Regions and Countries

	Table of Contents
p. 4 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy and Development Issues III. ADB’s Development Experience IV. ADB’s Operational Strategy V. ADB’s Assistance Program VI. Risks, Performance Monitoring and Evaluation

Country Strategy and Program Update 2004-2006: People's Republic of China

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III. ADB’s Development Experience

A. Review of the 1997 Country Operational Strategy

50. The 1991 and 1997 country operational strategies (COSs) guided ADB’s PRC operations. Since the 1997 COS, there have been changes within ADB including making poverty reduction the overarching objective, adopting the medium- and long-term strategic frameworks, implementing a reorganization, and establishing the PRC Resident Mission (PRCM). The 1997 COS had three broad objectives: (i) improving economic efficiency, (ii) promoting economic growth to reduce poverty in the inland provinces, and (iii) enhancing environmental protection and natural resource management. A broad assessment of the 1997 COS follows.

51. According to the 1997 COS, ADB lending was to focus on (i) physical infrastructure (covering transport, communications, energy, and water supply), (ii) finance and industry, and (iii) agriculture and rural development. Infrastructure was expected to dominate ADB assistance and account for between one half and two thirds of lending in any given year. This expectation was met with infrastructure lending accounting for 58% of total lending between 1997 and 2002. The policy issues identified in the 1997 COS for the infrastructure sectors were generally appropriate and provided a framework for programming TAs. The 1997 COS stated that policy advice through the TA and economic, thematic, and sector work (ETSW) programs would be the core of ADB assistance for the financial and industry sectors, supplemented by selective lending. As it turned out, there was no lending to finance and industry from 1997 to 2002. ADB did provide some policy-based TAs to help address problems in the financial sector but the anticipated demand for lines of credit for loans and for strengthening the financial infrastructure did not materialize. Although some loans were provided to address industrial pollution, ADB has now exited from direct lending to SOEs. The 1997 COS recognized that ADB’s agriculture and rural development portfolio would be modest because of the Government's policy of primarily using concessional funds and domestic resources for this sector. This turned out to be the case and agriculture accounted for 9% of ADB’s lending from 1997 to 2002. The agriculture policy agenda identified in the 1997 COS was too broad and ADB, except for water resource management and land degradation, experienced difficulty in addressing many of the strategic issues in this sector. As expected in the 1997 COS, there were no operations in the health or education sectors.

B. Portfolio Performance

52. The PRC portfolio is one of ADB’s largest and best performing portfolios. As of 31 December 2002, ADB had approved 94 loans to the PRC amounting to $12 billion.⁴¹ The PRC portfolio performance is consistently better than the ADB average in terms of disbursement, contract awards, and most key project implementation indicators (Table 2). This reflects the PRC’s strong country ownership, project implementation capability, and internal control systems. Major elements of this system include: (i) initial selection of projects to ensure that the projects are aligned with government priorities; (ii) clear allocation of responsibility at the executing agency level to plan and implement projects and to mobilize substantial counterpart funding before a decision is made to borrow; (iii) feasibility studies prepared by the executing agency, which are independently checked by central government agencies with further quality enhancement through project preparatory technical assistance (PPTA) work, especially in the areas of financial and economic analysis, and resettlement planning;⁴² (iv) a requirement for local environmental protection bureaus to sign off on domestically prepared environmental impact assessments; and (v) the establishment of executing agencies that are adequately staffed by competent professionals who are involved in project preparation, before external development funds are made available.

53. Appendix 2, Table A2.8 summarizes project success by sector. Of the 13 PRC projects that have been postevaluated, 10⁴³ were rated as generally successful and three were rated as unsuccessful. The three unsuccessful projects were early projects and included one each in the agriculture, transport, and energy sectors. The principal lessons identified from the evaluation of completed projects are summarized in Box 6. Special studies undertaken by the Operations Evaluation Department (OED) found that the PRC performs well in terms of resettlement, environmental impact assessment, and road maintenance. The establishment of PRCM strengthened ADB’s portfolio management activities. Interaction with executing agencies increased and broader portfolio management activities were undertaken (e.g., country portfolio reviews, procurement reviews, and financial compliance reviews).

54. The central and local governments make substantial efforts to mobilize domestic resources to finance ADB projects, an indicator of strong project ownership. During the past 5 years, ADB provided only 36% of the total financing for ADB-supported projects. The average ADB financing percentage in the PRC is far below the maximum limit allowed by ADB policy.⁴⁴ ADB has provided very little local cost financing (LCF).⁴⁵ The availability of counterpart financing has generally not been a problem.

C. Assessment of ADB’s PRC Operations

55. Overall Assessment. The PRC was selected as the first country for a country assistance program evaluation (CAPE),⁴⁶ the most comprehensive assessment available of ADB’s country operations. It concluded that the 1997 COS framework was largely reflected in the subsequent lending and TA programs. In terms of providing strategic direction, the 1997 COS was judged to be an improvement over the 1991 COS because the overarching objectives were more directly linked to sector goals and priorities. The CAPE also concluded that the 1991 and 1997 COSs were designed to address ADB’s internal needs. This underscores the need for close consultation with the Government and other stakeholders during CSP formulation. The focus of ADB’s operations narrowed from what was envisaged in the 1997 COS. By 2002, ADB was no longer providing public sector lending for finance,⁴⁷ commercial sectors (e.g., industry, ago-industry, agro-processing),⁴⁸ and some types of infrastructure (e.g., ports and telecommunications).⁴⁹ Lending for the energy sector was less than anticipated, largely because the shortages of electricity were resolved and there was no demand for large conventional generation projects during the period.⁵⁰ Lending for water supply/wastewater treatment and transport was higher than anticipated.

56. Sector Impacts. Generally the CAPE and portfolio reviews have rated ADB’s performance in infrastructure, both lending and the impact of technical assistance, as satisfactory, but there was less success in terms of project performance in agriculture, industry, and finance. An analysis of the economic internal rates of return (EIRRs) and financial internal rates of return (FIRRs) in project performance audit reports (PPARs) and project completion reports (PCRs) underlines the good performance of the PRC portfolio. The average EIRR for completed projects, weighted by project cost, was 15.2%.⁵¹ The average FIRR was 8.8%, well above the average cost of capital.⁵² The CAPE noted substantial progress in the environmental sector at both the strategic/policy level supported by technical assistance and in terms of lending. The findings of OED’s assessment on selected environmental TAs reconfirmed that these TAs have supported key elements of the PRC’s environmental management strategy. The actions taken to address the key recommendations of the PRC CAPE are summarized in Table 3.

57. Cofinancing. ADB’s cofinancing operations have been effective. About $6 billion in cofinancing has been mobilized, mostly from domestic commercial sources.⁵³ For every $1 of ADB lending to the PRC, there was about $0.50 of cofinancing. ADB was the first multilateral agency to mobilize funds to cofinance projects in the PRC from international commercial sources. ADB also helped introduce the European Investment Bank to the PRC Government. However, except for Department for International Development (DFID) of the United Kingdom and recent French cofinancing for Greater Mekong Subregion (GMS) projects, efforts to mobilize concessional funds from bilateral sources were not successful.

58. Private Sector Operations. Priority areas for private sector operations in the PRC include the financial sector, investment funds (including those that support SMEs), and infrastructure development. ADB has supported nine private sector projects in the PRC. The projects involve aggregate investments of $2.14 billion, for which ADB’s funding consisted of $151.5 million of direct loans, $79.3 million of equity investments, and $171.5 million in complementary financing. For every $1 of direct ADB funding about $8.50 of private sector financing was mobilized. ADB supported the first internationally competitively bid build-operatetransfer (BOT) water supply project in the PRC. While the water project was successful, a power BOT project (the Meizhouwan Project) has been plagued with difficulties related to changes in the sector environment and disputes related to the project. Similar problems have affected many BOTs in the power sector. In the financial sector, ADB provided a TA to strengthen the regulatory framework for foreign and joint-venture banks, and helped improve governance in financial institutions through investments in two banks, one SME fund, and two environment- related funds. While ADB has worked to improve governance in the financial institutions in which it has board representation, experience has demonstrated that there are limits to what a minority shareholder can accomplish in this area.

59. Impacts of TA Operations. The TA portfolio has performed satisfactorily. Of the 134 TAs with a TA completion report, 70% were rated as generally successful,⁵⁴ 25% as partly successful, and 3% as unsuccessful.⁵⁵ Postevaluation results indicate that the generally successful rating for PRC ADTAs (65%) is higher than the ADB-wide average (58%). While the TA program was effective in areas such as the environment, fiscal policy reforms, poverty reduction, and infrastructure, TA has been less effective in other areas. In general, the CAPE concluded that TA resources were scattered over a large number of operations and better strategic objectives were needed to guide TA operations. Some TAs were supply-driven to satisfy ADB’s internal needs and in some cases there was inadequate government ownership. Although ADB has contributed to policy and institutional change in some areas, the focus and impact of ADB’s knowledge-based products need to be improved by drawing on the results of a joint government/ADB study (Box 7).

D. External Funding Coordination and Partnership Agreements

1. 1. Coordination of External Funding

60. Because of declines in financing both from the World Bank Group, reflecting the end of the PRC’s access to International Development Association funds and concerns about exposure limits, and from the Japan Bank for International Cooperation, official flows to the PRC have declined significantly. By 2000, official flows were about one quarter of the 1995 peak.

61. Almost all major multilateral and bilateral aid agencies are active in the PRC. There is no formal external development aid group. Aid coordination is challenging, partly because of institutional issues in the Government’s aid management system.⁵⁶ This multiagency framework for aid management sometimes makes coordination between international lending agencies and bilateral grant agencies difficult because of institutional impediments. The Government recognizes the importance of aid coordination and has recently been encouraging development partners to seek ways to collaborate with each other in terms of project financing and knowledge-sharing.

62. As shown in Table 4 and Appendix 2, Table A2.10, most development partners have recently revised their country operational strategies.⁵⁷ While different development partners may have their own work program, they share many common themes such as poverty reduction, governance, and environmental improvement and have shifted the focus of their operations to help the poorer inland regions. This convergence of strategies offers increasing opportunities for collaboration. In general, support for infrastructure development will lie in the domain of the multilateral institutions such as the World Bank and ADB while the bilateral aid agencies will primarily channel their concessional funds to support environmental improvement, education, and health. ADB will continue to actively seek collaboration with the bilateral agencies to enhance the poverty orientation of its operations during the CSP period. The sharing of knowledge-based products will also continue to underpin collaboration efforts among development partners to increase strategic impacts and reduce duplication and overlap. ADB is committed to deepen its collaboration with other development partners during the implementation of the CSP and will actively seek opportunities to do so.

63. Major external development agencies in Beijing have adopted initiatives to promote coordination, including (i) establishing an informal development partners group that meets monthly, and (ii) the formation of roundtables on specific subjects (e.g., environment, governance, law and development, and energy). ADB’s role in external agency coordination increased after the establishment of PRCM. PRCM participates in local development partners’ group meetings, conducts briefings on ADB operations for development stakeholders, and attends events organized by other partners. The local development partners’ group implemented two key initiatives in 2002: a database web site that provides information on the projects funded by participating external development agencies and a joint commonality study. In April 2003, there was a major coordinated effort to support the Government’s fight against SARS.

64. The establishment of PRCM has increased ADB’s interaction with NGOs and the private sector. PRCM organizes periodic meetings to interact with NGOs and the private sector to focus on poverty reduction, unemployment issues, environmental protection, education, partnerships between public and private sectors, and roles of NGOs in development projects. Interaction with NGOs will be deepened as appropriate funding mechanisms become available. PRCM also provides briefings to interested private sector players, including the foreign chambers of commerce based in Beijing, to share the findings of ADB’s knowledge-based products and to discuss potential business opportunities.

2. Partnership Agreements

65. ADB will maintain its dialogue with the Government to identify appropriate financing for projects and will pursue cofinancing from external official and commercial sources and domestic banks. It will take steps to identify concessional cofinancing for poverty reduction and environmental projects. However, the budgets for bilateral funds are under pressure and bilateral grant pipelines are full. Thus expectations for mobilizing bilateral grant cofinancing remain modest. As the PRC prefers the benefits of competitive bidding compared to tied procurement, cofinancing from export credit agencies has not been a feature of ADB’s public sector lending program. Considering the reduction in official development assistance, ADB’s cofinancing operations will place increasing priority on cofinancing from semi-commercial and commercial sources, both domestic and international, and the use of credit-enhancement products.

66. The 2002 ADB, PRC, and DFID Poverty Reduction Cooperation Fund will help deepen the poverty orientation of ADB operations. Discussions with DFID and the Government are ongoing on a proposal to develop a provincial partnership agreement. The PRC-GEF Partnership on Operational Program 12 (OP12) will provide opportunities to assist the PRC in combating land degradation and underpin the country’s responses to international conventions such as the Convention to Combat Desertification, Convention on Biological Diversity, and the United Nations Framework Convention on Climate Change. ADB will play the lead external agency coordination role in this area. This experience indicates that if ADB wishes to play a lead role in a sector, it must be prepared to commit the necessary staff resources.

67. Collaboration with other partners is continuously being explored. Agence Française de Développement (AFD) has broadened its operational strategy to cofinance projects in Yunnan province and Thailand in the context of GMS regional cooperation. Such collaboration was arranged for the 2003 Western Yunnan Roads Improvement Project. The Japan Bank for International Cooperation and the European Investment Bank have cofinanced previous ADB projects. Opportunities will be explored to use the Public-Private Infrastructure Assistance Facility. The sharing of information with the Organisation for Economic Co-operation and Development (OECD) has increased as OECD has intensified its activities in the PRC.