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p. 34 of 39 BACK | NEXT The Record Chairman’s Message Board of Directors' Report 2005 in Figures Management Board of Directors Operations in 2005 East and Central Asia Mekong The Pacific South Asia Southeast Asia

Operations in 2005

Promoting Growth, Fighting Poverty

The year 2005 was, in part, one of tragedy in Asia and the Pacific. It opened as survivors of the Indian Ocean tsunami picked through the remnants of lives ruined by giant waves and closed as the homeless victims of the crushing earthquake in South Asia struggled to find shelter from the Himalayan winter.

ADB responded with speed and flexibility to both natural disasters, providing over $850 million for the countries hit by the tidal waves and a package of $1 billion for Pakistan. Early disbursements, although slow in some areas, were concentrated on reestablishing roads, power facilities, and other major infrastructure. ADB worked to focus its efforts to ensure speedy implementation of projects—and close cooperation with development partners in response to the disasters as well as to control the spread of the avian flu virus.

Overall operations during the year, meanwhile, focused on the physical infrastructure needed to remove barriers to faster economic growth, an important factor in efforts to reduce poverty when linked with complementary services and activities that support the broadening of livelihood opportunities for the poor.

ADB also found new ways to draw in private sector support for development projects—one of five thematic areas of its programs—including through risk mitigation products that can overcome investor hesitancy. Most developing countries hold enormous untapped potential for greater involvement from private markets, both international and domestic, and multilateral development banks can help unlock this potential and bring it to bear on the massive funding gap for infrastructure projects.

Similarly, ADB continued to build “soft” infrastructure under the second of its main development themes, capacity development. Ensuring strong economic growth means encouraging laws and strategies that protect property rights, promote openness, improve financial governance, and strengthen capital markets.

The other thematic areas include regional cooperation and integration, gender and development, and environment.

A power station access tunnel at Nam Theun 2 in the Lao PDR; the GMS is making solid progress toward a sound infrastructure base

The most advanced of ADB’s regional programs, for example, the Greater Mekong Subregion Economic Cooperation Program (GMS Program), has helped build a sense of community in the Mekong subregion, making solid progress in establishing a sound infrastructural base, and has begun to move into other areas. Realizing the power of partnership, ADB has forged an alliance comprising eight countries and six multilateral institutions to further regional cooperation under the Central Asia Regional Economic Cooperation Program. As a result, the program has become a model for cooperation and enhancing development effectiveness. Collectively, about $1.05 billion has been mobilized for regional cooperation projects under the program for the next 2 years alone in addition to assembling a vast pool of knowledge to increase cooperation in Central Asia.

Through such efforts, ADB is helping countries achieve stronger economic growth and make progress in their commitment to internationally agreed MDGs on poverty reduction by 2015.

However, the region has more people with inadequate nutrition, more living in slum conditions, and more without access to water and sanitation than any other developing region. To help relieve the problems faced by the poor, ADB’s lending programs also concentrate on several sectors, including education, governance, energy, environment, water, finance, social development, and health.

Public-private sector partnerships, for example, have had great success in improving health services in Bangladesh and Cambodia. In both cases, nongovernment organizations (NGOs) have been engaged to improve health service delivery in government clinics.

Hundreds of inventive projects have also been carried out under the ADB-administered poverty funds over the years. One standout project is the Strategic Private Sector Partnerships for Urban Poverty Reduction financed by the Japan Fund for Poverty Reduction and implemented with the corporateled NGO, Philippine Business for Social Progress. The NGO has recorded a number of great successes in upgrading slums and improving the livelihoods of the urban poor in Metro Manila.

There are other funds to accelerate ADB’s efforts on poverty reduction such as the Poverty Reduction Cooperation Fund, with financing from the United Kingdom and the Cooperation Fund in Support of the Formulation and Implementation of National Poverty Reduction Strategies financed by the Netherlands government.

Throughout its lending operations, ADB strives to ensure that environmental issues are central, and that there is a sharp focus on issues affecting women and other disadvantaged groups, two of five thematic priorities in lending operations. Environmental concerns are reflected in every loan, but several in particular were designed to square environmental concerns with the demands of high economic growth in places such as the PRC.

Infrastructure

Investment in infrastructure accounted for the bulk of ADB lending in 2005, as it has for several years. It comprises about 60% of ADB’s overall lending portfolio. The biggest portion of these loans in 2005 was for transportation and telecommunications projects at close to 30%. Loans for energy-related projects amounted to about 18% of the total, while water supply, sanitation, and waste management accounted for 11%.

One highlight of the year was the Nam Theun 2 Hydroelectric Project in the Lao PDR. It underscored the importance to development not only of infrastructure but also of the private sector, regional cooperation, stakeholder consultations, and close collaboration among development and finance institutions. Eventually, it will provide much-needed power to Thailand and much-needed development funds for the Lao PDR.

Building infrastructure is clearing the obstacles to economic growth and helping reduce poverty

However, in developing Asia and the Pacific, funds for infrastructure still fall far short of the estimated need. Private sector investment generally cooled off in East Asia after the 1997–1998 financial crisis, particularly for countries like Indonesia and the Philippines. Poorer countries in the region continue to attract little or no private infrastructure funds.

Financing needs for energy, transport, information and communication technology, and water and sanitation systems are expected to exceed $250 billion per year over the next 10 years. East Asia alone will require $1 trillion in infrastructure investment over the next 5 years to sustain fast growth and create jobs for its young population, according to a joint study published in March 2005 by ADB, World Bank, and Japan Bank for International Cooperation. The PRC still accounts for the lion’s share, at some 80%, of East Asian investment.

In ADB’s 4 decades, more than half of the $113 billion invested in Asia and the Pacific has gone to improvements in transportation and communications, energy, and water supply and sanitation. Commerce cannot thrive and the poor cannot improve their lives using potholed roads, archaic phone systems, weak irrigation, and distant sources of drinking water.

The experience of the PRC shows how large investments in such infrastructure support stronger economic growth and reduce poverty. Transport projects, in particular, open up bottlenecks and clear the way to new markets. ADB approved a large loan in September to help develop a modern railway connecting the provinces of Henan and Shaanxi.

At the other end of the scale, an infrastructure loan in Indonesia (approved in late 2005) illustrates ADB’s work to lift living standards in poor and often isolated villages. ADB is providing $50 million over 3 years to support government efforts in some 1,800 communities to cushion the effect of a 186% rise in the price of kerosene caused by the oil price spike and an end to government subsidies. The loan will finance construction and repair of roads, bridges, irrigation systems, water pipes, and drainage works with the help of community organizations. About 2 million people stand to benefit.

For more on ADB’s infrastructural and other lending programs, see the subregional chapters.

ADB Assists Disaster-Struck Areas

Sakina Bibi was at home with her children in northern Pakistan on 8 October 2005 when she felt the mountains shake. “I thought it was the end of the world…and we (were) all going to die,” she recalls. “I started calling out to Allah and ran out with my children. Within seconds my entire house had collapsed.” Surveying the damage in Pakistan The devastating earthquake was one of two dreadful disasters that book-ended 2005. The year dawned just days after massive waves had torn through coastal areas around the Indian Ocean, killing more than 200,000 people. And it ended as millions of survivors of the enormous quake faced winter in tent camps. Connecting the two was the swift response from ADB. In record time, with marathon legal and assessment work, ADB launched the Asian Tsunami Fund. This was equaled by the speed with which ADB’s project teams processed the emergency assistance for all disaster-struck countries. At $600 million, the fund is the largest grant program in ADB’s history. ADB then used the knowledge gained to launch the Pakistan Earthquake Fund in even less time. ADB coordinates its assistance for countries faced with natural disasters and post-conflict reconstruction under its Disaster and Emergency Assistance Policy of 2004. It has had a disaster policy since 1987 and provided $2.4 billion in emergency assistance loans since then. Under the new policy, however, ADB is learning from its long experience in disaster management gained through a string of calamitous events in the region, whether the Gujarat earthquake in India in 2001, massive flooding in Bangladesh in 2004 and in the PRC in 1998, or after conflicts in Cambodia, Timor-Leste, and elsewhere. The policy emphasizes better coordination among the many development agencies and relief organizations that respond to disaster, and places a premium on disaster risk planning. Rebuilding after the Waves Around the Indian Ocean, more than a year after the tsunami, the survivors are putting their lives back together with ADB’s help. With subsequent replenishment of the fund, ADB approved $859.9 million during the year for the countries hit by the waves. ADB reviews the damage in Sri Lanka (top) and Aceh, Indonesia (bottom); the response was swift and effective In Aceh, Indonesia, those funds are helping the severely affected agriculture sector get back on its feet. The waves washed out a fourth of cash crop areas and rice fields, taking away the livelihoods of about 320,000 farmers and employees and leaving damage estimated at more than $200 million. ADB’s Earthquake and Tsunami Emergency Support Project is helping communities find the resources they need to repair farms: agricultural enterprises are being restored and support services are being rehabilitated. Government and development partner joint assessments estimated losses to Indonesia at about $4.7 billion. Some 126,000 lives were lost in the provinces of Aceh and North Sumatra, and hundreds of thousands were left homeless. ADB approved grant financing of $300 million— $290 million for the Earthquake and Tsunami Emergency Support Project and $10 million for the Multi-donor Trust Fund. In South Asia, the tsunami funds are helping rebuild the essentials of economic growth and recovery: roads, power facilities, and other major infrastructure. They are being used to restore livelihoods, provide primary education and health services, revitalize water supply and sanitation, and rebuild homes. Sri Lanka is faced with the arduous task of rebuilding about 100,000 houses; replacing 70% of the fishing fleet; and helping 11,000 companies get back to business. Another 150,000 people, now in informal self-employment, have to get back on their feet. Sri Lanka is using the funds it received, a package of just under $240 million, to help rebuild roads—especially those in the north and east of the country— community-based infrastructure, fishery harbors, and livelihoods. ADB’s tsunami assistance also addresses governance issues, legal empowerment for survivors, and anticorruption issues. In India’s states of Tamil Nadu and Kerala, ADB has helped thousands of fishermen get back to work. Electricity, water, and transportation links are also coming back. Assistance to India includes the $200 million Tsunami Emergency Assistance Sector Project, comprising a $100 million loan and an Asian Tsunami Fund grant of $100 million. Another $5 million will come from technical assistance grants. In the Maldives, the tsunami caused damage of nearly $500 million, equivalent to some 62% of GDP, although the loss of lives was comparatively small. ADB’s tsunami assistance package of $23.2 million is helping restore infrastructure (transport, water supply/sanitation/solid waste management, power, agriculture, and fisheries). As a result of lingering tsunami-related effects coupled with a steady increase in oil prices, fiscal balances in the Maldives deteriorated. ADB Rushes Assistance to Pakistan after Earthquake The 8 October earthquake in South Asia was another debilitating natural disaster in the region’s history, killing about 73,000 and leaving another 70,000 severely injured or disabled. More than 2.8 million people were rendered homeless, and 2.3 million were left without adequate food. About 324,000 jobs were lost to the earthquake, equal to 29% of the previously employed population in the worst-hit districts. The cost of reconstruction is estimated at $3.5 billion. ADB responded quickly. ADB President Haruhiko Kuroda announced a package of $1 billion for reconstruction and recovery. Using the experience gained in putting the Asian Tsunami Fund together, ADB established the Pakistan Earthquake Fund in November to channel grant funding. Under the $300 million Earthquake Emergency Assistance Project, for example, ADB will help reconstruct lost assets and restore the transport, power, health, and education sectors in Azad Jammu and Kashmir* and in North-West Frontier Province. Approved in December, the loan features a quick-disbursing mechanism, amounting to $100 million, to finance imports of materials urgently needed for the recovery process. The project aims to quickly revive economic activity, with work to rehabilitate major roads and bridges, repair hydropower generating stations, and construct new lines and facilities. Health clinics and schools will also be reconstructed. The project will help reestablish some government services destroyed in the disaster. It will offer legal assistance and address governance issues and the rebuilding of government institutions to reduce the enormous strain on government services. This includes replacing documents such as birth and death certificates, property titles, and identification cards. * Azad Jammu and Kashmir is an area over which India and Pakistan have been in dispute since 1947. The Asian Development Bank does not intend to make any judgment as to the legal or other status of any disputed territories or to prejudice the final determination of the parties’ claims.

Private Sector Development

Raising development funds for infrastructure and other programs is a formidable challenge, and meeting it requires broad commitment of private sector funding and expertise. However, getting that support requires innovation.

The rebuilding of Afghanistan is a case in point. When the Taliban was pushed from power in 2001, there was little left of infrastructure. The roads, phone system, and financial system were shattered. Without such basic structure, many private sector investors were lukewarm about committing money. With ADB support for private sector investments, however, a new commercial bank was established and began expanding in 2005, and an investment fund to help small- and medium-sized enterprises was set up (see above).

Another ADB loan in 2004, $35 million to Roshan—a company that provides most of Afghanistan’s telecommunications—has helped produce spectacular results from establishing a mobile phone network.

Nonetheless, many obstacles to private sector growth still exist in Asia and the Pacific. Economic and regulatory uncertainties; macroeconomic instability; high tax rates; onerous regulatory and administrative requirements; corruption; and insufficient infrastructure, finance, and skills are all significant barriers to investment.

Through its private sector operations, ADB is finding innovative ways to overcome investor reticence toward some parts of Asia. It is mitigating risks, for example, through the creation of guarantee instruments such as partial credit guarantees and political risk guarantees, which protect investors against confiscation, nationalization, breach of contract, and other factors.

In 2005, ADB reinitiated a partial credit guarantee to banks in Pakistan to encourage lending to small- and medium-sized enterprises, while in Afghanistan it was in the process of disbursing loans of $5 million for the Afghanistan Investment Guarantee Facility and $10 million for a supplemental political risk guarantee.

Other major private sector projects included the Tangguh Liquefied Natural Gas project in Indonesia, for which ADB approved a $350 million loan to build and operate gas production wells, platforms, and a liquefied natural gas facility. ADB made an equity investment of $75 million in the PRC’s Bank of China, and in Pakistan, it will provide $37.3 million to help bridge a pending electricity shortfall in its first assistance to a private sector hydropower project.

Banking from Scratch—Investing in Afghanistan

The damage in Afghanistan was more than ruined buildings after a quarter century of war. The country’s financial institutions had ceased to function or no longer commanded trust; and the central bank had only a loose grip on the currency. By contrast, the ancient cash-based Hawala system enjoyed customer loyalty others could only envy. Afghanistan International Bank, established as a commercial bank that could foster private sector development crucial to economic revival, was among the first institutions to step in. Under a contract with Dutch banking giant ING and supported by an ADB investment of $2.6 million for a 25% stake, it is helping rebuild the shattered financial sector. A man and a boy prepare the day’s bread from scratch; rebuilding the country has also meant starting from scratch “It was very basic when we started here, and we had to start from scratch. This is not a branch office; we were setting up an all-new local bank. We needed not only to find a building, but also to create a whole new banking system. We couldn’t just adopt the system of our parent organization,” says Chief Executive Officer John Haye, a banking veteran who came to the bank from ING. The bank was established in Kabul in March 2004 as a local bank operating to international standards. It opened its first branch in Mazar-e-Sharif in August 2005, followed by a branch in Kandahar in October. Staffing was among the big challenges. To find corporate banking experts and chief accountants, skills not widely available in a country emerging from 25 years of war, the bank had to look abroad. It found suitable and affordable candidates, including Pashto speakers, in Pakistan. The next step was finding clients. Again, unlike other foreign banks, the bank could not tap an established clientele. “Most of the other banks operating here had merely shifted to their Pakistan clientele (many of them Afghan expatriates). So they had a clientele already,” says Mr. Haye. For its lending portfolio, the bank had some help from the United States Agency for International Development, with a $2 million funding program used to finance the agriculture sector and plans for another line to fund small- and medium-sized enterprises. The bank has also developed its own lending portfolio. “You have to be careful which clients you are selecting,” says Mr. Haye, referring to the need to avoid those involved in the huge illicit drug trade in Afghanistan and other areas. The bank has chosen economic sectors it feels are financially rewarding and need support. These include import substitution businesses that can replace lucrative goods now expensively imported from Pakistan or elsewhere, and promising Afghan export sectors that can generate foreign currency.

Regional Cooperation

Regional cooperation and integration have intensified in many parts of Asia and the Pacific over the past decade. Intraregional trade now accounts for 55% of East Asia’s total, up sharply from 35% in 1980; free trade agreements are proliferating; and rapid growth in the PRC and India is encouraging the trend.

ADB believes regional cooperation and integration will continue to play a significant role in the growth of Asia and the Pacific. It has stepped up its effort to encourage both and is managing the area under the new Regional Cooperation and Integration Strategy, which rests on four pillars: regional and subregional cooperation programs, trade and investment cooperation and integration, monetary and financial cooperation and integration, and the provision of regional public goods (such as in efforts to control HIV/AIDS or avian flu).

The GMS Program is widely recognized as an example of a successful subregional initiative established in 1992 with the support of ADB. In addition to ADB’s vigorous effort toward continued strengthening of the GMS Program, it envisages significant scaling up of support for the Central Asia Regional Economic Cooperation Program in the coming years, and work there has found momentum in building roads, ports, and bridges; planning power and telecommunication networks; and untangling trade relationships through harmonized policy and institutional environments.

Leaders in the Pacific region have overcome a recent lack of momentum toward greater cooperation and are moving forward with agreement to a new Pacific Plan for regional cooperation and integration.

In South Asian countries, dialogue is increasing through several programs, including the South Asian Association for Regional Cooperation, South Asia Subregional Economic Cooperation, and Subregional Economic Cooperation in South and Central Asia programs.

Meanwhile, emerging trends of trade and investment integration in Asia prompt ADB to have a more coherent approach to promote trade and investment intraregionally as well as extraregionally. ADB will focus on supporting regional and subregional policy dialogue on trade and investment, conducting research on regional trade agreements—how to make them a building block toward multilateral liberalization—and strengthening institutions within developing member countries.

Support for monetary and financial cooperation and integration has been significant. ADB has supported several regional initiatives, including those under the Association of Southeast Asian Nations (ASEAN), ASEAN+3, Asia-Pacific Economic Cooperation, and Asia-Europe Meeting. ADB will expand its support to other regional groups, such as the South Asian Association for Regional Cooperation Finance Ministers and Central Asia Regional Economic Cooperation Program Finance Ministers. ADB has conducted extensive research to support the ASEAN+3 Research Group and the Asian Bond Market Initiative Working Group. ADB publishes the biannual Asia Economic Monitor and Asia Bond Monitor and maintains the AsianBondsOnline website.

In April 2005, ADB established the Office of Regional Economic Integration to act as an internal focal point for regional cooperation and integration efforts. Two special advisors to the President in charge of regional cooperation and integration were appointed to coordinate and streamline activities undertaken by ADB’s departments and advise on strategic measures and initiatives to enhance the organization’s role in furthering regional cooperation and integration in Asia and the Pacific.

Cooperation Combats Avian Flu

Of the 175 human cases of avian flu the World Health Organization has reported globally since the outbreak in January 2004, almost all have been in Southeast Asia. Of those, 93 occurred in Viet Nam, with deaths now at 42. Estimates of the cost for controlling avian flu and preparing for a possible pandemic stand at about $1 billion for the next 5 years In October 2005, ADB approved $58 million for two planned grant projects—a $28 million regional project addressing bird flu and $30 million for a communicable disease project in the Mekong. It plans to rapidly allocate an additional $600,000 to continue its support to the World Health Organization’s regional office in Manila and extend this to its Delhi office covering Southeast Asia. However, estimates of the cost for controlling avian flu and preparing for a possible pandemic stand at about $1 billion for the next 5 years. Viet Nam’s Ministry of Agriculture and Rural Development and Ministry of Health estimate their needs to be about $300 million each. The government is providing about $130 million per year, mainly for the Ministry of Agriculture and Rural Development, and external agencies have committed about $90 million so far. Viet Nam has been the epicenter of the epidemic to date, with cases reported from most provinces and totaling over 1,900 outbreaks. About 60 million of the 300 million chicken and ducks have died or been culled and a nationwide campaign is in place to identify and contain new outbreaks in flocks. Although the poultry sector is relatively small, the economic cost is put at about $200 million, and a similar sum has been used for control efforts, most of it governmentfinanced. The flu epidemic is estimated to have lowered GDP by about 0.5% in 2004. In the medium term, ADB could commit at least $470 million to support the overall response in Asia, it announced in November. Assistance could include about $300 million for new projects in the PRC, Indonesia, Philippines, and Thailand.

Improving Financing Options

To expand the range of financing instruments and modalities, ADB began testing three new initiatives in 2005 under the Innovation and Efficiency Initiative. The aim is to increase flexibility to respond better to client needs.

A new approach to cost sharing and expenditure eligibility has been put in place. This will improve ADB’s project financing capability in a manner more consistent with market practices. The new arrangement involves more flexible cost-sharing limits and expands the categories of expenditures ADB can finance (land acquisition and payments for rights-of-way, taxes and duties, and other expenses such as bank charges, leasing, and secondhand goods). It also does away with the old distinction between foreign exchange and local costs and a level of investment plans.

A number of nonsovereign transactions with stateowned enterprises (majority owned by the state) are being prepared, namely in India and Indonesia. Project teams are screening proposals with local government units. Refinancing propositions are also under consideration.

ADB began testing the new multitranche financing facility in 2005 with two loans for major road investment programs in South Asia. Designed to provide finance “as you go” and somewhat akin to a commercial bank’s letter of credit, this facility will allow ADB to finance long-term investment programs in structured and staggered multiple loans. It allows clients to combine financing sources with ADB. The financing sources can include multilateral development banks, bilateral agencies, private equity groups, commercial banks, and capital market operators.

The facility establishes a means to target specific, sequential components of large stand-alone projects; slices (or tranches) of sector investments over a longer time frame than the current norm; equity investments; financial intermediary credit lines; and guarantees.

ADB has been expanding its coverage into local currency lending through bond issues and commercial swaps in the PRC, Philippines, and Thailand.

Good Governance, Fighting Corruption

Governance and legal systems have been called the weakest link in the strong chain of development in a number of economies in Asia. Poor government, ineffective policies, and corruption hinder economic growth and development, and thus efforts to reduce poverty. Public administration is often also used to serve a small portion of the population who rely on the state and its institutions to provide special privileges for their businesses or their personal interests.

ADB was the first multilateral development bank to adopt a governance policy applying to all its operations, in 1995, following it up 3 years later with the Anticorruption Policy. Governance work has covered a range of areas. In national government administration, for example, ADB’s work embraces Viet Nam’s Support Implementation of the Public Administration Reform Master program. It includes assistance to the Marshall Islands to refocus its public sector for effective delivery of basic social services, and technical assistance to Azerbaijan to develop a competition policy framework.

ADB is helping local governments in Cambodia, Indonesia, Pakistan, and Philippines to decentralize and improve their financial management and service delivery. In law and judiciary, ADB has supported the Access to Justice Program in Pakistan; set up a cadastral commission in Cambodia; and strengthened legal education in the Maldives, Mongolia, and elsewhere.

Among loans approved in 2005, ADB is providing the Indonesian government with $200 million to support its medium-term development plan, which aims to raise average GDP growth to 7% annually by 2009 from about 4% in 2004. Reaching that goal in Indonesia will require greater macroeconomic stability, and sound fiscal and financial management. To support the government’s plans, ADB is working with the World Bank and using the Development Policy Support program, which includes a series of structural reform packages. It is one of several recent loans in Indonesia that will help improve governance.

And to keep its governance programs sharp and its fight against corruption up-to-date, ADB began a review in 2005 of the implementation of its governance and anticorruption policies.

Environmentally Sustainable Growth

Serious environmental problems have accompanied strong economic growth in the region: air pollution chokes many major cities, forest cover is the world’s lowest per capita, and wetlands and wildlife habitat are disappearing fast. Often the poor suffer the worst effects.

The countries of Asia and the Pacific must continue to grow strongly to overcome poverty. However, in its second Asian Environment Outlook, released in 2005, ADB stressed that a “grow now, clean up later” approach to economic growth is unacceptable. Degradation is not inevitable, and a healthier environment in Asia and the Pacific is a prerequisite to economic development that includes the poor.

Under its Environment Policy of 2002, ADB is working to reshape views toward environmental management under five goals: promoting environmental interventions to reduce poverty directly, mainstreaming environmental considerations in economic growth, supporting the maintenance of global and regional life support systems, building partnerships, and integrating environmental safeguards into ADB operations.

Furrowing the land to protect against erosion in Gansu, PRC (top); through efforts such as those to protect the Tonle Sap, ADB is striving to achieve environmentally sustainable growth

In 2005, 9 of 58 new public sector loan projects had environmental sustainability as a theme, totaling some $605 million, up from $569 million in 2004. They represented 12% of total public sector lending. Of the total, 80% funded urban environmental improvements through provision or rehabilitation of water supply, sanitation, and waste management systems; 15% promoted the conservation of natural resources; while 5% funded the rebuilding and restoration of tsunami-affected areas.

Many of ADB’s interventions support several of the Environment Policy goals simultaneously.

The Fuzhou Environmental Improvement project in the PRC, Kerala Sustainable Urban Development, Phase II project in India, and Regional Development project in the Maldives, for example, are improving environmental infrastructure, strengthening planning and environmental management, and building management and implementation capacity. These projects were designed with strong stakeholder participation and are expected to provide the basis for stronger economic growth potential.

The Sanjiang Plain Wetlands Protection project, meanwhile, began establishing a program in 2005 to conserve globally significant biodiversity while generating employment and income in a sustainable manner in the northeast corner of the PRC.

Assistance was approved to restore tsunami-affected areas in Sri Lanka in ways that will conserve coastal ecosystems.

Technical assistance grants are also an important source of environmental work. Of the nearly $307 million in technical assistance and grants approved in 2005 with environmental objectives—almost triple the 2004 amount—77% funded improvements to urban or rural environments, 15% promoted natural resource conservation, and 7% helped mainstream the environment into the legislative, policy, and institutional frameworks.

The amount of technical assistance grants approved in 2005 to strengthen environmental capacity at the national and regional levels doubled to about $38 million from $19 million in 2004. Moreover, environmentoriented grants rose to $260 million compared with $24 million in 2004, with a sizeable portion of this increase attributed to rebuilding tsunami-affected areas in Sri Lanka ($203 million), but also including protection of wetlands in the Sanjiang Plain of the PRC ($12.14 million) and support for the Tonle Sap sustainable livelihoods initiative in Cambodia ($15 million).

In the Mekong subregion, ADB is undertaking extensive work to ensure that environmental sustainability remains of paramount importance as the subregion’s economy expands. In May 2005, in conjunction with its endorsement of the Core Environment Program, the environment ministers of countries of the GMS Program endorsed the establishment of an environment operations center in Bangkok to enhance cooperation in the subregion.

ADB continued to support efforts to reverse patterns of land degradation afflicting many parts of the region, an important factor contributing to poverty. As an executing agency of the Global Environment Facility, ADB is leading three partnerships for combating drought and desertification and mitigating drought in Central and East Asia.

In 2004 and 2005, for example, ADB approved a regional technical assistance activity, the Prevention and Control of Dust and Sandstorms in Northeast Asia, in collaboration with the United Nations Environment Programme, United Nations Economic and Social Commission for Asia and the Pacific, and United Nations Convention to Combat Desertification. Four countries are actively participating: PRC, Japan, Republic of Korea, and Mongolia.

The Central Asian Countries Initiative for Land Management, meanwhile, with ADB serving as the lead Global Environment Facility agency, will support the implementation of a 10-year program of country-driven activities and resource mobilization to pursue sustainable land management in those countries.

In collaboration with the International Finance Corporation, ADB approved a small-scale technical assistance for the training of representatives from financial institutions in the region on environmental and social due diligence, and on finding new business opportunities in the environment field.

In parallel with these new efforts, ADB has continued to implement a range of ongoing regional environmental programs. The Poverty and Environment Program in 2005 helped integrate environmental considerations into poverty reduction projects, while ADB’s Renewable Energy, Energy Efficiency, and Climate Change program supported by Canada, Denmark, and Netherlands has provided funding to the Climate Change Adaptation Program in the Pacific, which is helping some Pacific countries prepare for the likelihood of rising seas and more frequent severe storms.

ADB is also one of the few international institutions providing underlying finance to projects that can produce tradeable emission-reducing credits for governments to meet commitments made under the Kyoto Protocol (www.adb.org/CDMF). Three such projects have already contracted credit buyers, and several more projects will be coming on board in 2006 or 2007 through assistance by the Clean Development Mechanism facility.

Among ADB’s major existing environmental partnerships, work continued in 2005 under the Clean Air Initiative–Asia, which now has over 130 members including cities, governments, development agencies, NGOs, academic organizations, and corporations. The initiative’s work centered on the establishment of national networks in several parts of the region to promote investment and policy reform supporting air quality improvement.

By ensuring that gender issues are reflected in all its work, ADB is helping improve women’s lives

In 2005, ADB presented its second Asian Environment Outlook, which focuses on opportunities for the region to address environmental issues more effectively through strong engagement of the private sector. It argues that the pursuit of a sustainable future for Asia and the Pacific must include a business sector that takes responsibility for its environmental performance and also recommends how the public and private sectors can work together more closely to achieve environmental goals (www.adb.org/environment/aeo).

Environmental and Social Safeguards

ADB has three safeguard policies covering the environment, indigenous peoples, and involuntary resettlement. These policies aim to avoid, minimize, and/or mitigate adverse environmental and social impacts including the marginalization of vulnerable groups that may result from development projects.

Working under the overriding safeguard mandate to ensure all projects “do no harm,” ADB reviewed all projects for Board approval during the year to ensure safeguard policy compliance. In a review of 74 projects and equity investments, 59 projects required environmental assessment reports, 20 required the preparation of a plan or specific action for indigenous peoples, and 41 required resettlement plans and/or frameworks. More than a hundred staff members at headquarters and resident missions were trained on ADB’s safeguard requirements. ADB reinforced knowledge sharing through the regular update of its websites on the safeguards.

During the year, ADB initiated a safeguard policy update to enhance the effectiveness of its safeguard policies and ensure relevance to changing client needs and new lending modalities and instruments (www.adb.org/Safeguards/policy.asp). A discussion note, uploaded on the ADB website, describes the objective and scope of the safeguard policy update. Face-to-face consultations will start after completion in 2006 of an independent study by the Operations Evaluation Department on the implementation of the three safeguard policies.

ADB approved assistance to help strengthen the country safeguard systems of selected member countries and will shortly begin to develop its corporate approach to country safeguard systems. Together with the United States Agency for International Development, ADB also launched the Asian Environmental Compliance and Enforcement Network, which will serve as an important new mechanism for sharing of best practices among Asian environmental decision makers.

In relation to involuntary resettlement and under regional technical assistance for Capacity Building for Resettlement Risk Management, ADB assisted three participating countries—Cambodia, PRC, and India—to identify resettlement risks and improve capabilities for handling involuntary resettlement.

In Bangladesh, ADB is working with the Ministry of Land to develop a national policy on involuntary resettlement, while in Cambodia, technical assistance for Enhancing the Resettlement Legal Framework and Capacity Building is helping the government develop a subdecree on compensation, resettlement, and rehabilitation. In Nepal, the National Planning Commission is preparing a national resettlement policy framework with ADB support. In Viet Nam, technical assistance for Enhancing the Resettlement Legal Framework and Institutional Capacity assisted the government in developing a decree on compensation and resettlement and to disseminate it nationwide.

In its continuing effort to safeguard the interests of indigenous peoples, ADB also actively participated in regional and global discussions. In two regional workshops, ADB engaged in constructive dialogues with some indigenous peoples network members from the region. It also took part in a dialogue between the United Nations Permanent Forum on Indigenous Issues (the Permanent Forum), World Bank, Inter-American Development Bank, ADB, and International Fund for Agricultural Development. Discussions highlighted the need for international finance institutions to rethink the concept of development, with the full participation of indigenous peoples in development processes and taking into account their rights and traditional practices. ADB also continued to work with the World Bank and the Inter-American Development Bank on the joint publication of the Global Handbook on Indigenous Peoples Policy.

Gender and Development

Gaining knowledge and new skills in a computer class in Viet Nam

As a major thematic concern of ADB’s Poverty Reduction Strategy, gender issues have been increasingly mainstreamed in ADB loan operations across a range of sectors: agriculture, water resource management, transport, rural infrastructure, governance, education, and water supply and sanitation. In 2005, ADB continued to strengthen its overall loan portfolio addressing gender issues. Significant gender mainstreaming was evident in 37% of loans in 2005. Of these, 17% (11 loans) were classified with a gender theme, while 20% (13 loans) were classified with significant gender mainstreaming. The majority of the remaining loans indicate the potential to benefit women in some ways.

Loans addressing gender equality objectives were represented in all three core strategic areas of ADB operations—pro-poor, sustainable economic growth; inclusive social development; and good governance. While they tend to be concentrated in the health, education, and water supply sectors, some loans were for irrigation, rural development, agriculture and natural resources, small- and medium-sized enterprises, public resource management, and rural infrastructure. ADB also continued to improve how it addresses gender issues in large infrastructure projects, especially road projects.

The multi-donor Gender and Development Cooperation Fund established in 2003 continued to support gender equality and women’s empowerment through regional and technical assistance activities. As of 31 December 2005, 4 technical assistance projects and 24 subprojects under regional technical assistance were approved for funding to enhance gender design features in ADB loans, support initiative and strategic approaches to empower women and girls, and promote regional awareness and cooperation on gender issues. These include 14 subprojects approved in 2005.

Other technical assistance approved in 2005 included the $4.5-million Pakistan Gender Reform Action Plan Implementation, financed by the Government of Canada and the United Kingdom's Department for International Development through the ADB-administered Poverty Reduction Cooperation Fund, and a $550,000 regional technical assistance activity, Legal Empowerment for Women and Disadvantaged Groups.

Meeting the MDGs by 2015 will mean ensuring that development programs increasingly address issues affecting gender equality and women’s empowerment. Goal 3 specifically calls for promoting gender equality and women’s empowerment, whereas Goal 5 calls for improving maternal health. In addition, two other goals—Goal 2 on education and Goal 6 on HIV/AIDS—include gender-specific or gender-disaggregated indicators.

To help ensure that gender concerns are reflected in its country strategies and programs, ADB has been preparing country gender assessments and related strategies, which specify how ADB intends to promote and implement its overall gender and development objectives in a DMC, and discuss how ADB assistance will address gender disparities. In cooperation with multilateral/bilateral donors and United Nations agencies, country gender assessments were completed for Mongolia, Timor-Leste, and Uzbekistan and are under way for Fiji Islands and Indonesia. Assessments were prepared for Azerbaijan, Kazakhstan, Kyrgyz Republic, and Tajikistan under regional technical assistance on Mainstreaming Gender into Poverty Reduction Strategies in Four Central Asian Republics.

In 2005, ADB continued the review of the implementation of the Gender and Development Policy to assess progress and effectiveness since its adoption in 1998, the results of which will form the basis for the Gender and Development Action Plan. As part of the review, ADB conducted rapid gender assessments on gender equality results in selected projects in Bangladesh, Cambodia, Nepal, and Pakistan. The assessments aim to determine whether the introduction of project-specific gender action plans and strategies has improved project implementation, outreach, and results for women as compared with those for men.

Social Protection

ADB defines social protection as a set of policies and programs designed to reduce poverty and vulnerability by promoting efficient labor markets, lowering people’s exposure to risks, and enhancing their capacity to protect themselves from hazards and loss of income.

Loan projects in 2005 contributed to social protection schemes in pensions in India, work protection in Pakistan, child protection in the Kyrgyz Republic and Azerbaijan, and social security reform in Mongolia. Social protection in the informal sector, social insurance, labor issues in enterprise restructuring, and migration for employment were among the areas of special focus during the year.

Through closer consultations, civil society representatives are getting involved early in projects and policy Consultations Enhance Role of NGOs ADB’s efforts to involve NGOs and other civil society organizations meaningfully in its development activities are evolving quickly. Through deeper and more organized consultations, these groups are now taking part more frequently at the early stages of project and policy formulation, and implementing an increasing number of effective projects targeted at poverty reduction. For example, a regional 3-year technical assistance project begun in 2003 and completed in December—Promoting NGO Support for Poverty Reduction in the Greater Mekong Subregion—has demonstrated through practical trials in the GMS how their early involvement in formulating ADB’s latest regional and country strategies can contribute to the depth and support for such strategies. By nurturing trust among government, civil society organizations, and ADB, it has strengthened foundations for regular future collaboration. Some of the most dynamic ADBassisted projects involving NGOs, meanwhile, were being carried out through a pilot NGO small-grants facility established under a regional technical assistance for NGO Partnerships for Poverty Reduction. Through this 3-year activity, ADB supported more than 70 NGO-run projects in 15 countries, with the last grants made in 2005.

Knowledge Management

In July 2005, ADB marked its first year implementing the Knowledge Management Framework. Through its extensive operations in the region, ADB has always been a major repository of information. The framework aims to make better use of this information by making ADB a hub for knowledge about Asian countries, encouraging sharing within ADB and among DMCs.

Vice President Geert van der Linden put it more simply: “In India, the people want to find out how things are done in the People’s Republic of China.”

In 2005, the Knowledge Management Center worked to establish communities of practice to help generate and share knowledge within ADB. A community of practice includes groups of professionals who share common expertise in areas such as education or governance but who may otherwise be spread out in different departments. Binding them together in organized communities of practice helps them share their knowledge.

Other communities of practice within ADB concern energy, environment, water, finance, gender and social development, health, regional cooperation, and transport; the number of groups was narrowed last year from 19 to 10.

Among other activities, ADB also signed a memorandum of understanding with the Republic of Korea to establish the e-Asia and Knowledge Partnership Fund at ADB. This aims to narrow the “digital divide” in the region by providing technical assistance for promoting information and communication technology in e-government, e-learning, e-trade, and e-commerce.

In 2006, the framework will include initiatives to increase awareness through an internal communications plan and a knowledge management electronic newsletter, to increase the number of activities to help staff integrate knowledge management concepts into their work processes and to create incentives to encourage staff to support knowledge sharing. Together with the Office of Information Systems and Technology, systems will be developed for capturing, classifying, and accessing information to encourage the exchange of information and collaboration among staff.

Asian Development Bank Institute

Encouraged by the Board of Directors, the Tokyo-based Asian Development Bank Institute increased its focus in 2005 on work in infrastructure for regional cooperation, as well as continuing work in other areas of poverty reduction, governance, and private sector development.

The institute responds to stakeholders’ requests for assistance in research, training, and the supply of local language materials. For example, after the Indian Ocean tsunami, the institute coordinated a conference for Indonesia to promote financial accountability in managing funds for conflicts, tsunamis, and other disasters. It also commissioned a study on long-term efforts to rebuild damaged areas of Sri Lanka, translating it into Bahasa Indonesia to share the lessons learned.

Under poverty reduction, the institute published the book Poverty Targeting in Asia, which includes studies on the effectiveness of poverty targeting in the PRC, India, Indonesia, Philippines, and Thailand.

Fighting corruption and ensuring integrity help all people in Asia and the Pacific, including this family

It also released a study in English and Khmer on Cambodia’s accession to the World Trade Organization, and lessons for other least developed countries.

Work in the private sector area included aspects of the revitalization of the PRC’s northeast region, focusing on trade with Japan and the Republic of Korea, enterprise performance, and technological capability.

As part of knowledge management activities, more than 50 independent expert reviews of developmentoriented CD-ROMs have been posted on the institute’s website. A guidebook to Asian think tanks and their research programs is also online.

Audit and Integrity

The Office of the Auditor General, through the Financial, Administrative and Information Systems Division, conducts independent appraisals of ADB activities to ensure that internal controls are adequate and effective, and to improve efficiency. Through the Integrity Division, it addresses alleged incidents of corruption or fraud in ADB projects, or by staff.

The office completed 20 audits in 2005 related to financial and administrative operations of resident missions and a representative office, administration of loans and technical assistance in two countries; reallocation of loan proceeds, and post-implementation review of two modules of ADB’s financial and human resources information system.

ADB barred 40 firms and 33 individuals in 2005 as a result of corruption investigations, making a total of nearly 250 firms and individuals currently ineligible to work with the development institution.

The Integrity Division, which enforces ADB’s Anticorruption Policy, received 199 complaints last year, up 44% from 2004.

The Integrity Division also conducted four project procurement-related audits as part of its efforts to reduce weaknesses that may allow fraud, corruption, or abuse in ADB-financed projects. It also recommended strengthening of internal control over the procurement process.

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