticcapital markets as well as for policy and regulatorychanges that facilitate access to internationalcapital. Key changes supported by the Bankinclude:

! Introduction of market-based interest rates.

! Strengthening of domestic securitiesmarkets and creation of bond markets.

! Reform of pension and insurance systemsto develop sources of long-term capital

! Establishment and strengthening ofdomestic credit rating agencies.

! Recapitalization, commercialization andprivatization of state-owned bankingsystems.

! Establishing adequate legal and institu-tional infrastructure for the development ofcapital markets.

! Building DMC capacity in capital marketmanagement

! Establishment of regional infrastructurefunds.

6.4 Credit Enhancement

The private sector is often reluctant to invest inlarge-scale infrastructure projects, particularly in leastdeveloped countries such as in the Mekong region,because of high costs, long lead times, exchangerate volatility and inadequate legal frameworks11 aswell as the risks of expropriation, nationalization,arbitrary regulatory changes and economic downturn.In addition, infrastructure projects such as hydro-dams are regarded as high-risk, low return invest-ments with a reputation for major cost overruns anddelays due to environmental problems and publicopposition12 .

Bank guarantees are designed to reduce theinvestor’s exposure to risk. The Bank provides twotypes of guarantees for private investors: partial creditguarantees and partial risk guarantees13 . The Bank’sguarantees are irrevocable and unconditional.

A partial credit guarantee covers part of theinterest payment and/or repayment of the principalirrespective of the cause of default i.e. lenders areguaranteed partial repayment of the principal andinterest regardless of the problems with the project.Partial credit guarantees are provided for both publicand private sector projects.

A partial risk guarantee covers specific risks forprivate sector projects. These risks are defined inadvance and are usually referred to as sovereignrisks. Typical risks include nationalization, currencyconvertibility and transferability, strikes and civildisturbances and non-performance by government ofcontractual obligations such as the non-delivery ofinputs or non-payment for outputs.

In both cases, the Bank requires a counter-guarantee from the host government.

Lenders can also channel loans through theBank’s Complementary Financing Scheme. The loanto the project proponents is made in the Bank’sname but the cofinanciers have no recourse to theBank for debt service. The advantages to lenders arethat these types of loans are free from withholdingtaxes, provisioning requirements and are coveredagainst sovereign risk. The Bank also acts as achannel for loan administration, including disburse-ments and debt service payments.

6.5 Export Credit

The Bank assists project proponents withaccessing export credit, particularly for large-scale infrastructure projects. Export credit isusually made available to an importer or buyerof exported goods by a commercial bank or44

syndicate of banks with the benefit of credit and/orpolitical risk insurance from an Export Credit Agency(ECA) from the exporting country. Alternatively,ECAs may make loans themselves. For example, aprivate company building a hydropower dam in Laosmay receive assistance from the ADB in accessingNorwegian export credit for the purchase of turbinesfrom Norway.

ECAs are publicly funded government agenciesthat have emerged as key players in an increasinglycommercialized aid and development industry.Examples of ECAs include the US Overseas PrivateInvestment Corporation (OPIC) and the AustralianExport Finance and Insurance Corporation. Interna-tionally, lending by ECAs increased by 400% fromUS$26 billion to US$105 billion between 1988 and199614 . ECAs may, through public subsidies, chargeinterest rates or insurance premiums that are belowmarket rates. ECAs loans or insurance are usuallyguaranteed by governments.

7. A Critique of Cofinancing

Increasing debt: the ADB has lent $82 billiondollars to DMCs between 1966 and 1999 from itsown sources on either concessionary or non-concessionary terms. In addition, the ADB hasmobilized another $30 billion in cofinancing over thesame period15 . At least $48 billion of the ADB’s ownloans is outstanding, almost 6% of the Asia Pacificregion’s total external debt of $808 billion in 1997.The total external debt of developing countries nowexceeds two trillion dollars.16 The escalatingdependence of developing countries on debt-financeddevelopment has not only resulted in increasing debtservicing requirements (see below). It has alsocontributed to:

a) The neglect of domestic savings as a sourceof development finance, particularly incountries where increasing and mobilizingdomestic savings for development financewould require the redistribution of productiveassets and the institutionalization ofprogressive tax regimes, both inimical tohighly centralized states captured by powerfulindustrial, military or land owning interests. Insuch instances, continued access to aid hasreduced the domestic impetus for political,economic and social reform.

b) an escalation of export-orientated – andfrequently unsustainable - resource extractionto meet debt servicing requirements

c) a reorientation of agriculture from meetinglocal needs to production for export inhighly skewed regional and globalmarkets

d) An increased dependence on imported,capital intensive technologies as aconsequence of tied aid.

e) An increased dependence on and influence ofinternational financial institutions, particularlythrough the imposition of debt-inducedstructural adjustment programs and the shiftto policy-based lending by the MDBs.

Increasing debt servicing: the ADB isincreasing the proportion of commercial relative toofficial cofinancing and increasing its role in non-concessionary lending overall. This is because of:

a) The decline in global ODA both in absoluteterms and as a proportion of total capitalflows. ODA declined from $50.6 billion in1990 to $49.8 billion in 1997. In contrast,private capital flows increased from US$43.6billion in 1990 to US$252 billion in 1997. ODAmade up 15.3% whilst private capital flowsmade up 77.7% of total net resource flowsfrom DAC member countries and multilateralagencies to developing counties in 1997.17

This shift threatened to undermine the raisond’etre and influence of the MDBs if theycontinued to rely predominantly onconcessional financing. As a result, MDBs,including the ADB, have increasingly focusedon mobilizing non-concessionary capital andcreating “an enabling environment for theprivate sector”, particularly through theprovision of policy advice and/or theimposition of loan conditionalities which focuson economic liberalization, privatization andderegulation.

b) The scale of the ADB’s emergencyassistance for crisis-affected countries hassignificantly reduced the Bank’s OrdinaryCapital Resources and forced the Bank toincrease its interest rates and other chargeson OCR loans as of January 2000. This willalso reduce the amount of net income fromOCR lending which can be transferred to theAsian Development Fund (ADF)18 .

c) Some bilateral donors have privately beenhighly critical of the performance of the ADBin general and the ADF in particular.Concerns include the low level of investmentin social sectors, poor coordination with otherdonors, the highly centralized nature of Bankoperations, weak quality control andevaluation and inadequate performance-basedcriteria for ADF resource allocations. Thiscrisis of legitimacy is leading to increasedscrutiny of the ADB by bilateral donors and isfrustrating the ADB’s attempts to quicklyfinalize negotiations for ADF VIII19 .

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This shift from concessionary to non-concessionary lending will have a particular impacton the low-income countries in the Asia Pacificregion. These countries have little or no access tointernational capital markets and will continue torely on concessionary lending such as thatprovided by the ADF. The decline in concessionarylending will reinforce the existing inequitabledistribution of capital flows between middle-incomeand low-income countries in the region.20 This shiftwill add to debt servicing requirements, particularlyin countries such as Indonesia, Thailand, Laos,Vietnam, Mongolia, Bangladesh, Papua NewGuinea, India and Pakistan that already haverelatively high debt to export ratios in 1997.21 Takentogether with reductions in government revenue andthe decline in ODA, debt servicing has and willresult in cuts in government outlays for basic socialservices and basic infrastructure.

Inappropriate development model: theincreasing emphasis on commercial cofinancingand non-concessionary lending is likely to reinforceboth the Bank’s existing emphasis on “bankable”infrastructure projects, particularly those whichgenerate hard currency receipts and, in moregeneral terms, the export-orientated, capital andresource intensive development models that havetraditionally been supported by the MDBs and theirbilateral backers.

Co-financing will continue to be used tosupport large-scale infrastructure projects that haveresulted in the enclosure and commodification ofland and other natural resources, the disruption oflocal resource management regimes, environmentaldegradation, declining food security and the large-scale displacement of rural and urban populations.

Large-scale infrastructure projects rely heavilyon external financing, technology, knowledge andexpertise which reinforce forms of dependantdevelopment, particularly in the smaller DMCs.Similar projects and technologies are often nolonger acceptable in developed countries due tostringent regulation, technological innovation,diminishing returns from a degraded resource base,higher costs and increased resistance from citizengroups. As a result, bilateral and multilateralagencies have supported the aggressive push byresource and infrastructure companies into develop-ing countries in search of new markets andinvestment sites. Co-financing is often tied tosourcing equipment and expertise from thesecompanies or from a list of preferred contractorswhich drives up project costs and leads to weaksocio-cultural and political analysis during theproject design and appraisal processes.Consultants engaged to undertake pre-projectfeasibility and social and environmental

impact assessments are often closely linked toproject proponents, which precludes objectivity.

This combination of aggressive marketing,tied financing, vested interests and importedtechnologies militate against participatoryapproaches to project planning which areresponsive to local needs, incorporate indigenoustechnologies and which are consistent with orcontribute to building institutional capacity at thesub-national and national level.

Reducing national sovereignty in macro-economic and social policy and planning: Theuse of Bank guarantees and contract conditionsattached to cofinancing operations have significantimplications for national sovereignty. Theconditions frequently pre-empt establishedprocesses for regulatory or policy change at thenational level or are used as a catalyst for suchchanges. The conditions are often not made publicbecause they are subject to commercial-in-confidence provisions. In addition, agreements mayonly be judicable in third country courts.22 Thisreinforces the lack of accountability and transpar-ency that often characterizes negotiations anddispute resolution in relation to large-scaleinfrastructure projects.

The scale, complexity and cost of large-scaleinfrastructure projects invariably distort nationaldevelopment priorities and the allocation of humanand financial resources in smaller DMCs.Similarly, the doctrinaire emphasis on liberaliza-tion, privatization and deregulation that informs theBank’s governance and private sector strategiesand which will in turn frame the operationalizationof the Bank’s new poverty reduction strategy andsectoral strategies severely prescribe the range ofpolicy options open to national governments.

Reduced capacity of governments todeliver accessible, affordable and relevantsocial and physical infrastructure: the prevailingemphasis on private sector delivery of large scalephysical – and increasingly social – infrastructurethrough the contracting out of government servicesand the privatization of public utilities has led to aloss of institutional commitment to and expertise inthe establishment and delivery of physical andsocial infrastructure. This is of particular concern inrelation to the delivery of basic social services andbasic infrastructure particularly in low-incomecountries and in poorer rural areas that are unlikelyto attract private investment. At the same time, theskills, experience, regulatory frameworks and

institutions necessary to manage privatizedservices are weak or non-existent. This is ofparticular concern in countries where thecountervailing power of civil society46

organizations and democratic institutions is weak ornon-existent.

The socialization of risks: the credit and riskguarantees provided by the ADB and export creditagencies to private sector actors are backed bynational governments using tax payer funds. Thisprotects private sector actors – and the ADB itself -from market discipline. In addition, ADB guaranteestypically require a counter-guarantee that shifts theburden of risk to the host government. Public-privatepartnership contracts typically accentuate thistransfer of risk from the private sector to the publicsector, particularly through externalizing social andenvironmental risks but also where possible shiftingmarket risk to public actors as well. Contractconditions may include shifting responsibility forsocial and environmental impact mitigation to hostgovernments, limiting a private company’s liability forcompensation, fixing the price and quantity ofproject outputs to be purchased by state utilities23

and prioritizing the distribution of revenues, typicallyprivileging private companies and lenders ahead ofhost governments and shareholders.

8. Summary

In summary, the increasing emphasis oncommercial cofinancing of development projectsthrough multilateral institutions such as the ADBmilitates against participatory approaches todevelopment which are primarily financed throughdomestic sources, which are responsive to localneeds, which incorporate local technologies andexpertise and which are consistent with institutionalcapacity at the national and sub-national level.Instead, increasing cofinancing is likely to increaseindebtedness, reinforce inappropriate developmentmodels, enhance dependency, reduce transparencyand accountability and reduce institutional capacity,all of which will lead to a further deterioration inhuman development outcomes, particularly in thesmaller developing countries in the region.

* Chris Adams is a Visiting Researcher at Focus on theGlobal South. He is currently on leave from CommunityAid Abroad – Oxfam Australia.

1 Asian Development Bank Annual Report 1998, p. 1

2 ibid, p. 62

3 ibid, p. 63

4 Ibid, p. pp 62-63

5 Commercial Cofinancing and Guarantees, ADB, 1999, p. 5

6 ibid, p. 7

7 ibid, p. 5

8 Private Sector Development Strategy, ADB, 9/3/00, p. 6

9 Op cit, ADB 1999, p. 10.

10 Ibid, pp. 10-11

11 ibid, p. 6.

12 The Theun-Hinboun Public-Private Partnership: A Critique of the ADB’s

model Hydropower Venture in Lao PDR, Paper # 3, Power Sector Reform, Probe

International, pp. 1-2.

13 Op cit, ADB 1999, pp. 21-22

14 Export Credit Agencies, AIDWATCH Newsletter, July 1999, p. 1

15 ADB Annual Report 1999.

16 Human Development Report 1999, UNDP.

17 Financing Development: Key Issues for the South, South Center, 1999, p.

16.

18 The ADB transferred $230 million of unallocated net income from OCR to

the ADF in 1997.

19 The ADF is replenished by donors on average once every four years. The

ADF has been replenished six times since it was established in 1973. The last

replenishment (ADF VII) runs from 1997 to 2000. Negotiations are now

underway for the seventh replenishment which will establish ADF VIII.

20 Twelve countries account for more then 80% of private capital flows to

developing countries, particularly Argentina, Brazil, China, Indonesia,

Malaysia and Mexico.

21 World Development Report 1998/99, p. 230

22 The shareholders’ agreement for the Theun-Hinboun Hydropower project

in Lao PDR requires disputes to be submitted to arbitration in Singapore under

the UN Commission on International Trade Law. The Theun-Hinboun Public-

Private Partnership: A Critique of the ADB’s model Hydropower Venture in

Lao PDR, Paper # 3, Power Sector Reform, Probe International, p. 4.

23 For example, the Electricity Generating Authority of Thailand (EGAT) is

bound to purchase a fixed quantity of power at a fixed price from the Theun-

Hinboun Power Company for a 25 year period, regardless of need and

fluctuations in the market price of an increasingly privatized power industry.

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