ADB and India -
Partners in Development
Last updated on 10 December 1999
The Asian Development Bank (ADB) is a multilateral development finance institution dedicated to promoting economic growth and a higher standard of living in its developing member countries (DMCs). The member countries include 41 from the Asian and Pacific region and 16 from outside the region. ADB was established in1966 with headquarters in Manila, Philippines, under the auspices of the Economic and Social Commission for Asia and the Pacific.
The Bank, which started as a financier of projects focusing on infrastructure development, has gradually shifted to a broadbased development institution. It is concerned not only with financing but also with policies and institutional capacity building essential for sustainable development. Beginning in the late 1980s, the Bank has expanded its assistance to new areas such as human development. To bring these developments together and set forth future direction, ADB in 1992 prepared the first medium-term strategic framework. It highlighted five crosscutting priority areas., i.e., economic growth, poverty reduction, human development, environment protection, and promotion of women's status. Since 1992, the strategic framework has been updated and includes other fields of strategic importance such as governance and capacity building.
The Bank's highest policymaking body is the Board of Governors which meets annually. Responsibility for the direction of Bank's operations rests with the Board of Directors representing member governments and residing in Manila. The Bank's President is elected by the Board of Governors and chairs the Board of Directors. Under the President there are two Vice-Presidents overseeing operations and one Vice-President responsible for administration and finance. The Bank has ten resident missions, one regional mission, and three representative offices for Europe (Frankfurt), Japan (Tokyo), and North America (Washington, DC). Over 650 professional staff are recruited from the Bank's members.
B. Sources of Finance
ADB's financial resources consist of ordinary capital resources (OCR) and Special Funds resources. OCR, which carries a market-based interest rate, is based on the authorized capital stock comprising subscribed capital and the paid-in capital. The amount of the callable capital is used as a guarantee for the Bank to borrow in the international capital markets. The Special Funds come from contributions by developed member countries and several of the more industrialized DMCs, and from the transfer from the Bank's earnings. It includes the Asian Development Fund (ADF), the Technical Assistance Special Fund (TASF), and the Japan Special Fund (JSF). Except for ADF which finances longterm, interest-free loans to least developed member countries, Special Funds are extended as grants.
ADB lending may be classified into three main categories - project, sector, and program lending. Through project lending, the Bank transfers resources to specifically designed investments, and through sector lending, the Bank aims to support policy development of a sector or subsector and related financial requirements. Program loans finance economy-wide or sector-specific import requirements on the basis of a positive or negative list. Loan proceeds are released in tranche and not linked to specific expenditure incurred. In addition, ADB extends credit lines to development finance institutions and other financial intermediaries for onlending to industries. The Bank also extends assistance to the private sector through loans with or without government guarantee, equity investments, and guaranteeing of loans from other sources. Bank assistance has been channeled to agriculture, energy, industry, financial , transport and communications, water supply and sanitation, urban development, education, health, population, and multisector projects.
D. Technical Assistance
Technical assistance constitutes another important area of ADB activity. Technical assistance operations facilitate the transfer of resources to DMCs to improve their capabilities to design, implement, and operate development projects. ADB provides four types of technical assistance - projects preparatory, project implementation, advisory, and regional activities. Project preparatory technical assistance helps a borrower formulate viable investment projects for financing by ADB or other sources. Project implementation technical assistance assists an executing agency in the implementation of a Bank-assisted project. It usually comprises consulting services and training to help manage the project. Advisory technical assistance may not be directly related to a Bank-assisted project. It is provided to help establish or strengthen an institution, carry out studies on policy issues, or formulate national development plans. Regional technical assistance supports training, seminars, workshops, and studies which concern more than one member country.
E. Assistance to the Private Sector
ADB promotes complementarity between the public and private sectors. Bank loans to the private sector can be either with or without government guarantee. In 1983, ADB began investing funds from its OCR in the equity capital of institutions and enterprises in DMCs. Equity operations may take the form of investments in the equity of productive enterprises for financing specific projects, or investments in the equity of development finance institutions and other similar institutions set up to promote enterprises through lines of equity. The Bank's equity investments are mainly for the private sector but can also be made in mixed enterprises to invest in projects with high socioeconomic priority and potential profitability. To address potential financiers' concern about risks related to private sector projects, the Bank has two types of guarantees. One is the partial risk guarantee designed to provide cover against some sovereign contractural obligations which are critical to the sustainability of a project. The other is the partial credit guarantee designed for use when there is a need for longer-term funds for a project. It is used to extend maturities in cases where commercial lenders are reluctant to take long-term credit risks.
F. Project Cycle
Stages in a typical bank-assisted project include project identification, fact finding to establish project feasibility, appraisal to assess project soundness and viability, consideration, and approval by the Bank's Board of Directors, implementation, and evaluation on completion of a project. Project identification is conducted during the Bank's annual country programming missions in consultation with the government, generally preceded by economic and sector studies of DMCs development plans and priorities. A project may go for fact finding and appraisal after identification, but normally technical assistance is extended to collect pertinent information to design a project. In appraising a project, its technical, financial , economic, social, environmental, and institutional aspects are examined, and terms and conditions of the loan are discussed and agreed at negotiations between the Bank and the Government. After a loan is approved by the Bank's Board of Directors, an agreement is signed by the President of the Bank and representatives of the Government. Normally, the loan document allows 90 days for the loan agreement to become effective. Implementation time ranges from two to five years, depending on the type of project. On project completion, assessment of implementation performance and initial development impact are conducted to gain lessons for future project formulation.
INDIA: ADB's OPERATIONAL STRATEGY AND PROGRAM
ADB's work in India is guided by its country operational strategy. India's economic reforms, which began in the early 1900s, have led to significant deregulation and the revival of economic growth, but further structural changes are needed for sustainable growth. Key areas requiring such changes include reduction in the high levels of central and state government deficits, continued trade and financial sector reforms, resolution of infrastructure policy, regulatory and institutional constraints, and corporatization and divestment of public sector undertakings. Except for trade and finance, these areas of change are the concurrent responsibility of the central and state governments, which require coordinated efforts to reform. The Bank's strategy is formulated reflecting these requirements, the Government's overall development strategy, and the Bank's medium-term strategic framework. In addition, it takes into account lessons learned from the review of the Bank's portfolio in India and current non-accessibility of India to concessional loans from the Asian Development Fund.
To pursue the long-term goal of increasing employment opportunities and incomes and reducing poverty, the Bank aims to assist in improving macroeconomic stability and sector efficiencies. It also promotes competitions and private sector participation, encourages corporatization, restructuring, and commercialization of public enterprises,and enhances resource mobilization through further reforms of financial and capital markets.
In terms of sector strategies, the Bank gives priority to the alleviation of constraints in key infrastructure sectors (i.e., energy, transport and communications, and urban infrastructure). To mobilize required infrastructure financing, priority is also given to financial and capital market reforms. The Bank's strategy also supports structural reforms. The Bank's strategy also supports structural reforms in selected states. Up to 50 percent of annual lending to India is targeted for state-level operations.
B. Sector Strategies
Energy. Energy development is essential for sustaining economic and social development in India. The Bank aims to promote (i) appropriate institutional, policy, and regulatory environment to enhance sector efficiency and private sector participation; (ii) rational pricing policies; and (iii) nonconventional sources of energy, and energy-efficient and environment-friendly technologies. The Bank provides financial and technical assistance to the development of hydrocarbon and power subsectors.
In the hydrocarbon subsector, the Bank encourages cleaner fuels like gas and liquefied petroleum gas (LPG) and promotes improved efficiency in exploration, production, and utilization of hydrocarbons. The Bank also supports policies toward market competition by introducing market determined pricing mechanisms, strengthening environmental protection, and promoting private sector participation. In oil, Bank assistance focuses on upgrading existing assets, joint ventures in production, and demand-side management. The Bank has supported the liberalization of the investment climate, and the promotion of market-oriented reforms. Increased private sector participation has raised investments for oil and gas exploration and the development of proven reserves with joint venture partners. The reforms have further laid the groundwork for the corporatization and divestiture of the Oil and Natural Gas Corporation and other public enterprises.
In the power subsector, the Bank seeks to support reforms at the state level by restructuring and corporatizing the State Electricity Boards and enabling participation of the private sector where desirable. In the power subsector, the Bank is supporting reforms of the institutional and regulatory framework at the state level; the restructuring and corporation of the State Electricity Boards; and increased private sector participation. Tariff reforms form an important element of the restructuring. The Bank supports domestic and foreign private investment in generation and distribution of electricity, rehabilitation of existing generating and distribution assets, and demand-side management practices.
The Bank also extends loans to development finance institutions such as the industrial Development Bank of India and Indian Renewable Energy Development Agency for onlending to promote energy-efficient technologies in industry and nonconventional sources of energy such as power plants based on biomass and wind energy farms.
Transport and Communications. India has an extensive and diversified transport system. The Bank's policy focuses on alleviating constraints to economic development and attracting private sector participation to develop and maintain an efficient and dynamic multimodal transport system. Assistance is extended to roads, railways, and ports.
Bank support for roads is focused on policy reforms, and attracting private sector participation for the development of national highways and expressways, as well as state highways. Having helped support the establishment of the national Highway Authority, the Bank has strengthened its efforts in promoting reforms of the institutional and regulatory framework. It encourages improved efficiency in public sector operations and removal of bottlenecks in highdensity corridors. The promotion of environmental and safety standards are carefully examined during project preparation.
Bank support to the railway sector includes expansion of the freight traffic capacity of Indian Railways (IR) by upgrading technology and providing freight facilities. The Bank also aims to collaborate with IR in reforms to encourage efficiency in management, greater operational autonomy, tariff adjustments, restructuring of ancillary industries, and private sector participation.
In the port subsector, the Bank supports the rehabilitation and upgrading of port facilities, privatization and commercialization of ports, and creation of policy conditions and an appropriate institutional and regulatory framework for promoting efficiency. Within this strategic framework, the Bank aims to gradually shift its support to the development of minor and intermediary ports as major ports have greater access to other sources of funding.
Urban Infrastructure. Rapid urbanization is a major development issue as it aggravates the pressure on major cities and the urban poor, and causes serious damage to the environment. Through its lending and technical assistance, the Bank encourages an integrated approach to urban development to meet basic needs and improve living conditions. The Bank's emphasis is given to policy reforms, environmental promotion, and private sector participation.
The Bank began support to the urban sector in 1993 with technical assistance to prepare an urban infrastructure project in Karnataka. Another technical assistance was approved in 1995 to develop infrastructure subprojects for selected municipalities in Rajasthan. Subsequently, the Bank approved the Karnataka Urban Infrastructure Development Project in 1995. The first Housing Finance Project, consisting of separate loans to three housing finance institutions, was approved in 1997. It provides funds to finance institutions which onlend to individual borrowers. Slum upgrading and microcredit schemes have been incorporated into these loans to address poverty reduction through support for low-income housing and community-based institutions.
Financial and Capital Market. The Bank promotes market-based financial systems and institutions capable of mobilizing and allocating financial resources in an efficient and effective manner. In 1992, the Bank extended a loan to help meet the cost of financial sector reforms introduced by the Government. It has assisted the development of a diversified, competitive, and market-based financial sector to mobilize savings and allocate credit for growth of the economy. In 1995, the Bank provided a Capital Market Development Program Loan to further the development of India's domestic capital market. To promote reforms in the financial sector, the Bank also participates in equity investments in financial institutions, including private sector banks and equity funds. These financial institutions are setting improved standards of efficiency in the banking and financial sector with a catalytic impact on other public and private sector institutions. The Bank's strategy envisages promotion of private sector banks, recapitalization of public sector banks in conjunction with reduced managerial and ownership control of the Government, strengthening of regulatory institutions, development of efficient and integrated markets in the financial sector, further deregulation in the sector, and promotion of greater participation of the private sector, particularly in the insurance sector.
C. State-Focused Operations
ADB started operations targeted at selected states in 1996 when the first such loan was approved for Gujarat. Through state-focused support, the Bank aims to promote improved public finances at the state level, enhance public sector efficiency, and accelerate infrastructure development. Given significant economic policymaking and regulatory responsibilities assigned to the states by the Constitution of India, economic reforms at the central and state levels need to move in tandem. Most states are, however, disadvantaged both in human and financial resources to design and carry out reforms.
With the Bank's resource constraints and the need to help states implement economic reforms, sector strategies have been oriented to support state-level initiatives. Up to 50 percent of Bank lending and a substantial part of technical assistance are expected to be targeted at state-level operations to form a long-term development partnership with selected, progressive states in both the public and private sectors.
D. Regional and Subregional Cooperation
The Bank attaches great importance to regional and subregional cooperation, which can complement national development efforts.
The Bank approaches regional and subregional cooperation in a phased manner. The first phase is increasing awareness of the potential and importance of regional cooperation. The second phase identifies potential projects for regional and subregional cooperation. The third phase includes financing of selected pilot projects. ADB support for the Greater Mekong Subregion and the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area are examples of effective cooperation. the Bank supports the initiative to promote the South Asia Growth Quadrangle (SAGQ), involving Bangladesh, Bhutan, India, and Nepal.
INDIA RESIDENT MISSION
B. Promoting the Relationship with India
Interface with the Government. INRM liaises with the Government of India through the Department of Economic Affairs (DEA) of the Ministry of Finance on the Bank's operational matters. Close contacts are also maintained with line ministries and agencies at the center and in selected state governments to improve dialogue on sector-specific policies and programs and establish effective relationships.
Information Dissemination. INRM disseminates information to the Government and the public on developments of ADB in general and pertinent to its operations in India through various media. INRM publishes a quarterly newsletter and other information brochures, and maintains ADB publications to provide relevant information to development partners. INRM also organizes periodic workshops to explain Bank's policies and procedures, especially those related to project implementation as part of the effort to improve portfolio management, and participates in meetings to discuss general operations of the Bank. Responding to numerous letters of inquiry is another role INRM plays.
Interface with Aid Community. INRM interacts with other aid agencies and embassies represented in New Delhi to exchange information on assistance approaches and programs, and coordinate development efforts to identify possible avenues for joint work and cofinancing. Besides individual contacts, INRM aims to host a joint meeting of aid agencies. One such example was a state-level aid coordination meeting held in Madhya Pradesh in 1998. In addition, INRM participates in the annual forum for aid coordination, India Development Forum chaired by the World Bank, and periodic meetings organized by the United Nations Development Programme. As appropriate, INRM contributes to the annual aid forum by preparing a background paper such as a note prepared on the implementation performance of externally assisted projects.
Coordination with NG0s. Maintaining dialogue with nongovernment organizations (NG0s) is an important part of INRM activities. NG0s are involved in the Bank's activities in a variety of ways, including project identification, preparation, and implementation. INRM organizes consultation meetings with selected NG0s either inside or outside New Delhi to share experiences on social development and environmental management, and other issues related to the Bank's operations.
C. Improving Operational Activities
Portfolio Management. INRM is directly responsible for the supervision of about one third of ongoing loan projects and an increasing number of technical assistance projects. Beginning in September 1998, INRM has taken greater responsibility for disbursement functions, which include the processing of withdrawal applications. Besides continuous monitoring of the portfolio, INRM organizes twice a year bilateral meetings with executing agencies and tripartite meetings, including DEA to establish annual performance targets and follow up on progress made. For these reviews, INRM prepares detailed background papers. INRM also conducts the annual country portfolio review with participation of headquarters staff. In addition to public sector projects, the supervision of most private sector projects was transferred to INRM in 1998 and an annual review report is prepared on each project.
Monitoring of Political and Economic Developments. INRM continuously collects and analyzes information on political and economic developments, in particular those pertinent to the Bank's operations in India. The information is used as part of monitoring macroeconomic and financial as well as sector policy developments which may impact on the ongoing projects and also as part of identifying the future areas of collaboration. For these goals, INRM participates in seminars and workshops, interacts with people in different fields, and as resources permit, carries out special studies.
Country Strategy, Programming, and Processing. INRM supports the work of headquarters in developing the country strategy, and programming and processing of loan and technical assistance projects. Support is also provided to the analysis and drafting of economic and sector study reports such as the country economic analysis and the analysis related to the energy, transport, and financial sectors. These studies contribute to dialogue with the Government in developing an assistance strategy and program. INRM's involvement in loan and technical assistance processing facilitates coordination with other agencies and relevant NGOs.
Subregional Cooperation. INRM advances efforts of the Bank in promoting subregional cooperation by sharing ADB's experiences in other subregions, such as its support to the Greater Mekong Subregional Cooperation since 1992. In the context of South Asia, INRM assists headquarters by exploring the SAGQ involving Bangladesh, Bhutan, India, and Nepal, and electricity exchange between Bangladesh and India.
Private Sector Development. Consistent with the Bank's policy of public and private partnership for development, ADB assists the private sector through loans, equity investments, commercial cofinancing, investment advisory services, and guarantees. In support of this policy, INRM meets private sector project developers, advisers, commercial bankers, and others interested in obtaining Bank assistance for their projects. These discussions help initial screening of the requests for assistance and provide data for the preparation of a concept note. UNARM also participates in the preparation of business plans for joint investments.