Risks and Implications: Merger of ADB’s Asian Development Fund and Ordinary Capital Resources
At the 47th Annual Governors Meeting of the Asian Development Bank (ADB) held in Astana, Kazakhstan in May 2014, President Takehiko Nakao formally announced an “innovative” scheme to augment the Bank’s financial resources. This is the merging of its two main lending operations: the Ordinary Capital Resources (OCR) and the Asian Development Fund (ADF) in consonance with its anti — poverty agenda.
Expected to be operational by 2017, ADB combines the OCR, which is offered at near — market terms to middle and low — income countries, with the ADF, its concessional window. The Bank will retain the ADF as grant — only operation. Currently, OCR comprises majority of the Bank’s lending resources while the ADF offers grants and loans at very low interest rates to ADB’s poorest borrowing countries [1]. The proposal increases OCR equity from a projected USD 17.1 billion to USD 54.1 billion. ADB, through OCR, will continue concessional lending with the same terms and conditions as currently provided to ADF countries, while ADF will now provide grant assistance only.
The Bank says the proposed combination will have multiple benefits for all its stakeholders. First, it will strengthen support to ADF countries to better address their future development needs. ADF countries will benefit from receiving enhanced financial assistance of concessional loans and grants on the same terms as currently provided. Second, it will strengthen OCR lending and ADB’s risk — bearing capacity. Third, it will also significantly reduce the future financial burden on ADF donors and enable larger transfers from OCR to ADF grant operations.
In light of this development, we express concern and reservation regarding the potential impacts of this proposal, particularly to the poor and marginalized sectors in ADF countries and Developing Member Countries (DMCs) in transition. The supposed strengthening of the Bank’s financial capacity, in our view, should be seriously considered vis-à-vis ADB’s commitment to stringently enforce its safeguards and other protective measures against social and environmental threats posed by its projects.
Risks and Implications
So far, civil society has not registered strong opposition to the proposed ADF-OCR merger in order to facilitate ADB’s ability to support the transition of “ADF only countries” to “blend status countries”. The merger is also supposed to assist the consequent graduation of countries from “blend status” to “OCR status.”
However, this lending combination elicits our grave concern primarily because the proposal seeks to “increase support for private sector operations, especially in ADF countries” (ibid.) [2]. Under its Strategy 2020, the Bank intends to scale up its private sector operations to as high as 50% of its annual operations by year 2020. Given the weak institutional frameworks, higher susceptibility to financial vulnerabilities and political instability of ADF countries and in some middle income countries (MICs), we believe that ADB is contradicting itself by providing heightened support to private sector operations that prove to be even detrimental to its DMCs.
In 2013 alone, ADB approved some USD 1.82 billion projects, with the following sectors receiving the largest shares: energy (37%); water and other infrastructure and municipal services (27%); and transport and information and communication technology [3]. Aside from these infrastructure projects, the ADB has historically taken a significant advisory role in the restructuring of power and water sectors of Asian countries as far back as the early 1990s. Previous projects have demonstrated the pivotal role of ADB in privatizing the power sector of some DMCs. These projects include ADB’s 1992 Technical Assistance (TA) on Corporatization of Dhaka Electric Supply Authority in Bangladesh. ADB supported power sector reforms in Gujarat and Madhya Pradesh that led to the corporatization and commercialization principles of the power sectors of these Indian States in 2000. The USD 300 million for reconstructing the Philippine power sector that led to the Power Industry Restructuring Act (EPIRA) [4] in 2001 is another example. In December 2014, the ADB approved a results–based lending loan for the Senior High School Support Program in the Philippines. One of the components of the said program loan is a voucher program, which further promotes privatization. Simply, this makes education not affordable to the poorest of the poor Filipinos.
A 2013 Development Effectiveness Committee (DEC) report has disclosed a breakdown of projects by safeguard classification from 2002–2013. There were 58 projects or 93% for the Environment projects for capital markets classified under financial intermediaries (FIs). This reechoes the Forum’s position that calls for stronger Bank oversight and due diligence on its operations. We raise the question of whether the ADB is indeed bearing the onus of ensuring that its Environmental and Social Management Systems (ESMS) are responsibly undertaken by its staff and the project implementers at the ground level, especially those under the private sector operations department (PSOD). Private sector operations should mitigate, if not totally avoid, potential environmental and social risks.
Privatization, in our opinion, has failed to deliver the public benefits it has promised. Education, power and water sector reforms should never burden the people with higher cost of education, electricity and water rates. Privatization should not result in the loss of adequate government regulation mechanisms and the transfer of corporate debt. Without stretching the argument and the alarm bells on the direction to which ADB is headed, we pose these legitimate concerns. We urge the ADB revisit its past hard lessons so that these will not be duplicated in the ADF-borrowing countries.
It is also disturbing for the ADB to arrive at this generalization: “the differences in social and economic indicators of these countries (OCR countries, ADF countries and donors) are not as stark as they used to be.” The draft consultation paper further adds that the ADF and OCR countries made good progress in poverty reduction but extreme poverty incidence remains higher in ADF countries (23% in 2010) than in OCR countries (20% in 2010). We recognize that the per capita income and credit worthiness of a DMC are established indicators for development. However, we have long argued for the need to arrest the increasing disparity on income inequality in Asia. We consistently argue against the grim reality of OCR countries showing high growth rates but still registering high poverty incidence. A case in point is the Philippines, which has an average economic growth rate of 5.1% since 2000. But only the elite few are benefitting from the said growth [5].
In the same manner, we strongly caution the ADB from making diagnosis such as: “key factors that constrain growth include weak infrastructure, weak education and health outcomes, weak governance and a weak environment for private sector development (PSD) [6] .” We recognize the rationale for massive infrastructure projects on energy, water, municipal services and transport in the context of providing more access for people to social services. However, we cannot not reconcile such rationale with or should ADB justify it at the expense of poor implementation of the safeguards and high operational standards. Secondly, our reservation on the approach that implementation and ownership of public services and utilities will be left at the disposal of the private sector strongly remains.
Recommendations
The Forum retains its strong position that health, education and basic sectors should be provided for by the State’s tax revenue and should not be appropriated to debt financing modalities of international financial institutions (IFIs) including the ADB. We urge the ADB’s Strategy and Policy Department (SPD) to conduct a policy impact assessment on the proposal. Specifically, this will serve in the interest of ADF countries and DMCs that will graduate to “blend status” per the projections made in the draft consultation paper. We note that the (i) anticipated benefits such as enhanced ability to leverage, efficient management of liquidity, etc., and (ii) the feasibility of the proposal from the Bank’s end are well tackled in the proposal. However the said policy impact assessment will also be a useful tool to ensure that the proposal will work primarily for the benefit of ADF countries and DMCs in transition.
Further, ADB should also look into the lending merger’s consequent effects from the perspective of DMCs and ADF countries. The Bank must reflect on whether the ADF-OCR combination best serves its poverty reduction agenda. Alongside measures to enhance the financial capacity of the Bank, we constantly call for the judicious implementation of environmental and social safeguards in all its operations.
[1] ADF only: Afghanistan, Bhutan, Cambodia, Kiribati, Kyrgyz Republic, Lao PDR, Maldives, Myanmar, Nauru, Nepal, Samoa, Solomon Islands, Tajikistan, Tonga, Tuvalu, Vanuatu Blend (ADF and OCR): Armenia, Bangladesh, Georgia, Micronesia, Mongolia, Pakistan, Palau, Papua New Guinea, Sri Lanka, Timor Leste, Uzbekistan, Vietnam.
[2] ADB, Enhancing ADB’s Financial Capacity for Achieving Poverty Reduction in the Asia and Pacific Region, August 2014, Executive Summary.
[3] ADB, Development Effectiveness Committee Report (DEC) 2013, Private Sector Operations.
[4] A Handbook on the Asian Development Bank: The ADB and its Operations in Asia.
[5] Raquiza, Marivic. Poverty and Inequality: After the rhetoric of the Past, a Look into the Future. Social Watch Philippines Report 2014.
[6] ibid. (para.13)
** Originally posted at NGO Forum on ADB Bankwatch on 1 December 2014.
