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Board of Directors’ Report

Economic growth was strong in large parts of the region in 2005 despite the tsunami and earthquake disasters, avian flu threat, and higher oil prices. Many countries are no longer merely aspiring to be part of the global economy but have moved to its center.

Judged by purchasing power parity, Asia and the Pacific now makes up 30% of global gross domestic product (GDP), while the proportion of population surviving on $1 a day or less has come down from about 34% in 1990 to 19% in 2003, or some 620 million people.

But Asia and the Pacific is still home to fully two thirds of the world’s poor—more than any other region. Those living on less than $2 a day still number about 1.9 billion, or nearly a third of the world’s population. Clearly, reducing poverty must continue to be the guiding priority of the Asian Development Bank (ADB) in the years ahead.

ADB remains firmly committed to helping its developing member countries (DMCs)—and the entire region—achieve the Millennium Development Goals (MDGs). Meeting all these goals by 2015 will be a challenge and depends on the actions of the developing countries themselves, as well as those of all development partners. ADB will play its part to strengthen these partnerships, and actively monitors progress.

While the region as a whole is making good progress toward meeting the income poverty target of the first goal (to eradicate extreme poverty and hunger), several countries may fall short. The region is also at considerable risk of failing to reach the non-income goals, with available data indicating that 27 of ADB’s DMCs are at risk of not achieving 25% or more of the indicators.

The greatest concerns are in the health, water supply and sanitation, primary education, and environment sectors. Additionally, more action is needed to achieve gender equality in tertiary education and women’s empowerment.

Throughout the region, ADB must ensure that all its work is aimed at reducing poverty—its overriding purpose. This means intervening either directly—by including strong, pro-poor elements in all programs and projects— or indirectly, by fostering pro-poor sustainable economic growth in its DMCs.

In his speech at the 2005 Annual Meeting in Istanbul, ADB President Haruhiko Kuroda called on ADB to be more relevant, more responsive, and more focused on results so it can meet the challenges and demands of the borrowing members in achieving the MDGs.

The following presents some steps ADB is taking to ensure it is more effective and efficient in carrying out its work. Subsequent chapters of this report look at the work ADB continued or launched in 2005 to help meet the goals in each of its operational subregions.

Improving ADB’s Effectiveness

Portfolio Performance and Results

The Annual Report on Loan and Technical Assistance Portfolio Performance for 2004 from the Operations Evaluation Department was well received by the ADB Board, which found that the report provided hard evidence and numbers to identify several important strategic challenges.

These findings were generally consistent with those of other efforts, including the consultation missions for the partnership framework for middle-income ordinary capital resources (OCR) countries, and the independent assessment of the effectiveness of the reorganization of ADB and the Innovation and Efficiency Initiative.

Among the findings, the analyses indicated that when the increased lending of 1997–1998 in response to the Asian financial crisis was factored out, the annual OCR and Asian Development Fund (ADF) loan approvals had stagnated at about $5.2 billion a year in the past decade, and OCR disbursements had declined steadily. Income from OCR lending fell by 43% from 2001 to 2004, resulting in a 38% drop in ADB’s gross annual income.

Some 86% of loan projects in the past 10 years experienced delays that required at least one extension of the loan closing date; 60% required extensions of more than 1 year, with the average overall extension about 2 years.

Many borrowers struggled to meet conditions for second and subsequent program loan releases, resulting in a carryover of about $1.25 billion in delayed tranche releases at the end of 2005. In addition, lending was heavily concentrated, with 8 DMCs receiving 83% of the total, while the 23 smallest borrowers received only 9%.

These broad trends supported the contention that ADB’s traditional products were no longer meeting many of the needs of its key clients, and that new products and less arduous procedures were needed to improve the effectiveness of its development activities.

During 1998–2004, the total number of ongoing technical assistance grants in ADB’s portfolio increased by 53%, while the net amount of the technical assistance portfolio increased by just 42%. There are indications that the technical assistance portfolio growth has exceeded ADB’s capacity to manage it effectively. The proportion of technical assistance activities visited by a review mission has fallen steadily each year from a high of 66% in 1998 to a low of 25% in 2004. And despite the significant growth in the technical assistance portfolio, the average annual number of staff days on technical assistance review missions remained about the same during 1998–2004.

These issues are being addressed under ADB’s Reform Agenda, through the Innovation and Efficiency Initiative and other programs. New products, such as the multitranche financing facility, subsovereign and nonsovereign public sector financing facility, local currency lending, refinancing and retrofinancing facility, and financing syndications and risk-sharing agreements, are being introduced, and the administration of more projects is being delegated to ADB’s country offices to improve oversight and reduce response times.

The report’s direct impacts are largely internal to ADB. For the first time, the Development Effectiveness Committee requested Management to prepare an action plan to address the findings of an Operations Evaluation Department report. Management formed a task force to prepare an action plan to address the issues identified in the report at the corporate level. The larger and more important indirect impacts of this report will be to stimulate improvements in ADB’s performance in administering the portfolio, and better project delivery for ADB’s DMCs.

Assessing Project Quality

The reforms under way throughout ADB’s operations are equally important in its Operations Evaluation Department, where changes have started to eventually turn the 2005 Annual Evaluation Review into a review of development results, rather than a review of evaluation activities.

In comparison with its predecessors, the 2005 review differed in structure, content, and analytical depth. In particular, it undertook a retrospective evaluation of ADB’s public sector projects, which account for 84% of cumulative lending, and its conclusions should help ADB improve project quality and portfolio performance in the future.

In general, the analysis of 968 projects showed that project success deteriorated during the 1970s, bottomed out in the early 1980s, and improved from 1987 onward . The evidence also suggests that efforts in the early 1990s to improve project quality through the project management structure, quality at entry, and portfolio management and project administration met with some success, although these efforts need to be continued.

The report highlighted some key factors necessary for ADB to become a results-based organization, such as improving selectivity and focus, taking into account past results of projects; raising the performance of countries with poor records; and strengthening the economic forecasts underlying project plans—since most infrastructure projects require that planners take a decades-long view.

Measures to prevent project approvals bunching up at the end of the calendar year were also suggested, among them, giving staff a clear message that achieving development results is more important than the calendar year in which a loan is approved. ADB Management responded in August, saying that ADB’s ongoing and future operations will support the implementation of major recommendations. The report also noted that ADB had made considerable efforts to mainstream the Managing for Development Results agenda across all operations, particularly through its results-based country strategies and programs and the Project Performance Management Systems.

Another innovation in the 2005 report featured a chapter drawing together some of the broader findings of ADB’s operations in one sector.

In 2005, the Operations Evaluation Department also published several separate sectoral evaluations (such as the social sector in Pakistan and the power sector in the Philippines). In addition, evaluations were completed on ADB’s country assistance programs for Bhutan and Indonesia.

Improving Country Strategies

These evaluation findings are also being used to help ADB improve its country strategies.

Among the specific findings, the analysis showed that the project sector was an important determinant of project performance. For transport and energy projects approved in the 1990s, the probability of a successful rating was over 85%. There was a lower probability of success, at 46%, for projects in the agriculture sector and for lines of credit to governmentowned development finance institutions. The problems in the agriculture sector were widespread, although performance was relatively better for irrigation and rural development projects.

Overall, energy is one of ADB’s best-performing sectors

Performance also varied, naturally enough, by country, although it improved for all country groupings in the 1990s. More than two thirds of ADB-funded projects were successful in Bhutan, Central Asian republics, People’s Republic of China (PRC), Greater Mekong Subregion (GMS), Maldives, and Mongolia.

The project success rate was below 50% in the Pacific islands, heavily influenced by weak performance in Papua New Guinea, and in the Philippines.

ADB policies were applied uniformly to all countries, despite clear differences in portfolio performance and borrower requirements. ADB has recognized that it will be more efficient, will reduce transaction costs, and likely improve results to delegate more authority and accountability to strong DMCs; work on this continues in the middle-income country strategy and through the Innovation and Efficiency Initiative. Efforts will also be required to assist small, vulnerable, and/or weakly performing DMCs whose primary needs may not be for loan-funded projects or programs.

In reviewing these reports, the Development Effectiveness Committee recommended further work to improve sector selectivity and focus on country strategies, strengthen core technical skills, increase delegation to the resident missions, and strengthen loan and technical assistance project implementation. The committee noted that, while past performance in a sector is an important factor, other considerations also need to be taken into account, including the borrowers’ requirements and the potential impact on poverty reduction.

Spotlight on the Energy Sector

The Operations Evaluation Department chose to put the energy sector under the spotlight in its 2005 report, because it accounts for 19.7% of cumulative lending and is going through structural changes in many countries.

Overall, energy is one of ADB’s best-performing sectors. Although delays in implementation are the norm, of the 94 evaluated power projects, 76 were rated as successful or better, 16 as partly successful, and only 2 as unsuccessful.

ADB assistance has contributed to economic development by increasing access to electricity and making the energy sector more efficient. ADB should continue to support power sector reform, sound regulation, tariff reform and cost recovery; development of an enabling environment for private sector investment; and finance for both public and private sector investments in infrastructure.

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