Countries and Regions

	Table of Contents
p. 11 of 21 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Agriculture B. Infrastructure C. Social Infrastructure and Environment D. Governance Dimensions of ADB Operations E. Gender Dimensions of ADB Operations F. Private Sector Operations IV. Subregional Economic Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - People's Republic of China : III. Sector Strategies

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B. Infrastructure

63. Consistent with the PRC Country Operation Strategy, the Government has requested ADB for continued lending to the energy/power and transport sectors in order to alleviate infrastructure bottlenecks as well as improve the flow of commodities from the poorer Western provinces to the coastal areas. These sectors account for slightly more than half of total lending during the 2001-2003 program period. The large amounts of capital required for investment in infrastructure exceed the amounts available from traditional domestic, multilateral, and bilateral financing sources. To supplement ADB’s lending for the public sector, the strategy promotes the use of other sources and methods of financing (such as Build-Operate-Transfer and Public-Private Partnership) to meet the scope of infrastructure investment requirements. ADB will also mobilize additional resources using cofinancing mechanisms and act as a catalyst in project financing (through loan and/or equity investment) involving private sector participation in the financing of infrastructure. Work in these areas will continue under ongoing TAs such as the Jiangsu BOT Highway TA. To ensure that ADB financed infrastructure projects generate pro-poor economic growth, most of the infrastructure projects in the program are located in the poorer interior provinces, and will be designed with specific poverty reduction components or monitorable impact features. Infrastructure projects will be designed to spread development benefits to the poor (e.g. adding feeder roads to road and railway projects; incorporating rural electrification components in power projects; considering ability to pay in tariff design).

1. Transport

64. In the road sector, where the need for assistance in the transport sector in the transport sector is most apparent, ADB operations will focus on the construction of the national trunk highway system, and improving strategic provincial highways and secondary roads that facilitate regional cooperation/inter-jurisdictional trade and thus improve the access of less developed communities to regional market centers. In line with ADB’s poverty reduction strategy, ADB-financed road projects will be designed to include connector roads and feeder roads that will also maximize the benefits of trunk roads to the poorest areas in the zone of influence. This will promote rural development and help increase rural incomes. All road projects in the program are located in poor inland provinces, concentrating primarily on key corridors in southwestern PRC (Guangxi, Shanxi, Sichuan, Yunnan and Guizhou) and the central region (Taiyuan to Xi’an).

65. A key element of ADB’s policy dialogue in the road subsector is to promote private investment in road infrastructure through BOT or public/private partnership (PPP), securitization, leasing, and bond issues. ADB is actively seeking road projects under BOT scheme or PPP that meet economic and financial criteria. In 1999, for the first time, shares were listed for two ADB financed public sector road projects.¹² Private investment to road projects will mostly take place in the eastern coastal areas where the traffic levels and expected returns are high enough to attract the private sector and freight forwarding operators. Policies addressed in the road subsector include institutional strengthening and corporatization to increase the commercial orientation and managerial efficiency of the expressway operating entities, setting the appropriate level and structure of tolls to promote cost recovery and creating an environment to attract private investment, reducing vehicle emissions, improving construction quality and improving road safety.

66. ADB’s transport strategy will also focus on expanding the railway system by constructing connecting lines and link roads with poverty areas as well as modernizing and increasing the capacity/distribution and tracking of product on key routes of the national railway system. Policy issues addressed by ADB in the railway sector include commercializing operations, improving cost recovery and promoting managerial autonomy with accountability, including corporatization where appropriate. The JFPR will be explored to supplement road and railway infrastructure projects in a manner that directly benefit the core poor.

67. Although ADB’s PRC COS covers ports and telecommunications, ADB has exited from these sectors. While the CAP for the public sector program in 2001-2003 does not include any loans or TAs in these sectors, ADB would consider financing private sector projects in these areas.

2. Energy

68. Although the PRC has achieved overall balance in the demand and supply for power, there are local power shortages because of the bottlenecks in the low voltage distribution systems and the lack of adequate investments in regional interconnections. There are also significant transmission losses at the low voltage level that lead to high electric tariffs, particularly in rural areas. The high cost of electricity has a significant impact on rural disposable income and constrains expenditure on education, health as well as investment in income generation activity, particularly by poor households.

69. To lower the costs of production and achieve a proper hydro/thermal power mix, the Government will improve grid interconnections and thus optimize available generating capacity, rationalize inefficient coal-fired power plants, and develop competitive power markets over the next decade. The Tenth-Five Year Plan (TFYP) will promote more environment-friendly power generation including hydropower development in the western region and investments in the inter-provincial and inter-regional transmission connections. Consequently, Government approval of new power generation projects will emphasize “transmitting power from the west to the east”, the reduction of sulfur dioxide, nitrogen dioxide, and total suspended particles that adversely affect air quality and result in acid rain, and allocating more gas resources as well as renewable energy for power generation. Under TFYP, the Government has set a 5 percent target of renewable energy-based electricity by the end of 2005 to reduce the high pollutant generation rate per unit energy delivered to consumers.

70. ADB will encourage private sector participation and technology transfer in the power sector to address the Government’s concerns over pollution standards and production efficiency. ADB will support private sector investment in LNG terminals and gas pipelines to provide PRC with a clean fuel alternative. In the western and central areas, ADB’s private sector operations will encourage the development of merchant power plants and the privatization of existing state-owned power plants to support the creation of competitive markets for electricity.

71. ADB, through its ongoing TA for Power Sector Restructuring, is helping the State Power Corporation (SP) to introduce competitive power markets. ADB’s lending pipeline includes high voltage inter-provincial and inter-regional interconnections and particularly those utilizing modern technology such as the high voltage DC transmission (HVDC) systems (Shen-Da System Improvement and Electrification; and Inter-regional System Improvement). Priority will be given to projects involving strengthening and modernization of the rural and urban distribution systems. This will enable ADB to promote the reforms in the rural and urban power supply and address rural income growth and poverty reduction. For power generation, in addition to special purpose generation project (Hebei Zhanghewan Pumped Storage) to meet peak demand, ADB will focus on small to medium hydropower projects in the western region. ADB will identify more renewable energy projects (e.g. wind power; solar power; and use of biogas).

3. Finance, Enterprise and Social Security Reform

72. A key element of the Government’s enterprise reform strategy is to make SOEs responsive to market forces and to hold SOEs accountable for their commercial performance. Among other things, this requires comprehensive reform of the social security system. The Government’s major objectives in social security reform are: (i) to develop a responsive social safety net for laid-off SOE workers; (ii) improve coverage for the self-employed, private sector workers, and the poor; (iii) remove the rigidities in the labor markets by allowing portability of benefits; and (iv) reduce the fiscal burden on the provinces and the national government. These concepts will initially be tested on a pilot project basis in Liaoning Province.

73. The Government has asked ADB to be the first multilateral agency to support its social security reform through a program loan. In response, ADB’s Program includes Social Security Reform Program Loan (SSRPL) and three TAs aimed at strengthening policy development within the SDPC, MOF, MOLSS and MOCA. The SSRPL will provide support in the following areas: (i) consolidating the social security system (SSS) with broadened coverage and affordability, (ii) prudently resolving the implicit pension debt problem, (iii) enhancing efficiency and improving accountability of the social security system administration, (iv) developing supplementary schemes, and (v) strengthening the legal, regulatory and supervisory framework for the social security system, the insurance sector and capital markets. The supporting TAs will provide for policy support in the areas of medical insurance and unemployment insurance and with an emphasis on maternal child care, workers’ injury and the minimum living standard. The SSRPL will introduce a number of administrative support mechanisms to facilitate program management in the area of Minimum Living Standard. During the Program period ADB will also help improve the legal framework for social security reform by helping to draft the Social Security Law and the Trust Law.

74. ADB is also supporting the development of the financing and legal infrastructure for SMEs. During the Program period, ongoing work will continue under four TAs approved in 2000 through which ADB will help facilitate SME growth by (i) creating a favorable macro policy environment with the SETC to develop feasible financing mechanisms to SMEs; (ii) develop financial instruments with the Shanghai Municipal government to facilitate SME access to financing in the debt markets; (iii) support ongoing policy and legal reform in consultation with the All China Federation of Chambers of Commerce to stimulate private sector development and business support services; and (iv) provide institutional strengthening to the China Development Bank (CDB) – a major policy bank with a focus on project finance and SME development on-lending in the western region. The TAs will form the basis for the implementation of the SME-based Financial Instruments loan in 2003.

75. In the area of capital markets, ADB operations will continue to strengthen the regulatory and supervisory frameworks for the development of supplementary schemes through: (i) the effective implementation of ADB supported Securities Law which became effective in 1999; (ii) the strengthening of the China Securities Regulatory Commission; and (iii) developing self-regulatory organizations at levels of securities exchanges and securities market participants. Work will also continue to build capacity of the China Insurance Regulatory Commission to strengthen prudential regulations and establish solvency rating systems on insurance companies by the CIRC as well as stimulate the development of institutional investors. ADB will take an active role in the development of this sector through a TA for China Life Insurance Corporate Governance. This publicly-held company has an active interest in developing the supplementary health insurance market in the PRC. Joint venture equity investment by a foreign insurer, assisted through ADB involvement, will bring best practices in commercial insurance that will also assist the sustainability of the social security system over the long-term.

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