Four Decades of the Asian Development Bank

By Hemantha Withanage

The Asian Development Bank had its beginnings when it held its inaugural Annual Meeting in November 1966 in Tokyo. Its next Annual Meeting was then held in Manila in April 1968. In 1966, the Bank was owned by 40 regional and 16 non-regional member countries. Currently, it is owned by 48 regional and 19 non-regional ones. Its authorized capital stock of US$1.1 billion increased to US$48 billion in 1999 then to US$50 billion in 2006. Moreover, the annual budget is US$42 million in 1966 which increased to US$7.97 billion on 2007.

From its founding up to 31 December 2005, the ADB has approved US$84.6 billion of Ordinary Capital Resources (OCR) loans. In 2005 alone, it approved loans from OCR totaling US$4.4 billion (US$4.0 billion in 2004), which included US$536 million (US$293 million in 2004) for private sector borrowers. On the other hand, outstanding loans from the Asian Development Fund (ADF), which is the largest Special Fund, amounted to US$20.2 billion as of 31 December 2005. Resources for ADF loans consist mainly of contributions mobilized under the periodic replenishments from donor members. As of 31 December 2005, ADF aggregate resources committed to loans amounting to US$27.6 billion. In 2006, the ADB further released US$7.97 billion in loans; US$654.8 million in credit enhancements; US$260.5 million in equity investments; US$538.4 million in grant-financed projects; US$241.6 million in technical assistance operations; and US$3.81 billion in multitranche financing facilities (MFF). Interestingly, ADB net income increased from US$389.6 million in 2004 to US$415.6 million in 2005.

Sustainable economic growth was the most prevalent theme and was associated with 57 projects. But of the 67 projects and programs approved in 2006, finance received the largest share of lending (24 percent) among the sectors. The 2006 annual fund release is a significant increase compared to its figures in 2004 and 2005.

However, the cost of the four-year old Iraq War is expected to reach US$456 billion on September 2007.[1] According to the Congressional Budget Office of the USA, the war in Iraq could cost up to US$9 billion monthly.[2] Spending around US$110 billion over 40 years of the ADB is not an insignificant figure.

According to former ADB President Tadao Chino, “Asia and the Pacific have made tremendous economic and social gains over the past three decades. Per capita income has tripled. Average life expectancy at birth in the early 1970s was 48 years; now it is 65 years. Then, only 40 percent of the population could read and write; today, 70 percent of the region's adults are literate. These three decades of unprecedented economic growth and improvement in the standard of living have witnessed a decline in the proportion of Asians living in poverty. Nevertheless, Asia is still home to the poor: two-thirds of the world’s poor live in Asia. South Asia alone has more than 500 million poverty-stricken people, almost twice as many as in the whole of Africa.”[3]

According to the Asian Development Bank Annual Report 2005, “In recent decades, strong economic growth has raised per capita incomes across the region. Life expectancy has increased; literacy rates have improved; and greater opportunities have been created for tens of millions of people. In developing Asia as a whole, poverty has declined significantly from 34 percent in 1990 to 22 percent in 2002.” However, the ADB agreed that the region remains home to two-thirds of the world’s poor and that poverty reduction, therefore, remains a pressing concern.

The recent Millennium Development Goals: Progress in Asia and the Pacific 2006 Report points out that two-thirds of Asians -- or a total of 1.5 billion people -– still do not have access to basic sanitation. The region is also home to roughly three times as many underweight children and people living on less than one dollar a day, as sub-Saharan Africa and Latin America combined. According to the Report, the region is not progressing fast enough to meet some important targets, including infant mortality and access to basic sanitation in urban areas. Meanwhile, HIV prevalence is actually on the rise and the proportion of people with access to improved water sources is declining.

The figures may be changing but Asia and the Pacific region is without doubt still suffering from poverty. The rough figures as stated in the ADB Poverty Report do not show much improvement in the poverty situation in the region. Where has this money gone?

Balancing ‘Development’ and ‘Banking’

The recent ADB Water Review Panel Report highlights the imbalance between the ‘D’ and ‘B’ of ADB. This means that the ADB primarily operates as a banking institution and only secondly as a development institution. The ADB’s main business is to “sell” loans, premised on its working principle that poor countries need to borrow more money in order to develop.

In the early days, all its projects followed the development mandate. It was true to its goal which according to the Charter is to “foster economic growth and cooperation in the region of the Asia and Far East… and to contribute to the acceleration of the process of economic development of the developing member countries in the region…”[4] However, in response to the critics in the 80s -- and perhaps in response as well to the Earth Summit process and to the Brundtland Commission Report, a 50:50 project mix of traditional growth projects and projects incorporating social and environmental concerns was brought in during the early 90s. Coincidentally, it also produced environmental and other safeguard policies since 1995.

Since 1998, the ADB justified all its projects under the pro-poor approach. However, ADB projects still involved environmental and social destruction. Further, it was criticized for pushing the privatization of public utilities and resources and for its principles of “full cost recovery” and of private sector as the “engine of growth,” among others. Also, ADB’s accountability and transparency were questioned. The ADB was accused of inability to control corruption in the region and of supporting undemocratic regimes. The effectiveness of ADB lending on development has been questioned.

Development vs. social and environmental impacts

In recent years, the movement for accountability of International Financial Institutions (IFI) has won some of its greatest victories in the realm of ensuring that development projects do not damage the environment. Despite a wide range of catastrophes that include the continuing funding of disastrous large-scale water infrastructures, the IFIs have taken some steps to alleviate the most grievous and immediate environmental problems associated with their policy and programme lending. However, basic questions about the medium- to long-term effects of project and policy lending remain largely unanswered and often unasked.

The ADB was undoubtedly a driver of the so-called “Green Revolution.” It supported a total of 29 large dams in at least 12 countries in the Asia and Pacific region. Most of the ADB-supported large dams (48 percent) were built in the 1970s. In March 31, 2005, after years of putting everything on hold, the World Bank decided to support the construction of the US$1.3-billion 1100-MW Nam Theun 2 (NT2) Hydropower Project in Laos by providing up to US$270 million in loans and risk guarantees. In April 2005, ADB’s Board of Directors approved up to US$120 million in loans and risk guarantees for the same project which will displace over 6000 families. In the Philippines, 10,000 indigenous peoples (Dumagat and Remontado) and upland settlers in the Sierra Madre mountain range are bound to be displaced while eight barangays (villages) (10,000 hectares) within the boundary of Rizal and Quezon provinces will be submerged by the ADB-funded US$1-billion Laiban Dam[5].

According to ADB’s Statement of Operations in 2006, 57 loans and 25 grants have been categorized under the theme “sustainable economic growth.” On the other hand, 17 loans and two grants go under “environmental sustainability.” It therefore begs the question: can there be sustainable economic growth without environmental sustainability?

Since the beginning, the ADB was criticized for assisting destructive infrastructure projects such as highways and dams, forests plantations, oil palm cultivations, coal power, etc. Its involvement in problematic projects began as early as 1969.

For instance, Sri Lanka was the site of a problematic project as early as 1969. The Bank lent US$8.6 million (at concessional interest of three percent for 25 years) for developing 12,000 hectares along the Walawe River as a project for comprehensive rural development to facilitate irrigation, land settlement, and agriculture and community development.[6] It took ten years to complete and thus falling seven years behind schedule. The Bank’s post-evaluation team found structural and operational deficiencies including inefficient irrigation that put people in more trouble. The problems have yet to be solved.

In terms of Involuntary Resettlement, the Bank’s projects have led the people to forced evacuation. According to Grainne Ryder (2000), “ADB loaned about US$150 million for lignite mine expansion, transmission lines, and the first generating units at this lignite-fired power station in the 1970s to Thailand. And since 1980, the Bank has loaned the Electricity Generating Authority of Thailand (EGAT) another US$390 million for new generating units at Mae Moh, one of the largest sources of poisonous sulphur dioxide emissions in Southeast Asia.

The Bangkok-based environmental group, Towards Ecological Recovery and Regional Alliances (TERRA), has described Mae Moh as "one of the most serious public health disasters in Thailand's history." At least 42,000 people near the plant suffered chronic respiratory diseases, breathing problems, and skin disorders. Livestock regularly fell ill and died. Large orchards, vegetable gardens, and rice crops wilted from acid rain. Streams and waterways were blackened by the emissions as well as by the run-off from the lignite mining operations nearby. In 1996, six villagers from the Mae Moh valley died of blood poisoning, suspected to be caused by sulphur dioxide emissions from the plant.”^[7]

In a similar project in the Philippines, the ADB loaned the National Power Corporation US$254 million for transmission lines and a second 300-MW generating unit at the Masinloc coal-fired power station. The first unit was financed by the World Bank in 1990 despite opposition from local communities and environmental groups who feared that the project will poison century-old mango orchards, fisheries, and farmland upon which nearby communities depend. This has caused scores of environmental damage.

The ADB loaned US$60 million to the state utility, Electricité du Laos, for its 60 percent stake in the Theun Hinboun Power Company which owns and operates a 210-MW dam for exporting electricity to Thailand. Completed in 1998, the US$260 million dam destroyed riverine fisheries in two rivers upon which dozens of rural communities – or about 6,000 people – depended for their livelihoods. The ADB approved the dam contracts which have restricted the power company's obligation to pay for compensation and for environmental mitigation. Grainne Ryder (2000) wrote, “As for the ADB's responsibility, as project engineer Mike Bristol explained recently in Hanoi, the ADB is not a social and environmental agency,” and as such it has "little influence over project outcomes."

The total number of affected people in the Jamuna Bridge Project in Bangladesh is estimated at about 77,220. The survey conducted by the Bangladesh Rural Advancement Committee (BRAC) revealed that 39,000 persons will be directly affected and another 37,800 people will be indirectly affected due to loss of access to land, etc. needed to eke out their living.^[8]

Based on the Operations Evaluation Department (OED) of the ADB, the Industrial Tree Plantation Project in Laos, which started in 1993 and was completed in 2003, was a disaster. It created and increased poverty and indebtedness. It replaced forests important to the livelihoods of local communities with eucalyptus plantations that then failed. Loan funds went missing and the Bank investigated allegations of corruption. According to the ADB’s Project Completion Report, the US$11.2 million project was “unsuccessful” and the ADB’s performance in the project was “unsatisfactory” among its many failings.^[9]

However, in January 2006, only a month after releasing the OED assessment of the previous project, the ADB approved a new Forest Plantation Development Project in Laos. The Bank will give a US$7 million loan and a US$3 million grant bringing the total project cost to US$15.35 million. The project will set up a Lao Plantation Authority and establish about 9500 hectares of “small livelihood plantations.”

Since 1994, the ADB has displaced more than 1.77 million people, according to the new OED (2006) report. It further stated that “projects approved in the last five years were expected to affect between 100,000 and 150,000 people every year.”[10] The study also reported that the actual figure is 65 percent, much higher than was estimated in the Report and Recommendation to the President (RRP). For instance, the Highway Expansion Project in Vietnam resettled 86,000 instead of 6000 people as identified in the design stage (OED, 2006). From the 76 percent of the affected people who have been affected by the transport projects across Asia, 61 percent comes from the People’s Republic of China. The findings point to public sector projects as responsible for majority of the displacements.

There are many other recent examples of the disastrous socio-economic and environmental effects by ADB-funded projects such as the Chasma Right Bank Irrigation Project in Pakistan; the Kirindi Oya Irrigation Project and Southern Transport Development Project in Sri Lanka; and the Kulna-Jessore River Tidal Management Project in Bangladesh. This saga is widespread in Asia and the Pacific.

According to Stephanie Fried, Shannon Lawrence and Regina Gregory,[11] Indonesia and Pakistan are, respectively, the ADB’s first and second biggest cumulative borrowers. Together, they have received more than one-third of total ADB funds disbursed during the Bank’s first thirty-six years. During the 1990s, however, Sri Lanka became one of the top borrowers from the Bank’s concessional lending window, the Asian Development Fund (ADF), and is currently among the “reconstructing nations” targeted by the ADB for post-conflict loans. Two ADB loans to Sri Lanka, although relatively small compared to those given to Indonesia and Pakistan, currently comprise approximately 20 percent of the country’s public external debt.

As of December 2002, the ADB has provided 112 loans to Sri Lanka to support projects in sectors such as agriculture and natural resources, social infrastructure, finance, and transport. It appears that as much as 78 percent of ADB projects in Sri Lanka -- the equivalent of US$1.2 billion of Sri Lanka’s debt to the ADB -- may be considered unsustainable, and therefore, failures[12]. The ADB’s record in Sri Lanka is apparently even more dismal than its performance in Indonesia or Pakistan.

These projects are considered as failures because in its 2000 assessment of multilateral development finance, the bi-partisan U.S. Congressional International Financial Institution Advisory Commission (the Meltzer Commission) found project sustainability -- whether or not a project provides lasting, long-term economic and social benefits -- to be the key indicator for judging the performance of multilateral development banks such as the ADB. The Meltzer Commission considered the lack of project sustainability to be synonymous with project failure[13].

The report states, “if we utilize the standard of project sustainability as an indicator of project success, the shocking conclusion of this report -- based on data presented in the ADB’s own audit documents -- is that over 70 percent of ADB projects in these countries are unlikely to provide long-term social and economic benefits.”

Stolen power

Since its inception, the ADB’s decision-making power was monopolized by the United States and Japan as donor nations. While non-regional countries own 64.8 percent of shares, developing member countries own only 35.2 percent, which already includes China at 6.5, India at 6.4, and Indonesia at 5.5 percent. Borrowing countries in the region are mere borrowers, although countries such as the Philippines and Sri Lanka are the nations behind the designing of the ADB. Among the nine countries in the race to host the ADB, the Philippines was selected not because it was poor but because of the successful game in the voting process. Japan, who badly wanted to host the ADB, sent a 40-page memorandum explaining, among other things, that there were 158 golf clubs, 200 foreign movie houses and 6488 dentists in the Tokyo area[14]. This story is a foreshadowing of what the ADB was set up for; that is, not for development assistance but clearly for business.

While Japan and USA still hold control due to their high voting power, China and India, through the years, have become the new power bases within the ADB due to their high borrowing power. Most other borrowing nations are just borrowers in this financial game.

Policy rhetoric and practice

Over the decades, the ADB has adopted a number of policies. Since 1994, the ADB has adopted over 38 policies and strategies to manage its projects and ensure accountability, information disclosure, safeguards, good governance etc. Currently, the ADB Public Communication Policy, along with the Accountability Mechanism, is the best among the similar policies of the Multilateral Development Banks. This could have been brought about by the lobby of the civil society organizations’ engagement since 1989 under the umbrella of the NGO Working Group on ADB which evolved to the current NGO Forum on ADB.

On paper, the ADB Safeguard Policies are one of the best among the IFIs. But it was criticized for the non-implementation of these. The recent Compliance Review Panel (CRP) Report on the Southern Transport Development Project states that “the Panel recommendation: Management should review selected road projects as to how changes of scope may make the application of environment and resettlement policies more difficult.” The report further states that, “The Panel wishes to make clear that its intent in this recommendation was that ADB should assess the potential for weakening of application of safeguard policies when minor or major changes are made. It seems clear, in the case of STDP that the environmental safeguards were weakened with the changes of trace and stakeholders at each project stage until the Final Trace.”

The ADB is now going through a review of its safeguards policies. Perhaps this is an attempt to weaken its safeguards as other IFIs have done in the recent past. One reason is that the ADB is facing a business crisis due to the competing financing institutions such as export credit agencies which provide easy money in shorter cycles. The ADB is facing this threat from its middle-income countries, China and India, whose high borrowing power allows them to have access to easy money from the export credit agencies. Therefore, it is not a secret that they pressure the ADB to weaken its safeguard standards to make it easy to borrow ADB money without being bothered by safeguards.

According to the ADB, its new broad strategic themes -- pro-poor, sustainable economic growth; inclusive social development; and good governance – make for effective policies and institutions. The ADB likewise seeks to promote environmental sustainability and gender development through the projects in which it is involved. It is focused on encouraging private sector development and regional economic and financial cooperation as well.

The increasing number of new projects, on top of the old projects, needs increased capacity of the ADB to monitor them. However, the ADB has no such capacity. Therefore it cannot increase the business while maintaining the social and environmental safeguards at the same level. Consolidated policy reviews could then potentially weaken the safeguard policies to make it easy for project handling.

A Regional Technical Assistance (RETA) on Strengthening Country Safeguard Systems has been initiated by the ADB’s Regional and Sustainable Development Department (RSDD) to define its corporate approach on Country Safeguard Systems in selected developing member countries (DMCs). These assessments will identify commonalities and gaps that will require capacity-building, policy adaptation, and procedural clarity and definition.

Strengthening the Country Safeguard Systems could prove to be a strategic undertaking to bring country safeguard systems to international standards and ensure the enforcement in all projects at the country level, whether or not they are funded by the ADB. Such process however will require a strong buy-in at the country level and adequate time for such process to take place.

It has been pointed out that the RSDD’s Update on the Safeguard Policies is done because of the pressure to streamline the current Safeguard Policies to become a single policy that would sustain, if not increase, the attractiveness of ADB portfolio. This is in line with ADB’s attempt to bring back the level of lending that has steadily decreased in the past years. If not done carefully, the streamlining of the safeguard policies will likely result to a watering down of the essence of safeguarding. The Update could easily be seen as a manifestation of the intention to implement a country system that may likely allow flexibility in the standards of the safeguard policies.

However, countries such as India and China, which have become the biggest borrowers of the ADB, are now pushing for a reduced number of policies. The Fisheries Policy and the Forest Policy are already under threat. Some selected policies will allegedly be phased out in the coming years.

Non-implementation of the safeguard policies is one of the major problems at the end of the fourth decade of the ADB. According to the OED, the lack of capacity, lack of trained staff, cumbersome planning process, and lack of harmonisation at the country level especially with regard to the co-financed project, are some main reasons for the non-implementation.

In most cases, the ADB accused national project-executing agencies for non-implementation. Sri Lankan Highway Project is one good example. It was found that more than 70 percent of the project went beyond the scope during the implementation. In addition, out of the 17 recommendations of the Compliance Review Panel in July 2005, only 3 were adopted by June 2006.

Asian Development Bank to an Asian Cooperative Bank

The ADB, to become an “Asian Cooperative Bank” needs more than just balancing “Development” and “Banking.” Addressing issues like corruption; accountability; good governance; pro-poor development; conditionalities that bind sovereign government; sustainable lifestyles; and social and environmental rights of the people, is a development people like to see within the ADB. Increasing the lending, while maintaining effective development, is the challenge for the Asian Development Bank.

The ongoing Safeguards review will show the future direction of the ADB whether it will take either the traditional development or the sustainable development path. Learning on-the-ground experience from ADB’s past is the best mechanism. However, if the ADB submits to the pressure coming from middle-income countries, it will go on the other direction.

It also seems to be an impossible task to influence the ADB to enforce its Safeguard Policies given the tremendous pressure brought by the presence of export credit agencies as alternative sources of development funding. Ultimately, the Bank is threatened of losing its relevance in the region.

Mere rhetoric

The ADB has vowed to continue to play a major role in the fight against poverty in Asia and the Pacific region as proclaimed by President Haruhiko Kuroda. However, the latest pronouncements and policy directions that the Bank is taking seem to tell otherwise. The overarching goal of the Bank seems to be set aside in favor of its corporate agenda.

Former ADB President Chino claimed that, “ADB believes the most powerful weapons in the fight against poverty are pro-poor, sustainable economic growth, social development, and good governance.” However, the ADB should re-examine its three pillars whether these have been weakened due to malpractices, corruption, and too much focus on corporate profits if it does not want to see a poverty–free region by 2020 as mere rhetoric.

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[1] Turning Data into Action, http://costofwar.com/numbers.html (February 2007)

[2] Estimated Costs of an Iraq War, http://usgovinfo.about.com/library/weekly/aairaqwarcost.htm (retrieved March 2007)

[3] Asian Development Bank, Annual Report (2000)

[4] Dick Wilson, The Bank for Half the World, published by The Asian Development Bank (1987)

[5] NGO Forum on ADB, The ADB and Dams (November 2005)

[6] Dick Wilson, A Bank for Half the World- The story of the Asian Development Bank 1966-1986, published by The Asian Development Bank (1986)

[7] Grainne Ryder, Why consumers and citizens should pull the plug on ADB( A critique of the ADB’s role in the electricity sector), published by Probe International Canada, (April 2000)

[8] The Asian Development Bank, Handbook on Resettlement (1998)

[9] Chris Lang and Bruce Shoemaker, Creating Poverty in Laos: The Asian Development Bank and Industrial Tree Plantations (A World Rainforest Movement briefing paper) (April 2006)

[10] ADB Operation Evaluation Department, Special Evaluation Study (2006)

[11] Stephanie G. Fried, Ph.D., Shannon Lawrence, and Regina Gregory, The Asian Development Bank: In its own words (An Analysis of Project Audit Reports for Indonesia, Pakistan, and Sri Lanka) (July 2003)

[12] Ibid

[13] Ibid

[14] Dick Wilson, (1986)