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2005 ANNUAL REPORT

1
The Record
(amounts in $ million)
1966–2005 2002 2003 2004 2005
OPERATIONAL ACTIVITIES
a a b
LENDING (amount) 116,040 5,658 6,085 5,239 5,797
Number of Projectsc 1,940 70 66 63 64
b b
Ordinary Capital Resources (OCR) Loans (amount) 84,630 4,008 4,706 3,997 4,421
Number of Loans 1,093 35 37 32 32
Disbursements (amount) 56,377 3,067 2,688 2,508 3,498
Asian Development Fund (ADF) Loans (amount) 31,411 1,650 1,379 1,242 1,376
Number of Loans 1,105 53 47 47 40
Disbursements (amount) 22,118 1,136 1,128 1,055 1,247
A. Government and Government-guaranteed Loans (amount) 113,648 5,548 5,918 4,947 5,261
Number of Projects c 1,846 67 62 58 58
OCR Loans (amount) 82,252 3,898 4,539 3,705 3,885
Number of Loans 1,000 32 33 27 25
Disbursements (amount) 54,945 3,011 2,575 2,399 3,294
ADF Loans (amount) 31,396 1,650 1,379 1,242 1,376
Number of Loans 1,100 53 47 47 40
Disbursements (amount) 22,103 1,136 1,128 1,055 1,247
B. Private Sector Loans (amount) 2,392 110 167 293 536
Number of Projects 94 3 4 5 7
b b
OCR Loans (amount) 2,378 110 167 293 536
b b
Number of Loans 93 3 4 5 7
Disbursements (amount) 1,432 55 113 109 204
ADF Loans (amount) 14 – – – –
Number of Loans 5 – – – –
Disbursements (amount) 14 – – – –
b b
EQUITY INVESTMENT (amount) 1,121 36 36 164 217
b b
Number of Investments 137 4 3 11 10
EQUITY UNDERWRITING (amount) 40 – – – –
Number of Commitments 6 – – – –
GUARANTEES 3,166 882 240 10 68
Number of Projects 25 4 3 1 2
Political Risk Guarantee (amount) 763 382 70 10 50
Number of Projects 9 3 1 1 1
b b
Partial Credit Guarantee (amount) 2,403 500 170 0 18
b b
Number of Projects 16 1 2 0 1
GRANTS (amount) 2,065 178 454 104 1,151
Number of Projects 151 27 12 27 51
b b
TECHNICAL ASSISTANCE (amount) 2,782 179 175 195 199
b b b
Number of Projects 5,923 323 312 321 299
MULTITRANCHE FINANCING FACILITIES d (amount) 1,520 0 0 0 1,520
Number of Facilities 2 0 0 0 2
COFINANCING e (amount) 49,492 2,713 2,563 2,437 7,385
Number of Projects 692 33 28 32 34

RESOURCES
Ordinary Capital Resources
Authorized Capital (at end of period) 50,163 47,288 51,997 54,162 50,163
Subscribed Capital (at end of period) 50,163 47,234 51,997 54,162 50,163
Borrowings (gross) 59,553 6,145 4,141 1,629 4,230
Outstanding Debt (at end of period) 24,454 26,324 26,359 24,212 24,454
Ordinary Reserve (at end of period) 8,957 8,470 8,892 8,865 8,957
Special Reserve (at end of period) 194 184 186 190 194
Gross Revenue 34,010 1,979 1,657 1,313 1,432
Net Income after Appropriation of Commissions/ 11,478 978 436 427 105
Guarantee Fees to Special Reserve
Special Funds Resources
Asian Development Fund Total Resources (at end of period) 27,605 22,853 26,759 29,571 27,605
Technical Assistance Special Fund Total Resources (at end of period) 1,257 920 1,006 1,062 1,257
Japan Special Fund
Regular and Supplementary Contributions (at end of period) 904 836 853 877 904
Asian Currency Crisis Support Facility 241 241 241 241 241
ADB Institute Special Fund Total Resources (at end of period) 110 71 83 96 110
Asian Tsunami Fund Total Resources 565 565
Pakistan Earthquake Fund Total Resources 85 85
– Nil.
a
Totals may not add due to rounding.
b
Adjusted to exclude terminated loans/guarantees/equity investments/technical assistance.
c
Projects with multiple loans are counted once. Cumulative number of projects excludes supplementary loans.
d
Multitranche financing facilities are facilities that will give rise to loans. Loans arising from the facilities are included under loans when they are approved by ADB.
e
2 These are non-ADB funds generated by ADB’s cofinancing operations for ADB projects.
Asian Development Bank
2005 Annual Report

Contents
VOLUME 1

Chairman’s Message 2

Board of Directors’ Report 4

Operations 30

East and Central Asia 46

Mekong 60

Pacific 72

South Asia 82

Southeast Asia 94

Appendixes 104

Contact Addresses 114

3
Chairman’s
Message
ADB: Relevant, Responsive,
and Results-Focused

President Kuroda visits women's hospital in Jaipur,


India, refurbished with ADB assistance

T
ragedy on a staggering scale was a share the Mekong River started to benefit from
recurrent theme in Asia during 2005. coordinated cross-border transport and energy
The year started with the international infrastructure plans. Recently too, with ADB’s
community rushing to help survivors help, these countries began to work together
of the Indian Ocean tsunami and ended with to address issues that transcend borders,
the huge humanitarian task of sheltering such as environmental and health threats.
the millions whose homes were destroyed In 2005, ADB established the Office
in October by the South Asia earthquake. of Regional Economic Integration to further
Both catastrophes and the threat of avian strengthen regional cooperation and
flu throughout the year illustrated Asia and the integration initiatives and to ensure that
Pacific's vulnerability to events that cannot be they are coherent and strategically focused.
contained within national borders. Cooperation with other development
At the same time, even as the region as partners also deepened over the course of the
a whole has become a formidable player in the year, in keeping with the commitment made in
global economy, large numbers of poor people March at the high-level forum at which more
and growing inequality make evident that than 100 countries and major international
not all are benefiting from strong economic agencies endorsed the Paris Declaration on Aid
growth. Many countries are unlikely to reach Effectiveness. The international community also
the non-income Millennium Development reaffirmed its commitment to poverty reduction
Goals by 2015. Clearly, poverty reduction and the Millennium Development Goals at the
remains the region’s key challenge. United Nations Millennium+5 Summit in
The Asian Development Bank faces these September in New York. ADB contributed to
and other emerging issues in its developing and participated in both these processes.
member countries with hardened resolve.
We must pursue our vision of an Asia and
Pacific region free of poverty amidst a new era
We must pursue our vision
of development in which nations, economies, of an Asia and Pacific region
and societies are becoming more interdepen-
dent, more integrated. We will strive to help free of poverty amidst a new
the region and the countries become more
inclusive, with the benefits of dynamic growth era of development in which
spread more equitably.
ADB sees regional cooperation and nations, economies, and
integration as a powerful tool that can
complement national-level efforts aimed at
societies are becoming
poverty reduction and shaping a better future. more interdependent,
In 2005, our efforts were rewarded as the
Central Asian nations and the countries that more integrated

4
2
ADB collaborated with development partners assistance—and even more collaboration with
to deliver quick recovery and reconstruction development partners—the Medium-Term
assistance to communities devastated by the Strategy II, which will be launched soon, should
tsunami and the earthquake, and joined the improve the effectiveness of operations over
World Health Organization and the Food and the coming years. As ADB moves toward its
Agriculture Organization in the fight to stop 5th decade as the region’s development partner,
the spread of avian flu. it does so with the confidence that it is
A series of internal changes and realign- increasingly well placed to meet the emerging
ments over the year reshaped ADB to become challenges of its developing members, striving
more relevant, responsive, and results-focused to ensure that all have the opportunity to
in its operations. Under our Reform Agenda, participate in, contribute to, and benefit from
we are improving policies and strategies, sustained economic growth. With the support
seeking to manage for development results, and commitment of the staff and all our members
refining business processes, expanding and partners, it is my privilege to continue to
knowledge management, and putting in place serve ADB and to support its role in fostering
new procedures to improve human resources. peace and prosperity in Asia and the Pacific.
Better systems for planning, monitoring,
and evaluation are being designed to track
ADB performance at every level: the country level,
the institutional level, and globally as part of ADB has made a clear
a network of development institutions. Results-
based country strategies and programs have been
commitment to raise the
introduced for all developing member countries. standards of its operations
And a new Public Communications Policy
promises much more transparency and in keeping with dynamic
accountability to ADB’s stakeholders.
An array of financing instruments offered forces at work in the region
under the Innovation and
Efficiency Initiative, mean-
while, aims at giving
developing member
countries greater flexibility
in meeting their investment
needs. A sharper focus on
portfolio management and
project implementation has
produced an increase in
public sector loan disburse-
ment, while projects at risk
decline steadily.
To manage the risks
inherent in development
work, ADB moved last year
to a centralized risk manage-
ment structure through the
new Risk Management Unit.
ADB will continue to
play a major role in the fight
against poverty in the Asia
and Pacific region. ADB has
made a clear commitment
to raise the standards of its
operations in keeping with
dynamic forces at work in
the region.
Armed with its clearer
strategic priorities, critical
focus on results, a more Large numbers of poor people and growing inequality make clear that not all are benefiting
selective approach to from strong economic growth

3
5
Board of
DIRECTORS’ REPORT
BOARD OF

Directors’
Report
Improving ADB’s Effectiveness

E
conomic 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
More action is needed in the region to
indicating that 27 of ADB’s DMCs are at risk of not achieve women’s empowerment and
achieving 25% or more of the indicators. gender equality in tertiary education

4
BOARD OF
DIRECTORS’ REPORT

5
caption goes here
The greatest concerns are in the health, water supply ADB President Haruhiko Kuroda
BOARD OF
DIRECTORS’ REPORT

and sanitation, primary education, and environment


sectors. Additionally, more action is needed to achieve called on ADB to be more relevant,
gender equality in tertiary education and women’s
empowerment.
more responsive, and more focused
Throughout the region, ADB must ensure that all its on results
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— of other efforts, including the consultation missions for the
or indirectly, by fostering pro-poor sustainable economic partnership framework for middle-income ordinary capital
growth in its DMCs. resources (OCR) countries, and the independent assess-
In his speech at the 2005 Annual Meeting in ment of the effectiveness of the reorganization of ADB
Istanbul, ADB President Haruhiko Kuroda called on ADB and the Innovation and Efficiency Initiative (see page 11).
to be more relevant, more responsive, and more focused on Among the findings, the analyses indicated that
results so it can meet the challenges and demands of the when the increased lending of 1997–1998 in response to
borrowing members in achieving the MDGs. the Asian financial crisis was factored out, the annual
The following presents some steps ADB is taking to OCR and Asian Development Fund (ADF) loan approvals
ensure it is more effective and efficient in carrying out its had stagnated at about $5.2 billion a year in the past
work. Subsequent chapters of this report look at the work decade, and OCR disbursements had declined steadily.
ADB continued or launched in 2005 to help meet the Income from OCR lending fell by 43% from 2001 to
goals in each of its operational subregions. 2004, resulting in a 38% drop in ADB’s gross annual
income.
Improving ADB’s Effectiveness Some 86% of loan projects in the past 10 years
experienced delays that required at least one extension
PORTFOLIO PERFORMANCE AND RESULTS of the loan closing date; 60% required extensions of more
The Annual Report on Loan and Technical Assistance Portfolio than 1 year, with the average overall extension about
Performance for 2004 from the Operations Evaluation 2 years.
Department was well received by the ADB Board, which Many borrowers struggled to meet conditions for
found that the report provided hard evidence and numbers second and subsequent program loan releases, resulting
to identify several important strategic challenges. in a carryover of about $1.25 billion in delayed tranche
These findings were generally consistent with those releases at the end of 2005. In addition, lending was

6
heavily concentrated, with 8 DMCs receiving 83% of the Reform Agenda, through the Innovation and Efficiency

DIRECTORS’ REPORT
BOARD OF
total, while the 23 smallest borrowers received only 9%. Initiative and other programs. New products, such as the
These broad trends supported the contention that multitranche financing facility, subsovereign and
ADB’s traditional products were no longer meeting many nonsovereign public sector financing facility, local currency
of the needs of its key clients, and that new products and lending, refinancing and retrofinancing facility, and
less arduous procedures were needed to improve the financing syndications and risk-sharing agreements, are
effectiveness of its development activities. being introduced, and the administration of more projects
During 1998–2004, the total number of ongoing is being delegated to ADB’s country offices to improve
technical assistance grants in ADB’s portfolio increased oversight and reduce response times.
by 53%, while the net amount of the technical assistance The report’s direct impacts are largely internal to
portfolio increased by just 42%. There are indications that ADB. For the first time, the Development Effectiveness
the technical assistance portfolio growth has exceeded Committee requested Management to prepare an action
ADB’s capacity to manage it effectively. The proportion of plan to address the findings of an Operations Evaluation
technical assistance activities visited by a review mission Department report. Management formed a task force to
has fallen steadily each year from a high of 66% in 1998 to prepare an action plan to address the issues identified in
a low of 25% in 2004. And despite the significant growth the report at the corporate level. The larger and more
in the technical assistance portfolio, the average annual important indirect impacts of this report will be to stimu-
number of staff days on technical assistance review late improvements in ADB’s performance in administering
missions remained about the same during 1998–2004. the portfolio, and better project delivery for ADB’s DMCs.
These issues are being addressed under ADB’s
ASSESSING PROJECT QUALITY
The reforms under way throughout ADB’s operations are
These broad trends supported the equally important in its Operations Evaluation Department,
where changes have started to eventually turn the 2005
contention that ADB’s traditional Annual Evaluation Review into a review of development
products were no longer meeting results, rather than a review of evaluation activities.
In comparison with its predecessors, the 2005 review
many of the needs of its key clients, differed in structure, content, and analytical depth. In
and that new products and less particular, it undertook a retrospective evaluation of ADB’s
public sector projects, which account for 84% of cumulative
arduous procedures were needed lending, and its conclusions should help ADB improve
to improve the effectiveness of project quality and portfolio performance in the future.
In general, the analysis of 968 projects showed that
ADB’s development activities project success deteriorated during the 1970s, bottomed

7
In general, the analysis of
BOARD OF
DIRECTORS’ REPORT

968 projects showed that project


success deteriorated during the
1970s, bottomed out in the early
1980s, and improved from 1987
onward

out in the early 1980s, and improved from 1987 onward


(see graph, page 6). 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 Overall, energy is one of ADB’s best-performing sectors
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 performance (see table, page 7). For transport and energy
poor records; and strengthening the economic forecasts projects approved in the 1990s, the probability of a
underlying project plans—since most infrastructure successful rating was over 85%. There was a lower
projects require that planners take a decades-long view. probability of success, at 46%, for projects in the
Measures to prevent project approvals bunching up at agriculture sector and for lines of credit to government-
the end of the calendar year were also suggested, among owned development finance institutions. The problems
them, giving staff a clear message that achieving develop- in the agriculture sector were widespread, although
ment results is more important than the calendar year in performance was relatively better for irrigation and rural
which a loan is approved. ADB Management responded in development projects.
August, saying that ADB’s ongoing and future operations will Performance also varied, naturally enough, by country,
support the implementation of major recommendations. although it improved for all country groupings in the
The report also noted that ADB had made considerable 1990s. More than two thirds of ADB-funded projects were
efforts to mainstream the Managing for Development successful in Bhutan, Central Asian republics, People’s
Results agenda across all operations, particularly through Republic of China (PRC), Greater Mekong Subregion
its results-based country strategies and programs and the (GMS), Maldives, and Mongolia.
Project Performance Management Systems. The project success rate was below 50% in the Pacific
Another innovation in the 2005 report featured a islands, heavily influenced by weak performance in Papua
chapter drawing together some of the broader findings of New Guinea, and in the Philippines.
ADB’s operations in one sector. ADB policies were applied uniformly to all countries,
In 2005, the Operations Evaluation Department also despite clear differences in portfolio performance and
published several separate sectoral evaluations (such as the borrower requirements. ADB has recognized that it will be
social sector in Pakistan and the power sector in the Philip- more efficient, will reduce transaction costs, and likely
pines). In addition, evaluations were completed on ADB’s improve results to delegate more authority and
country assistance programs for Bhutan and Indonesia. accountability to strong DMCs; work on this continues in
the middle-income country strategy and through the
IMPROVING COUNTRY STRATEGIES Innovation and Efficiency Initiative. Efforts will also be
These evaluation findings are also being used to help ADB required to assist small, vulnerable, and/or weakly
improve its country strategies. performing DMCs whose primary needs may not be for
Among the specific findings, the analysis showed that loan-funded projects or programs.
the project sector was an important determinant of project In reviewing these reports, the Development

8
Of the 94 evaluated power projects, and realignment: improving operational policies, strategies,

DIRECTORS’ REPORT
BOARD OF
and approaches; mainstreaming Managing for Development
76 were rated as successful or better Results; refining organizational process and structure;
reinforcing knowledge management; and improving
human resources management and staff incentives.
Effectiveness Committee recommended further work to Major milestones were reached on many of the
improve sector selectivity and focus on country strategies, Reform Agenda’s 19 initiatives in 2005, including
strengthen core technical skills, increase delegation to the adoption of three change proposals under the Innovation
resident missions, and strengthen loan and technical and Efficiency Initiative on new financing instruments
assistance project implementation. The committee noted and modalities, local currency loan product, and cost
that, while past performance in a sector is an important sharing and expenditure eligibility; adoption of a revised
factor, other considerations also need to be taken into design and monitoring framework for the project
account, including the borrowers’ requirements and the performance management systems; establishment of
potential impact on poverty reduction. an independent Risk Management Unit and the Office
of Regional Economic Integration; adoption of a new
SPOTLIGHT ON THE ENERGY SECTOR Public Communications Policy; and adoption of a new
The Operations Evaluation Department chose to put the performance management system under the human
energy sector under the spotlight in its 2005 report, resources strategy.
because it accounts for 19.7% of cumulative lending and Running like a thread through the organization, ADB
is going through structural changes in many countries. is deepening its application of results-based systems for
Overall, energy is one of ADB’s best-performing planning, monitoring, reporting, and evaluating its actions
sectors. Although delays in implementation are the norm, to better manage for development results.
of the 94 evaluated power projects, 76 were rated as
successful or better, 16 as partly successful, and only MANAGING FOR DEVELOPMENT RESULTS
2 as unsuccessful. Managing for Development Results at ADB is focused on
ADB assistance has contributed to economic improved learning and decision making at the DMC level,
development by increasing access to electricity and making within its own institutional framework, and globally as
the energy sector more efficient. ADB should continue to part of an emerging network of Managing for
support power sector reform, sound regulation, tariff reform Development Results institutions and practitioners.
and cost recovery; development of an enabling environment During 2005, for example, ADB produced the first
for private sector investment; and finance for both public results-based annual report on its poverty reduction
and private sector investments in infrastructure. strategy. The report assesses progress in advancing the

New and Revised Policies


and Procedures
REFORMING TO REMAIN RELEVANT
The year 2005 was very much a year of transition for ADB:
a new president in February, the final year of the current
medium-term strategy, and many changes implemented
through its Reform Agenda.
To remain responsive and relevant in the complex
and fast-changing environment and to help ensure that
economic growth lifts as many lives as possible, ADB has
been reforming its processes, policies, and programs. Many
changes are being put in place under the plan known as
the Reform Agenda, adopted in 2004, which is making
ADB more effective in delivering country-level
development outcomes and its goal of poverty reduction.
The agenda consists of 19 ADB-wide reform initiatives ADB must make sure all its programs and projects contain pro-poor
to deliver five broad outcomes related to internal changes elements

9
BOARD OF
DIRECTORS’ REPORT

Women in Bangladesh learn the basics of microfinance, a key step


to improving their lives (left); ADB must clearly and consistently
demonstrate effectiveness in its operations (above)
strategy, and introduces a results-based monitoring and
evaluation framework with clear indicators.
The ADB Board of Directors also endorsed results-
based country strategies and programs in Bangladesh, Results-based country strategies
Bhutan, Mongolia, and Philippines, the first batch to join
the 2004 debut of Nepal’s pilot results-based country
and programs provide the
strategy and program. The country strategies and programs flexibility to zero in on the
for Fiji Islands, Indonesia, Papua New Guinea, Uzbekistan,
and Viet Nam are being developed to include tools to
developmental constraints of
enable those programs to be managed for development the member country
results. All are being put together after extensive
consultations with a broad spectrum of stakeholders in
those countries, making the strategies and programs more Cooperation Strategy and Program (Pacific Strategy) is also
inclusive and reflective than ever before of the needs of designed to be managed for results and was put together
the poor. after consultations and extensive workshops with
stakeholders concerned.
RESULTS IN COUNTRY STRATEGIES The Pacific Strategy is a unique document in ADB.
AND PROGRAMS It will guide the preparation of all country strategies and
Results-based country strategies and programs put in place programs in the region and all regional activities. Through
a matrix of objectives and clear indicators for monitoring a matrix of three objectives and seven key result areas, the
progress, and provide the flexibility to zero in on the strategy is based on monitoring, reporting, and assessing
developmental constraints of the member country. For work across the region, and, importantly, learning from
example, the Philippine country strategy and program this process for future decision making.
focuses on the fiscal deficit, the Bangladesh and Nepal
country strategies and programs deal closely with PROJECT PERFORMANCE MANAGEMENT SYSTEMS
governance, and regional imbalances are important in the Inadequate planning and insufficient involvement of
Viet Nam country strategy and program. stakeholders in project preparation are among the main
Some countries have more capacity to adopt results reasons for project failure. The results-based approach is
orientation than others—such as large, middle-income also working at the project level, under the Project
economies—more so than smaller, fragile states. As a key Performance Management Systems, which centers around
action under Managing for Development Results, ADB the development of improved design and monitoring
will work with its DMCs to help develop their capacity frameworks for ADB projects, programs, and technical
and strengthen country systems for the strategy. assistance.
Regionally, the new Pacific Regional Economic The new frameworks are results-based participatory

10
instruments that help in conceptualizing, designing, The Innovation and Efficiency

DIRECTORS’ REPORT
BOARD OF
implementing, monitoring, and evaluating projects.
The improved use of better frameworks is expected to Initiative aims to make ADB more
provide a consistent structure for all lending and non-lending
operations; clarify outcomes by harmonizing better with
client- and results-oriented,
other aid agencies; describe the “results chain” of a project; and efficient
and improve the formulation of expected development
outcomes by identifying performance indicators.
NEW INSTRUMENTS AND MODALITIES
GLOBAL AGENDA ADB is testing five new financing instruments and
ADB has also played a key role in discussions among the modalities to meet client needs in a more efficient and
multilateral development banks to mainstream Managing cost-effective manner. The new instruments will be
for Development Results. For example, it initiated joint implemented on a pilot basis for an initial period of 3 years,
development of the multilateral development banks’ after which performance, suitability, and outcome will be
Common Performance Assessment System, which will evaluated. If found to be sound, relevant, and effective,
collectively assess each year how five banks are progressing they will be mainstreamed into ADB’s operational toolkit.
in mainstreaming the Managing for Development Results The new financing instruments are meant to be
agenda. client-driven and easy to use. They follow ADB’s strategic
Indeed, at the Second High-Level Forum on Aid framework, comply with ADB’s Charter, and are aligned
Effectiveness in March 2005, delegates from more than with existing policies and procedures.
100 developed and developing countries and major They are also designed to preserve the institution’s
international agencies endorsed the Paris Declaration on triple A credit rating. An independent Risk Management
Aid Effectiveness. They resolved to take far-reaching and Unit was created in 2005 as a precondition for the pilot
monitorable actions to reform the ways aid is managed. instruments, and to evaluate nonrecourse financing or
ADB and other multilateral development banks also nonsovereign finance transactions. This unit will cover
committed to harmonizing operational policies, public and private sector operations processed by regional
procedures, and approaches to reduce transaction costs for departments, by the Private Sector Operations
donors and developing countries. ADB collaborates with Department, or by joint teams.
partners on key economic, sector, and thematic works and The financing instruments include the following.
increasingly uses harmonized approaches in developing • A multitranche financing facility facility,, similar to
results-based country strategies and programs. a standby and noncontingent line of credit,
relevant for both debt equity and guarantee
INNOVATION AND EFFICIENCY INITIATIVE finance. The facility targets mainly investment
ADB provides both finance and expertise to its clients. programs, large projects, and credit lines. Pilot
Finance includes debt, equity, and guarantees. Expertise testing began in 2005 with two transactions,
covers sector and thematic areas and is channeled mainly one in India and another in Pakistan.
via technical assistance grants. Besides its proximity to the • Direct financing to subsovereign, quasi-
market and sector/thematic knowledge, ADB also maintains sovereign, and state-owned enterprises. This
a close working relationship with countries in the region. new instrument responds to the decentralization
To package these assets for greater development process taking place in the region and allows ADB
effectiveness, ADB is streamlining some of its business to service a new set of clients.
processes and developing new financing instruments and • Local currency financing. This is now
modalities. The Innovation and Efficiency Initiative has applicable to both public and private transactions.
been established for this purpose. It aims to make ADB It addresses the potential mismatch between
more client- and results-oriented, and efficient. The borrowing in foreign currency and having income
initiative covers seven change areas: new financial streams in local currency. This is especially relevant
instruments, including local currency; better country in the case of public services, utilities, and
strategies; simplified business processes; improved infrastructure projects.
procurement policies; simplified consulting services; • Refinancing facility
facility.. This allows ADB to help
enhanced cost-sharing and expenditure eligibility criteria; with the restructuring and/or expansion of existing
and improved safeguard policies. projects with inappropriate financing plans.

11
ADB has been reviewing and
BOARD OF
DIRECTORS’ REPORT

improving its policies, strategies,


and approaches to ensure that
they are focused on results and
are relevant

conclusions in the draft paper Improving Governance and


Fighting Corruption: Implementing the Governance and
Anticorruption Policies, which was made publicly
available for comment in December 2005.
New country strategies and programs are being put together after
extensive consultations, making them more inclusive and pro-poor The review finds that ADB has succeeded in raising
the profile of governance in the region and significantly
increased assistance between 2000 and 2004. However,
• New forms of cofinancing. ADB has seen the review concludes that there is a long way to go toward
increased interest from commercial financial embedding implementation of the governance and
institutions in both the private and public sectors anticorruption policies in the mainstream of ADB
to enter into risk-sharing agreements—cofinancing operations. The sheer scope of the governance policy and
through active financial syndications and risk its action plan has resulted in too many small projects of
sharing with commercial financing partners. The short duration and thinly spread staff resources.
new arrangements will expand cofinancing and The review also concludes that ADB has achieved
partnership opportunities for all parties involved. some success in dealing with fraud and corruption in
procurement and in increasing awareness of the
OTHER POLICIES AND STRATEGIES Anticorruption Policy. But less progress has been made
ADB has been reviewing and improving its policies, in assessing the impact of corruption on a country's
strategies, and approaches to ensure that they are focused ability to meet its development goals.
on results and are relevant. In 2005, ADB reviewed its The review also finds that service delivery in many
existing Private Sector Development Strategy and started DMCs is plagued by inefficiency and corruption, for
preparing a new strategy for regional cooperation and example, in health, education, water, licensing, revenue,
integration. Following the review of its Private Sector and land titles. It says that higher priority should be
Development Strategy, ADB prepared and submitted to given to supporting investments in local transparency,
the Board of Directors a new strategic framework. This participation, and complaint mechanisms; and strong
focuses on enabling environment intervention to create a preventive measures against corruption must be built into
level playing field for instruments, mobilization of project design and followed up with effective oversight
finance for private sector development, and new ways of and corruption risk mitigation management during
financing public goods and services. The framework is implementation.
accompanied by an action plan. ADB also continued implementation of its
Setting the tone for policy review, meanwhile, the Performance-Based Allocation Policy, which governs the
Public Communications Policy was approved. After allocation of grants and loans to borrowers from the ADF
extensive and transparent consultations with interested (see below).
groups around the world, working drafts were posted on And the year included work to prepare ADB’s second
the internet, and extensive comments were publicized Medium-Term Strategy, which will introduce some
on the ADB intranet. ADB closely considered all strategic measures as the first steps to a more
contributions in the final product, which is now setting comprehensive longer-term ADB response to the rapid and
a progressive tone for the organization’s dissemination of far-reaching changes in the region is experiencing. The
knowledge and information (see page 13). document will be made available in 2006 (www.adb.org/
Similar wide-ranging consultations were held as part Documents/Policies/MTS/2006/). A review of ADB’s
of the review of the implementation of ADB’s governance Long-term Strategic Framework is also to progress,
and anticorruption policies. ADB circulated the review beginning in 2006.

12
DIRECTORS’ REPORT
BOARD OF
Public Communications Policy: Making Information Available

A
DB’s new Public Commu- ADB also recognizes that those the onus on ADB staff to defend
nications Policy heralds who need information do not why information cannot be released.
an ambitious shift necessarily have access to the internet. The policy also favors “redaction”
toward sharing knowl- Early in the design of projects that rather than withholding of informa-
edge. ADB commits to a refined and affect local residents, information tion; that is, ADB will remove the
more focused approach to external will be made available to the people confidential part of a document in
relations, with clear positions on likely to be affected, and ADB will order for the bulk of it to be
issues of importance, better work closely with the borrower or released. And ADB will not withhold
information products to explain project sponsor to ensure informa- information simply because it is
them, and wider distribution. The tion is provided and feedback negative. It will report failures and
policy's new rules regarding the sought. A focal point will also be disappointments, as well as suc-
disclosure of information about its designated for regular contact. cesses.
operations put ADB ahead of other Organizations such as national- ADB now has strict time limits for
international finance institutions. level civil society groups increasingly responding to requests for informa-
The policy forthrightly supports want to be involved in their country's tion, and regularly monitors the
the right of people to seek, receive, development strategy. ADB enables policy to ensure that it operates in
and impart information and ideas this involvement by requiring that draft accordance with its principles and
about ADB’s activities. Among its country strategies and programs be rules. Reports on the policy's
unique features, it will proactively disclosed to in-country stakeholders. implementation will be produced
make information publicly available ADB regularly consults a wide and disclosed annually.
by posting it on the web, and not range of groups before adopting or
only after a request. People should revising new operational policies and
be able to find the information they strategies, and now requires draft ADB will not withhold
want, rather than having ADB policy and strategy papers to be
presuppose what they need. posted routinely on its website. information simply
If the information ADB holds is
not subject to clear confidentiality Disclosure Enables Accountability
because it is negative
criteria, it must be publicly disclosed. From the beginning of open and
The policy even favors disclosure of broad-based consultations with
sensitive information if the public's a huge spectrum of interests in
interest in receiving the information preparing the policy—a process one
outweighs the harm that may be major nongovernment organization
caused to ADB. By leapfrogging (NGO) called the best policy review
other international development to date among multilateral develop-
organizations, the new policy puts ment banks—ADB has signaled a
ADB apace with a global movement new direction under this policy. As a
toward greater transparency and public finance institution, it wants to
disclosure. The organization believes be held publicly accountable.
that greater awareness and under- ADB-supported development
standing of its objectives will help activities are paid for by citizens of its
generate public trust. member countries, so the organiza-
tion recognizes that it needs to be
Disclosure Enables transparent with the public. ADB
Participation reviewed all the documentation it
Overall, the more transparent regularly produces and asked the The policy supports the rights of people
approach under the policy ensures question: What is the harm in to seek, receive, and impart information
that much more information will be releasing this document? This puts and ideas about ADB’s activities
available to the public in the early
stages of policies, country strategies,
or projects—before decisions are
made and members of the public
Disclosure of sensitive information is favored
can no longer influence the
development initiatives that affect
if the public’s interest in receiving the
them. By sharing information, information outweighs the harm that may
people can better participate in
decision making. be caused to ADB

13
PERFORMANCE-BASED ALLOCATION POLICY implemented through the new performance management
BOARD OF
DIRECTORS’ REPORT

ADB’s Performance-Based Allocation Policy governs the system and learning and development programs.
allocation of resources under the ADF, which provides Subsequent implementation of the ADB-wide competency
loans and grants to poorer countries on highly concessional framework will continue in 2006 through enhancements to
terms. The policy and its implementation was a central the recruitment, selection, and promotion systems.
theme of ADF IX negotiations. ADB began Among the initiatives, the new performance
implementation of its revised Performance-Based management system clearly defines individual staff
Allocation Policy after Board approval in December 2004. responsibilities and accountabilities in annual work plans
In 2005, ADB took a number of steps to strengthen agreed between staff and managers. The Performance and
implementation and increase transparency of the policy, Development Plan provides better alignment between an
and to further harmonize performance-based operations individual staff member's work plan and the organization’s
with those of development partners. key results. It is a framework that provides the needed
A focal point was established in ADB’s Strategy and structure to manage performance on a daily basis through
Policy Department. The First Multilateral Development timely, continuous, and constructive feedback as well as
Banks’ Technical Meeting on Performance-Based more objective performance distinctions and recognition.
Allocation, jointly planned by the African Development The Performance and Development Plan will allow ADB
Bank, ADB, and the International Development to efficiently manage staff development and personnel
Association of the World Bank Group, was hosted in decisions. Improvements will continue to be made to the
Manila in January 2005. performance management system during the 2006 cycle.
In April, ADB organized regional technical workshops Recruitment and selection initiatives were improved
in Suva, Fiji Islands, and in Bangkok, Thailand, to explain through the delegation of some oversight functions to the
the objectives of the new policy to officials from DMCs Vice President (Finance and Administration) and through
and civil society organizations. the use of external specialized recruitment firms for senior
In line with the revised policy, the World Bank’s positions in the Private Sector Operations Department
Country Policy and Institutional Assessment and the new Risk Management Unit. Panel interviews for
questionnaire was adopted to conduct the 2005 country professional staff and greater participation of the hiring
performance assessments, and the two organizations divisions were sought to screen and interview external
coordinated to ensure consistency in the conduct of candidates.
assessments exercises. To facilitate implementation of the strategy, ADB
The first country performance assessments under the was required to first attain the flexibility to adjust the
revised policy were carried out in 2005 to determine ADF composition of its workforce to ensure that staff possess
allocations for 2007–2008. The assessments covered five the appropriate competencies, motivation, and potential
areas: macroeconomic management, structural policies, to perform. Implementation of the Enhanced Separation
social inclusion/equity, governance, and portfolio Program started in 2005 and will be completed in 2006.
management. The program encourages selected staff members who
Recently, ADB reached an important milestone in have reached a plateau in their careers to take the
implementing the revised Performance-Based Allocation opportunity to separate from ADB earlier than their
Policy, with numerical ratings being released for the first normal retirement date.
time in the public domain.
New Unit Formed to Focus on Learning
Internal Initiatives The Learning and Development Unit was established in
2005 to optimize the use of learning and development
HUMAN RESOURCES resources, support a more efficient approach to learning
Human Resources Strategy and development, and adopt a more strategic approach
The Human Resources Strategy, approved in 2004, is a toward identifying learning needs within the business
critical component of ADB’s Reform Agenda. ADB made
significant progress implementing several initiatives
under the strategy in 2005. The initiatives, by improving The Human Resources Strategy
management of human resources, help ADB work toward
achieving results.
is a critical component of ADB’s
The ADB-wide competency framework was Reform Agenda

14
environment. The focus is primarily on promoting

DIRECTORS’ REPORT
BOARD OF
institutional efficiency and effectiveness, redesigning
leadership programs, and improving technical programs.
To determine ADB’s learning needs, an ADB-wide
training needs assessment was implemented as part of the
new performance management system. Several new
workshops were introduced in 2005, and broad training
programs on technical and operations skills development
as well as leadership coaching to strengthen leadership
and accountability were conducted. A job rotation pilot
was implemented for resident mission national officers.
Initiatives that continue to support the objective of
creating an inclusive and women-friendly environment
were implemented, including diversity and gender
sensitivity sessions.

Staffing
At the end of 2005, ADB had a staff of 2,456 coming from
53 of its 64 member countries. The total comprised
887 professional staff members and 1,569 local staff The new performance development plan provides better alignment
members, of whom 342 or about 17.2% are located in between staff work plans and ADB’s key results
field offices. During the year, there were 95 appointments
and 68 departures of professional staff members, while
137 local staff joined ADB, and 102 left. Women
At the end of 2005, ADB had
professional staff members increased in number but a staff of 2,456 coming from 53 of
decreased as a percentage of total professional staff.
Women professional staff members totaled 255 (29.8% of
its 64 member countries
total professional staff) at the end of 2004 and 259
(29.3% of total professional staff) at the end of 2005. Development Plan. Some benefit changes that were
discussed with the Board and approved by Management
COMPENSATION included changes to the Staff Retirement Plan and the
Consistent with ADB’s market-driven compensation Group Medical Insurance Plan for pensioners, as well as
system, the Board approved a 3.4% weighted average minor changes to the expatriate benefits on housing,
salary increase for professional staff and a 0.9% salary home country travel, and education assistance.
budget for nonrecurring, non-pensionable bonus for 2006.
It also approved a weighted average salary increase of INTERNAL ADMINISTRATIVE EXPENSE BUDGET
10.9% for national officers and administrative staff at Internal administrative expenses for 2005 totaled
headquarters for 2006, while an overall weighted average $294.3 million, a saving of $5.5 million against the
salary increase of 10.8% for the national officers and original budget of $299.8 million, resulting mainly from
administrative staff in 25 field offices was implemented lower-than-expected staff costs, business travel, and
for 2006. administrative expenses, despite emergency assistance to
The Board discussed the Comprehensive Review of the earthquake- and tsunami-affected areas. Savings were
Compensation and Benefits for professional staff in offset by a higher requirement for consultants and staff
November 2005. It approved a change in the methodology relocation. About $0.7 million was transferred from the
for setting professional staff salaries. The European Bank general contingency to meet the unexpected increase in
for Reconstruction and Development has been added as a staff-related expenses of the Operations Evaluation
comparator, in addition to the World Bank. The salary Department and higher relocation expenses of the offices
budget increase has been split into two components: a of the directors.
salary increase to be distributed based on performance; For 2006, the internal administrative expense budget
and a nonrecurring, non-pensionable bonus to be given to is $312.9 million, including a general contingency of 1%
staff rated exceptional under the Performance and (summarized in Appendix 10), and net of $3.8 million

15
estimated to be recoverable from administering trust initiatives in 2005. Under the Enhanced Security
BOARD OF
DIRECTORS’ REPORT

funds of multilateral and bilateral institutions. The 2006 Access Control Project—one of the projects under the
budget has been prepared under a zero real growth Special Capital Budget Projects, which was approved in
scenario, with no professional staff increases. The nominal April 2004 by the Board of Directors—all six entrances
budget increase over the 2005 budget estimate is 5.3%, to the headquarters building were improved and the
which is fully attributable to price increases. To achieve Security Operations Center that operates 24/7 to provide
this flat real growth budget and to ensure that resources timely information was established. It also led to the
are available to fund priority work programs for 2006, development of the ADB Business Continuity Strategy,
an across-the-board sequestration of 5% of the authorized approved in February 2005. The strategy, which aims to
professional staff complement and selected discretionary mitigate the probability of a risk occurrence and reduce
expenses was applied. the impact of a risk event, focuses on the timely response
Budgetary resources in 2006 will fund a prioritized to a disruption affecting ADB’s business processes.
work program, including the following major initiatives: In November 2005, ADB passed its second year
expansion of OCR lending to meet the priority needs of surveillance and maintained its ISO 14001 and OHSAS
DMCs, including lending to subsovereign and nonsovereign 18001 certification, confirming that ADB’s environment,
entities; expanded private sector operations to reach health, and safety management systems comply with
unserved DMCs; enhanced portfolio management with international standards.
increased delegation of project implementation and other The office also launched and managed ADB’s i-travel
functions to resident missions; strengthened credit risk self-booking tool to enable personnel to make online
assessment and management; enhanced regional and travel reservations anytime they require. Last year’s
subregional cooperation and integration; Managing for projects also included the improvement of procurement
Development Results and the Human Resources Strategy procedures and outsourcing opportunities, and the latest
under the Reform Agenda; the Committee of Sponsoring printing technology upgrade.
Organizations of the Treadway Commission framework; All these bank-wide initiatives were anchored on the
knowledge management action plan; and implementation Balanced Scorecard and Six Sigma, which are now being
of the Public Communications Policy. Increases in used in the office as tools to measure quality for business
budgetary resources to support these initiatives are to be process management improvement.
met through sequestration of resources, trade-offs,
productivity gains, and various efficiency measures. INFORMATION SYSTEMS AND TECHNOLOGY
In addition to internal administrative expenses, The Office of Information Systems and Technology
the 2006 budget also includes an annual capital budget of provides access to knowledge and information as required,
$4.1 million, mainly to fund cyclical capital expenditures in support of ADB goals in three major areas: information
for headquarters facilities and information technology systems, technology infrastructure, and information
equipment, and to meet replacement and acquisition technology governance.
requirements of field offices. Under information technology governance, the office
recently completed a realignment, putting in place four
ADMINISTRATIVE SERVICES business units: Technology Division, Solution Delivery
The Office of Administrative Services worked to maintain Division, Infrastructure Unit, and Business Process
a safer and better work environment through several major Support Unit.
As part of the Information Systems and Technology
Strategy Phase II, several initiatives have started to
The 2006 budget has been increase efficiency in information and technology areas.
prepared under a zero real growth Foremost is the infrastructure optimization initiative to
simplify and consolidate existing technology. This is
scenario, with no professional staff expected to streamline ADB’s information and technology
environment toward the desired enterprise architecture
increases. The nominal budget laid out against the defined business direction and to
increase over the 2005 budget ensure greater cost-effectiveness.
In the area of information systems, the office is working
estimate is 5.3%, which is fully closely with the Knowledge Management Center and the
attributable to price increases Regional and Sustainable Development Department to

16
identify requirements for better information sharing in terms. Each Director appoints an Alternate. The President

DIRECTORS’ REPORT
BOARD OF
support of decision making and knowledge management. is elected by the Board of Governors for a 5-year term and
serves as Chairperson of the Board of Directors. The
Governing Structure President manages ADB, assisted by four Vice Presidents
and a Managing Director General. (For the current list of
BOARD OF GOVERNORS AND Governors and Directors, see appendixes 4 and 5.)
BOARD OF DIRECTORS Haruhiko Kuroda assumed office as ADB President on
ADB’s highest policy-making body is its Board of Governors, 1 February 2005 after being unanimously elected by the
which is composed of one representative from each ADB Board of Governors in November 2004.
member. The Governors meet annually and elect the Vice President Joseph Eichenberger completed
12 members of the Board of Directors, who serve 2-year his assignment on 31 December 2005. C. Lawrence

38th Annual Meeting

T
he 38th annual meeting of Economic Integration; the region; and
the Board of Governors was • shared ADB’s concern with the • commended ADB on the
held in Istanbul, Turkey, negative net transfer of resources introduction of grants in ADF IX,
from 4 to 6 May 2005, with to DMCs, and welcomed ADB's and noted that the use of ADF IX
activities and events commencing on plan to streamline policies and grant resources must be
2 May 2005. procedures, develop new lending consistent with ADB's overall
ADB’s Board of Governors instruments, sharpen the focus of commitment to development
recognized that developing Asia had its operations, and ensure cost effectiveness.
entered a new era of development competitiveness, within a well- About 2,500 participants
characterized by dynamic growth, defined medium-term strategic attended the annual meeting,
increased interdependence, and an framework; including representatives from
unprecedented prominence in the • urged ADB to work with govern- multilateral and bilateral institutions,
global economy. The Governors also ments, development partners, the global financial community, and
recognized that the generally and the private sector to meet the civil society. The 39th annual meeting
buoyant economic profile was not large infrastructure challenges in will be held in Hyderabad, India.
uniform, that significant disparities
in economic and social development
persist within countries and across
the region, and that reducing non-
income poverty has been slow
in many countries.
The Governors expressed firm
commitment to reducing poverty
and achieving the MDGs in the Asia
and Pacific region, and reaffirmed
their vision of a region free of
poverty.
The Governors also
• expressed their strong apprecia-
tion to ADB for its leadership role
and quick response in addressing
the aftermath of the tsunami in
late 2004; About 2,500 participants attended the annual meeting, including representatives from
multilateral and bilateral institutions, the global financial community, and civil society
• reaffirmed the importance of
Managing for Development
Results;
• noted ADB’s strong commitment The Governors expressed firm commitment
to a more proactive role in
regional cooperation and to reducing poverty and achieving the MDGs
integration, and welcomed the
creation of the Office of Regional for a poverty-free Asia and Pacific region

17
Greenwood, Jr. was elected by the Governors to replace and budget framework should be viewed as an ADB
BOARD OF
DIRECTORS’ REPORT

Mr. Eichenberger. Mr. Greenwood assumed office on business plan to enhance effectiveness, with inclusion of a
28 February 2006. stronger results framework.
The Board of Directors met formally on 49 occasions The committee reviewed the special capital
and held 38 informal meetings in 2005 including expenditure proposal on a business continuity facility,
briefings, discussion seminars, and presentations. later approved by the Board, to serve as a backup work
Members of the Board of Directors made official visits to facility during business interruptions at headquarters.
India, Maldives, and three Central Asian republics. It also recommended approval of ADB’s 2006 budgets
The Annual Meeting was held on 4–6 May 2005 in for internal administrative expenses and annual capital
Istanbul, Turkey (see page 17). expenditures. The guiding principle of the budget
formulation was zero real growth.
BOARD COMMITTEES During the deliberations on the 2006 budgets, the
The Board of Directors has four standing committees. committee requested a review of the overall lending
Membership is shown in Appendix 6. program projections in the draft budget document, and
these were subsequently revised upward. In response,
Audit Committee the committee was provided with an update of the
The Audit Committee identified and reviewed a projected programs on regular operations, ADF grants,
comprehensive range of audit issues within its mandate, multitranche financing facility, and emergency
representing a broad cross-section of ADB operations and assistance. The committee expressed concern about the
activities, including the quarterly financial statements, impact of a zero real growth budget on the scaling up of
which are analyzed closely to review the financial operations, implementation of new initiatives, and the
soundness of ADB, and to keep track of the net income medium-term strategy. The committee was informed
position. It continued to monitor implementation of the that this would not restrict work program objectives
Financial Accounting Standard, FAS 133, covering and targets, which are fully resourced.
accounting principles and practices in relation to The committee reviewed the work program of the
derivative instruments; the effectiveness and efficiency of ADB Institute, proposed a 2006 budget of $14.2 million,
control procedures, including backup procedures as part of and recommended its approval.
the Business Continuity Plan; and measures being taken
to prevent fraud and corruption. Compliance Review Committee
The committee, together with relevant ADB The Compliance Review Committee, set up under the
departments, finalized a review of its terms of reference, Accountability Mechanism (see page 19), clears the
bringing them in line with those of other multilateral Compliance Review Panel’s proposed terms of reference and
development banks. The role of the committee was made time frame for conducting compliance reviews, and reviews
more specific with the inclusion of risk management, and the panel’s draft monitoring reports on implementation of
procurement policies and procedures as part of the review remedial actions approved by the Board before the panel
of internal controls. The committee supported the finalizes them. In 2005, the committee discussed the
initiative of the President at the Istanbul Annual Meeting panel’s proposed terms of reference for conducting a
of establishing an independent Risk Management Unit. compliance review of the request under the Southern
Transport Development Project in Sri Lanka and three draft
Budget Review Committee monitoring reports on the implementation of remedial
The Budget Review Committee discussed the Enhanced actions on the inspection request on the Chashma Right
Separation Program, later approved by the Board. It clarified Bank Irrigation Project (Stage III). The terms of reference
how the program will provide flexibility to adjust human and monitoring reports are posted on the panel’s website
resources in line with the Human Resources Strategy. (www.compliance.adb.org).
The committee also discussed and amended its
terms of reference to reflect the participation of Vice Development Effectiveness Committee
Presidents in committee meetings as necessary, allowing To ensure the independence of ADB’s operations
the discussion of strategic directions before the evaluation process and reports, on 1 January 2004,
finalization of the work program and budget framework. the Operations Evaluation Department began reporting
The committee also looked at efforts and progress to directly to the Board of Directors through its
improve cost information. It noted that the work program Development Effectiveness Committee.

18
Evolving areas of concern to the committee include The committee has changed the focus of its reviews

DIRECTORS’ REPORT
BOARD OF
how evaluation recommendations that Management and discussions from individual project evaluations to
accepts are turned into action, with an eye to making broader evaluations at the country, sector, thematic,
improvements. They also include how impact is monitored, and policy levels. Accordingly, in 2005, the committee
and how the department could play a more strategic role. meeting agenda included only such broader studies,
All evaluation reports are posted on ADB’s website none at the project level. For the first time, the
upon circulation to the Board and Management, in committee recommended that Management formulate
accordance with the Public Communications Policy. a comprehensive action plan to address key strategic
Management’s responses to the reports and issues identified in the annual report on portfolio
recommendations, and the chair’s summaries of performance. Management responded positively to the
committee discussions of the department’s major reports recommendation and committed to monitoring and
are also posted when available. reporting to the Board on such an action plan.

Accountability Mechanism

A
DB’s Accountability a project because ADB has failed to In December 2004, the Compli-
Mechanism aims to comply with its operational policies ance Review Panel received a request
improve development and procedures. The panel will for compliance review of the
effectiveness, project assess eligibility and will conduct Southern Transport Development
quality, and transparency in opera- compliance reviews agreed to by the Project in Sri Lanka. The Compliance
tions. Its two functions—consulta- Board of Directors. The Compliance Review Panel found the project to
tion and compliance review—help Review Panel reports directly to the have lapses of compliance with
solve problems and investigate ADB Board of Directors for such several ADB operational policies and
alleged violations of ADB’s opera- matters. procedures, including involuntary
tional policies and procedures. The Office of the Special Project resettlement; and environmental
Through the mechanism, people Facilitator received a complaint from considerations, gender and develop-
adversely affected by an ADB- five villages in South Kalimantan ment, and incorporation of social
assisted project can file a complaint about the Community Empower- dimensions in ADB operations. The
with the Office of the Special Project ment for Rural Development Project Board approved the recommenda-
Facilitator (www.adb.org/SPF), which in Indonesia and declared it eligible tions in the Panel’s Final Report in July
reports directly to the ADB President. in March 2005. The agreed course of 2005. The Panel is presently monitor-
Through the consultation action consisted of preparatory ing ADB Management’s implementa-
function, the mechanism seeks meetings with all parties involved, tion of the remedial actions.
agreement among all parties. A joint fact-finding activities, and The Panel also monitored ADB
venue and a process for problem multi-stakeholder consultations. Management’s implementation of
solving that can include fact-finding At the end of September 2005, the Board-approved remedial actions
reviews, meetings, roundtable the parties signed village agree- under the inspection request of the
discussions, stakeholder consulta- ments for all five villages, and the Chashma Right Bank Irrigation
tions, and other means appropriate consultation phase was concluded. Project (Stage III) in Pakistan.
to the situation are provided. Three Indonesian NGOs played an The Office of the Special Project
Separately, affectees may also file important role as intermediaries. The Facilitator and the Office of the
a request for compliance review with parties were to submit a progress Compliance Review Panel intensified
the Compliance Review Panel (http:// report on the implementation of the their outreach activities with
compliance.adb.org) if they believe agreements by the end of January government representatives, civil
they have been adversely affected by 2006. society, private sector, academe, and
ADB personnel in nine countries.
The Office of the Compliance
Review Panel hosted the 2nd Meeting
Through the mechanism, people adversely of Accountability Mechanisms,
which was attended by 18 represen-
affected by an ADB-assisted project can tatives from various accountability
mechanisms in development
file a complaint institutions.

19
The main instruments for providing ADF IX grants are assisting countries in reducing
BOARD OF
DIRECTORS’ REPORT

the debt burden of development finance, making the


help to ADB’s DMCs are policy transition from conflict to peace and stability, and
dialogue, loans, equity combating HIV/AIDS and other infectious diseases.
ADB also manages and administers additional funds:
investments, guarantees, grants, Japan Scholarship Program, Japan Fund for Poverty
and technical assistance Reduction, and Japan Fund for Information and
Communication Technology, including those grants
provided by bilateral and multilateral donors to support
Financing Operations in 2005 technical assistance and soft components of loans.
In recent years, thematic trust funds focusing on gender
FINANCIAL RESOURCES and development, governance, poverty reduction, water,
Authorized and subscribed capital stock amounted energy, and the environment were established to support
to $50.2 billion. ADB raised long-term funds totaling technical assistance operations and selected components
$4.2 billion, of which $1.0 billion was raised through of loan projects (see page 41).
a global public offering. Technical assistance funded through grants or loans
Gross income, which includes revenue and net helps maximize ADB’s development impact. Technical
realized gains, amounted to $1.4 billion, $1.0 billion of assistance grants are used for preparing projects, and for
which was generated from the loan portfolio, supporting advisory and regional activities in areas such
$375.3 million from the investment portfolio, and as law and policy reform, strengthening fiscal policies and
$36.3 million from other sources, of which $24.5 million procedures, good governance, capacity building, and
came from equity investment operations. natural resource management.
ADB’s Special Funds are the ADF1 with 2005 ADB has a triple-A credit rating and actively
committed resources amounting to $2.6 billion, mobilizes financial resources through its cofinancing
Technical Assistance Special Fund of $195.5 million, operations, tapping official, commercial, and export credit
Japan Special Fund totaling $34.3 million, ADB Institute sources. Assistance to its DMCs creates an enabling
Special Fund of $13.9 million, Asian Tsunami Fund of environment for private sector development. ADB also
$578.6 million, and Pakistan Earthquake Fund of directly finances private sector projects to assist
$85.5 million. commercial investors and lenders (www.adb.org/about/
fnncemgt.asp).
FUNDING
About 72.9% of cumulative lending is from OCR. OVERVIEW OF OPERATIONS
Funding from OCR comes from three distinct sources: In 2005, ADB approved 72 loans (64 projects) for
private placements and capital markets in the form of $5.8 billion, 10 equity investments for $217.1 million,
borrowing; paid-in capital provided by shareholders; and 2 guarantees for $68.4 million, 51 grant-financed projects
accumulated retained income (reserves), which provides for $1.2 billion, and 299 technical assistance operations
a buffer for risks. for $198.7 million for ADB operations of $7.4 billion
The main instruments for providing help to ADB’s (see page 24). In addition, ADB approved 2 multitranche
DMCs are policy dialogue, loans, equity investments, financing facilities totaling $1.5 billion.
guarantees, grants, and technical assistance.
ADB offers a range of modalities and terms for loans LOANS
aimed at improving performance. Lending with government guarantee accounted for 65 loans
Loans are also provided from Special Funds. for $5.3 billion (58 projects and programs), comprising
The ADF offers loans on concessional terms to members 25 loans from ADB’s OCR for $3.9 billion and 40 loans
with low per capita gross national product and weak from the ADF for $1.4 billion. 1 This is a 6% increase over
debt-repayment capacity. It is the only multilateral the almost $5 billion in 2004 (an increase of 4.9% for OCR
development bank concessional fund dedicated lending and 11% for ADF lending). Lending without
exclusively to economic and social development in the government guarantee to the private sector accounted for
region. The ADF is financed by periodic voluntary seven loans for $536.0 million (seven projects)—in
contributions from donors. The current ADF IX program financial terms, this is an increase of 83.2% over the five
is $7 billion for 1 January 2005–31 December 2008. loans for $292.5 million (five projects) in 2004.

20
DIRECTORS’ REPORT
BOARD OF
In discussions with borrowers during 2005, countries highlighted the need for ADB to expand support for poverty reduction programs

Of the 64 public and private sector projects and The 10 policy-based programs2 approved in 2005
programs approved in 2005, 16 (25%) were categorized were valued at $1.14 billion, compared with 14 programs
as targeted interventions and 48 (75%) as general for $1.12 billion in 2004. Two program loans approved in
interventions. By theme, sustainable economic growth 2005 were coupled with an investment project loan or a
was most prevalent and was associated with 53 projects. technical assistance loan.
By sector, transport and communications received the
largest share of lending (30%). EQUITY OPERATIONS
The 54 public and private sector projects represented Ten equity investments totaling $217.1 million were
a total investment of approximately $19.7 billion, of approved in 2005, compared with 11 for $164 million
which $5.1 billion (26%) will be financed by ADB; in 2004.
$4.4 billion (23%) by governments and borrowers;
$10.1 billion (51%) by cofinanciers, equity sponsors, COFINANCING AND GUARANTEE OPERATIONS
and local finance institutions; and $50.7 million (0.3%) ADB actively promotes cofinancing to complement its
by project beneficiaries. Eight projects, amounting to assistance to its developing member countries with funds
$1.0 billion, were financed under the sector lending from bilateral partners and multilateral financial
modality, compared with seven projects amounting to institutions, export credit agencies, as well as commercial
$1.3 billion in 2004. financial institutions. As of 31 December 2005, non-ADB
funds generated by ADB’s cofinancing operations
amounted to $7.4 billion, including $5.2 billion of
By theme, sustainable economic commercial cofinancing from international and domestic
banks and export credit agencies, $1.8 billion of official
growth was most prevalent and loan cofinancing, and $352.6 million of grant cofinancing
from bilateral and multilateral development partners.
was associated with 53 projects; Of this, cofinancing raised through ADB’s provision of
by sector, transport and financial administration or credit enhancement services
amounted to $322.9 million, including $68.4 million in
communications received the credit enhancements (guarantees) for commercial loans,
largest share of lending (30%) $30.5 million with partial administration services for

21
official loans, and $224.0 million with full or partial MULTITRANCHE FINANCING FACILITIES
BOARD OF
DIRECTORS’ REPORT

administration services for project grants. Under a new financing modality, two multitranche
Additionally, ADB established two new trust funds— financing facilities were approved, totaling $1.52 billion.3
PRC Poverty Reduction and Regional Cooperation Fund These were $770.0 million to Pakistan for the National
($20 million) and Cooperation Fund for Fighting HIV/ Highway Development Sector Investment Program, and
AIDS in Asia and the Pacific ($12.8 million)—with $750.0 million to India for the Rural Roads Sector II
financing commitments of $32.8 million, and replenished Investment Program. It is expected that loans from these
two funds with commitments of $57.2 million. facilities will be approved starting in 2006.

GRANTS RESOURCE TRANSFERS


ADB approved a total of 51 project grants for $1.2 billion. While 2005 shows improvement in disbursement,
Of this amount, $246.6 million was funded from ADF IX; lending to clients over the past 10 years was stagnant.
$570.0 million from the Asian Tsunami Fund; In discussions with borrowers during the year, countries
$80.0 million from the Pakistan Earthquake Fund; highlighted the need for ADB to expand support for
and $254.7 million from cofinancing sources with full or poverty reduction programs. The Board discussed a range
partial administration by ADB, including $28.4 million of new financial mechanisms and business procedure
from the Japan Fund for Poverty Reduction, $12.1 million reforms under the Innovation and Efficiency Initiative to
from the Global Environment Facility, $2.4 million from respond to client demands.
the Japan Fund for Information and Communication The net transfer of resources to ADB from its DMCs
Technology, and $211.8 million for ADB administration decreased to $0.4 billion in 2005, compared with
from bilateral and multilateral sources (Australia, $2.1 billion in 2004. There was a net inflow of
Canada, Finland, Netherlands, New Zealand, Norway, $1.0 billion ($2.6 billion in 2004) to ADB from OCR
Sweden, United Kingdom, and European Commission). borrowers/investors, mainly from full repayment of the
In addition, parallel grants of $128.6 million were financial sector program loan to the Republic of Korea of
provided from multilateral and bilateral institutions $1.7 billion and prepayments of $0.6 billion in 2005
without ADB administration services for seven ADB- ($2.8 billion in 2004) of OCR loans. However, net
financed projects. transfers from ADB to ADF borrowers increased from
$468.5 million in 2004 to $612.2 million in 2005
TECHNICAL ASSISTANCE (see tables 27, 28, Statistical Annex, Volume 2).
A total of 299 technical assistance activities for Loan disbursements in 2005 totaled $4.7 billion
$198.7 million, including 269 new ones and 30 supple- comprising 116.8% of the target for the year. Of the total,
mentary, were approved in 2005—in financial terms, OCR disbursements were $3.5 billion or 74% and ADF
this represents a 2% increase over the 321 technical disbursements were $1.2 billion or 26% (see tables 8, 9,
assistance activities for $195.1 million in 2004. Of the 15, Statistical Annex, Volume 2).
299 technical assistance activities, 68 were for project Loan service payments reached $5.2 billion in 2005,
preparation, 152 were advisory, and 79 were for regional compared with $5.6 billion in 2004. The decrease was
assistance. Of the total amount approved, $89.5 million mainly because of lower prepayments of $0.6 billion
will be financed from the Technical Assistance Special ($2.8 billion in 2004). In 2005, the four largest net
Fund, $28.4 million from the Japan Special Fund, resource transfers from ADB were to PRC, India, Pakistan,
$2 million from the Asian Tsunami Fund, and the and Viet Nam (see tables 27, 28, Statistical Annex,
remaining $79 million from other multilateral and Volume 2).
bilateral sources.
PRIVATE SECTOR OPERATIONS
A total of 17 financial markets and infrastructure projects
ADB established two new trust providing $821.5 million in assistance in the private
sector were approved by ADB in 2005. The interventions
funds—PRC Poverty Reduction are composed of 10 equity investments of $217.1 million,
and Regional Cooperation Fund 7 loans of $536 million, a partial credit guarantee of
$18.4 million, and a political risk guarantee of
and Cooperation Fund for Fighting $50 million.
HIV/AIDS in Asia and the Pacific ADB’s loan and equity investments mobilized

22
PDR) was approved for the Nam Theun 2 Power

DIRECTORS’ REPORT
BOARD OF
Company Limited in 2005.
One hundred ninety-one projects with cumulative
assistance of about $5 billion (inclusive of all types of
interventions) have been approved since ADB
commenced private sector operations in 1983. ADB’s
cumulative equity and loan approvals of $3.5 billion have
catalyzed a total of about $31.6 billion in funding for
private sector projects, leveraging ADB’s investments by a
ratio of 5.4 times. Cumulative disbursements for private
sector projects have thus far amounted to $2.1 billion.
As of 31 December 2005, the overall private sector
exposure amounted to about $1.7 billion, consisting of
$598.2 million in equity investments, loans of
$732.2 million, and guarantees of $361.7 million.
ADB’s private sector exposure is largest in the
infrastructure sector with a total of $820.9 million in
exposure, followed by investment funds and financial
institutions at $742.3 million, with exposure in all other
sectors at $128.9 million.
The total private sector exposures are largely in India
(17.1%), PRC (15.6%), Sri Lanka (11.5%), and
Bangladesh (11.2%). Regional projects account for roughly
8.9% of the total.
ADB’s private sector loan and equity investments mobilized funding
from other sources, leveraging ADB’s own funds by almost 10 times Capital was freed up for new investments in the
amount of $53.4 million as ADB’s equity shareholdings
in 15 private companies were fully or partly divested
funding from other sources, leveraging ADB’s own funds in 2005. Loan repayments for the year, including
by almost 10 times. In 2005, ADB’s private sector prepayments, amounted to $54.7 million, while total
operations also embarked on technical assistance for disbursements amounted to $336.2 million.
capacity building in areas such as water, trade, finance, While ADB constantly explores ways to improve risk
small business and microfinance banks, development of management in its private sector operations, a loss
the asset-backed securities market, and worker provision is recorded for equity investments and loans.
remittances. The loss provision, which includes impairment loss, was
ADB has undertaken strategic interventions through about $116.6 million as of 31 December 2005. The loss
public-private partnerships in projects that boost a reserve ratio as a percentage of total outstanding portfolio
DMC’s domestic capacity to finance private sector and was 10.8%.
economic growth, an indispensable ingredient in poverty
reduction. The projects improve the delivery of essential
services and extend them to the poor. Although private 191 projects with cumulative
sector operations are still and will remain in the larger
DMCs, ADB continues to look at opportunities in the
assistance of about $5 billion
smaller borrowing DMCs, following the priorities have been approved since
identified in various regional and country strategies and
programs. For example, the first and largest private sector
ADB commenced private sector
project in the Lao People’s Democratic Republic (Lao operations in 1983

Endnotes
1
Total ADF operations—loans and grants—amounted to $1.62 billion.
2 Policy-based programs include program loans and policy loan components of sector development program facilities.
3
In 2005, there were four projects with project cost in excess of $1 billion each. In 2004, there were no projects of this size.

23
BOARD OF
DIRECTORS’ REPORT

24
BOARD OF
DIRECTORS’ REPORT

25
BOARD OF
DIRECTORS’ REPORT

26
BOARD OF
DIRECTORS’ REPORT

27
Management
BOARD OF
DIRECTORS’ REPORT

Haruhiko Kuroda
President

Liqun Jin Geert van der Khempheng C. Lawrence Young-Hoi Lee Jeremy Hovland
Vice President Linden Pholsena Greenwood, Jr. Managing Director The Secretary
Vice President Vice President Vice President General

28
Board of Directors

DIRECTORS’ REPORT
BOARD OF
Volker Ducklau David Taylor Emile Gauvreau Pasi Hellman Sibtain Fazal Marita Magpili-
Director Alternate Director Director Alternate Director Halim Jimenez
Director Alternate Director
Austria, Germany, Luxembourg, Turkey, United Canada, Denmark, Finland, The Netherlands, Kazakhstan, Maldives, Marshall Islands, Mongolia,
Kingdom Norway, Sweden Pakistan, Philippines, Timor-Leste

Agus Haryanto Richard Stanley Chol-Hwi Lee Batir Mirbabayev Masaki Omura Atsushi Mizuno
Director Alternate Director Director Alternate Director Director Alternate Director

Cook Islands, Fiji Islands, Indonesia, Kyrgyz Republic of Korea; Papua New Guinea; Sri Lanka; Japan
Republic, New Zealand, Samoa, Tonga Taipei,China; Uzbekistan; Vanuatu; Viet Nam

Patrick Pillon Niklaus Zingg Ashok Saikia Nima Wangdi Stephen Sedgwick Richard Moore
Director Alternate Director Director Alternate Director Director Alternate Director

Belgium, France, Italy, Portugal, Spain, Switzerland Afghanistan, Bangladesh, Bhutan, India, Lao Australia; Azerbaijan; Cambodia; Federated States of
People’s Democratic Republic, Tajikistan Micronesia; Hong Kong, China; Kiribati; Nauru;
Palau; Solomon Islands; Tuvalu

Paul W. Speltz Paul W. Curry Chaiyuth Sein Tin Xiaosong Zheng Xiaolong Mo
Director Alternate Director Sudthitanakorn Alternate Director Director Alternate Director
Director
United States Malaysia, Myanmar, Nepal, Singapore, Thailand People’s Republic of China

29
Operations
in 2005
OPERATIONS IN
OPERATIONS 2005
IN 2005

Promoting Growth, Fighting Poverty

T
he 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 (see page 34) as well
as to control the spread of the avian flu virus (see page 38).
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 ADB’s infrastructure projects,
particularly roads, are encouraging
unlock this potential and bring it to bear on the massive private firms to invest
funding gap for infrastructure projects.

30
OPERATIONS IN 2005

31
Similarly, ADB continued to build “soft” infrastruc- under the Central Asia Regional Economic Cooperation
ture under the second of its main development themes, Program. As a result, the program has become a model
capacity development. Ensuring strong economic growth for cooperation and enhancing development effectiveness.
means encouraging laws and strategies that protect Collectively, about $1.05 billion has been mobilized for
property rights, promote openness, improve financial regional cooperation projects under the program for the
governance, and strengthen capital markets. next 2 years alone in addition to assembling a vast pool
OPERATIONS IN 2005

The other thematic areas include regional of knowledge to increase cooperation in Central Asia.
cooperation and integration, gender and development, Through such efforts, ADB is helping countries
and environment (see pages 37–43). achieve stronger economic growth and make progress in
The most advanced of ADB’s regional programs, their commitment to internationally agreed MDGs on
for example, the Greater Mekong Subregion Economic poverty reduction by 2015.
Cooperation Program (GMS Program), has helped build However, the region has more people with
a sense of community in the Mekong subregion, making inadequate nutrition, more living in slum conditions,
solid progress in establishing a sound infrastructural base, and more without access to water and sanitation
and has begun to move into other areas (see page 63). than any other developing region. To help relieve the
Realizing the power of partnership, ADB has forged problems faced by the poor, ADB’s lending programs
an alliance comprising eight countries and six multi- also concentrate on several sectors, including education,
lateral institutions to further regional cooperation governance, energy, environment, water, finance, social
development, and health.
Public-private sector partnerships, for example,
ADB continued to build “soft” have had great success in improving health services in
Bangladesh and Cambodia. In both cases, nongovernment
infrastructure under the second organizations (NGOs) have been engaged to improve
of its main development themes, health service delivery in government clinics (see pages
68, 89–90).
capacity development Hundreds of inventive projects have also been
carried out under the ADB-administered poverty funds
over the years (see page 41). 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 corporate-
led 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 (see page 101).
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 (see page 41) 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
A power station access tunnel at Nam Theun 2 in the Lao PDR; the
concerns with the demands of high economic growth
GMS is making solid progress toward a sound infrastructure base in places such as the PRC (see pages 56–57).

32
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

OPERATIONS IN 2005
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 develop-
ment and finance institutions. Eventually, it will provide
much-needed power to Thailand and much-needed
Building infrastructure is clearing the obstacles to economic growth
development funds for the Lao PDR (see page 69). 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 The experience of the PRC shows how large invest-
Asia after the 1997–1998 financial crisis, particularly ments in such infrastructure support stronger economic
for countries like Indonesia and the Philippines. growth and reduce poverty. Transport projects, in particu-
Poorer countries in the region continue to attract little lar, open up bottlenecks and clear the way to new mar-
or no private infrastructure funds. kets. ADB approved a large loan in September to help
Financing needs for energy, transport, information and develop a modern railway connecting the provinces of
communication technology, and water and sanitation Henan and Shaanxi (see page 55).
systems are expected to exceed $250 billion per year over At the other end of the scale, an infrastructure loan in
the next 10 years. East Asia alone will require $1 trillion Indonesia (approved in late 2005) illustrates ADB’s work
in infrastructure investment over the next 5 years to to lift living standards in poor and often isolated villages.
sustain fast growth and create jobs for its young popula- ADB is providing $50 million over 3 years to support
tion, according to a joint study published in March 2005 government efforts in some 1,800 communities to cushion
by ADB, World Bank, and Japan Bank for International the effect of a 186% rise in the price of kerosene caused by
Cooperation. The PRC still accounts for the lion’s share, the oil price spike and an end to government subsidies.
at some 80%, of East Asian investment. The loan will finance construction and repair of roads,
In ADB’s 4 decades, more than half of the bridges, irrigation systems, water pipes, and drainage
$113 billion invested in Asia and the Pacific has gone to works with the help of community organizations. About
improvements in transportation and communications, 2 million people stand to benefit (see pages 101–102).
energy, and water supply and sanitation. Commerce For more on ADB’s infrastructural and other lending
cannot thrive and the poor cannot improve their lives programs, see the subregional chapters.
using potholed roads, archaic phone systems, weak
irrigation, and distant sources of drinking water. PRIVATE SECTOR DEVELOPMENT
Raising development funds for infrastructure and other
programs is a formidable challenge, and meeting it
Financing needs for energy, requires broad commitment of private sector funding
transport, information and and expertise. However, getting that support requires
innovation.
communication technology, The rebuilding of Afghanistan is a case in point.
and water and sanitation systems When the Taliban was pushed from power in 2001, there
was little left of infrastructure. The roads, phone system,
are expected to exceed $250 billion and financial system were shattered. Without such basic
per year over the next 10 years structure, many private sector investors were lukewarm

33
ADB Assists Disaster-Struck Areas

S
akina Bibi was at home with
her children in northern
Pakistan on 8 October 2005
OPERATIONS IN 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.”
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 enor-
mous 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 Surveying the damage in Pakistan
countries. At $600 million, the fund
is the largest grant program in disaster, and places a premium on and leaving damage estimated at
ADB’s history. ADB then used the disaster risk planning. more than $200 million.
knowledge gained to launch the ADB’s Earthquake and Tsunami
Pakistan Earthquake Fund in even Rebuilding after the Waves Emergency Support Project is helping
less time. Around the Indian Ocean, more than communities find the resources they
ADB coordinates its assistance for a year after the tsunami, the survivors need to repair farms: agricultural
countries faced with natural disasters are putting their lives back together enterprises are being restored
and post-conflict reconstruction with ADB’s help. With subsequent and support services are being
under its Disaster and Emergency replenishment of the fund, ADB rehabilitated.
Assistance Policy of 2004. It has had approved $859.9 million during the Government and development
a disaster policy since 1987 and year for the countries hit by the waves. partner joint assessments estimated
provided $2.4 billion in emergency In Aceh, Indonesia, those funds losses to Indonesia at about $4.7
assistance loans since then. are helping the severely affected billion. Some 126,000 lives were lost
Under the new policy, however, agriculture sector get back on its in the provinces of Aceh and North
ADB is learning from its long feet. The waves washed out a fourth Sumatra, and hundreds of thousands
experience in disaster management of cash crop areas and rice fields, were left homeless. ADB approved
gained through a string of calami- taking away the livelihoods of about grant financing of $300 million—
tous events in the region, whether 320,000 farmers and employees $290 million for the Earthquake and
the Gujarat earthquake in India in
2001, massive flooding in Bang-
ladesh in 2004 and in the PRC in
1998, or after conflicts in Cambodia,
ADB coordinates its assistance for countries
Timor-Leste, and elsewhere. faced with natural disasters and post-conflict
The policy emphasizes better
coordination among the many reconstruction under its Disaster and
development agencies and relief
organizations that respond to Emergency Assistance Policy of 2004

34
OPERATIONS IN 2005
ADB reviews the damage in Sri Lanka (top)
and Aceh, Indonesia (left); the response
was swift and effective

Tsunami Emergency Support Project Assistance Sector Project, comprising announced a package of $1 billion
and $10 million for the Multi-donor a $100 million loan and an Asian for reconstruction and recovery.
Trust Fund. Tsunami Fund grant of $100 million. Using the experience gained in
In South Asia, the tsunami funds Another $5 million will come from putting the Asian Tsunami Fund
are helping rebuild the essentials of technical assistance grants. together, ADB established the
economic growth and recovery: In the Maldives, the tsunami Pakistan Earthquake Fund in
roads, power facilities, and other caused damage of nearly $500 November to channel grant funding.
major infrastructure. They are being million, equivalent to some 62% of Under the $300 million Earth-
used to restore livelihoods, provide GDP, although the loss of lives was quake Emergency Assistance Project,
primary education and health comparatively small. ADB’s tsunami for example, ADB will help recon-
services, revitalize water supply and assistance package of $23.2 million struct lost assets and restore the
sanitation, and rebuild homes. is helping restore infrastructure transport, power, health, and
Sri Lanka is faced with the (transport, water supply/sanitation/ education sectors in Azad Jammu
arduous task of rebuilding about solid waste management, power, and Kashmir* and in North-West
100,000 houses; replacing 70% agriculture, and fisheries). As a result Frontier Province.
of the fishing fleet; and helping of lingering tsunami-related effects Approved in December, the loan
11,000 companies get back to coupled with a steady increase in oil features a quick-disbursing mecha-
business. Another 150,000 people, prices, fiscal balances in the Maldives nism, amounting to $100 million, to
now in informal self-employment, deteriorated. finance imports of materials urgently
have to get back on their feet. needed for the recovery process.
Sri Lanka is using the funds it ADB Rushes Assistance to The project aims to quickly revive
received, a package of just under Pakistan after Earthquake economic activity, with work to
$240 million, to help rebuild The 8 October earthquake in South rehabilitate major roads and bridges,
roads—especially those in Asia was another debilitating natural repair hydropower generating
the north and east of the country— disaster in the region’s history, stations, and construct new lines
community-based infrastructure, killing about 73,000 and leaving and facilities. Health clinics and
fishery harbors, and livelihoods. another 70,000 severely injured or schools will also be reconstructed.
ADB’s tsunami assistance also disabled. More than 2.8 million The project will help reestablish
addresses governance issues, legal people were rendered homeless, and some government services destroyed
empowerment for survivors, and 2.3 million were left without in the disaster. It will offer legal
anticorruption issues. adequate food. About 324,000 jobs assistance and address governance
In India’s states of Tamil Nadu were lost to the earthquake, equal to issues and the rebuilding of
and Kerala, ADB has helped 29% of the previously employed government institutions to reduce
thousands of fishermen get back population in the worst-hit districts. the enormous strain on government
to work. Electricity, water, and The cost of reconstruction is services. This includes replacing
transportation links are also coming estimated at $3.5 billion. documents such as birth and death
back. Assistance to India includes ADB responded quickly. certificates, property titles, and
the $200 million Tsunami Emergency ADB President Haruhiko Kuroda 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.

35
Banking from Scratch—Investing in Afghanistan

T
he damage in Afghanistan
was more than ruined
buildings after a quarter
OPERATIONS IN 2005

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 devel-
opment crucial to economic revival,
was among the first institutions to
step in. Under a contract with Dutch
banking giant ING and supported by A man and a boy prepare the day’s bread from scratch; rebuilding the country has also
an ADB investment of $2.6 million meant starting from scratch
for a 25% stake, it is helping rebuild
the shattered financial sector. speakers, in Pakistan. sectors it feels are financially
“It was very basic when we started The next step was finding clients. rewarding and need support. These
here, and we had to start from Again, unlike other foreign banks, include import substitution busi-
scratch. This is not a branch office; the bank could not tap an estab- nesses that can replace lucrative
we were setting up an all-new local lished clientele. “Most of the other goods now expensively imported
bank. We needed not only to find a banks operating here had merely from Pakistan or elsewhere, and
building, but also to create a whole shifted to their Pakistan clientele promising Afghan export sectors
new banking system. We couldn’t (many of them Afghan expatriates). that can generate foreign currency.
just adopt the system of our parent So they had a clientele already,”
organization,” says Chief Executive says Mr. Haye.
Officer John Haye, a banking veteran
who came to the bank from ING.
For its lending portfolio, the bank
had some help from the United
Afghanistan Interna-
The bank was established in
Kabul in March 2004 as a local bank
States Agency for International
Development, with a $2 million
tional Bank, estab-
operating to international standards. funding program used to finance lished as a commer-
It opened its first branch in Mazar-e- the agriculture sector and plans for
Sharif in August 2005, followed by a another line to fund small- and cial bank that could
branch in Kandahar in October. medium-sized enterprises.
Staffing was among the big The bank has also developed its foster private sector
challenges. To find corporate own lending portfolio. “You have to
banking experts and chief accoun- be careful which clients you are development crucial
tants, skills not widely available in a
country emerging from 25 years of
selecting,” says Mr. Haye, referring to
the need to avoid those involved in
to economic revival,
war, the bank had to look abroad. It the huge illicit drug trade in was among the first
found suitable and affordable Afghanistan and other areas.
candidates, including Pashto The bank has chosen economic institutions to step in

about committing money. With ADB support for private a company that provides most of Afghanistan’s telecommu-
sector investments, however, a new commercial bank was nications—has helped produce spectacular results from
established and began expanding in 2005, and an establishing a mobile phone network (see pages 90–91).
investment fund to help small- and medium-sized Nonetheless, many obstacles to private sector growth
enterprises was set up (see above). still exist in Asia and the Pacific. Economic and
Another ADB loan in 2004, $35 million to Roshan— regulatory uncertainties; macroeconomic instability;

36
high tax rates; onerous regulatory and administrative found momentum in building roads, ports, and bridges;
requirements; corruption; and insufficient infrastructure, planning power and telecommunication networks; and
finance, and skills are all significant barriers to untangling trade relationships through harmonized policy
investment. and institutional environments (see pages 49–50).
Through its private sector operations, ADB is finding Leaders in the Pacific region have overcome a recent
innovative ways to overcome investor reticence toward lack of momentum toward greater cooperation and are

OPERATIONS IN 2005
some parts of Asia. It is mitigating risks, for example, moving forward with agreement to a new Pacific Plan
through the creation of guarantee instruments such as for regional cooperation and integration.
partial credit guarantees and political risk guarantees, In South Asian countries, dialogue is increasing
which protect investors against confiscation, nationaliza- through several programs, including the South Asian
tion, breach of contract, and other factors. Association for Regional Cooperation, South Asia Subre-
In 2005, ADB reinitiated a partial credit guarantee gional Economic Cooperation, and Subregional Economic
to banks in Pakistan to encourage lending to small- and Cooperation in South and Central Asia programs.
medium-sized enterprises, while in Afghanistan it was Meanwhile, emerging trends of trade and investment
in the process of disbursing loans of $5 million for the integration in Asia prompt ADB to have a more coherent
Afghanistan Investment Guarantee Facility and approach to promote trade and investment intraregionally
$10 million for a supplemental political risk guarantee. as well as extraregionally. ADB will focus on supporting
Other major private sector projects included the regional and subregional policy dialogue on trade and
Tangguh Liquefied Natural Gas project in Indonesia, for investment, conducting research on regional trade
which ADB approved a $350 million loan to build and agreements—how to make them a building block toward
operate gas production wells, platforms, and a liquefied multilateral liberalization—and strengthening institu-
natural gas facility. ADB made an equity investment of tions within developing member countries.
$75 million in the PRC’s Bank of China, and in Pakistan, Support for monetary and financial cooperation and
it will provide $37.3 million to help bridge a pending integration has been significant. ADB has supported
electricity shortfall in its first assistance to a private several regional initiatives, including those under the
sector hydropower project (see page 87). Association of Southeast Asian Nations (ASEAN),
ASEAN+3, Asia-Pacific Economic Cooperation, and
REGIONAL COOPERATION Asia-Europe Meeting. ADB will expand its support to
Regional cooperation and integration have intensified in other regional groups, such as the South Asian Association
many parts of Asia and the Pacific over the past decade. for Regional Cooperation Finance Ministers and Central
Intraregional trade now accounts for 55% of East Asia’s Asia Regional Economic Cooperation Program Finance
total, up sharply from 35% in 1980; free trade agreements Ministers. ADB has conducted extensive research to
are proliferating; and rapid growth in the PRC and India support the ASEAN+3 Research Group and the Asian
is encouraging the trend. Bond Market Initiative Working Group. ADB publishes
ADB believes regional cooperation and integration the biannual Asia Economic Monitor and Asia Bond Monitor
will continue to play a significant role in the growth of and maintains the AsianBondsOnline website.
Asia and the Pacific. It has stepped up its effort to In April 2005, ADB established the Office of Regional
encourage both and is managing the area under the new Economic Integration to act as an internal focal point for
Regional Cooperation and Integration Strategy, which regional cooperation and integration efforts. Two special
rests on four pillars: regional and subregional cooperation advisors to the President in charge of regional cooperation
programs, trade and investment cooperation and integra- and integration were appointed to coordinate and
tion, monetary and financial cooperation and integration, streamline activities undertaken by ADB’s departments
and the provision of regional public goods (such as in and advise on strategic measures and initiatives to
efforts to control HIV/AIDS or avian flu; see page 38). enhance the organization’s role in furthering regional
The GMS Program is widely recognized as an cooperation and integration in Asia and the Pacific.
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 In April 2005, ADB established
GMS Program, it envisages significant scaling up of
support for the Central Asia Regional Economic Coopera-
the Office of Regional Economic
tion Program in the coming years, and work there has Integration

37
IMPROVING FINANCING OPTIONS are screening proposals with local government units.
To expand the range of financing instruments and moda- Refinancing propositions are also under consideration.
lities, ADB began testing three new initiatives in 2005 ADB began testing the new multitranche financing
under the Innovation and Efficiency Initiative. The aim facility in 2005 with two loans for major road investment
is to increase flexibility to respond better to client needs. programs in South Asia (see pages 85 and 87). Designed
A new approach to cost sharing and expenditure to provide finance “as you go” and somewhat akin to a
OPERATIONS IN 2005

eligibility has been put in place. This will improve ADB’s commercial bank’s letter of credit, this facility will allow
project financing capability in a manner more consistent ADB to finance long-term investment programs in
with market practices. The new arrangement involves structured and staggered multiple loans. It allows clients
more flexible cost-sharing limits and expands the to combine financing sources with ADB. The financing
categories of expenditures ADB can finance (land sources can include multilateral development banks,
acquisition and payments for rights-of-way, taxes and bilateral agencies, private equity groups, commercial
duties, and other expenses such as bank charges, leasing, banks, and capital market operators.
and secondhand goods). It also does away with the old The facility establishes a means to target specific,
distinction between foreign exchange and local costs and sequential components of large stand-alone projects;
a level of investment plans. slices (or tranches) of sector investments over a longer
A number of nonsovereign transactions with state- time frame than the current norm; equity investments;
owned enterprises (majority owned by the state) are being financial intermediary credit lines; and guarantees.
prepared, namely in India and Indonesia. Project teams ADB has been expanding its coverage into local

Cooperation Combats Avian Flu

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

38
currency lending through bond issues and commercial And to keep its governance programs sharp and its
swaps in the PRC, Philippines, and Thailand. fight against corruption up-to-date, ADB began a review
in 2005 of the implementation of its governance and
GOOD GOVERNANCE, FIGHTING CORRUPTION anticorruption policies.
Governance and legal systems have been called the weak-
est link in the strong chain of development in a number of ENVIRONMENTALLY SUSTAINABLE GROWTH

OPERATIONS IN 2005
economies in Asia. Poor government, ineffective policies, Serious environmental problems have accompanied strong
and corruption hinder economic growth and development, economic growth in the region: air pollution chokes many
and thus efforts to reduce poverty. Public administration is major cities, forest cover is the world’s lowest per capita,
often also used to serve a small portion of the population and wetlands and wildlife habitat are disappearing fast.
who rely on the state and its institutions to provide special Often the poor suffer the worst effects.
privileges for their businesses or their personal interests. The countries of Asia and the Pacific must continue
ADB was the first multilateral development bank to to grow strongly to overcome poverty. However, in its
adopt a governance policy applying to all its operations, second Asian Environment Outlook, released in 2005, ADB
in 1995, following it up 3 years later with the Anti- stressed that a “grow now, clean up later” approach to
corruption Policy. Governance work has covered a range economic growth is unacceptable. Degradation is not
of areas. In national government administration, for inevitable, and a healthier environment in Asia and the
example, ADB’s work embraces Viet Nam’s Support Pacific is a prerequisite to economic development that
Implementation of the Public Administration Reform includes the poor.
Master program. It includes assistance to the Marshall Under its Environment Policy of 2002, ADB is
Islands to refocus its public sector for effective delivery working to reshape views toward environmental manage-
of basic social services, and technical assistance to ment under five goals: promoting environmental interven-
Azerbaijan to develop a competition policy framework. tions to reduce poverty directly, mainstreaming environ-
ADB is helping local governments in Cambodia, mental considerations in economic growth, supporting the
Indonesia, Pakistan, and Philippines to decentralize and maintenance of global and regional life support systems,
improve their financial management and service delivery. building partnerships, and integrating environmental
In law and judiciary, ADB has supported the Access to safeguards into ADB operations.
Justice Program in Pakistan; set up a cadastral commis- In 2005, 9 of 58 new public sector loan projects had
sion in Cambodia; and strengthened legal education in environmental sustainability as a theme, totaling some
the Maldives, Mongolia, and elsewhere. $605 million, up from $569 million in 2004. They
Among loans approved in 2005, ADB is providing the represented 12% of total public sector lending. Of the total,
Indonesian government with $200 million to support its 80% funded urban environmental improvements through
medium-term development plan, which aims to raise provision or rehabilitation of water supply, sanitation,
average GDP growth to 7% annually by 2009 from about and waste management systems; 15% promoted the
4% in 2004. Reaching that goal in Indonesia will require conservation of natural resources; while 5% funded the
greater macroeconomic stability, and sound fiscal and rebuilding and restoration of tsunami-affected areas.
financial management. To support the government’s Many of ADB’s interventions support several of the
plans, ADB is working with the World Bank and using the Environment Policy goals simultaneously.
Development Policy Support program, which includes a The Fuzhou Environmental Improvement project in
series of structural reform packages. It is one of several the PRC, Kerala Sustainable Urban Development, Phase
recent loans in Indonesia that will help improve gover- II project in India, and Regional Development project in
nance (see page 99). the Maldives, for example, are improving environmental
infrastructure, strengthening planning and environmental
management, and building management and implemen-
In its second Asian Environment tation capacity. These projects were designed with strong
stakeholder participation and are expected to provide the
Outlook, released in 2005, basis for stronger economic growth potential.
ADB stressed that a “grow now, The Sanjiang Plain Wetlands Protection project,
meanwhile, began establishing a program in 2005 to
clean up later” approach to conserve globally significant biodiversity while generating
economic growth is unacceptable employment and income in a sustainable manner in the

39
northeast corner of the PRC (see page 57).
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
OPERATIONS IN 2005

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 conserva-
tion, 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, environment-
oriented 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 sustain-
able livelihoods initiative in Cambodia ($15 million;
see page 65).
In the Mekong subregion, ADB is undertaking
extensive work to ensure that environmental sustainability
remains of paramount importance as the subregion’s Furrowing the land to protect against erosion in Gansu, PRC (top);
through efforts such as those to protect the Tonle Sap, ADB is
economy expands. In May 2005, in conjunction with its striving to achieve environmentally sustainable growth
endorsement of the Core Environment Program, the
environment ministers of countries of the GMS Program
endorsed the establishment of an environment operations collaboration with the United Nations Environment
center in Bangkok to enhance cooperation in the subregion. Programme, United Nations Economic and Social
ADB continued to support efforts to reverse patterns Commission for Asia and the Pacific, and United Nations
of land degradation afflicting many parts of the region, an Convention to Combat Desertification. Four countries are
important factor contributing to poverty. As an executing actively participating: PRC, Japan, Republic of Korea,
agency of the Global Environment Facility, ADB is and Mongolia.
leading three partnerships for combating drought and The Central Asian Countries Initiative for Land
desertification and mitigating drought in Central and Management, meanwhile, with ADB serving as the lead
East Asia. Global Environment Facility agency, will support the
In 2004 and 2005, for example, ADB approved a implementation of a 10-year program of country-driven
regional technical assistance activity, the Prevention and activities and resource mobilization to pursue sustainable
Control of Dust and Sandstorms in Northeast Asia, in land management in those countries.
In collaboration with the International Finance
Corporation, ADB approved a small-scale technical
ADB continued to support assistance for the training of representatives from finan-
cial institutions in the region on environmental and social
efforts to reverse patterns of due diligence, and on finding new business opportunities
land degradation afflicting many in the environment field.
In parallel with these new efforts, ADB has continued
parts of the region, an important to implement a range of ongoing regional environmental
factor contributing to poverty programs. The Poverty and Environment Program in 2005

40
helped integrate environmental considerations into pursuit of a sustainable future for Asia and the Pacific
poverty reduction projects, while ADB’s Renewable must include a business sector that takes responsibility
Energy, Energy Efficiency, and Climate Change program for its environmental performance and also recommends
supported by Canada, Denmark, and Netherlands has how the public and private sectors can work together more
provided funding to the Climate Change Adaptation closely to achieve environmental goals (www.adb.org/
Program in the Pacific, which is helping some Pacific environment/aeo).

OPERATIONS IN 2005
countries prepare for the likelihood of rising seas and
more frequent severe storms (see page 78). ENVIRONMENTAL AND SOCIAL SAFEGUARDS
ADB is also one of the few international institutions ADB has three safeguard policies covering the environ-
providing underlying finance to projects that can produce ment, indigenous peoples, and involuntary resettlement.
tradeable emission-reducing credits for governments to These policies aim to avoid, minimize, and/or mitigate
meet commitments made under the Kyoto Protocol adverse environmental and social impacts including the
(www.adb.org/CDMF). Three such projects have already marginalization of vulnerable groups that may result from
contracted credit buyers, and several more projects will development projects.
be coming on board in 2006 or 2007 through assistance by Working under the overriding safeguard mandate to
the Clean Development Mechanism facility. ensure all projects “do no harm,” ADB reviewed all
Among ADB’s major existing environmental partner- projects for Board approval during the year to ensure
ships, work continued in 2005 under the Clean Air safeguard policy compliance. In a review of 74 projects
Initiative–Asia, which now has over 130 members and equity investments, 59 projects required environmen-
including cities, governments, development agencies, tal assessment reports, 20 required the preparation of
NGOs, academic organizations, and corporations. a plan or specific action for indigenous peoples, and
The initiative’s work centered on the establishment 41 required resettlement plans and/or frameworks.
of national networks in several parts of the region to More than a hundred staff members at headquarters
promote investment and policy reform supporting air and resident missions were trained on ADB’s safeguard
quality improvement. requirements. ADB reinforced knowledge sharing through
In 2005, ADB presented its second Asian Environment the regular update of its websites on the safeguards.
Outlook, which focuses on opportunities for the region to During the year, ADB initiated a safeguard policy
address environmental issues more effectively through update to enhance the effectiveness of its safeguard
strong engagement of the private sector. It argues that the policies and ensure relevance to changing client

Fund Leads by Example

S
harpening the poverty for broader ADB investments. been completed, and most others
reduction efforts of For example, a $700,000 technical had been started. Two of the
developing members is assistance grant in the Greater completed grants went to the PRC,
the focus of the ADB- Mekong Subregion is trying to which has a $9 million window.
administered Poverty Reduction identify a set of successful methods Two others helped the Lao PDR,
Cooperation Fund. to raise awareness of HIV/AIDS with one helping silk weavers gain
The $60 million grant facility among specific ethnic minority business skills and another assisting
from the United Kingdom’s Depart- groups. the country in developing a social
ment for International Development By 2005, the fund had been protection strategy. Another went
was opened in 2002 to fund a wide fully committed to 109 projects, to support a consultative process
range of projects that are designed with $20 million endorsed last year. for developing multi-donor poverty
to improve policy, strategy, and Five technical assistance grants had reduction efforts across the Pacific.
capacity through advisory support,
small-scale pilots, research, and
knowledge sharing.
Many of the projects test
Many of the projects test how best
how best to target assistance to to target assistance to the poor and
the poor and to socially excluded
groups, and serve as good examples to socially excluded groups

41
needs and new lending modalities and instruments Permanent Forum), World Bank, Inter-American Develop-
(www.adb.org/Safeguards/policy.asp). A discussion note, ment Bank, ADB, and International Fund for Agricultural
uploaded on the ADB website, describes the objective Development. Discussions highlighted the need for
and scope of the safeguard policy update. Face-to-face international finance institutions to rethink the concept
consultations will start after completion in 2006 of of development, with the full participation of indigenous
an independent study by the Operations Evaluation peoples in development processes and taking into account
OPERATIONS IN 2005

Department on the implementation of the three their rights and traditional practices. ADB also continued
safeguard policies. to work with the World Bank and the Inter-American
ADB approved assistance to help strengthen the Development Bank on the joint publication of the Global
country safeguard systems of selected member countries Handbook on Indigenous Peoples Policy.
and will shortly begin to develop its corporate approach to
country safeguard systems. Together with the United GENDER AND DEVELOPMENT
States Agency for International Development, ADB also As a major thematic concern of ADB’s Poverty Reduction
launched the Asian Environmental Compliance and Strategy, gender issues have been increasingly
Enforcement Network, which will serve as an important mainstreamed in ADB loan operations across a range
new mechanism for sharing of best practices among Asian of sectors: agriculture, water resource management,
environmental decision makers. transport, rural infrastructure, governance, education,
In relation to involuntary resettlement and under and water supply and sanitation. In 2005, ADB continued
regional technical assistance for Capacity Building for to strengthen its overall loan portfolio addressing gender
Resettlement Risk Management, ADB assisted three issues. Significant gender mainstreaming was evident
participating countries—Cambodia, PRC, and India—to in 37% of loans in 2005. Of these, 17% (11 loans) were
identify resettlement risks and improve capabilities for classified with a gender theme, while 20% (13 loans)
handling involuntary resettlement. were classified with significant gender mainstreaming.
In Bangladesh, ADB is working with the Ministry of The majority of the remaining loans indicate the poten-
Land to develop a national policy on involuntary resettle- tial to benefit women in some ways.
ment, while in Cambodia, technical assistance for Loans addressing gender equality objectives were
Enhancing the Resettlement Legal Framework and represented in all three core strategic areas of ADB
Capacity Building is helping the government develop a operations—pro-poor, sustainable economic growth;
subdecree on compensation, resettlement, and rehabilita- inclusive social development; and good governance.
tion. In Nepal, the National Planning Commission is While they tend to be concentrated in the health,
preparing a national resettlement policy framework with education, and water supply sectors, some loans were
ADB support. In Viet Nam, technical assistance for for irrigation, rural development, agriculture and natural
Enhancing the Resettlement Legal Framework and resources, small- and medium-sized enterprises, public
Institutional Capacity assisted the government in resource management, and rural infrastructure. ADB also
developing a decree on compensation and resettlement continued to improve how it addresses gender issues in
and to disseminate it nationwide. large infrastructure projects, especially road projects.
In its continuing effort to safeguard the interests of The multi-donor Gender and Development
indigenous peoples, ADB also actively participated in Cooperation Fund established in 2003 continued to
regional and global discussions. In two regional work- support gender equality and women’s empowerment
shops, ADB engaged in constructive dialogues with some through regional and technical assistance activities.
indigenous peoples network members from the region. As of 31 December 2005, 4 technical assistance projects
It also took part in a dialogue between the United and 24 subprojects under regional technical assistance
Nations Permanent Forum on Indigenous Issues (the 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.
In Bangladesh, ADB is working These include 14 subprojects approved in 2005.
with the Ministry of Land to Other technical assistance approved in 2005
included the $4.5-million Pakistan Gender Reform
develop a national policy on Action Plan Implementation, financed by the
involuntary resettlement Government of Canada and the United Kingdom's

42
As a major thematic concern of
ADB’s Poverty Reduction Strategy,
gender issues have been
increasingly mainstreamed

OPERATIONS IN 2005
into ADB loan operations across
a range of sectors

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 implemen-
tation 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
By ensuring that gender issues are reflected in all its work, ADB is
helping improve women’s lives gender action plans and strategies has improved project
implementation, outreach, and results for women as
compared with those for men.
Department for International Development through
the ADB-administered Poverty Reduction Cooperation SOCIAL PROTECTION
Fund, and a $550,000 regional technical assistance ADB defines social protection as a set of policies and
activity, Legal Empowerment for Women and programs designed to reduce poverty and vulnerability by
Disadvantaged Groups. promoting efficient labor markets, lowering people’s
Meeting the MDGs by 2015 will mean ensuring exposure to risks, and enhancing their capacity to protect
that development programs increasingly address issues themselves from hazards and loss of income.
affecting gender equality and women’s empowerment. Loan projects in 2005 contributed to social protec-
Goal 3 specifically calls for promoting gender equality tion schemes in pensions in India, work protection in
and women’s empowerment, whereas Goal 5 calls for Pakistan, child protection in the Kyrgyz Republic and
improving maternal health. In addition, two other goals— Azerbaijan, and social security reform in Mongolia. Social
Goal 2 on education and Goal 6 on HIV/AIDS—include protection in the informal sector, social insurance, labor
gender-specific or gender-disaggregated indicators. issues in enterprise restructuring, and migration for
To help ensure that gender concerns are reflected employment were among the areas of special focus during
in its country strategies and programs, ADB has been the year.
preparing country gender assessments and related
strategies, which specify how ADB intends to promote KNOWLEDGE MANAGEMENT
and implement its overall gender and development In July 2005, ADB marked its first year implementing
objectives in a DMC, and discuss how ADB assistance the Knowledge Management Framework. Through its
will address gender disparities. In cooperation with extensive operations in the region, ADB has always been
multilateral/bilateral donors and United Nations a major repository of information. The framework aims
agencies, country gender assessments were completed for to make better use of this information by making ADB
Mongolia, Timor-Leste, and Uzbekistan and are under a hub for knowledge about Asian countries, encouraging
way for Fiji Islands and Indonesia. Assessments were sharing within ADB and among DMCs.

43
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
OPERATIONS IN 2005

includes groups of professionals who share common


expertise in areas such as education or governance
but who may otherwise be spread out in different depart-
ments. 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
Gaining knowledge and new skills in a computer class in Viet Nam Fund at ADB. This aims to narrow the “digital divide”
in the region by providing technical assistance for
promoting information and communication technology
Binding groups of professionals in e-government, e-learning, e-trade, and e-commerce.
In 2006, the framework will include initiatives to
together in organized communities increase awareness through an internal communications
plan and a knowledge management electronic newsletter,
of practice helps them share to increase the number of activities to help staff integrate
their knowledge knowledge management concepts into their work

Consultations Enhance Role of NGOs

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

44
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.

OPERATIONS IN 2005
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
It also released a study in English and Khmer on and the Pacific, including this family
Cambodia’s accession to the World Trade Organization,
and lessons for other least developed countries.
Work in the private sector area included aspects of tion of loan proceeds, and post-implementation review
the revitalization of the PRC’s northeast region, focusing of two modules of ADB’s financial and human resources
on trade with Japan and the Republic of Korea, enterprise information system.
performance, and technological capability. ADB barred 40 firms and 33 individuals in 2005 as
As part of knowledge management activities, more a result of corruption investigations, making a total of
than 50 independent expert reviews of development- nearly 250 firms and individuals currently ineligible to
oriented CD-ROMs have been posted on the institute’s work with the development institution.
website. A guidebook to Asian think tanks and their The Integrity Division, which enforces ADB’s
research programs is also online. Anticorruption Policy, received 199 complaints last year,
up 44% from 2004.
AUDIT AND INTEGRITY The Integrity Division also conducted four project
The Office of the Auditor General, through the Financial, procurement-related audits as part of its efforts to reduce
Administrative and Information Systems Division, weaknesses that may allow fraud, corruption, or abuse in
conducts independent appraisals of ADB activities to ADB-financed projects. It also recommended strengthen-
ensure that internal controls are adequate and effective, ing of internal control over the procurement process.
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 ADB barred 40 firms and
financial and administrative operations of resident
missions and a representative office, administration of
33 individuals in 2005 as a result
loans and technical assistance in two countries; realloca- of corruption investigations

45
East and
Central Asia
Armenia, Azerbaijan,
People’s Republic of China,
EAST AND CENTRAL ASIA

Kazakhstan, Kyrgyz Republic,


Mongolia, Tajikistan,
Turkmenistan, Uzbekistan

Subregional Perspective

T
he People’s Republic of China (PRC) has made
remarkable progress in reducing poverty,
establishing an example among emerging
economies in East and Central Asia, including
the South Caucasus. By 2004, the number of
people living on $1 per day or less had been slashed to about
10.4% of the population from 33% in 1990, while by 2005
the number of rural poor under the official poverty line had
fallen to 23.7 million from 250 million in 1978.
To the west, and blessed with oil, natural gas, cotton,
gold, and hydroelectric potential, the Central Asian and the
Caucasian republics are also growing strongly and stepping
away from their post-Soviet decline.
The PRC’s economic rise is well documented. In 2005,
economic growth surged to 9.9%, led by strong investment,
accelerating consumption, and robust exports. Foreign trade
exceeded $1.4 trillion to make it the third highest volume
in the world. The government recently adjusted its growth
figure for 2004 from the 9.5% originally reported to 10.1%.
Its economy is now the world’s fourth largest.
Major economic developments in 2005 included the
reform of the foreign exchange regime. Beginning in July 2005,
the PRC adopted a package of reforms installing a managed
floating exchange rate system based on market supply and
demand and with reference to a basket of foreign currencies.
Inflation in 2005 was under control at 1.8%, below the Smooth and strong, silk being spun
in Samarkand, Uzbekistan, which along
government’s 4% target, while urban unemployment was kept with its Central Asian neighbors,
to 8.39 million. grew strongly in 2005

46
EAST AND CENTRAL ASIA

47
East and Central Asia: Main Indicators,a 2005
Real GDP Average Foreign
Poverty Growth Inflation Trade Direct
Rate Rate Ratea Balance Investment
Country (%) (%) (%) ($ million) ($ million)

Armenia 39.0 13.9 0.6 (534.0) 151.0


Azerbaijan 29.0 26.4 9.6 2,701.0 3,466.0
China, People’s Republic of 10.4 9.9 1.8 133,450.0 60,325.0
Kazakhstan 14.3 9.4 7.6 9,817.0 2,544.0
Kyrgyz Republic 45.9 (0.6) 4.4 (435.0) 60.0
Mongolia 36.1 6.2 12.7 (95.0) 110.0
Tajikistan 56.6 6.7 7.1 (279.0) 55.0
EAST AND CENTRAL ASIA

Turkmenistan 29.9 10.0 5.9 1,301.0 233.0


Uzbekistan 26.2 7.0 7.8 1,300.0 200.0
– no data available, ( ) negative.
a
Where 2005 data are unavailable, data for the latest year have been provided.

High oil prices are an area of concern, however, and


pose some risks to the 2006 economic outlook. In 1993,
the PRC was an oil exporter, but as its economy surged,
so have its energy needs. It now imports 40% of its oil,
and its energy efficiency still needs improvement.
In Mongolia, GDP expanded by 6.2% in 2005,
down from 10.7% in 2004. Strong growth in 2005 was
underpinned by higher livestock production, investments
in the mining and mineral sectors, and surging
commodity prices. But all these have been insufficient to
bring down the high levels of poverty—more than one
third of the population—that emerged in the transition
from centrally planned to market-based economies.
In Central Asia, growth has been strong in recent years,
fueled by gas and oil deposits in Azerbaijan, Kazakhstan,
and Turkmenistan; gold in the Kyrgyz Republic; cotton in
Uzbekistan; and construction in Armenia.
However, Central Asia remains poor, and a gap is
opening up between those countries with oil and gas, and
those without. Per capita incomes in the oil producers in
2005 were already more than double those in the Kyrgyz Stronger economies and greater regional cooperation mean a better
future for children like these in Bukhara, Uzbekistan
Republic, Tajikistan, and Uzbekistan. In Kazakhstan’s
case, per capita GDP was $3,600 in 2005, compared with
Uzbekistan’s $515. Agriculture accounted for about 50%
of the Kyrgyz economy in 2005, but for just 6.3% of
Kazakhstan’s.
In Central Asia, growth has been
The value of exports increased by 87% in Azerbaijan strong in recent years, fueled by
in 2005 and by 40% in Kazakhstan, with proven oil
reserves of 0.6% and 0.8% of the world total, respectively. gas and oil deposits in Azerbaijan,
Turkmenistan has less oil, measured at about 0.3% of Kazakhstan, and Turkmenistan;
world reserves in 2003, but also accounts for about 2.1% of
global natural gas production. gold in the Kyrgyz Republic;
If the Central Asian and the Caucasian republics are to cotton in Uzbekistan; and
sustain strong growth, they will have to direct more attention
to the nascent private sector, the development of which has construction in Armenia

48
lagged behind both the PRC and Mongolia. In these other regional transport corridors through a series of road
countries, except in Armenia, which has undergone large- projects in Kazakhstan, Kyrgyz Republic, and Tajikistan.
scale privatization, the private sector is still being A loan was approved in November 2004 for the
overshadowed by large state enterprises; afflicted by weak Southern Transport Corridor Road Rehabilitation project
support for services; and hamstrung by poor policy, legal, to improve the road linking Osh in the south of the Kyrgyz
and regulatory frameworks. Republic through Irkeshtam on the PRC border with the
major Xinjiang market town of Kashgar and beyond.
In November 2005, ADB approved another loan,
Regional Cooperation the Dushanbe–Kyrgyz Border Road Rehabilitation II
project, to improve a section of the road running north from
Economic cooperation in the East and Central Asian Dushanbe in Tajikistan to the border with the Kyrgyz

EAST AND CENTRAL ASIA


regions is advancing strongly, fueled by the PRC’s economic Republic. Further projects are under consideration to
success. The PRC is actively working with its neighbors to complete the improvement of the north–south corridor
foster regional cooperation. To the south, through Yunnan through the Kyrgyz Republic and Tajikistan, to extend it
province, the country has been a member of the GMS west toward Kashgar and Urumqi in the PRC, and to
Program from its inception in 1992. In 2005, the GMS extend it east into Uzbekistan.
Program began integrating the PRC’s Guangxi Zhuang Under the Central Asia Regional Economic
Autonomous Region into its activities (see page 63). To the Cooperation Trade Facilitation Program, the PRC has
west, the PRC—through the Xinjiang Uygur Autonomous strengthened bilateral customs cooperation with other
Region—is also finding new opportunities as a member of participating countries. PRC customs entered into bilateral
the Central Asia Regional Economic Cooperation Program, cooperation agreements and protocols with Azerbaijan,
as the Central Asian republics look to reestablish age-old Kyrgyz Republic, and Uzbekistan, and initiated harmoni-
commercial ties with their booming neighbor. zation of customs manifest with Kazakhstan and a joint
Remote and landlocked, yet a land bridge connecting customs control initiative with Mongolia. Significant
Asia with Europe and Russia with South Asia, Central Asia progress has been made in preparing accession to the
and the Caucasus are finding regional cooperation a Customs Convention on International Transport of Goods
necessity. Under the program, founded in 1997 with ADB under Cover of Transports Internationaux Routiers Carnets
support, the countries are rediscovering regional trade and to promote transit trade and transform Central Asia and
finding bigger markets. the western part of the PRC into a modern Silk Road.
Spanning nearly 4,000 km across Central Asia, from PRC customs is also a major host and financial sponsor of
Baku, Azerbaijan on the west coast of the Caspian Sea, regional training and knowledge forums. Five events have
through Ulaanbaatar in Mongolia, the program includes been organized in the PRC since the beginning of the
Azerbaijan, Kazakhstan, Kyrgyz Republic, Mongolia, Trade Facilitation Program.
Tajikistan, Uzbekistan, and the Xinjiang Uygur
Autonomous Region of the PRC. Afghanistan was admitted
in November 2005, while Russia has been invited to join.
As of end-2005, ADB had approved 13 loans totaling
$357.1 million for nine program-related projects and had
attracted cofinancing amounting to $52.8 million for three
projects. ADB had also approved 37 technical assistance
grants totaling $23.8 million.
The program is an alliance of development partners
that includes ADB, World Bank, International Monetary
Fund, Islamic Development Bank, United Nations
Development Programme, and European Bank for
Reconstruction and Development. So far it has focused
on transport, energy, and trade.

BOOSTING TRANSPORT AND TRADE


ADB provided assistance in the transport sector for
Bread for sale in Khojand, Tajikistan; ADB projects provide micro credit
improving important sections of the old Silk Road and and assistance to small- and medium-sized enterprises

49
EAST AND CENTRAL ASIA

Major work has been done to improve Central Asia’s roads as


on this one between Bishkek and Osh in the Kyrgyz Republic (right),
making trade easier (above)

ADB is also helping the regional transport sector with


assistance to the Shanghai Cooperation Organization
in drafting a regional road transport agreement including
PRC, Kazakhstan, Kyrgyz Republic, Russian Federation,
Tajikistan, and Uzbekistan.
A large amount of infrastructural lending to the
Central Asian republics is channeled through the
Central Asia Regional Economic Cooperation Program A large amount of infrastructural
and, as in other regions, ADB has aimed to get the
private sector more deeply involved. Central Asia needs lending to the Central Asian
about $2–3 billion per year in new infrastructure from republics is channeled through
2005 to 2010 to sustain growth and reduce poverty,
up from about $1 billion per year. the Central Asia Regional Economic
For now, however, most is state-funded and Cooperation Program and, as in
insufficient. Red tape, excessive bureaucracy, insufficient
property rights, and corruption are just some factors other regions, ADB has aimed to
discouraging private sector growth. There is potential,
however, particularly for private sector participation in
get the private sector more deeply
railways, water supply, and aviation. involved

East and Central Asia: Approvals by Country, 2005 ($ million)


Grant-Financed Projects
Equity and Other Technical
Country Loans Guarantees ADF IX Fundsa Assistance Total

Armenia – – – – 0.15 0.15


Azerbaijan 52.00 – – 1.50 2.94 56.44
China, People’s Republic of 1,499.52 95.00 – 12.14 18.33 1,624.99
Kazakhstan – – – – 1.30 1.30
Kyrgyz Republic 15.50 – 15.50 – 1.80 32.80
Mongolia 10.00 – – 1.00 1.65 12.65
Tajikistan 29.50 – – 1.80 4.00 35.30
Turkmenistan – – – – – –
Uzbekistan 55.00 – – – 2.30 57.30

TOTAL 1,661.52 95.00 15.50 16.44 32.47 1,820.93


– = nil, ADF = Asian Development Fund.
a
Includes trust funds and externally financed grants.

50
POWERING CENTRAL ASIA
In the energy sector, projects under the Central Asia
Regional Economic Cooperation Program included
improving regional gas transmission networks,
rehabilitating the power supply in Tajikistan,
rehabilitating the Central Asia–Central Europe gas
pipeline, and working on power interconnection.
The program established the Members Electricity
Regulators Forum in 2005 to support regional electricity
trade through better regulation of power industry reforms
and the promotion of efficient energy use.

EAST AND CENTRAL ASIA


The program is gaining recognition, particularly with
its expansion to Afghanistan, and plans to include Russia.
It operates in partnership with other regional
organizations such as the Shanghai Cooperation
Organization and the Eurasia Economic Community
(which was recently merged with the Central Asia
Cooperation Organization), and is the only forum that
brings together all the countries of the region, key
A giant transformer in Nurek, Tajikistan; the Central Asia Regional
multilateral institutions, and regional trade organizations Economic Cooperation Program is taking measures to support
within a single institutional framework. regional electricity trade

East and Central Asia: Cumulative ADB Lending


by Country as of end-2005 ($ million)
Armenia –
Azerbaijan 104.00
China, People’s Republic of 16,375.40
Kazakhstan 501.60
Kyrgyz Republic 588.50
Mongolia 620.34
Tajikistan 273.84
Turkmenistan –
Uzbekistan 914.70

TOTAL 19,378.38
– nil.

East and Central Asia: Cumulative ADB Disburse-


ments by Country as of end-2005 ($ million)
Armenia –
Azerbaijan 0.50
China, People’s Republic of 9,920.25
Kazakhstan 432.58
Kyrgyz Republic 452.41
Mongolia 491.98
Tajikistan 99.59
Turkmenistan –
Uzbekistan 374.31

TOTAL 11,771.62
– nil.

51
ADB is strengthening its
partnership with the PRC and
members of the Central Asian
Regional Economic Cooperation
Program to enhance cooperation
in trade and transport in the region
EAST AND CENTRAL ASIA

ADB is strengthening its partnership with the PRC


and members of the program to enhance cooperation in
trade and transport in the region. An expressway project
linking Urumqi, the capital of Xinjiang Uygur
Autonomous Region, to the border of the Kyrgyz
Republic, and an urban infrastructure and environment
improvement project have been included in the 2007
and 2008 lending program.
In March 2005, the PRC contributed $20 million to
set up a technical assistance fund to promote regional
By strengthening its partnership with the PRC and members of
the Central Asia Regional Economic Cooperation Program, ADB aims
cooperation and poverty reduction among the countries
to promote cooperation in the region’s trade and transport of developing Asia.

East and Central Asia: Public and Private Sector Loan Approvals by Country, 2005 ($ million)
Total Date
Country OCR ADF Total Project Cost a Approved

AZERBAIJAN
East-West Highway Improvement 49.00 3.00 52.00 93.20 8 Dec
CHINA, PEOPLE’S REPUBLIC OF
Sanjiang Plain Wetlands Protection 15.00 – 15.00 55.55 14 Mar
Jilin Water Supply and Sewerage 100.00 – 100.00 232.20 18 Jul
Development
Fuzhou Environmental Improvement 55.80 – 55.80 185.50 29 Jul
Business Development Bank Limited b 20.72 – 20.72 35.72 11 Aug
Central Sichuan Roads Development 600.00 – 600.00 2,077.00 22 Sep
Xi’an Zhengzhou Railway 400.00 – 400.00 4,131.93 22 Sep
Henan Wastewater Management
and Water Supply 100.00 – 100.00 200.00 9 Dec
Hunan Road Development III 208.00 – 208.00 519.51 15 Dec
KYRGYZ REPUBLIC
Banking Sector and Capital Market – 15.50 15.50 15.50 20 Dec
Development Program
MONGOLIA
Financial Regulation and Governance Program – 10.00 10.00 10.00 15 Dec
TAJIKISTAN
Dushanbe-Kyrgyz Border Road – 29.50 29.50 39.50 17 Nov
Rehabilitation (Phase II)
UZBEKISTAN
Information and Communications Technology – 30.00 30.00 43.00 27 Oct
in Basic Education
Kashkadarya and Navoi Rural Water Supply – 25.00 25.00 36.00 12 Dec
and Sanitation Sector
– = nil, ADF = Asian Development Fund, OCR = ordinary capital resources.
a
Total project cost includes financing by ADB, governments, borrowers, beneficiaries, and sub-borrowers; cofinancing from official, export credit, and
commercial sources; equity sponsors; and local participating private companies and financial institutions.
b
Private sector loan without government guarantee.

52
Loan Helps Clean the Air in the PRC

C
oal is the primary fuel in substations to the cities of Benxi and
the PRC. It fires heavy Fushun.
industry and envelops Before 2002, none of the major
cities in a smoky, un- cities in Liaoning province in the PRC
healthy haze, particularly in the met national air quality standards.
winter months. Improving air quality By 2003, 7 of 14 did, helped by a
means finding more efficient ways to concerted government effort to close
use coal to meet energy needs. small and highly polluting coal-fired
Coal mines are already extracting heating boilers.

EAST AND CENTRAL ASIA


methane from mines around the The project will also supply large
country, which improves coal mining and efficient heating boilers
safety. Inefficient methane removal, equipped with modern pollution
however, causes the gas to be control devices, and allow the
released into the atmosphere, with closure of more than 412 small,
the PRC coal mines releasing about polluting coal-fired boilers.
6 billion cubic meters of highly Meanwhile, ADB’s Clean Develop-
potent methane each year. Methane ment Mechanism Facility and
has 21 times the greenhouse impact Clearworld Energy, a clean-energy
of carbon dioxide on the earth’s development company based in
atmosphere. Beijing, have structured agreements
Another way is to make better for the Fuxin Mining Group to sell
use of cleaner-burning methane gas, greenhouse gas emission reduction Cleaner air through reduced methane
present in many coal mines, for credits to two buyers under the emissions is the goal of several projects
heating and power, and to convert mechanism. The mechanism allows
methane into less harmful carbon industrialized countries to invest in
dioxide. In doing so, the process can developing country projects and to Development project in Shanxi
generate tradable emission reduc- acquire credits that they can then province. This project will use the
tion credits by using the Clean use to meet reduction targets under latest technologies to boost
Development Mechanism, a major the Kyoto Protocol. methane production produced by
provision of the Kyoto Protocol on ADB set up its facility in Septem- coal mines to about 265 million
climate change. ber 2003 to provide technical and cubic meters to fuel a 120-megawatt
To that end, ADB is lending administrative assistance to eligible power plant, and will transport
$70 million for the Liaoning projects in parallel with project methane to consumers under
Environmental Improvement project identification and loan processing. a $117.4 million ADB loan.
to extract, store, and distribute A larger undertaking to capture It is expected to save about
methane gas from coal mines. methane is the Coal Mine Methane 430,000 tons of coal per year.
A component of the project centered
around Fuxin is financed with
backing from a $15.8 million loan.
The Liaoning project will capture The Liaoning Environmental Improvement
up to 46 million cubic meters of
methane for residential and project will capture up to 46 million cubic meters
industrial use, delivering it through
new and upgraded pipelines and of methane for residential and industrial use

The Regional Cooperation and Poverty Reduction border trade, transport, and environmental protection
Fund, the first such one set up by an ADB developing with Mongolia. Mongolia is also a member of the program,
member, will encourage greater sharing of knowledge and a part of several other regional cooperation efforts.
and experience on regional cooperation and poverty
reduction across developing Asia. All ADB developing ADB Assistance
members will be eligible for grants.
In addition, the Inner Mongolia Autonomous Region To enhance relevance, ADB is adapting its programs
of the PRC has been exploring ways to cooperate in cross- in the PRC to improve infrastructure development,

53
EAST AND CENTRAL ASIA

$1.6 billion. It also approved $18.3 million in technical


assistance, and secured $2.5 billion in cofinancing. About
81% of ADB lending in 2005 went to transportation,
particularly roads and railways; about 17% for projects for
urban infrastructure and urban environmental improve-
ment; and the rest for agriculture and natural resources.
One way that ADB is helping address income
disparities between the east and west, and between urban
and rural areas, is through “connecting” infrastructure,
particularly roads and railways that lead to larger markets.
About 30 loans since 1991, totaling nearly $6.2 billion,
have financed approximately 4,500 km of expressways,
ADB assistance is helping the PRC rail network expand to the far
reaches of the interior, helping address income disparities which encourage interregional trade, and 7,700 km of
local road networks to foster economic efficiencies.
The “go west” policy involves a massive
environmental protection, agriculture and natural redistribution of resources from coastal areas to
resource management, energy conservation, social 12 western provinces. The policy is designed to create
sector development, private sector development, conditions supportive of economic activities, transport,
and regional cooperation. infrastructure, utilities, education, health, environmental
In Central Asia and the Caucasus, ADB’s lending protection, and private sector promotion.
portfolio has emphasized regional cooperation. Loan and A $600 million loan to finance construction of
grant support has also helped in several other areas in a 244-km expressway from Ya’an to Lugu in Sichuan
individual countries, including programs to help combat province was among the features of transport assistance
land degradation under the Central Asian Countries approved in 2005. Part of a $2 billion project, the
Initiative for Land Management (see page 55). expressway will complete a 900-km route connecting
Assistance in East and Central Asia totaled about the Sichuan capital, Chengdu, with Kunming in Yunnan
$1.84 billion in 2005. province; upgrade 678 km of local roads in poor areas;
and rehabilitate four public transport centers.
PEOPLE’S REPUBLIC OF CHINA Located in the poor mountainous periphery of the
Improving Connectivity province, the PRC’s seventh smallest, the project will
ADB approved loans to the PRC totaling about improve the network and increase access to jobs, markets,
$1.5 billion in 2005, with total assistance of about and social services. It also supports the Western Region

54
Agreement Tackles the Dust Bowl in Central Asia

T
he Central Asian republics
suffer severe land degrada-
tion caused by years of
unsustainable agricultural
practices including overgrazing and
deforestation, and natural disasters.
Degraded lands hamper economic
progress, are a health risk, and
undermine the region’s social

EAST AND CENTRAL ASIA


structure. Yet efforts to address
problems have generally had limited
success. They have been poorly
coordinated, and have suffered from
weak policy, legislation, and
regulation.
In answer, ADB and the Global Desertification can be tackled only through an integrated and cooperative effort
Mechanism of the United Nations involving all development partners
Convention to Combat Desertifica-
tion have spearheaded formulation
of the Strategic Partnership Agree- emerged as the main vehicle for planning and budgetary processes.
ment for UNCCD Implementation reaching their goals. With ADB It will also identify the leading
in the Central Asian countries. serving as the lead Global Environ- problems and constraints to sustain-
The agreement aims to coordinate ment Facility agency, the initiative able land management, and identify
a more integrated response among will support the implementation of a priority areas and investment and
the development agencies to the 10-year program of country-driven technical assistance requirements.
subregion’s land degradation activities and resource mobilization
problems. covering 2006–2015, with an
Members include the Global additional 5 years for implementa-
Mechanism, ADB, Canadian tion (to 2020). The agreement
International Development Agency, In 2005, it was in the design
the Convention to Combat Desertifi- phase, with a multi-country aims to coordinate
cation Project of the German Agency partnership framework currently
for Technical Cooperation, Swiss being prepared for submission a more integrated
Agency for Development Coopera- to the Global Environment Facility
tion, International Fund for Agricul- in March 2006. response among
tural Development, International
Center for Agricultural Research in
The initiative will help describe
the necessary policy, legislative, and
development
Dry Areas, and United Nations institutional conditions needed for agencies to the
Development Programme. The World sustainable land management and
Bank has applied for membership. will present an approach to main- subregion’s land
The Central Asian Countries streaming sustainable land manage-
Initiative for Land Management has ment into national development degradation problems

Development Strategy of the government, which aims to In 2005, ADB approved a $400 million loan to develop
reduce development disparities between the interior and the railway connecting the provinces of Henan and
coastal regions. Shaanxi, with plans for 459 km of track and nine new
Similarly, a $208 million loan for Hunan’s rural and stations from Zhengzhou in Henan to Xi’an in Shaanxi.
mountainous Xiangxi Tujia and Miao Autonomous The line will help link PRC cities and ports with Central
Prefecture will help build an expressway to provide access Asia and Europe by connecting the Beijing–Guangzhou,
to the poor region. Shanghai–Xuzhou, and Beijing–Wuhan main lines in the
Related objectives are behind PRC plans for east with the Xi’an–Baoji–Lanzhou, Xi’an–Baoji–Chengdu,
construction of eight passenger railway lines by 2020. Xi’an–Ankang, and Xi’an–Yan’an main lines in the west.

55
Improving the Environment An important $1 million technical assistance grant
The PRC’s rapid growth and urbanization have taken a helped develop a strategy for pollution control in the
toll on the environment. Urban infrastructure construc- Songhua River Basin, and is in line with the PRC
tion has not kept pace and large-scale investments will be government’s goal to develop a suitable river basin
required to improve air quality in major cities and towns, approach for managing water quality. The strategy
treat wastewater discharged into rivers and lakes, and gives attention to the critical areas of water quality
provide safe drinking water supplies. Land degradation is and pollution control management, as well as addressing
also a serious concern for the PRC and one that is linked a number of related policy, technical, institutional,
to agriculture. Sandstorms are an annual event, with regulatory, and financial issues. The government has
desertification encroaching in the west and north, while committed $1.9 billion to clean up the Songhua River’s
other areas suffer as farmers convert wetlands and other domestic and industrial wastewater, providing a basis
EAST AND CENTRAL ASIA

natural areas into agricultural uses (see page 57). for further, faster, and sustainable growth of the
ADB provided three loans in 2005 to improve the urban northeast economy.
environment of cities in Jilin and Henan provinces and
Fuzhou municipality. ADB’s partnership with the PRC in Private Sector Development
urban infrastructure and environmental improvement is The PRC’s private sector has been growing strongly, and
expected to strengthen in the next few years. more rapid development is expected as the government
To fight air pollution, ADB has undertaken several continues its efforts to tackle constraints such as unclear
projects to provide clean energy, one of which is building a private property rights, market entry barriers, high
hydroelectric power plant in Gansu province, where coal- taxation for domestic private enterprises, and inadequate
fired thermal plants have been the main source of energy. access to financial services. The government has asked
Approved in 2003 and expected to be completed in 2007, ADB for strong support. In response, ADB’s private sector
the $35 million project is constructing the 98-megawatt operations in the PRC have focused on environmental
Xiaogushan Hydropower plant to serve Zhangye city. improvement and on the infrastructure, energy, and
It will also upgrade the power supply to three poor rural financial sectors.
townships—Xishui, Huazhai, and Anyang. Zhangye In October 2005, ADB made an equity investment
suffers frequent power interruptions and shortages, of $75 million, less than a 1% stake, in the Bank of China
a situation that has worsened as demand has risen and Limited, its largest equity transaction to date from its
new generating plants have been slow to come online. private sector operations. This is an important effort to
Two other projects, in Liaoning and Shanxi, are support the PRC as it reforms its financial sector to
helping extract and use the methane gas produced in coal prepare for greater competition under the World Trade
mining as a clean fuel (see page 53). Organization and fits ADB’s view that an efficient
financial sector is a critical component of the region’s
economic development. The Bank of China is one of the
country’s largest commercial banks and among the first
state-owned banks slated for privatization.
More than 80% of small- and medium-sized
enterprises still have trouble accessing financial services.
Under one loan in 2005, ADB agreed to lend the
Business Development Bank Limited $17.5 million
and 2.5 million euros.
The Business Development Bank now extends
mainly dollar-denominated loans to medium-sized
enterprises requiring dollar financing in Shanghai and
nearby coastal provinces. It is also permitted to conduct

More than 80% of small- and


medium-sized enterprises still have
A flower seller in Kunming, Yunnan province; the province is gaining
new economic opportunities through the GMS Program trouble accessing financial services

56
Wetlands Plan Marks a Watershed

M
assive flooding in the
PRC in 1998—which
left thousands dead,
millions homeless,
and the economy poorer—marked
a critical change in views about flood
control. It helped officials recognize
the havoc caused by the destruction
of natural systems that for millennia

EAST AND CENTRAL ASIA


had sustained the country’s river
basins.
“There was an awakening after
the 1998 floods: People asked ‘Why,
when we’ve been spending all this
money, are these floods still
happening and causing more and
more severe damage?’ The emerging
view is that floods must be managed
under an integrated approach and in
better harmony with nature,” says
KyeongAe Choe, ADB principal
natural resources management
specialist.
That “new” thinking is behind the
$55 million Sanjiang Plain Wetlands
Protection project, which is designed
to manage watersheds in an
integrated way to protect humans
and biological diversity on the vast
Sanjiang Plain in Heilongjang
province in the northeastern PRC.
This is in line with the long-term
focus of ADB assistance for the
Songhua River.
The plain covers an area the size of
the Republic of Korea and supports
about 37 ecosystems, 1,000 plant
species, and 528 vertebrate species.
Yet 5 decades of agricultural
expansion have imperiled it, and
just one fifth remains in the original Two views of the vast Sanjiang Plain, where an ADB project is improving management
forest and wetland cover.
Residents have drained wetlands mid-2005 and is funded jointly by
to expand farms and have channeled the Global Environment Facility, PRC
floodwaters. Immense networks of government, and ADB. The Sanjiang Plain
drainage canals, pumping stations, It will increase forest cover in
and flood control dikes have altered upper watershed areas and improve Wetlands Protection
the cycle of entire watersheds and
destroyed millions of hectares of
water resource planning and
management. It also targets
project is designed
natural marshes and wet meadows.
To put the plain on a sustainable
restoration of 3,433 hectares of
wetlands and the repopulation of
to manage watersheds
path, the project adopts an inte- wetland natural reserves with in an integrated way
grated watershed and wetland globally threatened wildlife species.
management approach, combining Six key nature reserves will directly to protect humans and
conservation with the economic benefit from habitat and wildlife
welfare of rural people. It began in protection. biological diversity

57
Grant Fortifies Diets for Children

A
lack of basic vitamins and Yet salt can be iodized for as little After almost 3 years of implemen-
micronutrients in the diet as $0.05 per person per year, and tation, both production and
is damaging the cogni- wheat flour can be fortified with iron consumption of iodized salt had
tive health of children in for as little as $0.09, according to substantially increased in all
Central Asia, where deficiencies are the World Bank. participating countries. As of April
unusually high. A two-phase project under the 2004, production of iodized salt in
Only two parts of the world are Japan Fund for Poverty Reduction— Kazakhstan, Kyrgyz Republic, and
now suffering from a rise in the Improving Nutrition of Poor Mothers Tajikistan had surpassed the project
levels of stunted children caused by and Children in Asian Countries in goal of 66% of domestically
EAST AND CENTRAL ASIA

malnutrition: Central Asia and Sub- Transition, begun in 2001 and consumed salt. Tajikistan produced
Saharan Africa. Iron-deficient provided with over $7 million in more than twice the project goal.
women are more likely to die in 2004—is one of two approved by
childbirth and to give birth to ADB to remedy the situation.
children with impaired or delayed A second phase of the project,
motor and cognitive skills. running from 2005 to 2007, is
In Tajikistan alone, more than promoting fortification as a simple
30% of children suffer from a severe solution to the malnutrition problem,
lack of iodine in their diets, which and is helping iodize salt and fortify
can impair brain development. wheat flour with iron, folic acid,
There are pockets of Central Asia and other minerals in Azerbaijan,
where the incidence of iodine Kazakhstan, Kyrgyz Republic,
deficiency is greater than 90%. Mongolia, Tajikistan, and Uzbekistan.

A Japan Fund for Poverty Reduction project is


promoting fortification as a simple solution
to the malnutrition problem, and is helping Fortifying basic, staple foods will allow

iodize salt and fortify wheat flour children like this one in the Kyrgyz
Republic to grow up healthy

limited renminbi business with foreign enterprises in


specified major cities. Under the loan, it will expand
lending to small- and medium-sized enterprises, increase
its capital base, and obtain a broader renminbi business
license to provide local currency loans to local enterprises.
The year 2005 also saw the launch of the first yuan-
denominated bond (the Panda Bond) for CNY1 billion
($124.9 million), part of a bigger plan to boost local
currency capital markets throughout East Asia and
improve the availability of funds for the private sector in
the PRC.

MONGOLIA
A $10 million loan for the Financial Regulation and
Governance Program, approved in 2005, will develop a
sound and broad-based financial sector. The program aims
to reduce borrowing costs and expand credit, strengthen
Education provides the basis for a sound economy
governance in banks, and enhance the role of nonbank

58
financial institutions in mobilizing savings for
investment capital by helping establish a single regulator
for the sector. The program will establish a financial
intelligence unit in the Bank of Mongolia to help reduce
the risks from money laundering.
In 2005, ADB approved $1.65 million in technical
assistance to Mongolia to prepare the Urban Development
and Housing project to support capacity building for
financial sector reforms, and for a prefeasibility study
of the Western Regional Road Corridor. A $1 million
Japan Fund for Poverty Reduction grant for Maternal

EAST AND CENTRAL ASIA


Mortality Reduction will help Mongolia meet this
important MDG.

CENTRAL ASIAN AND CAUCASIAN REPUBLICS


ADB approved about $152 million in loans to the Central
Asian and Caucasian republics in 2005, almost the same
as in 2004. A third of the loan assistance went to
Uzbekistan at 36%, followed by Azerbaijan with 34%,
Tajikistan with 19%, and the Kyrgyz Republic with 10%.
Students at a computer class in Merv, Turkmenistan; information and
ADB also approved $12.49 million in technical communication technology will equip them to land better jobs
assistance.

Supporting Transition in grades five to nine as well as 89,000 teachers in


A considerable number of projects are helping support predominantly poor, rural, and remote areas.
transition to more market-friendly rural economies, where Uzbekistan invests substantially in its education
economic growth has been slower, with much wider system and, indeed, all the Central Asian republics boast
support for farmers’ rights and with less state interference. high literacy rates. However, the systems are expensive
In Tajikistan, for example, ADB is assisting farm and based on Soviet values and the labor requirements of
reform and is implementing the Farm Debt Resolution a centrally planned economy, and are thus ill suited to
Strategy. This $15 million project will help the Tajikistan transitional economies.
government resolve cotton farm debt through an analysis
of a large number of indebted farms. Safe Drinking Water, Improved Health
The technical assistance grant will also help Another project approved in 2005 will benefit around
coordinate the activities of other agencies involved in the 250,000 rural residents in Uzbekistan, who will gain
country’s rural sector, including the World Bank, United access to safe drinking water and sanitation through
Nations Development Programme, and European Union. rehabilitation of dilapidated infrastructure in two
ADB is helping Azerbaijan improve the last two provinces, backed by a $25 million ADB loan. The project
sections of its East-West Highway through a new loan will help improve living conditions and public health in
package of $52 million approved in late 2005. It is about 170 villages in Kashkadarya and Navoi provinces
improving a two-lane paved road on the Yevlakh–Ganja through rehabilitating and upgrading piped water supply
and Qazakh–Georgian border, as well as local roads. systems, building public and school latrines, and
improving wastewater drainage. Some 12 subprojects will
Improving Education be carried out covering clusters of up to 20 villages
In the Kyrgyz Republic, ADB approved a $15.5 million comprising an integrated water supply system and
grant to help it deliver better basic education services to improved sanitation facilities.
children in poor areas. Wide-ranging support also included a grant from the
In Uzbekistan, ADB lent $30 million to integrate Japan Fund for Poverty Reduction to help the region deal
information and communications technology—including with the serious problem of poor nutrition that is behind
computers and internet access—into basic education. the high incidence of cognitive dysfunction, birth defects,
The project will directly benefit some 540,000 students and maternal and child mortality (see page 58).

59
Mekong

Cambodia, Lao People’s Democratic


Republic, Myanmar, Thailand,
Viet Nam
MEKONG

Regional Perspective

T
he Mekong River has always connected the
diverse peoples living in its watersheds, a
geographic constant in the face of trade links
often broken in the past by conflict. The
countries sharing its watersheds, however, are
now securing lasting ties amid growing economic prosperity.
Poverty in the Mekong countries has declined markedly
since 1990, when the incidence was close to 50%. Recent
estimates show national poverty levels ranging from 9.8%
in Thailand to 34.7% in Cambodia. Despite this reduction,
poverty remains a major development challenge.
In 2005, most Mekong countries grew strongly despite
high oil prices and the economic fallout from avian flu
(see page 38).
Cambodia registered remarkable growth estimated
at 8.4% in 2005, buoyed mainly by considerably stronger
agricultural production. New government legislation is
expected to have far-reaching, positive implications for
Cambodia’s private sector and for growth throughout the
economy.
The Law on Commercial Enterprises, which took effect
recently, eases business start-up by substantially reducing
the time and cost to register. Similarly helpful to private
businesses, the Law on Secured Transactions is likely to
reduce lending costs and increase bank intermediation, and
the Law on Concessions should improve the environment for
private participation in infrastructure projects. Both are The lungs of the Mekong, the waterways
before the National Assembly awaiting approval. of the Tonle Sap must be preserved

60
MEKONG

61
Mekong: Main Indicators, 2005
Real GDP Average Foreign
Poverty Growth Inflation Trade Direct
Rate Rate Rate Balance Investment
Country (%) (%) (%) ($ million) ($ million)

Cambodia 34.7 a 8.4 b 5.8 (1,033.5) b


216.0 b,c
Lao PDR 32.7 d 7.2 7.2 (342.3) 27.1 e
Myanmar 26.6 f 12.2 g – 1,231.7 h

Thailand 9.8 i 4.5 4.5 (8,578.0) 3,288.9 c
Viet Nam 19.5 a 8.4 8.3 (4,564.0) 1,914.0 c
– no data available, ( ) negative.
a
Data as of 2004; b Estimates; c Net basis; d Data as of 2002–2003; e Gross basis; f Data as of 2001; g Fiscal year 2005 (April 2005–March 2006); h Fiscal year 2004 (April 2004–
March 2005); i Data as of 2002.

Cambodia’s financial sector has made significant fiscal situation remained solid, while business confidence
progress since the Financial Sector Cluster program began remained strong.
MEKONG

in 2001, with greater financial stability, increased financial Viet Nam, a net exporter of oil, actually benefited
services, and indications of growing confidence in the sector. from the oil price rises. Oil prices aside, the country was
The Lao PDR grew strongly in 2005, following on also spurred by an improving business environment.
healthy expansion in recent years that helped lower Standout sectors included strong manufacturing, a diverse
poverty figures. The country is also making progress agricultural base little influenced by avian flu, and
toward the income and non-income MDGs. Inflation buoyant hotel and restaurant businesses, which grew by
slowed to 7.2% in 2005, while the trade and current 15% during the year, thanks to a surge in tourism. A solid
account balances remained in deficit. expansion of private enterprise also boosted growth.
Thailand posted growth of 4.5% in 2005, helped by In Myanmar, ADB continues to monitor economic
the favorable performance of the export sector and with developments, but a reliable assessment remains to be
the effect of the December 2004 tsunami and drought made, depending on the availability of timely and
subsiding in the second half of the year. The country’s reliable data.

Major transport routes are being built to form the base of the subregion’s economic corridors that link production, trade, and investments

62
Regional Cooperation The 13th GMS Ministers’ Meeting, held in Vientiane
in December 2004, welcomed the inclusion of the
The Greater Mekong Subregion Economic Cooperation Guangxi Zhuang Autonomous Region of the PRC in the
Program (GMS Program) was established in 1992 with GMS Program. Guangxi began participating in GMS
ADB support. It promotes cooperation in nine sectors— Program activities in 2005 and, during the year, ADB
transportation, energy, telecommunications, human assisted a study of how Guangxi could more rapidly link
resource development, tourism, environment, trade, with the rest of the GMS.
investment, and agriculture—and provides a means for
GMS members to reduce poverty. Member countries— ECONOMIC CORRIDORS BOOST ECONOMIES
Cambodia, PRC, Lao PDR, Myanmar, Thailand, and Reflective of the progress in 2005 on the projects under
Viet Nam—have made steady progress toward greater way are the major transport routes that form the base of the
connectivity and improved competitiveness, resulting in GMS economic corridors—the strategic concentrations of
an increased sense of community in the Mekong subregion. infrastructure development linked to production, trade,
Initiatives aimed at addressing shared concerns, such as and investment. The transport corridors are at the core of
those related to sustainable management of shared the 11 flagship programs of the GMS Program. The three

MEKONG
natural resources and tackling health and social issues, are major economic corridors—the east-west, north-south, and
also contributing to a more equitable and prosperous southern corridors—will provide the foundation for
subregion. significantly higher cross-border economic activity.
The GMS Program entered a new phase in 2005 Along the newly upgraded 240-km highway between
as work on several economic transport corridors passed Phnom Penh and Ho Chi Minh City, business is booming.
milestones. Hundreds of kilometers of newly paved Traffic increased rapidly once the road improvements
roads, easier border crossings, and agreements to expand were made.
trade are boosting livelihoods around the subregion.
By streamlining cross-border transport arrangements;
laying down modern roads, telecommunications, and Hundreds of kilometers of
power links; and promoting tourism and investment,
GMS members are reducing poverty.
newly paved roads, easier border
In 2005, five GMS loans and grants amounting to crossings, and agreements to
$56 million and 24 technical assistance grants totaling
$39.2 million (including cofinancing) were approved.
expand trade are boosting
Between 1992 and December 2005, ADB approved loans livelihoods around the subregion
totaling $1.8 billion and technical assistance grants
amounting to $67 million under the GMS Program.

GMS SUMMIT AND OTHER EVENTS


The Second GMS Summit of Leaders was held in
Kunming in July 2005. The successful conclusion of
the summit saw the issuance of the Kunming
Declaration: A Stronger GMS Partnership for Common
Prosperity, which embodied the subregional leaders’
strong commitment to the GMS Program, underscoring
the need for concerted effort to achieve the MDGs.
The Biodiversity Corridors Conservation Initiative,
launched by the GMS Ministers of Environment in
May 2005, was an important legacy of the summit.
Initiatives in the social and environment sectors
were also pursued more vigorously. These include
the prevention and control of infectious diseases,
training of civil servants under the Phnom Penh Plan
for Development Management, and the Core
Under the GMS Program, the Mekong countries are simplifying
Environment Program. customs procedures to speed up border crossings

63
MEKONG

The Tomb of Emperor Tu Duc in Hue, Viet Nam, is one of the many tourist attractions in the GMS, where tourist arrivals totaled nearly
20 million in 2005

Progress on the East-West Economic Corridor is PROMOTING TOURISM, TELECOMS


indeed impressive. It stretches nearly 1,500 km from the To boost tourism, the GMS countries in 2005 launched
Andaman Sea in the west to the South China Sea in the the long-term GMS Tourism Sector Strategy, which aims
east. At Sepon, Savannakhet province, on the East-West to promote the subregion as a single destination.
Economic Corridor, an Australian mining company has They have begun to relax visa regimes, upgrade airports,
made substantial investments. The development has start training programs, and step up marketing efforts.
provided employment and other forms of livelihood to the Tourist arrivals in the six countries in 2005 totaled
benefit of local villages. nearly 20 million, and these are expected to soar to
30 million by 2010.
EASIER BORDER CROSSINGS In the telecommunications sector, meanwhile,
The GMS Program is helping reduce nonphysical barriers to feasibility studies have been undertaken for establishing
the cross-border movement of people and goods through the a subregional network. Fiber-optic cable links are planned
implementation of the Cross-Border Transport Agreement. for the missing portions of a backbone that will inter-
Formulated under the auspices of ADB technical assistance, connect national networks in the subregion. Cooperation
the agreement is a multilateral instrument designed to be will also focus on constructing an information super-
adopted by all GMS members. It covers in one document all highway network that will enhance the range of services
the relevant aspects of cross-border transport facilitation and applications based on subregional network facilities.
including single-stop, single-window inspection; cross-
border movement of people; transit traffic regime; and
exchange of commercial traffic rights. To boost tourism, the GMS
In 2005, the GMS Program began implementing the
agreement at the Lao PDR–Viet Nam border of countries in 2005 launched the
Dansavanh–Lao Bao. Implementation will commence in
2006 at the borders of Bavet-Moc Bai, along the Phnom
long-term GMS Tourism Sector
Penh–Ho Chi Minh City highway; at Mukdahan– Strategy, which aims to promote
Savannakhet along the East-West Economic Corridor; and at
Aranyaprathet–Poipet between Thailand and Cambodia.
the subregion as a single
Trade is already on the rise in many parts of the subregion. destination

64
Initiative Protects Cambodia’s Great Lake

C
enturies ago, Cambodia’s 1993. The United Nations declared it the basin as a whole, but everything
inhabitants mastered the a biosphere reserve in 1997. In cannot be tackled at the same time.
seasonal ebb and flow of 2003, ADB finalized the Tonle Sap Interventions work from core areas
Southeast Asia’s largest Basin Strategy, giving geographical of the lake to its upper catchments
freshwater lake, maximizing rice focus to its country strategy and over an 8-year period, repeating this
production and making possible the program for 2005–2009 and its cycle as may be needed to allow the
wonder of the Angkor Kingdom. annual updates. The development accomplishments and lessons
Today, many Cambodians rely on the objectives are to foster, promote, learned to be incorporated into
Tonle Sap for fish to feed their and facilitate pro-poor sustainable long-term protection for the
families and on its monsoon-fed growth, access to assets, and complex ecosystem.
waters to irrigate their rice fields. management of natural resources As part of the initiative, in 2005,
Under its Tonle Sap Initiative, ADB and the environment. ADB approved a grant for $18
is helping the Cambodian govern- Threats to the lake must be million that will help provide safe
ment put in place a plan to protect considered from the perspective of drinking water to more than

MEKONG
the rich natural resource that 1 million people living around the
sustains so much of the nation. Tonle Sap River Basin.
Central to the initiative is a phased The grant will help fund a project
sequence of core loans and grants that will provide rural water supply
that will put in place an integrated and sanitation facilities to about
and basin-wide approach to dealing 1,760 villages in five provinces
with its problems. around the basin. It will also improve
The special characteristics of the sanitation for about 720,000 rural
Tonle Sap Basin derive from the 100- people, train communities to take
km long Tonle Sap River, which runs responsibility for the facilities, and
into the Mekong River farther south conduct health and hygiene
at the capital, Phnom Penh. During awareness outreach.
the rainy season, the heavy flow of
the Mekong forces the Tonle Sap
River to reverse flow and head north,
filling the lake. This causes it to swell Fish, birds, mammals,
from around 2,500 square kilome-
ters to as much as 16,000 square and plants thrive in
kilometers. Fish, birds, mammals,
and plants thrive in this hydrological this hydrological
phenomenon.
The Tonle Sap supports one of
The Tonle Sap supports one of the
most productive fisheries in the world
phenomenon
the most productive fisheries in the and supplies protein to a majority of
world and provides most Cambodi- Cambodians
ans with their main source of
protein. Its land, water, and biotic
resources directly benefit 40% of the
population of provinces adjoining
the lake and shore up food security
and employment elsewhere. The lake
is also of global significance for
biodiversity conservation.
Overexploitation of fisheries and
wildlife, conversion of the flooded
forest to agriculture, and collection
of wood for fuel are threats to this
balance. Widespread deforestation
in the watershed is destroying
habitats, impairing water and soil
quality, and increasing siltation rates.
Cambodia designated the Tonle
Sap a multiple-use protected area in

65
To ensure that the GMS Program
proceeds along an environmentally
sustainable path, the member
countries endorsed in 2005 the
implementation of the Core
Environment Program, including
the Biodiversity Conservation
Corridors Initiative
MEKONG

ADB is coordinating with its development partners to help


poultry farmers control avian flu SAFEGUARDING THE ENVIRONMENT
To ensure that the GMS Program proceeds along
an environmentally sustainable path, the member
WARDING OFF AVIAN INFLUENZA countries endorsed in 2005 the implementation of the
To help stem the avian influenza threat in Asia and the Core Environment Program, including the Biodiversity
Pacific, ADB has committed to another subregional Conservation Corridors Initiative. ADB approved its
initiative to encourage cooperation on infectious diseases. largest-ever regional technical assistance—about
A $30 million ADF grant, approved in 2005, will assist $25 million—to support the initiative, which aims at
Cambodia, Lao PDR, and Viet Nam in controlling the environmental sustainability and social equity in the
spread of avian flu and other infectious diseases among Mekong Subregion toward increasing its development
vulnerable groups. ADB committed $18 million in 2005 potential, performance, and impact.
for Viet Nam, which was at the center of the avian flu
outbreak in 2005 (see page 38).

Mekong: Cumulative ADB Lending by Country


as of end-2005 ($ million)
Cambodia 850.24
Lao PDR 1,183.14
Myanmar 530.86
Thailand 5,388.07
Viet Nam 3,732.37

TOTAL 11,684.68

Mekong: Approvals by Country, 2005 ($ million)


Grant-Financed Projects
Equity and Other Technical
Country Loans Guarantees ADF IX Fundsa Assistance Total

Cambodia 10.00 – 42.00 9.98 7.62 69.60


Lao PDR 70.00 50.00 16.00 1.50 3.02 140.52
Myanmar – – – – – –
Thailand – – – – 3.35 3.35
Viet Nam 577.70 – 25.64 0.90 12.25 616.49

TOTAL 657.70 50.00 83.64 12.38 26.24 829.96


– = nil, ADF = Asian Development Fund.
a
Includes trust funds and externally financed grants.

66
ADB Assistance
Helped by an ADB investment of about $800 million
in 2005, the Mekong countries continued to focus on
speeding up social and economic development as well
as reducing poverty in the subregion. Assistance to these
countries focused on providing the infrastructure needed
to boost economic growth and to reduce poverty, always in
cooperation with member governments and development
partners. Transport and energy-related projects accounted
for over three quarters of lending.

CAMBODIA: TONLE SAP INITIATIVE


During 2005, three loans/grants amounting to $43 million
were approved for Cambodia, including two exclusive grant

MEKONG
assistance projects for rural water supply and sanitation

A new bridge across the Mekong at Mukdahan to Khanthabuly


will lessen dependence on ferries

Mekong: Cumulative ADB Disbursements by


Country as of end-2005 ($ million)
Cambodia 564.58
Lao PDR 905.76
Myanmar 411.83
Thailand 4,183.05
Viet Nam 1,955.16

TOTAL 8,028.38

Mekong: Public and Private Sector Loan Approvals by Country, 2005 ($ million)
Total Date
Country OCR ADF Total Project Costa Approved

CAMBODIA
Financial Sector Program (Subprogram III) – 10.00 10.00 10.00 29 Sep
LAO PDR
Greater Mekong Subregion Nam Theun 2
Hydroelectric
– Private Sector Loan 50.00 – 50.00 1,450.00 4 Apr
– Public Sector Loan 20.00 – 20.00 4 Apr
VIET NAM
Preventive Health System Support – 27.90 27.90 47.54 25 Aug
Support the Implementation of the – 15.00 15.00 225.00 3 Nov
Poverty Reduction Program II
Central Region Transport Networks – 94.50 94.50 138.00 11 Nov
Improvement Sector
Greater Mekong Subregion: – 6.00 6.00 8.00 19 Dec
Kunming–Haiphong Transport Corridor
Noi Bai–Lao Cai Highway
Technical Assistance
Central Region Water Resources – 74.30 74.30 99.00 19 Dec
Northern Power Transmission 360.00 – 360.00 452.70 21 Dec
Expansion Sector
– = Nil, ADF = Asian Development Fund, OCR = ordinary capital resources.
a
Total project cost includes financing by ADB, governments, borrowers, beneficiaries, and sub-borrowers; cofinancing from official, export credit, and
commercial sources; equity sponsors; and local participating private companies and financial institutions.

67
Health Contracts Widen Access to Care

A
relatively low life expect- NGOs attract people in need of in the government clinics—$10–30
ancy, coupled with high care with cleaner clinics; predictable, per month—that health workers
maternal mortality rate professional, and respectful service; had to seek other income. Many
and greater vulnerability and successful treatment. They use openly sold their services outside
to contract HIV/AIDS, calls for enforceable contracts, financial of the health centers and earned
extensive and innovative efforts to incentives, user fees, and achievable 10 times more than their official
significantly improve the health goals to motivate staff. salaries.
status of the Cambodian people. Overall care has improved for Salaries were raised to levels high
The poor in Cambodia, when in numerous reasons, says HealthNet enough to get staff to dedicate
need of medical attention, may self- International, one of the contracted 100% of their time to the public
treat, call traditional healers, and NGOs. Of critical importance was an system. Doctors and district
even flee before they ever seek end to private practice among managers settled for salaries
advice from government-run clinics. public workers. Salaries were so low between $120 and $180 per month.
“When I saw the health staff
MEKONG

come to my village ... I took my little


baby with me and hid in the bushes
behind the village,” says one mother
in the Memut district of Kampong
Cham province.
A government program that
contracts private organizations to
run and upgrade public health
services is changing that. Wide-
spread success since the program
was begun in 1996, under a loan
now completed, has convinced
officials to expand contracting from
5 to 10 of the country’s 76 districts.
The second phase, ongoing in 2005,
was funded with a $20 million ADB
loan under the Health Sector
Support project and is due
for completion in 2007.
Under the contracting system,
use of public services has risen,
particularly among the poor. Average Maternal care is improving and use of public services is rising in clinics run by NGOs
out-of-pocket health costs have (above); salaries were raised to levels high enough to get staff to dedicate 100% of their
plunged by over $30 per person for time to the public system (below)
the bottom half of the population
in some project districts.

Under the
contracting system,
use of public services
has risen among the
poor; average out-of-
pocket health costs
have plunged by
over $30 per person

68
($18 million) as well as sustainable livelihood in the Tonle
Sap Basin ($15 million). The third project, amounting to
$10 million in an ADF loan, was approved for a financial
sector program for the development of a market-based
financial system.
The Tonle Sap Initiative has made good progress
toward reversing threats to Southeast Asia’s largest
freshwater lake (see page 65). Cambodians also continued
to find better health care in efficient clinics run by NGOs
under new funding in a long-running project (see page 68).
The non-lending program (consisting of 14 technical
assistance activities), based on resources from the
Technical Assistance Special Fund, Japan Special Fund,
and other sources, amounted to $7.62 million during
2005, which included technical assistance for project

MEKONG
preparation as well as capacity building.
The 2005–2009 country strategy and program for
Cambodia was endorsed by the Board. A notable feature
of its preparation was the joint process undertaken
with World Bank, United Kingdom’s Department for
International Development, and United Nations agencies
concerned.

LAO PDR: HYDROPOWER


In April 2005, ADB approved a $20 million public sector
A worker in a factory in the Lao Bao commercial area in the Lao PDR
loan, a private sector loan of up to $50 million, and a (above); Thailand’s economy and relationship with ADB are entering
political risk guarantee of up to $50 million for the Nam a new era (below)
Theun 2 Hydroelectric Project. These were ADB’s first
private sector loan and first such guarantee in the Lao
PDR. It was also the second public-private partnership
in the Lao PDR power sector. Approval of the project
was a breakthrough in the Mekong subregion, making it
a public-private partnership model. It is part of an
international effort to supply 1,070 megawatts of power
to the Thai and Lao PDR markets.
During 2005, ADB also approved a $10 million
ADF grant for the Lao PDR to help provide safe and
reliable water supplies. The quality and reliability of
water supply services will be improved in about 12 small
towns in the country’s northern and central regions by
developing new water sources and constructing optimal-
sized water supply systems.
Complementing the loans and grants for the Lao
PDR are seven technical assistance grants amounting to
$3.0 million, which focused on project preparation and
capacity development in priority areas.

MYANMAR
ADB continued to monitor economic development in
Myanmar during 2005. An operational strategy will be
formulated when appropriate. The last loan and technical

69
assistance projects for Myanmar were approved in 1986
and 1987, respectively.

THAILAND: A NEW ERA


The opening of the Thailand Resident Mission in 2005
marked a new chapter in the country’s long-standing
relationship with ADB. Discussions with the government
on a partnership framework are ongoing to define areas
of collaboration on national and regional programs.
As a middle-income country, Thailand recognizes
the critical role of infrastructure for sustainable economic
growth and increased competitiveness. ADB is prepared
ADB’s work in the Mekong countries focuses on laying the infra- to work closely with the government to support its
structure needed to boost economic growth and to reduce poverty “megaprojects” infrastructure investment program.
MEKONG

Cooperation on Dam Generates Power

C
onstruction of the Nam
Theun 2 hydroelectric
dam, so far the largest
foreign investment in the
Lao PDR, has started. It is also one of
the largest GMS projects and
exemplifies the benefits not only of
regional cooperation in the Mekong
but also of the potential for tapping
private sector strengths through
partnership with public sector groups.
Thailand will buy up to 95% of the
1,070 megawatts to be generated,
and the Lao PDR government will use
the dividends, taxes, and royalties for
its development program.
With funding from 27 interna-
tional institutions—including public
and private sector loans and a The Nam Theun 2 project illustrates the potential for tapping private sector strengths
political risk guarantee from ADB— through partnership with public sector groups
the Nam Theun 2 Power Company
Limited will build the project, the
total base cost of which is estimated
Thailand will buy up to 95% of the 1,070 mega-
at $1.25 billion. watts to be generated, and the Lao PDR
Consultations leading up to the
project were broad, deep, and government will use the dividends, taxes,
frequent. The people living near
the project began providing inputs and royalties for its development program
to planning in 1996, and were
consulted in several hundred Environmental concerns were also evaluation, including the publication
public meetings and information clearly established. For example, with of performance evaluations,
exchanges throughout the area. funding from the company, the progress reports, and data monitor-
Planners also held consultations in project will help preserve the Nakai ing. Furthermore, the obligations of
Bangkok, Tokyo, Paris, Washington Nam Theun National Protected Area, the company relating to social and
DC, and Vientiane with international one of Southeast Asia’s few environmental mitigation or compen-
groups concerned about the project, remaining intact tropical rainforests. satory measures are detailed in the
whose views were taken into It also features a program for safeguard documents and clearly set
account in the design. transparent monitoring and out in binding agreements.

70
MEKONG
Demand for electricity in Viet Nam has grown by at least 15% per year in the last 10 years, but supply has not always kept pace

Consistent with the government’s efforts to increase and, in selected rural districts, raise them to all-weather
the size, depth, and liquidity of Thailand’s capital market, condition. The improved roads will increase the efficiency
ADB issued a debut 4 billion baht ($102.5 million), 5-year with which people can move and goods can be traded, and
bond in the country’s domestic bond market in May 2005. the project will help improve access to markets, jobs, and
Thailand has always been an integral partner of ADB social services.
in the GMS Program. Additionally, new opportunities are Viet Nam will also be a beneficiary of a loan
being explored for expanding Thailand’s role as a regional ($27.9 million) and grant package ($10.1 million) totaling
development partner. ADB and Thailand are involved in a $38.0 million to strengthen the country’s preventive
number of initiatives to promote further development of health system. Specifically, the project will help combat
Asian bond markets. Collaboration will strengthen coope- communicable and emerging lifestyle diseases.
ration and deepen economic integration across the region. Non-lending assistance in Viet Nam, consisting
No new loans have been made to Thailand since of 20 technical assistance grants amounting to
2000. However, seven technical assistance grants $12.3 million for 2005, constituted an important element
amounting to $3.35 million were approved in 2005. toward project preparation as well as capacity building.
These included three tsunami-related technical An OCR loan for $360 million, approved in
assistance operations to assist in post-tsunami support December 2005, will construct and expand power
activities. Another technical assistance—Infrastructure transmission lines and substations in the northern part of
Investment Advisory Assistance to the Public Debt the country. The project will improve reliability, remove
Management Office of Thailand—aims to assist the transmission bottlenecks, reduce transmission losses, and
government in evaluating various mechanisms and promote more efficient use of power plants. Demand for
options for integrating the urban mass rail transport electricity in Viet Nam has grown by about 15% per year
system in Bangkok. in the last 10 years, but supply has not always kept pace.

VIET NAM: POWERING UP


In 2005, ADB approved $577.7 million in loans,
$26.5 million in grants, and $12.3 million in technical
Demand for electricity in Viet Nam
assistance, for a total of $616.5 million. A $95.0 million has grown by about 15% per year
loan and grant package approved in November 2005
will improve 1,200 km of roads and help boost economic
in the last 10 years, but supply
growth in the central provinces. It will rehabilitate roads has not always kept pace

71
Pacific
Cook Islands, Fiji Islands, Kiribati,
Marshall Islands, Federated States
of Micronesia, Nauru, Palau,
Papua New Guinea, Samoa,
Solomon Islands, Timor-Leste,
Tonga, Tuvalu, Vanuatu

Subregional Perspective

T
PACIFIC

he area covered by ADB’s Pacific operations is


vast. Just one country alone, Kiribati, spans
nearly 6,000 km from east to west. Most
of the region’s island nations are remote, have
small populations, and face a peculiar set of
developmental challenges as a result.
The economic performance of most Pacific countries
has improved in the past 2–3 years, following variable but
often weak or negative economic growth in the preceding
decade. On average, economic growth in the Pacific
countries weakened slightly in 2005 compared with the
previous year. Real GDP expanded on average by 2.7%—down
from 3.1% in 2004—and was barely enough to keep ahead of
regional population growth, which was 2.4% in 2004.
However, the average conceals significant variations
among the Pacific countries, including in the key factors
affecting growth prospects and performance. High oil prices,
for example, continued to weigh heavily on most Pacific
economies in 2005, although higher global commodity
prices for exports offset these in several countries.
In Papua New Guinea and Timor-Leste, higher oil
prices in 2005 were clearly beneficial, given the importance
of petroleum exports to both countries. In Papua New
Guinea, existing oil projects were expanded, while
agreements were secured with an Australian aluminum
refinery and a gas wholesaler for a proposed gas pipeline.
As of end-December 2005, Timor-Leste government
deposits held abroad by the Banking and Payments
Economic growth was strong in
Authority totaled $506 million, including $370 million several Pacific countries, including
in the Petroleum Fund. Samoa, where these schoolgirls live

72
PACIFIC

73
Pacific: Main Indicators, 2005
Real GDP Average
Poverty Growth Inflation Trade
Rate a Rate Rateb Balancec
Country (%) (%) (%) ($ million)

Cook Islands 12.0 d 3.0 1.7 32.0


Fiji Islands 39.5 e 1.7 2.4 (867.0)
Kiribati 50.0 d 0.3 2.5 (43.0)
Marshall Islands 20.0 f,g 3.5 3.5 (69.0)
Micronesia, Federated States of 27.9 d 1.0 2.5 (130.0)
Nauru – – – –
Palau 23.0 h 5.5 3.0 –
Papua New Guinea 53.8 3.0 1.7 1,464.0
Samoa 20.3 5.5 8.0 –
Solomon Islands – 4.4 6.9 (40.0)
Timor-Leste 39.7 i 2.5 1.8 (204.0)
Tonga 22.3 2.5 8.0 (90.0)
Tuvalu 29.3 j 2.0 2.8 –
Vanuatu 40.0 k 3.1 2.6 (86.0)
– no data available, ( ) negative.
a
Data are for 2002, except for the Fiji Islands (2003) and Papua New Guinea (2005); b Data are as of March for Tonga and refer to year-end inflation for Fiji Islands, Marshall
Islands, Papua New Guinea, and Tuvalu; for Kiribati, 2004; c Data for Fiji Islands, Kiribati, Palau, Papua New Guinea, and Solomon Islands are as of 2004; d 1998 Household
Income and Expenditure Survey (HIES) data; e 1990/91 HIES; f $1-a-day benchmark; g 1999 census data; h 1998 estimate; i Based on the 2001 Timor-Leste Living Standard
Measurement Survey; j Based on 1994 HIES data; k Calculated from the 1998 HIES $1-a-day benchmark.
PACIFIC

Of the 14 countries, growth in 2005 GDP was strong destinations, improved country and regional marketing,
in Palau (5.5%), Samoa (5.5%), Solomon Islands (4.4%), and structural reforms that are allowing low-cost air
and Marshall Islands (3.5%). Vanuatu (3.1%), Cook carriers to enter the market. In the Fiji Islands, tourist
Islands (3%), Timor-Leste (2.5%), and Tonga (2.5%) grew arrivals increased by 6% in the first 8 months of 2005;
modestly, with Tuvalu expanding by 2%, and Federated Palau broke its 2004 visitor arrivals record; and the Cook
States of Micronesia by 1%. Kiribati (0.3%) experienced Islands enjoyed a rise in arrivals, shaking off the
the region’s lowest growth. No figures were available for destruction of the March cyclones.
Nauru. Inflation decreased a bit in the region, although it
Papua New Guinea, the region’s largest economy remained slightly high in Samoa, Solomon Islands,
with 49.2% of regional GDP, grew by 3% in 2005, similar and Tonga.
to 2004’s 2.9%. Excluding gold production, all sectors of
the economy expanded, with agriculture particularly Regional Cooperation
strong. Palm oil and copra benefited from high world
prices. The country’s economy has improved greatly in Each Pacific country is unique, but they also face
recent years, as reflected in a buildup of foreign reserves, common challenges related to high transport and other
fiscal consolidation, a stable exchange rate, and much transaction costs, limited human resources and weak
lower interest rates and inflation. institutional capacities, governance difficulties, and
GDP growth slowed in the Fiji Islands to 1.7% in narrowly based economies vulnerable to natural disasters
2005 after 4.1% in 2004, as the region’s second largest and external shocks.
economy faced significant adjustment pressures. Fiscal
deficits continue to be moderately large, and the textile
and sugar sectors are under considerable pressure, Throughout the region in 2005,
reflecting reductions in preferential trade advantages
in Australia and the European Union (see page 79). tourism remained a significant
In Vanuatu, growth was 3.1% compared with 4.2%
in 2004 and -4.7% in 2003, led by agriculture, forestry,
income source; it has grown
and the fishing sectors. substantially in recent years,
Throughout the region in 2005, tourism remained
a significant income source; it has grown substantially
supported by a consumer shift
in recent years, supported by a consumer shift to safer to safer destinations

74
Regional cooperation and integration can help the
Pacific countries minimize constraints and expand
economic opportunities. They can gain economies of
scale and improve governance, for example, by building
regional institutional capacity that complements
national strengths. A regional approach can also expand
access to labor markets, including to larger neighboring
countries, and can be part of an important strategy for
increasing economic opportunities.
In 2005, heads of government of the Pacific Islands
Forum reinvigorated Pacific regionalism by approving the
Pacific Plan for Strengthening Regional Cooperation and
Integration. ADB preceded the initiative with the report
Toward a New Pacific Regionalism and supported the effort
with technical assistance. Published jointly by ADB and
ADB established the Aviation Safety Office under its first-ever loan to
the Commonwealth Secretariat, the report provided a regional organization
Forum island countries with a timely analysis of major
issues and opportunities for Pacific regionalism, and
recommended several initiatives that were later adopted The office will help the region meet international
under the Pacific Plan. aviation requirements by providing safety and security

PACIFIC
inspections, and technical assistance to airlines, airports,
SAFER SKIES and civil aviation authorities.
Aviation safety and security is one area where the benefits The ADB loan will establish the office in its new
of Pacific regional cooperation have been clearly headquarters in Port Vila, Vanuatu, while the grant will
demonstrated. Under an ADB loan and technical finance regulatory and legislative harmonization and
assistance grant package totaling $1.95 million approved update the certification of airlines. The office will
in 2005 and the first ever made directly to a regional standardize the operating environment across member
organization, ADB is helping Cook Islands, Fiji Islands, countries and support implementation of the Pacific
Kiribati, Papua New Guinea, Samoa, Solomon Islands, Islands Civil Aviation Safety and Security Treaty.
and Vanuatu establish the Pacific Aviation Safety Office. The regional approach adopted will reduce costs to

Pacific: Approvals, 2005 ($ million)


Grant-Financed Projects
Other Technical
Country Loans ADF IX Funds a Assistance Total

Cook Islands 2.83 – – 0.60 3.43


Fiji Islands 25.00 – – 1.60 26.60
Kiribati – – – – –
Marshall Islands – – – 0.30 0.30
Micronesia, Federated States of – – – – –
Nauru – – – 0.48 0.48
Palau – – – – –
Papua New Guinea – 0.00 – 2.15 2.15
Samoa 8.06 – 17.20 0.65 25.91
Solomon Islands – – – 1.10 1.10
Timor-Leste – 10.00 – 1.20 11.20
Tonga – – – 0.70 0.70
Tuvalu – – – – –
Vanuatu – – – – –
Regional 1.50 8.00 – 6.24 15.74

TOTAL 37.39 18.00 17.20 15.02 87.61


– = nil, ADF = Asian Development Fund.
a
Includes trust funds and externally financed grants.

75
governments, airlines, and airport operators, and the office Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu—
will become financially self-sustaining through service fees. the reported incidence of HIV/AIDS was over 120 cases in
2005, although the real number may be considerably
FIGHTING HIV/AIDS higher because of less than adequate surveillance systems.
A regional approach can also help better equip the Pacific Under an $8 million ADF grant approved in 2005,
in the fight against HIV/AIDS. Many small Pacific ADB will help improve the management and delivery of
nations share a vulnerability to the disease because of low HIV/AIDS programs by strengthening surveillance and
condom use, high mobility, and various cultural and supporting community prevention in the 10 countries.
sexual taboos. Reported contraceptive use averages around The project will help countries develop the skills to
30–35% in most Pacific countries. At the same time, identify risk factors and vulnerable sectors of the
many of the region’s health care systems have trouble population, design surveillance programs, and improve
ensuring safe blood supplies, have a poor record for laboratory work and data collection.
treating other sexually transmitted infections, and do not Community assistance will include social marketing
provide adequate counseling or testing for HIV/AIDS. programs for condoms, launch events, peer education,
At the end of 2005, Papua New Guinea was the only and campaigns to influence and change sexual behavior.
Pacific country considered to have an HIV epidemic, The project will increase facilities for diagnosing sexual
with cases estimated between 23,000 and 90,000 in the diseases, and will help fund 20 clinics in the 10 countries.
15–45 age group, or about 2% prevalence. Educational materials on HIV/AIDS and other
In 10 countries in the region—Cook Islands, Kiribati, sexually transmitted infections will be available at
Marshall Islands, Federated States of Micronesia, Nauru, drop-in centers to provide information to vulnerable
PACIFIC

Pacific: Cumulative ADB Lending as of end-2005


($ million)
Cook Islands 29.50
Fiji Islands 249.90
Kiribati 15.14
Marshall Islands 78.13
Micronesia, Federated States of 75.14
Nauru 5.00
Palau –
Papua New Guinea 873.99
Samoa 129.98
Solomon Islands 79.31
Timor-Leste –
Tonga 57.79
Tuvalu 7.82
Vanuatu 51.25
Regional 1.50

TOTAL 1,654.45

Pacific: Public and Private Sector Loan Approvals, 2005 ($ million)


Total Date
Country OCR ADF Total Project Costa Approved

COOK ISLANDS
Cyclone Emergency Assistance – 2.83 2.83 7.87 30 Jun
FIJI ISLANDS
Alternative Livelihoods Development 25.00 – 25.00 49.78 28 Mar
SAMOA
Education Sector II – 8.06 8.06 30.00 16 Dec
REGIONAL
Establishment of the Pacific Aviation Safety Office – 1.50 1.50 2.10 22 Sep
ADF = Asian Development Fund, OCR = ordinary capital resources.
a
Total project cost includes financing by ADB, governments, borrowers, beneficiaries, and sub-borrowers; cofinancing from official, export credit, and commercial
sources; equity sponsors; and local participating private companies and financial institutions.

76
HIV/AIDS programs will be improved by strengthening surveillance
and supporting community prevention in 10 Pacific countries (above);
vulnerable communities, such as seafarers, will be targeted (right)

communities such as seafarers. There will also be special Priorities are determined by matching country needs with
training on health issues at regional maritime schools as key result areas identified in ADB’s Pacific Strategy for

PACIFIC
well as for NGOs working with vulnerable groups. 2005–2009, which began implementation in 2005.
For HIV-positive people, the project will provide Total ADB assistance to the subregion was
skills training for livelihoods and fund antiretroviral drug $73.4 million. Four loans and two grant projects approved
treatments. Education campaigns will hopefully reduce by ADB for the Pacific in 2005 highlight the diversity of
high-risk behavior. the countries and the challenges facing the subregion.
Papua New Guinea, because of the scale of its HIV Valued at $63.1 million, they address the need for
challenge, is receiving targeted country-level assistance, agriculture sector restructuring and alternative livelihoods
with an ADF grant being prepared. for sugar farmers in the Fiji Islands (see page 79), a multi-
donor education sector partnership in Samoa (see page
ADB Assistance 80), cyclone recovery in Cook Islands, grant financing for
national roads in post-conflict Timor-Leste, and regional
ADB provides a range of services to its Pacific DMCs, with cooperation for aviation safety and HIV/AIDS prevention.
lending and grant operations supplemented by extensive ADB updated its strategy and program for three
technical assistance, analytical work, and policy advice. countries during 2005: Federated States of Micronesia,

Pacific: Cumulative ADB Disbursements by Country


as of end-2005 ($ million)
Cook Islands 26.15
Fiji Islands 160.56
Kiribati 13.55
Marshall Islands 63.99
Micronesia, Federated States of 36.78
Nauru 2.30
Palau 0.00
Papua New Guinea 634.01
Samoa 102.66
Solomon Islands 57.91
Timor-Leste 0.00
Tonga 52.26
Tuvalu 4.26
Vanuatu 48.99

TOTAL 1,203.42

77
Support Holds Back Rising Tides

K
ing tides, storm surges, change through “adaptation” road during construction. Estimates
and severe cyclones are projects under the Renewable suggested that spending the money
part of life for Pacific Energy, Energy Efficiency, and early for “climate proofing” would
islanders, particularly for Climate Change Program. save roughly 11% in costs due to
those living on the region’s many The Climate Change Adaptation lower maintenance and repair.
thousands of low-lying atolls. Program in the Pacific, for example,
Adapting to severe weather is a is aiming to climate-proof six
well-scripted routine learned over infrastructure projects in the
the millennia. Federated States of Micronesia and
However, these normal events Cook Islands. The program, funded
are becoming abnormally frequent by the Canadian Cooperation Fund
due to global warming, many for Climate Change, has designed
scientists now claim. adaptation measures and helped
ADB is helping Asian and Pacific provide the institutional and human
countries prepare for climate resource capacity to carry them out.
The effort addresses economic,
financial, technical, and legal issues,
plus social and environmental
ADB is helping Asian dimensions.
and Pacific countries
PACIFIC

In the Federated States of


Micronesia, the project identified
prepare for climate cost-effective adaptation measures
in the Sapwohn coastal community
change through in Pohnpei. A Kosrae road project
was put on hold until funds were Coastal areas are being made safer with
“adaptation” made available to climate-proof the climate proofing

Papua New Guinea, and Timor-Leste. ADB also approved Strengthening partnerships is increasingly important
$15 million for 24 technical assistance grants, including to ADB’s effectiveness in the Pacific. ADB resident
significant new regional assistance. Improving ADB’s missions in the subregion are enhancing dialogue and
project and technical assistance portfolio performance in responsiveness to member countries, while improving
the Pacific was a major focus in 2005, with the number coordination and advancing harmonization with
of active technical assistance operations substantially development partners are also a high priority. The Samoan
decreased to improve focus, and loan projects judged to education sector offers just one example of the new ways
be “at risk” reviewed and either managed for better of doing business. In addition, ADB has consciously
performance or closed. upgraded its relations with two key Pacific regional
The year 2005 was significant for publishing— organizations: the Pacific Islands Forum Secretariat and
in its Pacific Studies Series—the outcomes of ADB’s the Secretariat of the Pacific Community.
economic, sector, and thematic analytical work.
Economic studies included a country economic ENCOURAGING THE PRIVATE SECTOR
assessment for the Federated States of Micronesia and Improving the environment for the private sector so it
studies on the roles of remittances, trust funds, and can lead to economic growth is one of three main goals of
business development services in the Pacific. Thematic ADB’s Pacific Strategy for 2005–2009. Business success
studies published covered Pacific regionalism and stories exist in some Pacific countries, but on the whole
“climate proofing”—a risk-based approach for adapting policies and institutions for private sector development
to climate change (see box). An ADB education and are unfriendly to business and job creation. In many cases,
training sector strategy was also released, and private state activity crowds out private business, exacerbates
sector assessments for the Fiji Islands and Solomon the problems of geographic isolation, and harms economic
Islands were posted on ADB’s website and widely growth. Development partners have sometimes
disseminated in those countries. unwittingly contributed to this situation.

78
Loan Sows New Opportunity

T
he Fiji Islands’ sugar agricultural diversification, better
industry, at the core of its agricultural services, and effective
economy for over a century, public-private sector partnerships in
is in sharp decline, jeopar- commercial agriculture communities,
dizing the livelihoods of many offering farm households opportu-
thousands of farmers and workers. nities for substantially higher
The Fiji Islands’ economy floated incomes. The project will also
on high sugar returns for many improve about 600 km of farm roads
years, but favored treatment to provide farming communities
insulated growers from the need for with better access to markets.
improvements. The industry is now In addition, it will encourage off-
plagued by high costs and low yields farm livelihoods by promoting the
that stem from antiquated sugar development of small and micro-
mills and inefficient infrastructure. enterprises and supporting voca-
These leave it in poor shape to cope tional training. It will also strengthen
with world competition as the rural financial services in areas poorly
European Union reduces long- served by commercial banks. “It’s very hard for us to manage,” says
standing subsidies on much of the Roshni Chand (middle), whose husband
Ramesh earns $3.50 a day
country’s crop, in accordance with

PACIFIC
World Trade Organization rules.
This dire situation is exacerbated
by the anticipated expiry of some
10,300 farm leases over the next
25 years, which will likely cause
hardship both for experienced
farmers leaving the sugar industry
and for new farmers entering with
limited capital and experience.
In anticipation of the difficulties
now being faced by the Fiji Islands’
sugar farmers, ADB in March 2005
approved a $25 million loan to help
cushion the impact through support
of viable livelihood alternatives and
by promoting agricultural diversifica-
tion.
The Alternative Livelihoods
Development project targets 8,000 In anticipation of the difficulties now being
sugarcane farmers as well as cutters,
mill workers, and landowners, faced by the Fiji Islands’ sugar farmers,
including women, in the sugarcane
belt of the western and northern ADB in March 2005 approved a $25 million
divisions on the main islands of Viti
Levu and Vanua Levu. It will promote loan to help cushion the impact

Improving conditions for private sector development ADB has sought to raise the profile and elevate the
was therefore a major focus of ADB’s Pacific operations in discussion of private sector development issues in
2005, building on the knowledge gained from private individual countries and regionally. Private sector
sector assessments to better understand the problems of development road maps were formulated and used to
private business in the Pacific. Having consolidated the sharpen country and strategy program updates and to
common issues under a regional assessment—Swimming strengthen ADB’s portfolio of private sector development
Against the Tide: An Assessment of the Private Sector in the projects, technical assistance, and analytic work.
Pacific—which helped shape ADB’s new Pacific Strategy, Private sector assessments have proved to be a

79
Samoa Builds Its Knowledge Base

A
DB is supporting a joint curriculum is 25 years old, and many and to provide better schools,
government and develop- teachers lack in-service training, learning materials, and teaching
ment partner program of as well as teaching and learning methods. The program will help
improvements in the materials. Samoa also needs a more about 40,000 primary students get
Samoan educational system with an effective student assessment system. better education, targeting schools
$8 million ADF loan and a technical The ADB loan is integral to a with many pupils at risk.
assistance grant of $350,000, $30 million program financed by the Project partners are developing
approved in 2005. Australian Agency for International harmonized approaches in support of
Although Samoa has high levels Development, New Zealand Agency Samoa’s own systems to ease the
of school enrollment and has for International Development, and transaction costs of the program and
achieved gender equity, maintaining government of Samoa to improve the ensure it remains responsive to
the quality of education is a critical curriculum and student assessments Samoan needs and priorities.
challenge. More than half of fourth-
year Samoan students in 2003 fell
short of basic English language
standards, and about 71% of 6th-year
students were deficient in basic
mathematics. Samoa’s primary school
PACIFIC

Better schools,
learning materials,
and teaching
methods will help
40,000 students An ADB loan is helping Samoa update a 25-year-old school curriculum to raise basic
standards of education; maintaining quality is critical

powerful tool for engagement with governments. initiative, Improving the Legal Business Environment in
Increasingly, private sector organizations are using them the Pacific Region, is working to promote efficiency and
as a basis for their contributions to policy formulation and reduce risk, uncertainty, and transaction costs for private
policy dialogue with governments. businesses through updated companies laws and
The financial sector was one key area that passed associated regulations. Diagnostic Studies for Secured
substantial milestones in 2005. Samoa, for example, has Transaction Reforms in the Pacific Region is developing
followed up financial sector reforms by establishing a road maps for promoting secured financial transactions,
credit reference bureau, a key step in making credit more as well as funding selected analytic work on financial
available to business. In Vanuatu, a national task force on sector issues. Improving Delivery of Infrastructure
policy, legal, and regulatory frameworks for rural and Services, approved in 2005, aims to promote public-
microfinance was established to build on recent successes private partnerships, regional cooperation, and cost and
in rural microfinance provision. Significant successes were delivery efficiencies in providing infrastructure services—
also achieved in microfinance operations in Papua New water, power, telecommunications, and transport.
Guinea, Timor-Leste, and Vanuatu, with Papua New
Guinea’s recently established Wau Microbank attaining AT THE MERCY OF NATURE
operational financial self-sufficiency in 2005. Between 4 February and 8 March 2005, five cyclones
While individual countries were the primary focus of ripped across the Cook Islands. The storms, four of them
ADB’s private sector engagement in the Pacific, 2005 also in the maximum category 5, tore up public infrastructure,
saw substantial progress in regional technical assistance businesses, and private homes, with potential long-term
activities to promote reform across countries. One harmful effects.

80
The Post-Conflict Emergency
Rehabilitation project has provided
a highly visible peace dividend
for the people of two main islands
in Solomon Islands

potential for industrial and port development and for


international trade.
The project also incorporates gender design features
aimed at ensuring women’s involvement in project
activities, including rehabilitation and maintenance of
selected roads, community empowerment initiatives for
sustainable rehabilitation, road safety, and prevention of
Timor-Leste is rebuilding its roads, port facilities, bridges, and power
infrastructure, restoring normalcy to the country—and providing jobs the risks of HIV/AIDS.
At the same time, the Timor-Leste government
continued with road sector reforms in 2005 by creating

PACIFIC
To help recovery, ADB approved a $2.83 million loan the Road Fund in the National Road Authority to
in June for restoring basic social services and economic efficiently fund and implement routine maintenance
activities, covering part of the economic damage, starting in 2006. This reform was possible through ADB’s
estimated at about $7.9 million. The governments of policy dialogue in the sector.
Australia and New Zealand will cover 17% of the In Solomon Islands in 2005, the Post-Conflict
projected total cost, equivalent to $1.16 million, while Emergency Rehabilitation project has provided a highly
the government of the Cook Islands will take up the rest. visible peace dividend for the people of two main islands,
The project includes cleanup efforts, reinstatement rehabilitating vital roads, bridges, local administration
of infrastructure and basic services, and restoration of centers, and water supplies. The goal is to reinstate access
essential materials and supplies related to roads, ports, to markets and social services affected by years of conflict
power and water supply, waste management, and and political instability. Recognizing the primary
buildings. importance of this infrastructure to economic and social
These storms are a reminder of the vulnerability of recovery in Solomon Islands, Australia and New Zealand
many Pacific countries to severe weather. ADB’s work in have recently committed funds for an extension of the
2005 identified several successful approaches to preparing project and are working with ADB to prepare a long-term
for climate change by “climate proofing” Pacific road rehabilitation program.
infrastructure under the Climate Change Adaptation
Program in the Pacific (see page 78). To help implement WEB KIOSK SPREADS ADB’S MESSAGE
this approach, the Cyclone Emergency Assistance project In June 2005, ADB celebrated the first anniversary of
also included a technical assistance grant—Strengthening its South Pacific Subregional Office in Suva, Fiji Islands,
Disaster Management and Mitigation—to prepare by launching a public access information kiosk and
disaster management strategies to cope with severe website. The new office provides additional ADB capacity
weather caused by global warming, and a master plan for and responsiveness to the needs of Pacific clients.
developing environmentally sustainable infrastructure. It undertakes country programming, economic analysis,
and project administration for Cook Islands, Fiji Islands,
POST-CONFLICT INFRASTRUCTURE Samoa, Tonga, and Tuvalu.
In September 2005, ADB approved the first ADF IX grant Designed to provide better information services
to Timor-Leste of $10 million for the Road Sector to the public, the kiosk will offer users free access to
Improvement project. The project will rehabilitate downloads of ADB’s website, including the new
about 123 km of important roads in isolated rural areas subregional office web pages, and ADB studies and
with insecure food supplies. These roads have the reports on the Asia and Pacific region.

81
South Asia

Afghanistan, Bangladesh,
Bhutan, India, Maldives, Nepal,
Pakistan, Sri Lanka

Subregional Perspective

M
any South Asian countries have an
unparalleled opportunity now to reduce
SOUTH ASIA

poverty as never before. Buoyant


economies combined with policy changes
in the region are laying the foundations
for sustained growth that can lift millions out of poverty.
The regional economy grew a robust 7.8% in 2005,
helped by strong growth in India and Pakistan. South Asia
is benefiting from further integration into an expanding
global economy, rising consumer spending, generally
accommodative monetary policies, and market liberaliza-
tion. Still, 30% of the subregion’s 1.4 billion people live on
less than $1 a day.
Growth in India was impressive at 7.5% in 2004–2005
and reached 8.1% in 2005–2006. The government is
initiating several measures to address the constraints to
high growth in a comprehensive manner. These measures
will help in upgrading infrastructure, providing stronger
institutions and better policy, encouraging private
investment, and improving agricultural growth.
Meeting the funding needs for infrastructure will
require strong participation from the private sector, in
partnership with the public sector. Foreign direct invest-
ment can be a means of bridging the gap between India’s
huge investment requirement and domestic savings, but
a lot more needs to be done to attract those investors.
India’s economy is booming, and
Overall, high and volatile oil prices remain a major risk,
with ADB’s help, development assistance
with India depending on imports for 70% of its oil needs. is also reaching rural areas, particularly
The rapid rise in international crude prices has not been through infrastructure projects

82
SOUTH ASIA

83
South Asia: Main Indicators,a 2005
Real GDP Average Foreign
Poverty Growth Inflation Trade Direct
Rate Rate Rate Balance Investment
Country (%) (%) (%) ($ million) ($ million)

Afghanistan 53.0 13.8 10.0 (2,515.0) 253.0


Bangladesh 49.8 5.6 6.5 (3,297.0) 776.0
Bhutan 25.3 8.8 4.8 (225.0) 9.0
India 26.1 8.1 4.5 (59,342.0) 3,240.0
Maldives 21.0 (5.5) 3.3 (494.0) 13.0
Nepal 31.0 2.3 4.5 (978.0) 12.0
Pakistan 32.1 8.4 9.3 (4,515.0) 1,459.0
SOUTH ASIA

Sri Lanka 22.6 5.7 11.6 (2,690.0) 261.0


( ) negative.
a
Where 2005 data are unavailable, data for the latest year have been provided.

completely passed on to consumers, however, and inflation To some extent, Sri Lanka has
was contained at a moderate 4.5% in 2005.
In Pakistan, GDP expanded by 8.4% in 2005, its learned to live with uncertainty and
highest rate in 3 decades and the third consecutive year disasters; its economy has averaged
of strong growth. Manufacturing surged 12.5%, backed by
a 9-year high in agricultural growth, at 7.5%. Good weather, 4% growth in the last 3 decades
easier credit, and greater access to fertilizer benefited despite the upheavals of civil war
farmers. Inflation rose sharply to 9.3%, however, pushed up
by expensive energy and high consumer demand, while the
SOUTH ASIA

balance-of-payments current account turned into a deficit FY2005, compared with 3.5% in FY2004, affected also
of $4.5 billion, ending a 4-year surplus. by lower agricultural production due to poor weather and
In Bangladesh, the economy was buoyant, as GDP by weaker industry and services sectors. If it is to regain
expanded by 5.6%, helped by steady expansion in industry the average growth of 5% in the 1990s, it will need to
and services. However, insufficient pass-through of the resolve the conflict and accelerate its reform process.
increase in international oil prices to domestic consumers Faced with security problems, the illicit opium trade,
resulted in huge losses in the state-owned Bangladesh the poor state of infrastructure, and weak institutions,
Petroleum Corporation, amounting to 0.7% of GDP in Afghanistan nonetheless leapt ahead to full-year GDP
FY2005. Inflation hit 6.5% in FY2005. growth of 13.8% in FY2005, helped by continuous interna-
More promisingly, earlier concerns about the adverse tional reconstruction efforts, favorable weather conditions
effects on the industry sector from the phaseout of the for agriculture, and an expanding services sector.
Multi-Fibre Agreement for garment exports proved In Bhutan, GDP expanded by 8.8% in 2004/05,
unfounded. well above the medium-term trend of 7.0%. Hydropower
In Sri Lanka, the effect of the Indian Ocean tsunami remained the economic mainstay, backed up by a 19%
was not strong enough to slow economic growth signifi- spurt in the construction sector.
cantly. First-quarter GDP was dragged down in part by The Maldives’ economy was hit hard by the Indian
weak tourism and fisheries after the disaster, bringing it Ocean tsunami and contracted 5.5% in 2005. Tourist
down to 4.4%, but the country bounced back to full-year arrivals for 2005 did not meet expectations, while high oil
growth of 5.7%. prices have exerted additional pressure.
An upsurge in violence at the end of 2005 left the
cease-fire with the Liberation Tigers of Tamil Ealam
looking fragile. To some extent, Sri Lanka has learned Regional Cooperation
to live with uncertainty and disasters. Its economy has
averaged 4% growth in the last 3 decades despite the Regional cooperation gained momentum in South Asia,
upheavals of civil war. particularly after the meeting of the South Asian
Nepal’s economy has fared less well amid political Association for Regional Cooperation in November 2005
instability and conflict. Growth slowed to 2.3% in in Dhaka. At this landmark meeting, which reinvigorated

84
cooperation, the leaders affirmed their commitment to a
vision of South Asian economic union in a phased manner.
Another regional grouping, the Bay of Bengal Initia-
tives for Multi-Sectoral Technical and Economic Coopera-
tion, also gained momentum after a summit in July 2004.
This grouping joins Bangladesh, Bhutan, India, Nepal,
and Sri Lanka with Myanmar and Thailand.

ADB Assistance
Most urgently, assistance was rushed in 2005 to victims of
the Indian Ocean tsunami and the massive South Asian
earthquake. The late 2004 Indian Ocean tsunami
A man surveys the damage from the October earthquake in
devastated coastal communities in India, Maldives, and

SOUTH ASIA
Pakistan; ADB rushed aid under the Pakistan Earthquake Fund
Sri Lanka, while the earthquake inflicted suffering and
extensive damage in Azad Jammu and Kashmir* and
certain districts in North-West Frontier Province in NEW FACILITY TO FINANCE
Pakistan and in Jammu and Kashmir** in India. In both ROADS IN PAKISTAN
cases, ADB assistance concentrated on restoring the In Pakistan, total assistance was about $1.7 billion,
infrastructure needed for economic activity to resume, with including loans of $776 million. This also includes the
social service delivery, commerce, and communications new multitranche financing facility, which is making
either debilitated or destroyed (see page 34).
In 2005, ADB assistance to the South Asian subregion
totaled $4.4 billion. The overall operational approach The overall operational approach

SOUTH ASIA
remained focused on helping the eight countries spur
growth by removing infrastructural bottlenecks—in
remained focused on helping the
particular roads and highway development, urban develop- eight countries spur growth by
ment, and energy—and by improving governance. Work also
focused on sectors, such as education, and on projects
removing infrastructural bottlenecks
providing basic needs, such as water (see pages 88 and 93). and by improving governance

South Asia: Approvals by Country, 2005 ($ million)


Grant-Financed Projects
Equity and Special Other Technical
Country Loans Guarantees Funds a Funds b Assistance Total

Afghanistan 135.00 5.50 100.00 0.00 8.49 248.99


Bangladesh 474.80 – 10.00 75.99 7.45 568.24
Bhutan 27.30 – – 0.50 1.70 29.50
c
India 440.31 20.60 100.00 – 6.33 567.24
Maldives 7.80 – 20.00 1.00 1.92 30.72
Nepal – – – – 2.16 2.16
d
Pakistan 776.30 – 85.00 36.00 15.28 912.58
Sri Lanka 253.00 – 164.00 63.10 3.11 483.21

TOTAL 2,114.51 26.10 479.00 176.59 46.44 2,842.64


– = nil, ADF = Asian Development Fund.
a
Includes Asian Development Fund IX, Asian Tsunami Fund, and Pakistan Earthquake Fund.
b
Includes trust funds and externally financed grants.
c
This figure does not include the multitranche financing facility for the Rural Roads II Investment Program ($750 million).
d
This figure does not include the multitranche financing facility for the National Highway Development Sector Investment Program ($770 million).

* 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.
** 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.

85
$770 million in financing available to support the traffic. In other sections where congestion cripples traffic,
country’s National Highway Development Sector double lanes are needed, while cities need bypasses.
Investment program. ADB’s investment will target road improvements in
Infrastructure, particularly roads vital to regional three batches: the first comprises three sample projects
trade, remains one of ADB’s focal areas. The facility will covering 376 km, the second 460 km, while the third will
support the long-term development of the country’s be determined later. The facility also provides planning
national highway network and regional road connections. and design support, management of construction
Important sections of Pakistan’s highway network schedules, social and resettlement assessments,
consist of only narrow roads, often unsuitable for heavy and environmental safeguards.
SOUTH ASIA

South Asia: Public and Private Sector Loan Approvals by Country, 2005 ($ million)
Total Date
Country OCR ADF Total Project Costa Approved

AFGHANISTAN
Power Transmission and Distribution – 26.50 26.50 50.00 14 Apr
Fiscal Management and Public Administration
Reform Program (Subprogram I) – 48.00 48.00 55.00 14 Dec
Western Basins Water Resources Management – 60.50 60.50 87.60 20 Dec
BANGLADESH
Emergency Flood Damage Rehabilitation – 152.30 152.30 240.00 20 Jan
Second Urban Primary Health Care – 30.00 30.00 90.00 31 May
Gas Transmission and Development 225.00 5.00 230.00 413.00 27 Oct
Agribusiness Development – 42.50 42.50 60.00 27 Oct
Southwest Area Integrated Water Resources – 20.00 20.00 43.40 23 Nov
Planning and Management
BHUTAN
SOUTH ASIA

Road Network – 27.30 27.30 34.10 30 Sep


INDIA
Chhattisgarh Irrigation Development 46.11 – 46.11 66.61 29 Mar
Tsunami Emergency Assistance (Sector) 100.00 – 100.00 218.60 14 Apr
Infrastructure Development Finance Company Limitedb 50.00 – 50.00 50.00 19 Apr
Yes Bank Limited b 23.00 – 23.00 23.00 23 Aug
Kerala Sustainable Urban Development 221.20 – 221.20 316.10 20 Dec
MALDIVES
Tsunami Emergency Assistance – 1.80 1.80 25.30 31 Mar
Regional Development Project, Phase II—
Environmental Infrastructure and Management – 6.00 6.00 7.50 28 Apr
PAKISTAN
Agribusiness Development – 31.00 31.00 49.00 19 May
Infrastructure Development – 25.00 25.00 33.67 18 Aug
New Bong Escape Hydropowerb 37.30 – 37.30 149.20 21 Nov
Balochistan Devolved Social Services Program
–Program Loan 130.00 65.00 195.00 200.00 8 Dec
–TA Loan – 5.00 5.00 6.25 8 Dec
National Highway Development Sector
Investment Program – 3.00 3.00 3.00 13 Dec
Rawalpindi Environmental Improvement 20.00 40.00 60.00 85.70 13 Dec
Earthquake Emergency Assistance – 220.00 220.00 374.20 13 Dec
Punjab Resource Management
Program—Subprogram 2 200.00 – 200.00 200.00 14 Dec
SRI LANKA
Tsunami-Affected Areas Rebuilding 0.00 7.00 7.00 249.30 14 Apr
North East Community Restoration and
Development II – 26.00 26.00 55.00 14 Apr
Technical Education Development – 20.00 20.00 26.70 21 Nov
Local Government Infrastructure Improvement – 50.00 50.00 66.70 24 Nov
National Highways Sector 150.00 – 150.00 208.00 15 Dec
– = nil, ADF = Asian Development Fund, OCR = ordinary capital resources.
a
Total project cost includes financing by ADB, governments, borrowers, beneficiaries, and sub-borrowers; cofinancing from official, export credit, and commercial sources;
equity sponsors; and local participating private companies and financial institutions.
b
Private sector loan without government guarantee.

86
ADB assistance also focused on areas destroyed by
the devastating earthquake in October with almost
$400 million approved immediately to support
rehabilitation and recovery efforts (see page 34).
Work in Pakistan will shortly begin on the New Bong
Escape project, an 80-megawatt power plant downstream
from the Mangla dam on the Jhelum River in Azad Jammu
and Kashmir, home to some of the areas worst hit by the
earthquake. The plant, scheduled to begin generating
power in 2009 and to be built by a private entity, is the first
Help for India’s rural sector is coming through better roads and
large-scale, private sector infrastructure project in Azad improved irrigation under several programs
Jammu and Kashmir. It is also the first private sector co-
financing between ADB and the Islamic Development Bank.
ADB also approved a $205 million loan for the ADB approved five loan projects in 2005, including

SOUTH ASIA
Balochistan Devolved Social Services Program, which will two private sector loans (see page 86); the Chhattisgarh
support policy reforms to improve education, health, and Irrigation Development project ($46.1 million); Kerala
water supply and sanitation, and will also provide Sustainable Urban Development project ($221.2 million);
resources for local government social services—enabling and Tsunami Emergency Assistance Project, comprising
the private sector to participate—and help develop a loan of $100.0 million and an Asian Tsunami Fund
capacity and strengthen institutions. grant of $100.0 million. Three technical assistance
operations were approved in 2005 in support of the
INDIA: FOCUS ON INFRASTRUCTURE government’s road program.
Infrastructure development dominates ADB assistance in In addition to these loans, assistance to the country
India as well, and supports the Indian government’s own also included $750 million for the Rural Roads II

SOUTH ASIA
massive plans for such investment. Investment Program, setting up a credit facility from

South Asia: Cumulative ADB Lending by Country


as of end-2005 ($ million)
Afghanistan 752.28
Bangladesh 8,044.69
Bhutan 138.46
India 14,936.21
Maldives 91.48
Nepal 2,214.98
Pakistan 15,035.24
Sri Lanka 3,703.25

TOTAL 44,916.59

South Asia: Cumulative ADB Disbursements


by Country as of end-2005 ($ million)
Afghanistan 286.65
Bangladesh 5,572.63
Bhutan 98.82
India 8,144.63
Maldives 57.25
Nepal 1,437.19
Pakistan 10,530.69
Sri Lanka 2,573.91

TOTAL 28,701.77

87
Gujarat Communities Meet Basic Needs

I The Sabarkantha
n many parts of Gujarat, India, ing. Every 10th day, villagers receive
villagers struggle to find clean cash payments, right in the village.
drinking water. Almost 60% of
the state’s villages have no
The Sabarkantha Dairy has
organized villagers into eight dairy
Dairy has organized
water source that is assured through- cooperatives, has helped them villagers into eight
out the year. In Surendranagar purchase livestock, has trained them
district, rural communities face acute in basic animal husbandry, and buys dairy cooperatives,
water scarcity, especially during their entire milk production. In less
summer, when the entire Saurashtra than 2 months of operations, the has helped them
region is parched. The rural women villagers supplied nearly 15,000
bear the brunt, having to walk long liters of milk and generated sales of purchase livestock,
distances to collect drinking water.
The Aga Khan Rural Support
nearly $3,500.
Both these projects are funded
has trained them in
Programme is attempting to alleviate through a $3.4 million grant to the basic animal
this water crisis by mobilizing the government of Gujarat from the
local women’s federation, Mahila ADB-administered Japan Fund for husbandry, and
Manch, to operate tankers to supply Poverty Reduction. The grant is
drinking water at affordable rates to supporting more than a dozen buys their entire
20 villages in the Chotila and Sayla similar projects in Gujarat, which are
blocks of Surendranagar. In the being implemented by NGOs and milk production
summer of 2005, the Manch community-based organizations.
transported and supplied more
than 480,000 liters for nearly
2,000 households. With Aga Khan
support, the Manch procured tractors
SOUTH ASIA

and tankers, trained drivers, and


planned water distribution. The
Manch covers its operating costs
through a nominal charge to the
poor. This has forced private
suppliers to reduce water prices.
In the drought-prone Poshina
area of Sabarkantha district in north
Gujarat, nearly 1,000 tribal house-
holds have started lining up at the
local milk collection center to get
their milk weighed, tested, and
recorded before it is transported to
the Sabarkantha Dairy for process- Villages in Gujarat are mobilizing to address water issues

which loans can be drawn on the new multitranche and West Bengal and about 1,200 km in Orissa—will be
financing facility, the second facility structure set up in addressed in the first stage. The remaining projects will be
South Asia after Pakistan. prepared by participating states in three annual batches.
Providing loans from the multitranche financing ADB’s support to the Indian government’s develop-
facility, ADB’s assistance will finance investments in ment priorities include constructing rural infrastructure,
the rural roads program of the government, covering building the highway network, upgrading cities and
30,000 km and connecting 19,000 villages. To ensure satellite towns, and strengthening the power sector.
success, the facility will assist in all stages, from planning In support of urban development, for example, ADB
to maintenance and road safety. approved a loan of $221.2 million. It aims to develop
Multiple loans will be provided over 5 years, each urban living conditions in five municipal governments in
financing a clearly defined investment project. Some India’s southernmost Kerala State, including Kochi,
3,200 km of rural roads—about 1,000 km each in Assam Kollam, Kozhikode, Thiruvananthapuram (the state

88
In Chhattisgarh, ADB will help ADB’s overall loan portfolio to India at the end of
2005 comprised 33 ongoing loans for $5.7 billion,
improve the livelihoods of including $2.6 billion to transport, $1.7 billion to urban
infrastructure, $1.1 billion to energy, and $0.2 billion to
about 120,000 farm families the financial sector. Another $0.05 billion went to agri-
by improving irrigation services culture, environmental protection, and natural resources.
and agricultural practices through BANGLADESH: INFRASTRUCTURE
a $46.1 million loan FOR THE POOR
In Bangladesh, ADB approved six new loans in 2005.
These included ADF and OCR loans for the Gas Trans-
capital), and Thrissur. In particular, it will rehabilitate mission and Development project (total $230.0 million),
and expand urban water supply, sewerage and sanitation, Emergency Flood Damage Rehabilitation project
urban drainage, solid waste management, and roads and ($152.3 million), Agribusiness Development project
transportation. ($42.5 million), Second Urban Primary Health Care
It offers “livelihood enhancement” components project ($30.0 million loan and $10.0 million ADF grant),
focused on the poor communities; makes investments in and Southwest Area Integrated Water Resources Planning
other smaller urban local bodies in the state; and supports and Management project ($20.0 million).
capacity building and project management. The first project will construct four gas pipelines
The combined population of the Kerala municipali- totaling 353 km for transporting natural gas to the less
ties covered by the project is 2.5 million and is projected developed western region, an area with nearly 15 million
to rise to about 3.6 million by project completion in 2011 people. With plans to transport 360 million cubic feet of
and further to 6.2 million by 2021. Kerala has performed natural gas per day, this will be the first time the region
considerably better than most Indian states on social has had access to a large-scale gas supply.

SOUTH ASIA
development measures, but lingering urban poverty The Emergency Flood Damage Rehabilitation project
remains a threat to its future growth. will repair public infrastructure in five sectors damaged by
In Chhattisgarh, ADB will help improve the liveli- major floods in 2004. It will restore access to basic services,
hoods of about 120,000 farm families by upgrading increase disaster preparedness and mitigation, and include
irrigation services and agricultural practices through capacity building and training in infrastructure design and
a $46.1 million loan. The project will help the government assistance to enhance early warning systems.
of Chhattisgarh’s Water Resources Department better ADB also began the second phase of the highly
develop and manage the state’s irrigation sector by successful Urban Primary Health Care project, which has
strengthening its existing capacity, initiating reforms, been contracting NGOs to run primary health services.
upgrading procedures, modernizing equipment, and The project is providing more efficient and affordable care
developing new facilities. than government-run services, with at least 30% of its
It will also redefine and bolster the role of water users
associations in managing and maintaining irrigation
systems by strengthening the framework for partnership
between them and the government. The project will then
rehabilitate and upgrade about 200 minor and 20 me-
dium irrigation schemes, especially those with
high potential for diversified cropping, serving about
200,000 hectares throughout Chhattisgarh.
Other projects in India included several funded under
the Japan Fund for Poverty Reduction, which is adminis-
tered by ADB and uses extensive support from NGOs to
find creative ways to help alleviate the difficulties faced
by the poor. In Gujarat, for example, the Japan Fund for
Poverty Reduction is funding efforts to provide clean
drinking water to villages in the drought-prone state
Under the Urban Primary Health Care project, the poor in Bangladesh
(see page 88). are finding better health care in government clinics run by NGOs

89
services targeted at people earning less than 700 taka ADF loans and grants over the remainder of the 2005–
(about $10) per month. Nutritional supplements will also 2008 period, in keeping with its pledge at the 2004 Berlin
be given to severely malnourished women and children. donors’ conference, with up to 50% on a full-grant basis.
It will be active in six cities—Barisal, Chittagong, Dhaka, Another $10 million a year in grant financing will go
Khulna, Rajshahi, and Sylhet—and five municipalities— toward capacity development and technical assistance.
Bogra, Comilla, Madhabdi, Savar, and Sirajgonj—and In 2005, ADB approved a $50 million loan and grant
support the construction of 64 health facilities, upgrading package to improve the power supply. The project will
of 4, and purchase of 12 apartments and/or buildings for construct a 110-kilovolt power transmission network, as
primary health care facilities in Dhaka. well as a low-voltage distribution system that will connect
Separately, Bangladesh joined Nepal and Bhutan as 11 rural towns, or more than 900,000 households, to the
SOUTH ASIA

one of the first batch of countries to adopt a results-based emerging electricity grid.
country strategy and program for 2006–2010 (see page 92). Another grant for $55 million will rehabilitate a final
As a landmark harmonization initiative, the new section of Afghanistan’s “ring road” as ADB’s further
results-based strategy and program was prepared jointly contribution to major international efforts to restore the
with the United Kingdom’s Department for International national road system (see page 91).
Development, Government of Japan, and World Bank. A $75 million ADF loan and grant project will
The country strategy and program is also aligned with support irrigation rehabilitation in Afghanistan’s Western
Bangladesh’s national poverty reduction strategy, which Basins region. The project will include extensive capacity
aims to achieve the MDGs, including halving the development for Afghan authorities and improve commu-
number of poor people in the country by 2015 and nity water resource management.
delivering substantial improvements in almost all The $55 million Fiscal Management and Public
aspects of human development. To achieve these aims, Administration Reform Program approved in 2005
the national poverty reduction strategy emphasizes consisting of loan and grant support will help improve
promoting growth, advancing human development, and government budgeting, strengthen domestic resource
SOUTH ASIA

improving governance. mobilization, improve the civil service, and enhance the
monitoring of public finance—all important comple-
RECONSTRUCTING AFGHANISTAN ments to investments in infrastructure rehabilitation.
Since resuming operations in Afghanistan in 2002, ADB ADB’s assistance also contributes to improving
has approved some $817.5 million in support, comple- governance and development skills, national institutions,
mented by nearly $85 million in cofinancing. ADB will and major policies—areas that have constrained
provide the country with up to $200 million per year in Afghanistan’s reconstruction.

ADB will provide Afghanistan with up to $200 million per year in ADF loans and grants over the remainder of the 2005–2008 period

90
In the private sector, a $35 million loan approved in at the end of December 2004. In the coastal regions,
2004 to the main telecommunications provider, a company however, the tidal waves killed tens of thousands, wiped
called Roshan, had extraordinary results in 2005. Before out whole villages, and destroyed businesses. To help
the mobile phone network started operations, Afghanistan’s rebuild, ADB provided $157 million in 2005, of which
nearly 30 million people had to make do with just 25,000 $150 million was given as a grant from the Asian Tsunami
decrepit land-based telephone lines. Roshan quickly drew Fund. Support is going to the reconstruction of roads,
down the full ADB loan to erect communications towers community infrastructure, and shelter; rebuilding
to reach more remote parts of the country. livelihoods; and coastal protection. Other funding
agencies are supporting reconstruction in education,
TSUNAMI ASSISTANCE FOR SRI LANKA health, and power. The Japan Fund for Poverty Reduction

SOUTH ASIA
In Sri Lanka, the industrial sectors of the country were also provided a total of $4 million in grants for post-
more or less unscathed by the Indian Ocean tsunami tsunami reconstruction.

Gordian Task Reconnects Afghanistan

F
ixing Afghanistan’s transport graphic position and its potential as AIDS prevention and antihuman
network has been an a land bridge to boost regional trade. trafficking awareness campaigns in
undertaking of Gordian Rehabilitating the road system is areas near the road project.
complexity. As a result of critical for a landlocked country like ADB is also preparing a road
conflict, the nation’s roads were Afghanistan. In 2005, ADB approved development master plan through a
devastated, with many sections a $55 million ADF grant to rehabili- $2 million technical assistance grant
having all but disappeared. An early tate one of the last major unpaved that will identify routes linking main
assessment of Afghanistan’s stretches of the ring road. Together markets and production centers.
transport sector found that up to with an $80 million loan approved in Completion of the full primary road

SOUTH ASIA
54% of the country’s national roads, late 2004, ADB financing will rehabi- network by 2008, together with
totaling 6,100 km in length, were in litate 300 km from Andkhoy to Bala major upgrades of adjoining roads in
poor condition. Murghab, south of the Turkmenistan the Central Asian republics, Iran, and
Just getting supplies to construc- border, linking this remote part of Pakistan, will help realize the goal of
tion sites has been a huge logistical the country with the city of Herat, a regional transport corridor.
challenge. Roadsides remained about 100 km from Afghanistan’s Afghanistan’s opening of its borders
littered with land mines, freezing western border with Iran. has provided new opportunities for
winters slowed progress, and remote The project will include the landlocked countries in Central Asia
mountain ranges posed numerous provision of toll facilities, important to take advantage of the transit
problems. In addition, many areas for longer-term operation and corridors to access the Arabian Sea
were still subject to insurgency- maintenance of the national road and Persian Gulf through Iranian and
related violence, delaying the system, and will also support HIV/ Pakistani ports.
reconstruction process and aug-
menting security costs.
Yet through a massive internatio-
nal effort that includes ADB support,
work to rebuild the “ring road” that
circles the country and links Afghani-
stan to its neighbors is now well
under way. Planners have even begun
eyeing Afghanistan’s central geo-

Rehabilitating the
road system is critical
for a landlocked coun-
An early assessment of Afghanistan’s transport sector found that up to 54% of the
try like Afghanistan country’s national roads were in poor condition

91
Sri Lankans have been reestablishing livelihoods after the Indian
Ocean tsunami, with ADB’s help (above); throughout the region,
ADB focuses on bringing the essentials of life to the poor (right)

In addition to the tsunami assistance project,


four other projects were approved in 2005, including
the $150 million National Highways Sector project, through economic diversification, broadening the base to
$50 million Local Government Infrastructure Improve- better absorb large numbers of young people as they leave
ment project, $40 million loan and grant North East the school system. ADB undertook its country strategy and
Community Restoration and Development II project, program in consultation with other development partners to
and $20 million loan for the Technical Education ensure that all sectors of the economy were adequately
SOUTH ASIA

Development project. covered.


ADB and the new government are discussing reforms In the Maldives, the response to the tsunami included
in key sectors, including power; roads; and, in alignment a $20 million Asian Tsunami Fund grant and a loan for
with the International Monetary Fund, fiscal manage- $1.8 million. The Maldives Tsunami Emergency Assis-
ment. The government is striving to improve economic tance project aims to boost economic recovery by rebuild-
management within existing structures and promote a ing damaged infrastructure and restoring livelihoods,
greater role for the private sector and sector restructuring especially of the poor, on the affected islands. The Japan
where necessary for better performance. In Sri Lanka, the Fund for Poverty Reduction also provided a $1 million
lack of investment in infrastructure is one of the biggest grant for the restoration of livelihoods of the tsunami-
obstacles to private sector growth and investment, with affected farmers.
power among the most expensive in South Asia, and the The $6 million loan for the Regional Development
road network outside of Colombo in rough condition. project Phase II—Environmental Infrastructure and
Management was approved in April 2005 to raise the
BHUTAN, MALDIVES, AND NEPAL standard of living in the central regions of the Maldives
In Bhutan, total assistance in 2005 came to $29.5 million, by improving environmental and land management.
including $27.3 million for the Road Network project, Total assistance in the year amounted to $30.7
which will improve national roads and selected secondary million, including $7.8 million in loans, $21.0 million
roads to better connect rural areas. It will upgrade about in grant financing, and technical assistance amounting
140 km of the 244 km Gelephu–Trongsa national to $1.9 million.
highway, which connects with the Indian border. In Nepal, political instability and the security
As part of the first batch of results-based country situation hampered the 2005 assistance program,
strategies and programs, the Bhutan country strategy and although ADB approved a technical assistance for
program is designed to focus on managing for development $2.2 million. It was the first year of implementation
results. It will facilitate the achievement of the MDGs in of the new Nepal country strategy and program (2005–
Bhutan as well as specific commitments in each sector, 2009). It is ADB’s first pilot results-based country
with goals, targets, and indicators to which ADB assistance strategy and program and is serving as a model for
operations will contribute. It aims to reduce poverty other DMCs.

92
Water Projects Take on Rural and Urban Poverty

A
cross Bangladesh, every tions undertaken by the Department $1.4 billion in water sector loan
year, millions struggle of Cooperatives, members have effec- components and $27.5 million in
through months of floods, tively used their savings to start micro technical assistance grants, which
food insecurity, disease, credit schemes to increase their in- includes the water supply, sanitation,
and scarce incomes. In Pakistan’s comes in new activities, such as pur- and waste management sector, as
third largest city of Rawalpindi, chasing milk cows, sewing machines, well as water subsector components
storm drains turn into sludge canals and higher producing seeds. in multi-sector loans, amounting to
that seep waste into groundwater The same approach is being rolled 20% of ADB total lending and 14%
and through broken pipes, and out in 300 more communities during of total grants. In the water supply,
contaminate the drinking water. phase 2 of the project (2002–2009). sanitation, and waste management
These stark realities, however, are A third phase is planned. sector alone, ADB approved $618
changing. ADB is supporting govern- million in new loans and $5.1
ments as they tackle some of the Rawalpindi Project Brings million in technical assistance grants.
region’s toughest water problems. Institutional Reforms The investments are a consider-
These operations also address an The deplorable conditions of water able contribution to sustaining
array of poverty issues that are directly supply and sanitation in Rawalpindi, economic development—laying the
and indirectly linked to poor water near Islamabad, Pakistan, were clear groundwork for water’s critical role
supplies and lack of sanitation. The indications that institutions were not in achieving almost all the MDGs.
impact of these projects is proving in order. Lessons from other projects
that an investment in the water have shown that the sustainability of
sector is an investment across the water supply and sanitation projects
poverty board. requires the utilities to be in good
financial health first.
In the water supply,
Stemming Floods Revitalizes So the Rawalpindi Urban Water sanitation, and waste
Rural Life Supply and Sanitation Project went to

SOUTH ASIA
Managing chronic floods in work on institutional and financial management sector
Bangladesh was not the objective, reforms. Unreasonable and unsustain-
per se, of the Small-Scale Water able low tariff levels have been alone, ADB approved
Resource Development Sector revised, billing systems computerized,
project. Rather, it was an entry into several complaint offices established, $618 million in new
reducing overall poverty. If floods
could be managed, drainage
a disconnection policy for defaulters
of bills strictly enforced, and an
loans and $5.1 million
improved, and irrigation water made
available, then total cropping area
incentive program initiated among
utility employees to improve
in technical assistance
and cropping intensity could collection efficiency of utility bills. grants in 2005
increase. Essentially, less flooding, At the same time, the project
more fields, more irrigation, and began increasing water supply levels
higher yields could result in greater by considerably rehabilitating the
overall productivity, more farm jobs, distribution system, legalizing illegal
and higher income levels. connections, and extending the
What the project envisioned, network to new areas.
it accomplished—and more. In its The institutional reforms are
first phase (1995–2002), using an making for a more efficient, reliable
intensely participatory approach in system as the project unfolds into
the 280 subproject areas in the phase 2 (the Rawalpindi Environ-
west, total crop area increased by mental Improvement Project), which
almost 13% and cropping intensity was approved in December 2005.
by 40%. The increased agricultural
production in project areas has Operations Break Down Divisions
generated 14.4 million labor-days Guided by ADB’s Water for All Policy,
annually. Fishery production also which was externally reviewed in
increased and created an estimated 2005, these projects show how
176,000 labor-days annually. ADB’s operations in rural and urban
Local people have formed water water are cutting across sectors in The impact of these projects is proving
management associations to sustain 17 DMCs with ongoing projects. that an investment in the water sector is
these benefits. According to inspec- In 2005, ADB approved a total of an investment across the poverty board

93
Southeast
Asia
Indonesia, Malaysia,
Philippines, Singapore

Subregional Perspective

S
outheast Asia has made solid economic progress
since the financial crisis of 1997. Overall the
subregional economy has bounced back, with
strong performance in particular in Malaysia
and Singapore, though political uncertainty,
weak finances, and governance challenges to varying degrees
have clouded the picture in Indonesia and the Philippines.
SOUTHEAST ASIA

Significant challenges remain in poverty reduction, with a


total of more than 60 million people in poverty in Indonesia
and the Philippines.
The Philippine economy’s challenges are many, as
illustrated in the 2005 numbers. GDP growth slowed to
5.1%, from 6.0% in 2004, which ADB economists have said
is not enough for rapid progress in reducing the country’s
deep poverty. In the past, the Philippine economy has been
prone to boom and bust, rising and falling with the unstable
political climate and inconsistent policies.
It has settled down in recent years, but as the 2005
numbers show, the economy is still struggling to maintain
strong enough growth to absorb the rapidly expanding
population. Higher growth requires better public resource
management and incentives to spur private sector involve-
ment. The key to meeting the government’s hoped-for GDP
growth of 7–8% by 2010, say ADB economists, is annual
investment in capital stock of at least 10% of GDP in net
terms, substantially higher than the current rate of 3%.
The government took strong measures in 2005 to avert a
The economic future of Southeast Asia
fiscal crisis. Expansion of the value-added tax has is improving for people like this
contributed to a 20% drop in the deficit, an 8% prawn farmer in Indonesia

94
SOUTHEAST ASIA

95
Southeast Asia: Main Indicators,a 2005
Real GDP Average Foreign
Poverty Growth Inflation Trade Direct
Rate Rate Rate Balance Investment
Country (%) (%) (%) ($ million) ($ million)

Indonesia 6.5 5.6 10.5 22,784.0 2,258.0


Malaysia 0.2 5.3 3.0 33,391.0 713.0
Philippines 14.1 5.1 7.6 (7,546.0) 970.0
Singapore – 6.4 0.4 37,953.0 14,562.0
– no data available, ( ) negative.
a
Where 2005 data are unavailable, data for the latest year have been provided.

strengthening of the peso, and a drop of more than the impact on the poor (see page 97). By slashing fuel
100 basis points in government borrowing costs. subsidies, it relieved pressure on finances and helped
The slower 2005 economy was in part due to shore up investor trust.
a weaker agricultural performance and slower growth Inflation rose due to the fuel price increases but
in the services sector. Exports also slowed sharply to by year-end, the Bank of Indonesia’s aggressive monetary
3.7%, from 9.8% in 2004. stance had stopped the surge in prices and also led to
A revival in investment bolstered Indonesia’s economy a rebound in the rupiah, which had lost more than 10%
in 2005, with GDP expanding by 5.6%, compared with of its value earlier in the year.
4.9% in 2004, fueled by an 8.1% expansion in fixed Longer term, the private sector will be critical to
capital investment. The pickup follows the relatively achieving the government’s growth and job creation
seamless transition to a new government after elections in objectives.
2004, and expectations of greater regulatory certainty and In Malaysia and Singapore, strong exports fueled
a recovery in infrastructure spending. growth, with GDP expanding by 5.3% in Malaysia and
The Indonesian government earned high marks from 6.4% in Singapore, the second outstanding year for the
around the world for its firm measures to avert a fiscal city-state.
crisis threat caused by surging oil prices, while at the The year saw the end of the peg of the ringgit to
same time the government provided programs to lessen the US dollar and a series of reform steps, including
SOUTHEAST ASIA

preparation of major consumption-based tax reforms


aimed at improving the business environment, further
cementing Malaysia’s position as one of Asia’s strongest
emerging economies.

Regional Cooperation
Indonesia, Malaysia, Philippines, and Singapore have
been at the forefront of regional cooperation initiatives
in Asia for nearly 40 years as core members of ASEAN
and as participants in the ASEAN Free Trade Area and
the ASEAN Vision 2020, which foresees an integrated

The Indonesian government


earned high marks from around
the world for its firm measures
to avert a fiscal crisis threat caused
The private sector—and a well-educated population—will be critical
for achieving growth and creating jobs by surging oil prices

96
Southeast Asian market by 2020. The countries also take development progress and identify opportunities for
part in other leading international cooperation forums, private sector investment in the poorer islands of
such as the Asia-Pacific Economic Cooperation. Southeast Asia.
A series of external and internal crises in recent years Malaysia is playing a lead role in consultations for
has reinforced the need for strengthened cooperation: the cooperation, and participating in several subregional
financial crisis of the late 1990s, severe acute respiratory technical assistance activities, including support for
syndrome (SARS), HIV/AIDS, avian flu, haze from forest strengthening institutions in the Brunei Darussalam–
fires, and terrorism and other security threats are all Indonesia–Malaysia–Philippines East ASEAN Growth
spurring deeper cooperation. Area, and for developing Islamic financial services.
ADB sees opportunities for subregional energy In 2005, ADB began preparing a regional cooperation
resource sharing, transport, financial sector development, strategy and program for the four nations, which is
and safeguarding marine and fisheries resources. targeted for completion in 2006.
Consultations have been held in Indonesia, Malaysia,
and Philippines.
Separately, in December 2005, the heads of ADB Assistance
government and state from the Brunei Darussalam–
Indonesia–Malaysia–Philippines East ASEAN Growth ADB’s lending programs in Indonesia and the Philippines
Area and Indonesia–Malaysia–Thailand Growth Triangle were overhauled and revitalized during the year as the
agreed to meet annually. ADB has been asked to help the organization more than doubled loan approvals and
two subregional initiatives formulate methods to track disbursements, reflecting a move toward greater

Cushioning High Fuel Oil Prices

T
he cost of living for
Indonesia’s rural poor
increased overnight when
national fuel oil subsidies
were slashed in October 2005 as

SOUTHEAST ASIA
an essential measure to maintain
macroeconomic stability. The price
of kerosene, the most widely used
fuel in poor households, rose by
more than 185%.
To help lessen the impact, the
government launched programs
to bring in more investment into
rural infrastructure, health, and
education. ADB was asked to step in
and quickly approved a $50 million,
3-year loan to support the govern-
ment’s Fuel Subsidy Reduction
Compensation program in eastern
provinces, where vulnerability to the
shock was greatest. The rural poor were hard hit by the sudden increase in the price of kerosene
The loan finances community-
driven construction and repair of
village roads, bridges, culverts,
irrigation systems, water supply and
To soften the impact of reduced fuel oil
sanitation, and drainage works. subsidies, ADB approved a $50 million loan
About 1,800 mostly isolated villages
in East Java, East Nusa Tenggara, to support the Indonesian government’s Fuel
Southeast Sulawesi, and South
Sulawesi provinces will benefit. Subsidy Reduction Compensation program

97
The new Philippines country
strategy and program is part
of a batch of country guides that
place acute focus on results,
in particular through identifying
clear measures that can be
monitored and evaluated

country strategy and program for 2005–2007 that changes


ADB’s operating partnership with the Philippines.
Specific annual lending targets have not been included in
ADB’s overall 3-year envelope of $1.5 billion of possible
financial support. This provides the flexibility to respond
to changes in the lending environment.
The new Philippines country strategy and program is
part of a batch of country guides that place acute focus on
results, in particular, through identifying clear measures
that can be monitored and evaluated.
In Indonesia, two major loans made up the bulk of
Improving rural infrastructure is key to reducing poverty lending: one to support local government finance and
governance reforms, and the other for the country’s
medium-term growth and poverty reduction program.
responsiveness and relevance in its operations. Total ADB ADB also backed the government’s program for improving
assistance in 2005 was about $1.7 billion. rural infrastructure with a $50 million loan in 2005.
Highlights included approval of $1.3 billion for ADB took steps to draw the private sector into its
SOUTHEAST ASIA

nine loan projects, including the private sector, development efforts. A major loan will back the $6.3 billion
well up from $671 million in 2004; and $1.3 billion Tangguh Gas Project in West Papua, ADB’s first private
in disbursements, a 122% increase over 2004. ADB also sector project in Indonesia’s oil and gas sector, as well as
provided a $300 million Asian Tsunami Fund grant ADB’s first private sector operation in Indonesia since the
to Aceh for reconstruction after the tsunami (see page 34). 1997 financial crisis. In the Philippines, a $25 million
In the Philippines, the expanded assistance included public-private sector loan will help boost development
$180 million in loans to support the development of of small- and medium-sized enterprises.
small- and medium-sized enterprises and microfinance. In Malaysia, ADB continues to expand its private
ADB has improved management of its active loan sector operations, with equity positions taken in new
portfolio, and is breaking with the past under a new funds such as the Flagship Capital Corporation.

Southeast Asia: Approvals by Country, 2005 ($ million)


Grant-Financed Projects
Equity and Other Technical
Country Loans Guarantees ATF Funds a Assistance Total

Indonesia 1,145.69 – 300.00 30.48 10.33 1,486.50


Philippines 180.00 19.40 – 0.70 4.62 204.72

TOTAL 1,325.69 19.40 300.00 31.18 14.95 1,691.22


– = nil, ATF = Asian Tsunami Fund.
a
Includes trust funds.

98
INDONESIA
Strengthening Governance
Loan approvals in 2005 reached $1.1 billion in Indonesia,
including a private sector loan, with particularly strong
focus on governance and infrastructure.
In November, ADB approved a $300 million loan
to the country to strengthen and rationalize the policy,
legal, and regulatory frameworks for decentralization,
and to establish a more effective mechanism for
coordination among different levels of government.
Local governments are assigned responsibilities for
most public functions including service delivery under
Indonesia's decentralization laws, which were approved
in 1999 and amended in 2004, but inconsistencies in
the legal and regulatory frameworks and undeveloped
local level capacity have made implementation of their
responsibilities extremely challenging. An ADB loan is financing the provision of public services by
The loan supports revisions to the original local governments in Indonesia
decentralization framework and adoption of related rules
and regulations to streamline and clarify responsibilities
among different levels of government to ensure greater
transparency and accountability in the flow of funds to

Southeast Asia: Cumulative ADB Lending by


Country as of end-2005 ($ million)
Indonesia 20,728.50
Malaysia 1,987.54
Philippines 8,799.03

SOUTHEAST ASIA
TOTAL 31,515.07

Southeast Asia: Public and Private Sector Loan Approvals by Country, 2005 ($ million)
Total Date
Country OCR ADF Total Project Costa Approved

INDONESIA
Community Water Services and Health 34.10 30.59 64.69 92.38 7 Apr
Road Rehabilitation–2 151.00 0.00 151.00 215.80 29 Sep
Local Government Finance and Governance
Reform Sector Development Program
- Program Loan 300.00 – 300.00 300.00 3 Nov
- Project Loan – 30.00 30.00 42.90 3 Nov
Tangguh Liquefied Natural Gasb 350.00 – 350.00 6,303.00 14 Dec
Rural Infrastructure Support – 50.00 50.00 60.81 19 Dec
Development Policy Support Program 200.00 – 200.00 200.80 21 Dec
PHILIPPINES
Purchase and Resolution of Equitable 5.00 – 5.00 10.00 24 Jun
PCI Bank’s Portfolio of Nonperforming
Loans and Assets b
Small and Medium Enterprise Development 25.00 – 25.00 26.00 29 Sep
Support
Microfinance Development Program 150.00 – 150.00 150.00 22 Nov
– = nil, ADF = Asian Development Fund, OCR = ordinary capital resources.
a
Total project cost includes financing by ADB, governments, borrowers, beneficiaries, and sub-borrowers; cofinancing from official, export credit, and commercial sources;
equity sponsors; and local participating private companies and financial institutions
b
Private sector loan without government guarantee.

99
According to its medium-term development plan, Indonesia needs to
invest about $145 billion in infrastructure projects to sustain an
annual GDP growth of 6% through 2009

finance the provision of public services by local assistance is planned from the government of Japan.
governments. A national action plan for next steps in The harmonized assistance focuses on sound public
fiscal decentralization is also supported. These reforms financial management and more effective use of fiscal
promote development of a clear mandate for the delivery resources through measures to improve governance and
of education, health services, and public works. combat corruption with an eye at enhancing the efficiency
A separate $30 million loan will develop integrated of public expenditures, improving the investment
regional systems to support preparation of more reliable and climate, and strengthening the financial sector.
consistent financial statements by 71 local governments
and provide access to an integrated regional financial Infrastructure for Growth
information system to these local governments as well Investment in public infrastructure in Indonesia
as to 100 more, supporting the devolution of funding collapsed after the Asian financial crisis, slumping to
SOUTHEAST ASIA

to address regional inequities in basic public services $1.5 billion by 2002 from $16 billion in 1996. In a recent
and strengthening the framework for local government study, Indonesia’s infrastructural investments ranked
borrowing. last among countries with populations of more than
ADB also supported the Indonesian government’s 20 million.
efforts to improve macroeconomic management. Under The rural areas are particularly poorly served: a recent
its medium-term development plan for 2005–2009, study found that only 15% of rural households had access
Indonesia aims to boost sustainable economic growth to to piped or pumped drinking water, and just 21% had
7% by 2009, from about 4% in the years before 2004. septic tanks. More than half of rural villages were not
It is also a government target to halve the poverty rate connected by paved roads, and a third lacked year-round
to 8.2% by 2009, from 16.6% in 2004. access. The number of rural poor in Indonesia in 2004 was
A $200 million loan for the Development Policy
Support Program is being provided in conjunction with
World Bank assistance of $400 million, and further

Southeast Asia: Cumulative ADB Disbursements


by Country as of end-2005 ($ million)
Indonesia 15,112.95
Malaysia 1,403.28
Philippines 6,280.29

TOTAL 22,796.52

100
Upgrading Neighborhoods in Indonesia and the Philippines

H
alf the urban population In the Philippines, as well as helping 26 communities in eight metro area
of the Philippines lives in over 20,000 poor urban households cities.
makeshift housing in secure accommodation, microfinance Further afield, a 3-year project in
informal settlements, for small enterprises provided through Mindanao, run by the Notre Dame
where drinking water, sanitation, 10,000 loan packages has benefited Foundation for Charitable Activities,
and drainage systems are grossly about 100,000 poor urban residents. Inc.–Women in Enterprise Develop-
inadequate, according to official A $100 million Metro Manila ment—with a $1 million grant from
figures. Urban Services for the Poor project, the fund—is providing social safety
In Indonesia, where about now under preparation, will include nets for poor female market vendors
91 million people live in cities, a long-term metro-wide strategy for in eight cities.
the housing and land markets have upgrading slums in the National
also not kept pace with rapid urban Capital Region.
growth.
Recent initiatives challenged
The Strategic Private Sector Partner-
ships for Urban Poverty Reduction
The Indonesian
shortcomings in urban upgrading project has harnessed the power of housing project is
projects and opened new areas of the private sector to help the poor in
microfinance. The Philippines’ Metro Manila. It brings together the helping 180,000
Development of Poor Urban Philippine Business for Social Progress
Communities Sector project and the and ADB. Homes are being built, households
Indonesian Neighborhood Upgrad- day-care facilities set up, flood-prone
ing and Shelter Sector project work streets paved, and water systems and secure tenure
with local governments and NGOs proper drainage installed. With a
to make affordable plots available $3.6 million grant from the Japan
and to ensure access to loans. Fund for Poverty Reduction and
The Indonesian project is helping $3.6 million from the Philippine
180,000 households secure tenure. Business for Social Progress, it covers

SOUTHEAST ASIA
Housing and land markets in Indonesia
have not kept pace with rapid urban
growth (above); a grant fund is providing
social safety nets to female vendors in
Mindanao, Philippines (left)

about 24.7 million, or one fifth of the rural population. and Health Project, and Rural Infrastructure Support
According to its medium-term development plan, Program.
Indonesia needs to invest about $145 billion in Road Rehabilitation 2, the second phase of an earlier
infrastructure projects to sustain an annual GDP growth project, focuses on restoring and improving safety in key
of 6% through 2009. sections of national roads in Sumatra and Kalimantan
ADB approved three infrastructure-related loans last islands. It will provide farmers and local entrepreneurs with
year: Road Rehabilitation 2, Community Water Services better access to markets; reduce transport costs; make it

101
easier for governments to deliver administrative and social government’s program to encourage private sector
services; and create other income-earning opportunities, participation in the delivery of microfinance services,
including the operation of ojek or motorcycle taxis. HIV/ address systemic weaknesses, and promote competitively
AIDs awareness campaigns will also run parallel with road priced financial services for the poor and their enterprises.
construction activities in Kalimantan and Sumatra. Microfinance is central to the government’s strategy
As part of its efforts to obtain private sector for reducing poverty under the Social Reform and Poverty
support for major infrastructure projects, ADB approved Alleviation Act, and the Philippines has made good
a $350 million loan for the Tangguh Liquefied Natural progress. More than two thirds of the country’s poor, or
Gas Project in West Papua, which will extract gas from 17 million people, do not have access to microfinance
fields in the Berau and Bintuni Bay areas, a big step in the services and rely on costly informal sources. Access to
revival of ADB’s private sector operations in Indonesia. microfinance gives poor people the chance to build viable
businesses and livelihoods.
PHILIPPINES Among its many features, the new ADB loan will help
A Boost for Enterprise remove restrictions on competition for microfinance
The $180 million in loans approved in 2005 for the services, improve governance, and promote efficient
Philippines included support for financial sector operations and the expansion of private sector-led
development, with a focus on microfinance and small- microfinance institutions. It will make borrowing costs
and medium-sized enterprises. In addition is a loan for clearer by introducing greater transparency and “truth in
$5 million, without government guarantee, for the lending” to all types of microfinance institutions. Also,
purchase and resolution of nonperforming loans and assets it will clarify the tax regime governing the institutions.
of Equitable PCI Bank. In September, ADB approved the loan for small- and
The lending program is also closely linked to and medium-sized enterprise development, a project that
supports the fiscal consolidation agenda to which the includes a $25 million loan that will support the Small
authorities have demonstrated a strong commitment. Business Guarantee and Finance Corporation to expand
The budget deficit, the primary indicator of national
fiscal health, fell from 3.9% of GDP in 2004 to 2.7% in
2005. The expansion of the value-added tax removed
formerly exempted transactions in November 2005 and
set the rate at 10%. (In February 2006, the expanded
SOUTHEAST ASIA

value-added tax was raised to 12%.) Administration of the


tax system is being strengthened, and the challenge now
is to implement hard-won policy changes to ensure that
incremental revenues are collected.
A new $150 million loan for the Microfinance
Development Program aims to improve the access of
the poor to financial services. The loan supports the

Making microfinance loans available helps provide income-generating


opportunities for women such as this basketmaker (above) and
general store owner (left)

102
its portfolio of loans to small- and medium-sized
enterprises. The project also includes a partial credit
guarantee facility of about $18.4 million, and an equity
investment of up to $1 million.
By 2010, the government wants the enterprises to
contribute about 40% of value-added to the economy,
up from about 32% now, but it faces constraints in
unsupportive policies, cumbersome and costly registration
and licensing processes, and the lack of a national
business and collateral registry.
The partial credit guarantee, equivalent to about
1 billion Philippine pesos ($19.5 million), will be offered
to encourage selected private sector financial institutions
to also expand their portfolios for small- and medium-
sized enterprises, particularly to medium-sized
enterprises outside the corporation’s target group. The
facility will cover up to 50% of well-defined loan
portfolios. The equity investment will help establish a
comprehensive and credible credit information system,
Urban housing is being improved in the Philippines through a
one of the factors constraining development of the sector. program that promotes the development of low-income housing
units by the private sector
Improving Housing Finance and Upgrading Slums
ADB assisted the Philippine National Home Mortgage
Finance Corporation in resolving its portfolio of highly an ADB Philippine peso-denominated bond priced in
delinquent mortgage loans through a P1.6 billion loan October 2005.
approved in December 2004, which reached financial To help alleviate the worst effects of poverty, the
closure in November 2005. The loan to Balikatan Strategic Public-Private Partnerships for Urban Poverty
Housing, Inc., a special purpose company, financed its Reduction project, with funding from the Japan Fund for
purchase of the portfolio of nonperforming loans from the Poverty Reduction, continued in 2005 to combine the

SOUTHEAST ASIA
National Home Mortgage Finance Corporation. The sale business sector, local government units, and NGOs in the
of the troubled housing portfolio through this transaction Philippines to address the delivery of basic services and
will allow the corporation to more effectively allocate its livelihood programs. Operating in 26 marginalized
resources to developing and providing a secondary market communities in eight cities of Metro Manila—Caloocan,
for home mortgages to low- and middle-income Malabon, Marikina, Muntinlupa, Navotas, Pasig, Quezon
households. City, and Taguig—its many achievements have financed
ADB is also taking a 10% equity stake in Bahay construction of better homes and local infrastructure for
Financial Services, Inc., a new loan servicing company 894 households, given micro loans for businesses, and
that will restructure and service the nonperforming loans provided hundreds of individuals with scholarships,
on behalf of Balikatan Housing, Inc. A major portion of business training, and skills enhancement.
the funding for the peso-denominated loan came from
Energy Restructuring
In 2005, ADB continued work to strengthen the
In 2005, ADB continued work to Philippines’ Energy Regulatory Commission and to advise
the Power Sector Assets and Liabilities Management
strengthen the Philippines’ Energy Corporation on the privatization of assets of the National
Power Corporation under a technical assistance grant
Regulatory Commission and to approved in 2004.
advise the Power Sector Assets and Restructuring the power sector has reached a crucial
juncture. While the new legal and regulatory framework
Liabilities Management Corporation for introducing competition is largely in place, privatizing
on the privatization of assets generation and transmission assets has been slow.

103
Appendixes
105 Appendix 1: Members, Capital Stock, and Voting Power
106 Appendix 2: Resolutions of the Board of Governors Adopted in 2005
106 Appendix 3: Selected Policy, Financial, and Administrative Papers
Considered by the Board in 2005
107 Appendix 4: Board of Governors
109 Appendix 5: Board of Directors and Voting Groups
110 Appendix 6: Committees of the Board of Directors
110 Appendix 7: ADB Institute Advisory Council
111 Appendix 8: Organizational Structure
112 Appendix 9: Former ADB Presidents and Vice Presidents
113 Appendix 10: Summary of Budget for 2006

List of Abbreviations

ADB Asian Development Bank


ADF Asian Development Fund
ASEAN Association of Southeast Asian Nations
APPENDIXES

DMC developing member country


GDP gross domestic product
GMS Greater Mekong Subregion
HIV/AIDS human immunodeficiency virus/acquired immunodeficiency syndrome
Lao PDR Lao People’s Democratic Republic
MDG Millennium Development Goal
NGO nongovernment organization
OCR ordinary capital resources
PRC People’s Republic of China
SARS severe acute respiratory syndrome
km kilometer

104
APPENDIX 1
Members, Capital Stock, and Voting Power
(as of 31 December 2005)
Year of Subscribed Voting Year of Subscribed Voting
a b a
Membership Capital Power Membership Capital Powerb
(% of total) (% of total) (% of total) (% of total)

REGIONAL NONREGIONAL
Afghanistan 1966 0.034 0.340 Austria 1966 0.343 0.587
Armenia 2005 0.301 0.553 Belgium 1966 0.343 0.587
Australia 1966 5.834 4.979 Canada 1966 5.274 4.531
Azerbaijan 1999 0.448 0.671 Denmark 1966 0.343 0.587
Bangladesh 1973 1.029 1.136 Finland 1966 0.343 0.587
Bhutan 1982 0.006 0.317 France 1970 2.347 2.190
Cambodia 1966 0.050 0.352 Germany 1966 4.361 3.802
China, People's Republic of 1986 6.496 5.510 Italy 1966 1.822 1.770
Cook Islands 1976 0.003 0.315 Luxembourg 2003 0.343 0.587
Fiji Islands 1970 0.069 0.367 The Netherlands 1966 1.034 1.140
Hong Kong, China 1969 0.549 0.752 Norway 1966 0.343 0.587
India 1966 6.383 5.419 Portugal 2002 0.343 0.587
Indonesia 1966 5.490 4.705 Spain 1986 0.343 0.587
Japan 1966 15.734 12.900 Sweden 1966 0.343 0.587
Kazakhstan 1994 0.813 0.963 Switzerland 1967 0.588 0.783
Kiribati 1974 0.004 0.316 Turkey 1991 0.343 0.587
Korea, Republic of 1966 5.079 4.375 United Kingdom 1966 2.059 1.960
Kyrgyz Republic 1994 0.302 0.554 United States 1966 15.734 12.900
Lao, People's
Democratic Republic 1966 0.014 0.324
Subtotal Nonregional 36.649 34.944
Malaysia 1966 2.745 2.509
Maldives 1978 0.004 0.316 TOTAL 100.000 100.000
Marshall Islands 1990 0.003 0.315
Micronesia,
Note: Figures may not add due to rounding. For other details, see tables
Federated States of 1990 0.004 0.316
on pages 34 and 35, Volume 2.
Mongolia 1991 0.015 0.325 a Subscribed capital refers to a member’s subscription to shares of the
Myanmar 1973 0.549 0.752 capital stock of ADB.
b The total voting power of each member consists of the sum of its basic
Nauru 1991 0.004 0.316
votes and proportional votes. The basic votes of each member consist of
Nepal 1966 0.148 0.431 such number of votes as results from the equal distribution among all

APPENDIXES
New Zealand 1966 1.548 1.551 members of 20% of the aggregate sum of the basic votes and proportional
Pakistan 1966 2.196 2.069 votes of all members. The number of proportional votes of each member
is equal to the number of shares of the capital stock of ADB held by that
Palau 2003 0.003 0.315 member.
Papua New Guinea 1971 0.095 0.388
Philippines 1966 2.402 2.234
Samoa 1966 0.003 0.315
Singapore 1966 0.343 0.587
Solomon Islands 1973 0.007 0.318
Sri Lanka 1966 0.585 0.780
Taipei,China 1966 1.098 1.191
Tajikistan 1998 0.289 0.543
Thailand 1966 1.373 1.411
Timor-Leste 2002 0.010 0.320
Tonga 1972 0.004 0.316
Turkmenistan 2000 0.255 0.517
Tuvalu 1993 0.001 0.314
Uzbekistan 1995 0.679 0.856
Vanuatu 1981 0.007 0.318
Viet Nam 1966 0.344 0.588

Subtotal Regional 63.351 65.056

105
APPENDIX 2
Resolutions of the Board of Governors Adopted in 2005
RESOLUTION NO. SUBJECT DATE ADOPTED
303 Decisions Relating to Section 5 of the By-Laws 21 January 2005
304 Amendment to Section 7(B)(a) of the By-Laws 21 January 2005
305 Transfer of OCR Surplus to the Asian Tsunami Fund 4 March 2005
306 Place and Date of Fortieth Annual Meeting (2007) 5 May 2005
307 Financial Statements and Independent Auditors’ Reports 6 May 2005
308 Allocation of Net Income 6 May 2005
309 Procedures for the Election of Directors 26 May 2005
310 Transfer of Ordinary Capital Resources Surplus to the Pakistan
Earthquake Fund 25 November 2005
311 Conversion of ADF Resources into Other Currencies 28 November 2005
312 Development Status of the Republic of Palau 16 December 2005

APPENDIX 3
Selected Policy, Financial, and Administrative Papers Considered by the Board in 2005
SUBJECT DATE
Proposed Revision of the Water Policy of the Asian Development Bank 28 January 2005
Proposed Revisions to the Asian Development Fund Regulations and
Adoption of Special Operations Grant Regulations 7 February 2005
Asian Tsunami Fund 17 February 2005
Review of the Asian Development Bank's Loan Charges and Allocation of 2004 Net Income 12 April 2005
The Public Communications Policy of the Asian Development Bank 22 April 2005
Enhanced Separation Program 19 May 2005
Organizational Adjustments for Enhanced Operational Effectiveness 19 May 2005
Local Currency Lending 15 June 2005
Implementation of Disclosure Provisions of ADB’s Public Communications Policy Pertaining to Chair
Summaries and Minutes of Board of Directors’ Discussions, and Operations Evaluation Reports 12 July 2005
Eligibility of ADF Grant Projects for the Summary Procedure 10 August 2005
Policies and Procedures on the Use of Consultants by the Asian Development Bank and Its Borrowers 19 August 2005
Cost Sharing and Eligibility of Expenditures for Asian Development Bank Financing: A New Approach 25 August 2005
APPENDIXES

Introducing the Local Currency Loan Product 25 August 2005


Pilot Financing Instruments and Modalities 25 August 2005
Revising the Procurement Guidelines 20 September 2005
Work Program and Budget Framework (2006–2008) 11 October 2005
Special Capital Budget Proposal—The Business Continuity Facility 13 October 2005
A Review of Accounting Policy on Currency Exchange Rates Used for Financial Reporting and Transactions 13 October 2005
Japan Fund for Public Policy Training Modified Implementation Arrangements 14 October 2005
Revision of the Summary Procedure 14 October 2005
Asian Development Fund Currency Management Proposal 27 October 2005
Comprehensive Review of Compensation and Benefits for Professional Staff 3 November 2005
Pakistan Earthquake Fund 14 November 2005
Proposed Change in Asian Tsunami Fund Implementation Arrangements
and Transfer of Unutilized Amounts from the Asian Tsunami Fund and
Ordinary Capital Resources Surplus, Both to the Pakistan Earthquake Fund 14 November 2005
A Review of the Policy on Supplementary Financing: Addressing Challenges and Broader Needs 28 November 2005
Borrowing Program for 2006 06 December 2005
Budget of the Asian Development Bank for 2006 16 December 2005
Proposed Revisions to the Regulations of the Asian Development Fund
and the Special Operations Loan Regulations 19 December 2005

106
APPENDIX 4
Board of Governors
(as of 31 March 2006)

P. Chidambaram
(India)
(Chair)
Elbuchel Sadang Jean-Louis Schiltz
(Palau) (Luxembourg)
(Vice-Chair) (Vice-Chair)

MEMBER GOVERNOR ALTERNATE GOVERNOR


Afghanistan Anwar Ul-Haq Ahady Wahidullah Shahrani
Armenia Vardan Khachatryan1 David Avetissian1
Australia Peter Costello Teresa Gambaro2
Austria Karl-Heinz Grasser Marcus Heinz3
Azerbaijan Heydar Babayev 4 Avaz Alekperov
Bangladesh M. Saifur Rahman Md. Ismail Zabihullah
Belgium Didier Reynders Gino Alzetta
Bhutan Lyonpo Wangdi Norbu Daw Tenzin
Cambodia Keat Chhon Aun Porn Moniroth
Canada Peter MacKay 5 Alister M. Smith
China, People’s Republic of Jin Renqing Li Yong
Cook Islands Terepai Maoate6 Kevin Carr
Denmark Ole E. Moesby Sus Ulbæk
Fiji Islands Jone Yavala Kubuabola Savenaca Narube
Finland Marjatta Rasi 7 Anneli Vuorinen8
France Thierry Breton Xavier Musca
Germany Karin Kortmann9 Rolf Wenzel
Hong Kong, China Henry Tang Joseph Yam
India P. Chidambaram A. K. Jha10
11
Indonesia Sri Mulyani Indrawati Burhanuddin Abdullah

APPENDIXES
12
Italy Mario Draghi Ignazio Angeloni13
Japan Sadakazu Tanigaki Toshihiko Fukui
14
Kazakhstan Natalya Artemovna Korzhova Marat Apsemetovich Kusainov15
Kiribati Nabuti Mwemwenikarawa Taneti Maamau
Korea, Republic of Duck-Soo Han Seung Park
Kyrgyz Republic Akylbek Japarov Sabyrbek A. Moldokulov
Lao People's Democratic Republic Chansy Phosikham Phouphet Khamphounvong
Luxembourg Jean-Louis Schiltz Arsene Jacoby 16
Malaysia Dato’ Seri Abdullah Haji Ahmad Badawi Dato’ Izzuddin bin Dali

1 Appointed in December 2005. 9 Succeeded Uschi Eid in December 2005.


2 Succeeded Bruce Wilson in March 2006. 10 Succeeded Rakesh Mohan in July 2005.
3 Succeeded Thomas Wieser in March 2005. 11 Succeeded Jusuf Anwar in December 2005.
4 Succeeded Farhad Aliyev in October 2005. 12 Succeeded Antonio Fazio in February 2006.
5 Succeeded Pierre Pettigrew in February 2006. 13 Succeeded Lorenzo Bini Smaghi in June 2005.
6 Succeeded Geoffrey Henry in August 2005. 14 Succeeded Arman Galiaskarovich Dunayev in March 2006.
7 Succeeded Pertti Majanen in September 2005. 15 Succeeded Batyrkhan Arysbekovich Issayev in March 2006.
8 Succeeded Taisto Huimasalo in September 2005. 16 Succeeded Georges Heinen in September 2005.

107
CONTINUED

MEMBER GOVERNOR ALTERNATE GOVERNOR

Maldives Ismail Shafeeu Riluwan Shareef


Marshall Islands Brenson S. Wase Amon Tibon
Micronesia, Fed. States of Nick L. Andon Lorin Robert
Mongolia N. Altankhuyag Ochirbat Chuluunbat
Myanmar Hla Tun Daw Myo Nwe
Nauru David Adeang Jonathon Kirkby17
18
Nepal Roop Jyoti Bhanu Prasad Acharya
The Netherlands Gerrit Zalm Agnes van Ardenne-van der
Hoeven
New Zealand Michael Cullen John Whitehead
19
Norway Anne Margareth Fagertun Stenhammer Nils Haugstveit
Pakistan Omar Ayub Khan Khalid Saeed20
Palau Elbuchel Sadang Marino Rechesengel
Papua New Guinea Bart Philemon Simon Tosali
21
Philippines Margarito B. Teves Amando M. Tetangco, Jr.22
23
Portugal Fernando Teixeira dos Santos Carlos Costa Pina24
Samoa Misa Telefoni Retzlaff Hinauri Petana
Singapore Raymond Lim Siang Keat Lim Siong Guan
Solomon Islands Peter Boyers Shadrach Fanega
Spain Pedro Solbes Mira David Vergara Figueras
Sri Lanka Mahinda Rajapaksa25 P. B. Jayasundara
Sweden Annika Soder Anders Oljelund
Switzerland Oscar Knapp Adrian Schlaepfer
Taipei,China Fai-nan Perng Shuh Chen
Tajikistan Matlubkhon S. Davlatov26 Nagmatjon Kh. Buriev
Thailand Thanong Bidaya27 Suparut Kawatkul
Timor-Leste Maria Madalena Brites Boavida Aicha Bassarewan
Tonga Siosiua T.T. ‘Utoikamanu Aisake Eke
APPENDIXES

Turkey Ali Babacan28 Ibrahim H. Çanakci29


30
Turkmenistan Geldymurat Abilov (vacant)
Tuvalu Bikenibeu Paeniu Aunese Makoi Simati31
United Kingdom Hilary Benn Gareth Thomas
United States John W. Snow Josette S. Shiner32
33
Uzbekistan Saidakhmat Rakhimov Ulugbek Rozukulov34
Vanuatu Willie Jimmy Tapangararua35 Simeon Athy
Viet Nam Le Duc Thuy Phung Khac Ke

17 Succeeded Peter Depta In February 2006. 27 Succeeded Somkid Jatusripitak in August 2005.
18 Succeeded Shumshere J.B. Rana in December 2005. 28 Succeeded Ibrahim H. Çanakci in March 2006.
19 Succeeded Leiv Lunde in October 2005. 29 Succeeded Cavit Dagdas in March 2006.
20 Succeeded Shuja Shah in June 2005. 30 Appointed in March 2006.
21 Succeeded Cesar V. Purisima in July 2005. 31 Succeeded Seve Paeniu in March 2006.
22 Succeeded Rafael Buenaventura in July 2005. 32 Appointed in October 2005.
23 Succeeded Luis Campos e Cunha in July 2005. 33 Succeeded Rustam S. Azimov in August 2005.
24 Succeeded Maria Dos Anjos Nunes Capote in July 2005. 34 Succeeded Mamarizo Nurmuratov in August 2005.
25 Succeeded Sarath Amunugama in December 2005. 35 Succeeded Moana Carcasses Kalosil in November 2005.
26 Succeeded F.S. Kholboboev in March 2006.

108
APPENDIX 5
Board of Directors and Voting Groups
(as of 20 January 2006)

DIRECTOR ALTERNATE DIRECTOR MEMBERS REPRESENTED

Volker Ducklau 1 David Taylor Austria; Germany; Luxembourg; Turkey; United


Kingdom

Emile Gauvreau Pasi Hellman2 Canada; Denmark; Finland; The Netherlands;


Norway; Sweden

Sibtain Fazal Halim 3 Marita Magpili-Jimenez4 Kazakhstan; Maldives; Marshall Islands;


Mongolia; Pakistan; Philippines; Timor-Leste

Agus Haryanto Richard Stanley Cook Islands; Fiji Islands; Indonesia; Kyrgyz
Republic; New Zealand; Samoa; Tonga

Chol-Hwi Lee Batir Mirbabayev Republic of Korea; Papua New Guinea;


Sri Lanka; Taipei,China; Uzbekistan; Vanuatu;
Viet Nam

Masaki Omura Atsushi Mizuno5 Japan


6
Patrick Pillon Niklaus Zingg Belgium; France; Italy; Portugal; Spain;
Switzerland

Ashok Saikia Nima Wangdi7 Afghanistan; Bangladesh; Bhutan; India;


Lao People's Democratic Republic; Tajikistan

Stephen Sedgwick Richard Moore Australia; Azerbaijan; Cambodia; Federated


States of Micronesia; Hong Kong, China;
Kiribati; Nauru; Palau; Solomon Islands; Tuvalu

Paul W. Speltz Paul W. Curry8 United States

Chaiyuth Sudthitanakorn Sein Tin Malaysia; Myanmar; Nepal; Singapore;


Thailand

Xiaosong Zheng 9 Xiaolong Mo10 People's Republic of China

APPENDIXES
1 Succeeded Rolf Eckermann on 1 July 2005.
2 Succeeded Geert Jan Engelsman on 1 September 2005.
3 Succeeded M. Akram Malik on 16 November 2005.
4 Succeeded M. Akram Malik on 1 July 2005.
5 Succeeded Masaichiro Yamanishi on 24 August 2005.
6 Succeeded Michele Miari Fulcis on 1 October 2005.
7 Succeeded M. Saiful Islam on 1 June 2005.
8 Succeeded Troy Wray on 20 January 2006.
9 Succeeded Ju Kuilin on 1 February 2005.
10 Succeeded Shaolin Yang on 1 February 2005.

109
APPENDIX 6
Committees of the Board of Directors
(as of 23 January 2006)

STANDING COMMITTEES
AUDIT COMMITTEE BUDGET REVIEW COMMITTEE
Patrick Pillon (Chair) Ashok Saikia (Chair)
Batir Mirbabayev Paul Curry
Atsushi Mizuno Sibtain Fazal Halim
Paul W. Speltz Pasi Hellman
Richard Stanley Xiaolong Mo
Chaiyuth Sudthitanakorn Masaki Omura

COMPLIANCE REVIEW COMMITTEE DEVELOPMENT EFFECTIVENESS


Stephen Sedgwick (Chair) COMMITTEE
Volker Ducklau Agus Haryanto (Chair)
Chol-Hwi Lee Emile Gauvreau
Marita Magpili-Jimenez Richard Moore
Sein Tin David Taylor
Niklaus Zingg Nima Wangdi
Xiaosong Zheng

WORKING COMMITTEE
WORKING GROUP ON THE ANNUAL REPORT FOR 2005
David Taylor (Chair)
Pasi Hellman
Batir Mirbabayev
Xiaolong Mo
Sein Tin
Nima Wangdi
APPENDIXES

APPENDIX 7
ADB Institute Advisory Council
(as of 31 December 2005)

Masahiko Aoki Japan


William P. Fuller United States
Eric Girardin France
Li Yong People's Republic of China
Corattiyil Ramachandran India
Kanit Sangsubhan Thailand
Ifzal Ali ADB Chief Economist

ADB Institute Dean


Peter McCawley

110
APPENDIX 8
Organizational Structure1
(as of 31 March 2006)
BOARD OF GOVERNORS

BOARD OF DIRECTORS

PRESIDENT
H. Kuroda

MANAGING DIRECTOR OPERATIONS EVALUATION OFFICE OF THE COMPLIANCE


GENERAL DEPARTMENT2 REVIEW PANEL3
Y. Lee B. Murray, Director General R. Zelius, Secretary

VICE-PRESIDENT VICE-PRESIDENT VICE-PRESIDENT VICE-PRESIDENT


ASIAN DEVELOPMENT (Knowledge Management and
BANK INSTITUTE (Operations 1) (Operations 2) (Finance and Administration)
Sustainable Development)
P. McCawley, Dean L. Jin C. Lawrence Greenwood, Jr. K. Pholsena
G. van der Linden

REGIONAL AND SUSTAINABLE EAST AND CENTRAL ASIA


SOUTH ASIA DEPARTMENT OFFICE OF
DEVELOPMENT DEPARTMENT DEPARTMENT
OFFICE OF K. Senga, Director General THE SECRETARY
B. Lohani, 5 Director General H. S. Rao, Director General
THE AUDITOR GENERAL J. Hovland, The Secretary
P. Pedersen, Auditor General
AFGHANISTAN AZERBAIJAN
RESIDENT MISSION RESIDENT MISSION
ECONOMICS AND RESEARCH B. Fawcett, Country Director M. Westfall, Country Director OFFICE OF THE
STRATEGY AND POLICY DEPARTMENT GENERAL COUNSEL
DEPARTMENT I. Ali, Chief Economist A. Mitchell, General Counsel
BANGLADESH PRC RESIDENT MISSION
K. Sakai, Director General
RESIDENT MISSION T. Shibuichi
H. Du, Country Director Country Director
OFFICE OF BUDGET, PERSONNEL AND
OFFICE OF REGIONAL COFINANCING OPERATIONS INDIA RESIDENT MISSION KAZAKHSTAN MANAGEMENT SYSTEMS
ECONOMIC INTEGRATION W. Liepach, T. Kondo RESIDENT MISSION DEPARTMENT
M. Kawai, 4 Head Principal Director Country Director S. Wermert7 K. Munenaga, Director General
Country Director
NEPAL KYRGYZ OFFICE OF
OFFICE OF THE SPECIAL RESIDENT MISSION RESIDENT MISSION ADMINISTRATIVE SERVICES
PROJECT FACILITATOR S. Rahman, Country Director M.A. Malik, Country Director A. Wasan
N. Samarasingha, Special Principal Director
Project Facilitator PAKISTAN MONGOLIA
RESIDENT MISSION RESIDENT MISSION
P. Fedon, Country Director (vacant), Country Director CONTROLLER’S
DEPARTMENT
RISK MANAGEMENT UNIT SRI LANKA TAJIKISTAN P. Chiu, Controller
Y. Shin, Head RESIDENT MISSION RESIDENT MISSION
A. Pio, Country Director N. Jain, Country Director

UZBEKISTAN TREASURY
DEPARTMENT OF EXTERNAL RESIDENT MISSION DEPARTMENT
RELATIONS MEKONG DEPARTMENT
R. Nag, 6 Director General S. O’Sullivan, Country Director M. Kashiwagi, Treasurer
J. Hiday, Director General

CAMBODIA SOUTHEAST ASIA OFFICE OF


EUROPEAN RESIDENT MISSION DEPARTMENT INFORMATION SYSTEMS
REPRESENTATIVE OFFICE S.P. Bajpai, Country Director (vacant), Director General AND TECHNOLOGY

APPENDIXES
P. Benedic R. Dawson, Principal Director
Resident Director General LAO PDR INDONESIA
RESIDENT MISSION RESIDENT MISSION
J. Nugent, Country Director E. Cua, Country Director
JAPANESE
REPRESENTATIVE OFFICE THAILAND
W. Chung PHILIPPINES
RESIDENT MISSION COUNTRY OFFICE
Resident Director General J. Verbiest, Country Director T. Crouch, Country Director

NORTH AMERICAN VIET NAM


REPRESENTATIVE OFFICE RESIDENT MISSION
A. Konishi,7 Country Director PACIFIC DEPARTMENT
T. Diaz P. Erquiaga, Director General
Resident Director General
PRIVATE SECTOR PACIFIC LIAISON AND
OPERATIONS DEPARTMENT COORDINATION OFFICE
R. Bestani, Director General N. Chakwin
Regional Director
PACIFIC
1 For a list of management and senior staff, go to www.adb.org/ SUBREGIONAL OFFICE
S. Jarvenpaa
About/management.asp. Regional Director
2 OED reports to the Board of Directors through the Board
PAPUA NEW GUINEA
Development Effectiveness Committee. RESIDENT MISSION
3 The Compliance Review Panel reports to the Board of Directors. S. van der Tak
4 Concurrent Special Advisor to the President on Regional Country Director
Economic Integration. SPECIAL LIAISON OFFICE
5 Concurrent Chief Compliance Officer and Special Advisor to the IN TIMOR-LESTE
C. Andrews
President on Clean Energy and Environment. Resident Representative
6 Concurrent Special Advisor to the President in charge of Regional
Economic Cooperation and Integration. CENTRAL OPERATIONS
SERVICES OFFICE
7 Effective upon assumption of office. P. Daltrop, Principal Director

111
APPENDIX 9
Former ADB Presidents and Vice Presidents
(as of January 2006)

President

Takeshi Watanabe 24 November 1966–24 November 1972


Shiro Inoue 25 November 1972–23 November 1976
Taroichi Yoshida 24 November 1976–23 November 1981
Masao Fujioka 24 November 1981–23 November 1989
Kimimasa Tarumizu 24 November 1989–23 November 1993
Mitsuo Sato 24 November 1993–15 January 1999
Tadao Chino 16 January 1999–31 January 2005

Vice President

C. S. Krishna Moorthi 19 December 1966–31 March 1978


A. T. Bambawale 1 April 1978–28 October 1985
M. Narasimham 1 November 1985–31 July 1988
S. Stanley Katz 1 April 1978–28 September 1990
In Yong Chung 1 August 1988–31 July 1993
William R. Thomson 1 October 1990–30 June 1994
Günther G. Schulz 1 April 1983–30 June 1995
Bong-Suh Lee 1 August 1993–31 July 1998
Pierre Uhel 1 July 1995–24 November 1998
Peter H. Sullivan 6 July 1994–20 September 2000
Myoung-Ho Shin 1 August 1998–31 July 2003
John Lintjer 18 January 1999–16 January 2004
Joseph B. Eichenberger 15 December 2000–23 December 2005
APPENDIXES

112
APPENDIX 10
Summary of Budget for 2006
Internal Administrative Expenses
($ thousand)

2005
After 2006
Budget Transfersa Actual Budgetb
I. BOARD OF GOVERNORS 975 975 920 1,350
II. BOARD OF DIRECTORS 19,477 20,137 20,030 19,540
III. OPERATIONAL EXPENSES 222,537 222,537 221,916 236,123
Salaries 115,178 113,728 113,728 123,606
Benefits 61,799 63,919 63,919 65,008
Staff Development 3,267 2,369 1,894 3,697
Relocation 3,769 3,997 3,997 4,848
Consultants 18,906 20,303 20,303 19,327
Business Travel 19,246 17,849 17,735 19,259
Representation 372 372 340 378
IV. ADMINISTRATIVE EXPENSES 53,870 53,870 51,398 56,566
Communications 6,962 7,053 7,053 6,540
Office Occupancy 11,355 12,281 12,281 11,945
Library 925 937 937 694
Office Supplies 1,934 1,934 1,825 1,771
Office Equipment 6,288 6,288 5,518 5,518
Contractual Services 10,243 10,243 9,536 10,941
Insurance 837 837 747 3,483
Depreciation 14,839 13,810 13,019 15,271
Miscellaneous 487 487 482 403

APPENDIXES
V. TOTAL BEFORE GENERAL CONTINGENCY 296,859 297,519 294,264 313,579
VI. GENERAL CONTINGENCY 2,969 2,309 – 3,136
VII. Less: Fee Reimbursements from Trust Funds c (3,818)

TOTAL 299,828 299,828 294,264 d 312,897

a Transfers were made between budget items without exceeding the original amount of each category. An amount of $660,000 was transferred from
the General Contingency to meet overruns in the budget category Board of Directors.
b Effective from 2006 Budget, all expenses to fund ADB’s annual meeting are centralized in the budget category Board of Governors. In addition, the
subsidized premium of the postretirement group medical insurance plan will be reclassified from the Operational Expenses category (Benefits) to
Administrative Expenses category (Insurance).
c The fee reimbursement received by ADB from administering trust funds of multilateral and bilateral institutions is netted off to derive the net Internal
Administrative Expenses budget starting with the 2006 Budget.
d Excludes the following items reconciling with financial statements in compliance with generally accepted accounting principles: (i) provisions for future
liabilities with respect to severance pay (-$1,131,000), accumulated compensated absences ($1,151,000), and accrued resettlement/repatriation
allowances ($4,284,000); (ii) adjustments of actuarially determined assessment of benefit obligations with respect to pension costs ($13,967,000)
and postretirement medical benefits ($20,349,000); and (iii) expenses related to the enhanced separation program ($4,661,000); and (iv) adjustments
related to the Afghanistan Resident Mission Guest House (-$67,000). Total administrative expenses, as shown in the financial statements, amounted
to $337,478,000. This amount, after deducting $522,000 directly charged to the Japan Scholarship Program ($69,000) and Japan Fund for Poverty
Reduction ($453,000), has been distributed as follows: OCR—$135,689,000 (Ref. OCR-2) net of $24,481,000 as front-end fee offset against loan
origination costs and recognized as a reduction in administrative expenses; ADF—$175,751,000 (Ref. ADF-2), and Japan Special Fund—$1,035,000
(Ref. JSF-2).

113
ADB Contact Addresses
(as of 31 March 2006)

Afghanistan Resident Mission Indonesia Resident Mission Nepal Resident Mission South Pacific Subregional Office
House No. 126, Street 2 Gedung BRII, 7th Floor Srikunj, Kamaladi, Ward No. 31 Level 5, Ra Marama Building
Yaqoub, Roundabout Jl. Jend Sudirman Kav. 44–46 P.O. Box 5017 91 Gordon Street
Shar-e-now, Jakarta 10210, Indonesia Kathmandu, Nepal Private Mail Bag, Suva, Fiji Islands
Nest to District 10 Police Department P.O. Box 99 JKPSA Tel +977 1 422 7779 Tel +679 331 8101
Kabul, Afghanistan Jakarta 10350A Fax +977 1 422 5063 Fax +679 331 8074
Tel +93 020 210 3602 Indonesia adbnrm@adb.org adbspso@adb.org
Tel +62 21 251 2721 www.adb.org/nrm www.adb.org/spso
Azerbaijan Resident Mission Fax +62 21 251 2749
96 Nizami St. 4th Floor adbirm@adb.org North American Sri Lanka Resident Mission
Landmark Building www.adb.org/irm Representative Office 49/14–15 Galle Road
Baku AZ1000, Azerbaijan 815 Connecticut Avenue, NW Colombo 3, Sri Lanka
Tel +994 12 496 5800 Japanese Representative Office Suite 325 Tel +94 11 238 7055/533 1111
Fax +994 12 465 9990 Yamato Seimei Building 2nd Floor Washington DC 20006, USA Fax +94 11 238 6527
adbazrm@adb.org 1–7 Uchisaiwaicho 1-Chome Tel +1 202 728 1500 adbslrm@adb.org
www.adb.org/azrm Chiyoda-ku, Tokyo 100-0011 Fax +1 202 728 1505 www.adb.org
Japan naro@adb.org
Bangladesh Resident Mission Tel +81 3 3504 3160 www.adb.org/naro Tajikistan Resident Mission
Plot E-31, Sher-e-Bangla Nagar Fax +81 3 3504 3165 107 Nozim Khikmat Street
Dhaka-1207, Bangladesh adbjro@adb.org Pacific Liaison Coordination Office Dushanbe, 734001, Tajikistan
Tel +880 2 815 6000 to 6016 www.adb.org/jro Level 18, 1 Margaret Street Tel +992 372 235314/235315/
Fax +880 2 815 6018/6019 (corner of Clarence and Margaret 210558
adbbrm@adb.org Kazakhstan Resident Mission Streets) Fax +992 372 244900
www.adb.org/brm 12 Samal Sydney, New South Wales 2000 adbtjrm@adb.org
Astana Tower Business Center Australia www.adb.org/tjrm
Cambodia Resident Mission 10th Floor, Astana 010000 Tel +61 2 8270 9444
29 Suramarit Boulevard (268/19) Kazakhstan Fax +61 2 8270 9445 Thailand Resident Mission
Sangkat Chaktomok Tel +7 3172 325053/325054 adbplco@adb.org 23 rd Floor
Khan Daun Penh Fax +7 3172 328343 www.adb.org/plco The Offices at Central World
Phnom Penh, Cambodia 999/9 Rama I Road, Pathumwan
P.O. Box 2436 20A Kazybek bi Street, Arai Building Pakistan Resident Mission Bangkok 10330, Thailand
Tel +855 23 215805/215806/ 4th Floor, Almaty 050010 Overseas Pakistanis Foundation Tel +66 2263 5300
216417 Kazakhstan Building Fax +66 2263 5301
Fax +855 23 215807 Tel +7 3272 582223/917344 Sharah-e-Jamhuriyat jpverbiest@adb.org
adbcarm@adb.org Fax +7 3272 918670 G-5/2, Islamabad www.adb.org
www.adb.org/carm adbkarm@adb.org GPO Box 1863, Islamabad, Pakistan
www.adb.org/karm Tel +92 51 282 5011 to 5016/ Uzbekistan Resident Mission
People’s Republic of China 208 7300 1 A. Khodjaev Street
Resident Mission Kyrgyz Resident Mission Fax +92 51 282 3324/227 4718 Tashkent 700027, Uzbekistan
7th Floor, Block D 52–54, Orozbekov Street adbmprm@adb.org Tel +998 71 120 7921/7922/7925
Beijing Merchants International Bishkek, 720040, Kyrgyz Republic www.adb.org/prm Fax +998 71 120 7923
Financial Center Tel +996 312 627343/612 900445 adburm@adb.org
156 Fuxingmennei Avenue Fax +996 312 627344 Papua New Guinea Resident Mission www.adb.org/urm
Xicheng District adbkyrm@adb.org Deloitte Tower, Level 13
Beijing 100031, PRC www.adb.org/kyrm P.O. Box 1992 Viet Nam Resident Mission
APPENDIXES

Tel +86 10 6642 6601 Port Moresby, NCD Units 701–706


Fax +86 10 6642 6606 Lao PDR Resident Mission Papua New Guinea Sun Red River Building
adbprcm@adb.org Corner of Lanexang Avenue and Tel +675 321 0408 23 Phan Chu Trinh Street
www.adb.org/prcm Samsenthai Road Fax +675 321 0407 Hoan Kiem District
P.O. Box 9724, Vientiane adbpnrm@adb.org Hanoi, Viet Nam
European Representative Office Lao People’s Democratic Republic www.adb.org/pnrm Tel +84 4 933 1374
Rahmhofstrasse 2 Tel +856 21 250444 Fax +84 4 933 1373
60313 Frankfurt am Main Fax +856 21 250333 Philippines Country Office adbvrm@adb.org
Germany adblrm@adb.org 6 ADB Ave., Mandaluyong City www.adb.org/vrm
Tel +49 69 2193 6400 www.adb.org/lrm 1550 Metro Manila, Philippines
Fax +49 69 2193 6444 Tel +63 2 683 1000 Asian Development Bank Institute
adbero@adb.org Mongolia Resident Mission Fax +63 2 683 3300 8th Floor, Kasumigaseki Bldg.
www.adb.org/ero MCS Plaza, 2nd Floor phco-mailbox@adb.org 2-5 Kasumigaseki 3 Chome
4 Natsagdorj Street www.adb.org/phco Chiyoda-ku, Tokyo 100, Japan
India Resident Mission Ulaanbaatar, Mongolia Tel +81 3 3593 5500
4, San Martin Marg P.O. Box 1083, Central Post Office Special Office in Timor-Leste Fax +81 3 3593 5571
Chanakyapuri Ulaanbaatar-13, Mongolia ADB-World Bank-IMF Building info@adbi.org
New Delhi 110 021 Tel +976 11 313440/323507/ Avenida Dos Direitos Humanos www.adbi.org
India 329836 P.O. Box 62, Dili, Timor-Leste
P.O. Box 5331, Chanakyapuri HPO Fax +976 11 311795 Tel +670 332 4801
Tel +91 11 2410 7200 adbmnrm@adb.org Fax +670 332 4132
Fax +91 11 2687 0955 www.adb.org/mnrm www.adb.org
adbinrm@adb.org
www.adb.org/inrm

114
2005 ANNUAL REPORT
VOLUME 2 Financial Report
Contents
FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT AUDITORS

I. Management’s Discussion and Analysis


2 Overview
4 Ordinary capital resources
18 Special Funds
20 Trust funds Managed by ADB

II. Ordinary Capital Resources (OCR)


23Report of Independent Auditors
24 OCR-1 Balance Sheet, 31 December 2005 and 2004
26 OCR-2 Statement of Income and Expenses for the Years Ended 31 December 2005 and 2004
27 OCR-3 Statement of Cash Flows for the Years Ended 31 December 2005 and 2004
28 OCR-4 Statement of Changes in Capital and Reserves for the Years Ended 31 December 2005 and 2004
30 OCR-5 Summary Statement of Loans, 31 December 2005 and 2004
32 OCR-6 Summary Statement of Borrowings, 31 December 2005 and 2004
34 OCR-7 Statement of Subscriptions to Capital Stock and Voting Power, 31 December 2005
36 OCR-8 Notes to Financial Statements, 31 December 2005 and 2004

III. Special Funds Resources


Asian Development Fund (ADF)
57Report of Independent Auditors
58 ADF-1 Special Purpose Statement of Assets, Liabilities, and Fund Balances, 31 December 2005 and 2004
59 ADF-2 Special Purpose Statement of Revenue and Expenses For the Years Ended 31 December 2005 and 2004
60 ADF-3 Special Purpose Statement of Cash Flows For the Years Ended 31 December 2005 and 2004
61 ADF-4 Special Purpose Statement of Changes in Fund Balances For the Years Ended
31 December 2005 and 2004
62 ADF-5 Special Purpose Summary Statement of Loans, 31 December 2005 and 2004
64 ADF-6 Special Purpose Statement of Resources, 31 December 2005
65 ADF-7 Notes to Special Purpose Financial Statements, 31 December 2005 and 2004

Technical Assistance Special Fund (TASF)


71Report of Independent Auditors
72 TASF-1 Statement of Financial Position, 31 December 2005 and 2004
73 TASF-2 Statement of Activities and Changes in Net Assets For the Years Ended 31 December 2005 and 2004
74 TASF-3 Statement of Cash Flows For the Years Ended 31 December 2005 and 2004
75 TASF-4 Statement of Resources, 31 December 2005
76 TASF-5 Summary Statement of Technical Assistance Approved and Effective For the Year Ended
31 December 2005
77 TASF-6 Notes to Financial Statements, 31 December 2005 and 2004
Japan Special Fund (JSF)
80Report of Independent Auditors
81 JSF-1 Statement of Financial Position, 31 December 2005 and 2004
82 JSF-2 Statement of Activities and Changes in Net Assets For the Years Ended 31 December 2005 and 2004
83 JSF-3 Statement of Cash Flows For the Years Ended 31 December 2005 and 2004
84 JSF-4 Notes to Financial Statements, 31 December 2005 and 2004

Asian Development Bank Institute Special Fund (ADBISF)


88Report of Independent Auditors
89 ADBISF-1 Statement of Financial Position, 31 December 2005 and 2004
90 ADBISF-2 Statement of Activities and Changes in Net Assets For the Years Ended 31 December 2005 and 2004
91 ADBISF-3 Statement of Cash Flows For the Years Ended 31 December 2005 and 2004
92 ADBISF-4 Notes to Financial Statements, 31 December 2005 and 2004

Asian Tsunami Fund (ATF)


97Report of Independent Auditors
98 ATF-1 Statement of Financial Position, 31 December 2005
99 ATF-2 Statement of Activities and Changes in Net Assets for the Period from 11 February
to 31 December 2005
100 ATF-3 Statement of Cash Flows For the Period from 11 February to 31 December 2005
101 ATF-4 Notes to Financial Statements, 31 December 2005

Pakistan Earthquake Fund (PEF)


103Report of Independent Auditors
104 PEF-1 Statement of Financial Position, 31 December 2005
105 PEF-2 Statement of Activities and Changes in Net Assets For the Period from 14 November
to 31 December 2005
106 PEF-3 Statement of Cash Flows For the Period from 14 November to 31 December 2005
107 PEF-4 Notes to Financial Statements, 31 December 2005

4
STATISTICAL ANNEX

Operational Data
110 Table 1: Public and Private Sector Loan Approvals by Country, 2005
113 Table 2: Special Funds Grant-Financed Projects, 2005
115 Table 3: Loan Approvals by Sector: 3-Year Moving Averages, 1968–1970—2003–2005
116 Table 4: Loan Approvals by Sector, 2005
118 Table 5: Sectoral Distribution of Loans, 2005, 1967–2005
118 Table 6: Loan Approvals by Country and Source of Funds, 2005
119 Table 7: Projects Involving Cofinancing, 2005
121 Table 8: Loan Disbursements, 2004 and 2005
121 Table 9: Program Loan Disbursements, 2005
122 Table 10: Private Sector Approvals and Total Project Costs by Country, 2005
122 Table 11: Private Sector Approvals and Total Project Costs by Sector, 2005
123 Table 12: Private Sector Approvals by Year, 1983–2005
123 Table 13: Cumulative Private Sector Approvals by Country, 1983–2005
124 Table 14: Number of Loans and Projects Approved and Under Administration, Project Completion
Reports Circulated, Projects Completed, Loans Closed, and Project/Program Performance Audit
Reports Circulated
126 Table 15: Amount of Loans Approved, Contracts Awarded, and Disbursements
128 Table 16: Contracts Awarded by Country of Origin, 2005, Project Loans—Ordinary Capital Resources (OCR)
129 Table 17: Contracts Awarded by Country of Origin, 2005, Project Loans—Asian Development Fund (ADF)
130 Table 18: Contracts Awarded by Country of Origin, 2005, Project Loans—OCR and ADF Combined
131 Table 19: Estimates of Payment to Supplying Countries for Foreign Procurement Under Program Lending, 2005
132 Table 20: Cumulative Contracts Awarded by Country of Origin—Technical Assistance Operations
133 Table 21: Contracts Awarded by Country of Origin, 2003–2005—Technical Assistance Operations
134 Table 22: Technical Assistance Grants by Country and Regional Activities, 1967–2005, 2004, 2005
136 Table 23: Technical Assistance Grants, 2005
143 Table 24: Technical Assistance Grants by Sector, 1967–2005, 2004, 2005
143 Table 25: Technical Assistance: Loan and Grant-Financed by Sector, 2005
144 Table 26: Regional Technical Assistance Activities, 2005
147 Table 27: Net Transfer of Resources (OCR and ADF), 2003–2005
148 Table 28: Net Transfer of Resources (OCR and ADF Combined), 1996–2005

Financial Resources
149 Table 29: Asian Development Fund Resources and Commitment Authority
150 Table 30: Technical Assistance Special Fund
151 Table 31: Japan Special Fund—Regular and Supplementary Contributions
151 Table 32: Japan Special Fund—Asian Currency Crisis Support Facility
152 Table 33: Japan Fund for Poverty Reduction, 2005
152 Table 34: Japan Fund for Information and Communication Technology, 2005
153 Table 35: Projects Financed by Thematic Funds, 2005
Management’s
MANAGEMENT’S
DISCUSSION AND ANALYSIS

Discussion
and Analysis

Overview

T
he Asian Development Bank (ADB) is an
international development finance institution
whose vision is to make Asia and the Pacific free of
poverty. ADB was established in 1966 through the
“Agreement Establishing the Asian Development Bank” (the
Charter), ratified by 31 countries to promote the social and
economic development of the region and reduce poverty. As of
31 December 2005, ADB had 64 members, 46 of which are in
the region.
ADB provides various forms of financial assistance to its
developing member countries (DMCs). The main
instruments are loans, technical assistance (TA), grants,
guarantees, and equity investments. These instruments are
financed through ordinary capital resources (OCR), Special
Funds, and various trust funds. OCR and Special Funds are
used to finance operations that are solely under ADB
administration. Trust funds are externally funded and are
administered by ADB on behalf of donors. The Charter
requires that funds from each resource be kept separate from
the others.
ADB also provides policy dialogues and advisory services
and mobilizes financial resources through its cofinancing
operations tapping official, commercial, and export credit
sources to maximize the development impact of its
assistance. Cofinancing for ADB projects can be in the form of
loans, TA, grant components of loan projects, or credit
enhancement products such as guarantees.

2
MANAGEMENT’S
DISCUSSION AND ANALYSIS

3
Ordinary Capital Resources constraints on future borrowing, loan, and hedge programs
MANAGEMENT’S
DISCUSSION AND ANALYSIS

and would likely detract from minimizing the cost of


Funding for OCR comes from three distinct sources: funds borrowings, which ADB believes is more important.
borrowed from private placements and capital markets, Accordingly, ADB elected not to adopt hedge accounting
paid-in capital provided by shareholders, and and reports all derivative instruments in the balance
accumulated retained income (reserves). The financial sheet at fair value while recognizing changes in the fair
strength of OCR is largely based on the support of value of derivative instruments in the period as part of net
shareholders and on financial policies and practices. income.
Shareholder support is reflected in the form of capital Supplemental Reporting
Reporting. ADB manages its balance
backing from members and in the record of borrowing sheet by selectively using derivatives to minimize the
members in meeting their debt service obligations. interest rate and currency risks associated with its
Borrowed funds, together with equity, are used to financial assets and liabilities. Derivative instruments are
fund OCR lending and investment activities as well as used to enhance asset/liability management of individual
other general operations. Loans are generally made to positions and overall portfolios and to reduce borrowing
DMCs that have attained a higher level of economic costs. As certain financial instruments (including all
development and to private borrowers. Public sector loans derivatives and certain investments) are recorded at their
are priced on a cost pass-through basis in which the cost of fair value while loans, borrowings, and certain
funding the loans plus a lending spread is passed through investments are recorded at carry value, applying FAS 133
to the borrowers. Private sector loans are priced based on does not fully reflect the overall economic value of ADB’s
market practice. financial positions. Therefore, to better reflect ADB’s
With the introduction of London interbank offered financial positions and risk management, two
rate (LIBOR)-based loans (LBL) and the retirement of supplemental financial statements are included: current
other loan products, ADB has evolved into a full-fledged value and pre-FAS 133. Applications of consistent
LIBOR-based lender. In view of the higher interest rates approaches on these statements allow for better analysis
charged for pool-based loans compared with LIBOR-based for management information and decision making.
loans and the general trend in the interest rate
environment, prepayments of pool-based loans of Discussion and Analysis on Current Value
$2.8 billion were received in 2004. During 2005 this Table 2 presents estimates of the economic value of
reduced significantly to $0.6 billion. OCR’s financial assets and liabilities taking into
In addition to direct lending, ADB also provides consideration changes in interest rates, exchange rates,
guarantees to assist DMC governments and private and credit risks. Current value reflects the exit price for
borrowers in securing commercial funds for ADB-assisted financial instruments with liquid markets and is the
projects. ADB experienced strong and growing demand for estimated fair value. For financial instruments with no
guarantees as credit enhancement products. market quotations, current value is estimated by
discounting the expected cash flows by applying the
Basis of Financial Reporting appropriate market data. The current value results may
Statutory R eporting
Reporting
eporting. Table 1 presents financial data differ from the actual net realizable value in the event of
for 2005. ADB prepares its financial statements in liquidation. The reversal of the FAS 133 effects removes
accordance with accounting principles generally accepted its impact, as these effects are part of current value
in the United States (US). ADB complies with Financial adjustments (For details see tables 3 and 4.)
Accounting Standards (FAS) 133, “Accounting for
Derivative Instruments and Hedging Activities,” and its Current Value Balance Sheet
related amendments (collectively referred to as FAS 133). Loans and Related Swaps
Swaps. Most loans are made to or
FAS 133 allows hedge accounting only if certain guaranteed by ADB members. ADB does not sell its loans
qualifying criteria are met. An assessment of those criteria believing that there is no comparable market for them.
indicated that most of ADB’s derivative transactions are The current value of loans incorporates management's
highly effective in hedging the underlying transactions best estimate of expected cash flows including interest.
and are appropriate for reducing funding costs. However, Estimated cash flows from principal repayments and
applying FAS 133 hedge criteria would not entirely reflect interest are discounted by the applicable market yield
ADB's risk management and hedging strategies. curves for ADB’s funding cost plus lending spread.
Compliance with hedge accounting would impose undue The current value also includes an appropriate credit

4
DISCUSSION AND ANALYSIS
MANAGEMENT’S
TABLE 1: Selected Financial Data
(31 December, amounts in $ million)

Statutory Basis
2005 2004 2003 2002 2001
Revenue and Expenses
From Loans 1,036.3 1,038.3 1,383.0 1,710.0 1,813.6
From Investments 377.4 265.6 251.2 256.6 322.6
From Other Sources 18.2 9.2 22.9 12.5 21.9

Total Revenue 1,431.9 1,313.1 1,657.1 1,979.1 2,158.1


Borrowings and Related Expenses 893.2 861.7 996.9 1,157.0 1,434.1
Administrative Expensesa 135.7 118.3 118.5 90.6 59.0
Technical Assistance to Member Countries (3.4) (2.4) (.4) 56.0 20.0
Provision for Losses (3.5) 2.2 12.9 3.9 5.0
Other Expenses 4.2 3.1 – – –

Total Expenses 1,026.2 982.9 1,127.9 1,307.5 1,518.1


Net Realized Gains 16.9 59.4 87.4 82.3 75.8
Net Unrealized (Losses) Gains on
Derivatives, as Required by FAS 133 (308.7) 41.0 (178.4) 224.8 112.8
Cumulative Effect of Change in
Accounting Principle (4.6) – – – 34.7
Net Income 109.3 430.6 438.2 978.7 863.3
Average Earning Assetsb 36,092 36,364 37,540 38,244 36,272
Annual Return on Average Earning Assets 0.30% 1.18% 1.17% 2.56% 2.28%d
Return on Loans 4.35% 4.16% 4.56% 5.93% 6.42%
Return on Investments 2.96% 2.21% 3.74% 4.26% 5.91%
Cost of Borrowings 5.04% 3.37% 4.65% 4.10% 5.54%
Equity-to-Loan Ratioe 49.36% 51.64%

Pre-FAS 133 Basis


Net Income 415.6 389.6 616.6 753.9 715.8
Average Earning Assets 36,076 36,306 37,524 38,244 36,271
Annual Return on Average Earning Assetsc 1.15% 1.07% 1.64% 1.97% 1.97%
Return on Loans 4.35% 4.16% 4.56% 5.93% 6.42%
Return on Investments 2.99% 2.34% 3.13% 4.26% 5.91%
Cost of Borrowings 3.75% 3.58% 3.70% 4.32% 5.63%
Equity-to-Loan Ratioe 49.48% 50.54%

Current Value Basis


Net Income 93.7 562.8 1,363.3 1,182.9 472.6
Average Earning Assets 37,948 39,391 40,244 40,680 38,431
Annual Return on Average Earning Assets 0.23% 1.47% 3.39% 2.91% 1.23%
Return on Loans (1.18)% 4.25% 4.97% 10.53% 3.11%
Return on Investments (1.11)% 3.51% 5.88% 9.80% 2.66%
Cost of Borrowings (1.34)% 3.56% 2.55% 9.85% 3.02%
Equity-to-Loan Ratioe 49.72% 50.27%
a Net of administration charge allocated to the Asian Development Fund and loan origination costs that are deferred.
b Composed of investments and related swaps, outstanding loans excluding unamortized front-end fees and related swaps and equity investments.
c Represents net income before net unrealized (losses) gains on derivatives, as required by FAS 133 over average earning assets.
d Excludes the one-time cumulative effect of recording the adoption of FAS 133 on 1 January 2001.
e Approved and established in February 2004 to measure ADB's risk bearing capacity.

5
MANAGEMENT’S
DISCUSSION AND ANALYSIS

TABLE 2: Condensed Current Value Balance Sheets on 31 December 2005 and 2004
($ thousand)

31 December
31 December 2005 2004
Reversal of Current Current
Statutory FAS 133 Pre-FAS 133 Value Value Current
Basis Effects Basis Adjustments Basis Value Basis

Due from Banks 81,662 – 81,662 – 81,662 76,405


Investments and Accrued Income 11,212,091 – 11,212,091 – 11,212,091 10,780,768
Securities Transferred under
Securities Lending Arrangement 2,770,965 – 2,770,965 – 2,770,965 2,040,302
Securities Purchased under
Resale Arrangement 1,118,748 – 1,118,748 – 1,118,748 1,330,948
Loans Outstanding and Accrued
Interest 23,808,858 (757) 23,808,101 1,229,611 25,037,712 26,344,506
Less: Provision for Loan Losses
and Unamortized Front-End Fee (90,541) – (90,541) – (90,541) (112,653)
Equity Investment 404,975 – 404,975 – 404,975 257,437
Receivable from Members 173,004 – 173,004 (71,992) 101,012 134,641
Receivable from Swaps
Borrowings 9,733,074 226,683 9,959,757 (226,683) 9,733,074 9,583,846
Others 1,582,337 (10,033) 1,572,304 10,033 1,582,337 1,567,602
Other Assets 576,212 – 576,212 – 576,212 509,651

TOTAL 51,371,385 215,893 51,587,278 940,969 52,528,247 52,513,453

Borrowings and Accrued


Interest 24,660,637 74,717 24,735,354 225,597 24,960,951 25,238,996
Payable for Swaps
Borrowings 9,354,776 92,879 9,447,655 (92,879) 9,354,776 8,841,324
Others 1,586,604 19,607 1,606,211 (19,607) 1,586,604 1,809,722
Payable under Securities Lending
Arrangement 2,795,081 – 2,795,081 – 2,795,081 2,061,489
Accounts Payable and
Other Liabilities 677,147 – 677,147 – 677,147 624,198

Total Liabilities 39,074,245 187,203 39,261,448 113,111 39,374,559 38,575,729

Paid-In Capital 3,449,154 – 3,449,154 – 3,449,154 3,725,823


Net Notional Maintenance of
Value Receivable (586,105) – (586,105) – (586,105) (642,944)
Ordinary Reserve 8,957,392 – 8,957,392 882,858 9,840,250 9,575,099
Special Reserve 193,629 – 193,629 – 193,629 189,539
Loan Loss Reserve 167,000 – 167,000 – 167,000 218,800
Surplus 117 – 117 – 117 312,117
Cumulative Revaluation
Adjustments Account 234,833 (234,833) – – – –
Net Income After Appropriation 105,202 306,275 411,477 (321,834) 89,643 559,290
Accumulated Other
Comprehensive Income (224,082) (42,752) (266,834) 266,834 – –

Total Equity 12,297,140 28,690 12,325,830 827,858 13,153,688 13,937,724

TOTAL 51,371,385 215,893 51,587,278 940,969 52,528,247 52,513,453

– Nil.
() Negative.

6
DISCUSSION AND ANALYSIS
MANAGEMENT’S
TABLE 3: Condensed Current Value Income Statements for the Years Ended 31 December 2005 and 2004
($ thousand)

31 December
31 December 2005 2004
Reversal of Current Current
Statutory FAS 133 Pre-FAS 133 Value Value Current
Basis Effects Basis Adjustments Basis Value Basis

REVENUE
From Loans 1,036,329 – 1,036,329 – 1,036,329 1,038,345
From Investments 377,379 – 377,379 – 377,379 265,557
From Other Sources—Net 18,210 499 18,709 – 18,709 9,166

Total Revenue 1,431,918 499 1,432,417 – 1,432,417 1,313,068

EXPENSES
Borrowings and Related Expenses 893,218 2,967 896,185 – 896,185 861,667
Administrative Expenses 135,689 – 135,689 – 135,689 118,321
Technical Assistance to Member
Countries (3,446) – (3,446) – (3,446) (2,404)
Provision for Losses (3,477) – (3,477) 3,477 – –
Other Expenses 4,248 – 4,248 – 4,248 3,044

Total Expenses 1,026,232 2,967 1,029,199 3,477 1,032,676 980,628

Net Realized Gains 16,968 – 16,968 (111) 16,857 62,100


Net Unrealized Losses on
Derivatives, as Required
by FAS 133a (308,743) 308,743 – – – –
Cumulative Effect of Change in
Accounting Principle (4,619) – (4,619) (3,624) (8,243) –
Current Value Adjustments – – – (321,834) (321,834) 173,173
Provision for Losses – – – 7,212 7,212 (4,950)

Net Income 109,292 306,275 415,567 (321,834) 93,733 562,763


Appropriation of Guarantee Fees to
Special Reserve 4,090 – 4,090 – 4,090 3,473

NET INCOME AFTER APPROPRIATION 105,202 306,275 411,477 (321,834) 89,643 559,290

() Negative
a FAS 133 adjustments are reversed as the current value adjustments incorporate the effect of net unrealized losses on derivatives, as required by FAS 133
adjustments.

TABLE 4: Summary of Current Value Adjustments


($ thousand)

Balance Sheet Effects Income Statement Effects


as of 31 December 2005 Year-to-Date
Loans Investments Borrowings Other Less Prior 31 December 31 December
after Swaps after Swaps after Swaps Assets Year Effectsa 2005 2004
Total Current Value Adjustments
on Balance Sheet 1,224,283 34,967 (359,401) (71,992) (943,406) (115,549) 99,703
Unrealized Gains (Losses) on
Investments b 15,825 c
(31,232) c

d c c
Accumulated Translation Adjustments (227,605) 105,826
c c
Minimum Pension Liability Adjustment 5,495 (1,124)

Total Current Value Adjustments (321,834) 173,173

a Prior Year Effects include cumulative current value adjustments on all financial instruments made in the prior years.
b Relates to unrealized gain/losses of investments and equity investments classified as available for sale.
c These have been moved from the other comprehensive income under the statutory basis and included as part of current value adjustments for current value reporting.
d Relates to the accumulated translation adjustments for the period, net of current translation effects from FAS 133 reversals.

7
risk assessment. To recognize the risk inherent in these Current V alue Adjustments
Value Adjustments. All unrealized gains
MANAGEMENT’S
DISCUSSION AND ANALYSIS

and other potential overdue payments, the value of the and losses are presented as current value adjustments.
loan is adjusted through loan loss provisioning. ADB has Thus, the change in net unrealized gains on investments
never suffered a loss on public sector loans except and equity investments of $15.8 million as well as the
opportunity losses resulting from the difference between $7.2 million write-back on loan losses are presented as
payments for interest and charges not in accordance with part of the adjustment.
the loan’s contractual terms. For 2005, current value net income is $93.7 million
The positive adjustment of $1.2 billion indicates compared with pre-FAS 133 net income of $415.6 million
that the average interest on loans on an after swap basis and statutory reported net income of $109.3 million (see
are higher than ADB would currently originate on similar Table 3). The $321.8 million decrease from the pre-FAS
loans . 133 basis to current value basis (i.e., current value
Investments and Related Swaps Swaps. Under both adjustment) comprises a net unfavorable adjustment of
the statutory and current value basis, investment $115.5 million from the change in the valuation of all
securities and related derivatives are reported at fair outstanding financial instruments, $227.6 million from
values based on market quotations when available. unfavorable translation adjustments offset by $81.3
Otherwise, the current value is calculated using market- million unrealized gains on equity investments net of
based valuation models incorporating observable market $65.5 million of unrealized losses on investments and
data. The net positive adjustment of $35.0 million $5.5 million adjustment to minimum pension liability
resulted from unrealized gains on asset swaps due to (see Table 4).
increasing interest rates in certain markets. Impact of Changes in Interest Rates Rates. The net
Equity Investments
Investments. Under both statutory and decrease in the current value adjustments on the balance
current value basis, equity investments are reported (i) at sheet during 2005 was $115.5 million. It was a result of a
fair value when market values are readily determinable, $456.2 million decrease in unrealized losses in the
(ii) by applying equity method for investments in limited borrowing portfolio, and a $0.6 million decrease in
partnership and certain limited liability companies, or for unrealized gains in other assets offset by an increase in
investments where ADB has the ability to exercise unrealized gains in the loan and investment swap
significant influence, or (iii) at cost less impairment, portfolios of $567.1 million and $5.2 million, respectively.
which represents a fair approximation of the current value. The current value changes reflect the effects of the
Receivable from Members
Members. These consist of increase in interest rates in the U.S. market for the year
unrestricted and maybe restricted promissory notes. The where the majority of ADB’s portfolios are held.
current value is based on the cash flow of the projected Impact of Changes in Exchange Rates Rates.
encashment of the promissory notes discounted using Translation adjustments, reflected as part of
appropriate interest rates. “accumulated other comprehensive income” under the
Borrowings after Swaps
Swaps. The current value of statutory basis, are presented as current value
these liabilities includes the fair value of the borrowings adjustments. The general strengthening of the US dollar
and associated financial derivative instruments. The against other major currencies in 2005 resulted in a
current value of these liabilities is calculated using significant negative translation adjustment of $227.6
market-based valuation models incorporating observable million. This is in contrast to favorable translation
market data. adjustment of $105.8 million in 2004.
The $359.4 million unfavorable current value
adjustment is due to the fact that the average cost of the Operating Activities
borrowings on an after swap basis is higher than the In pursuing its objectives, ADB provides financial
market rate at which ADB can currently obtain new assistance through loans, TA, guarantees, and equity
funding. investments to its DMCs to help them meet their
development needs.
Current Value Income Statement Loans
Loans. Until 30 June 2001, ADB's three windows for
The total current value adjustment of $321.8 million loans from OCR were the pool-based multicurrency loan
($173.2 million in 2004) in Table 4 represents the change (PMCL), the pool-based single-currency loan (PSCL) in
in the current value of all ADB financial instruments US dollars, and the market-based loan (MBL). With the
during the year. The adjustment reflects changes in both introduction of LBL on 1 July 2001, PMCL and MBL are
interest rates and in currency exchange rates. no longer offered and on 1 July 2002, the PSCL in US

8
dollars was retired. The LBL is a timely response to lending spread of 60 basis points over the base lending

DISCUSSION AND ANALYSIS


MANAGEMENT’S
borrower demand for loan products that suit project needs rate. In 2004, 20 basis points of the lending spread were
and effectively manage their external debt. LBL products waived on public sector loans outstanding from 1 July
give borrowers a high degree of flexibility in managing 2004 to 30 June 2005 for borrowers that do not have loans
interest rate and exchange rate risks and at the same time in arrears. In 2005, the policy was extended to cover the
provide low intermediation risk to ADB. With the period up to June 2006. ADB’s variable lending rates for
introduction of the LBL, ADB offered borrowers to PSCLs in US dollars and PSCLs in Japanese yen are
transform their undisbursed balances of outstanding shown below.
PSCLs in US dollar to LBLs if the undisbursed balance For private sector loans, the lending spread is
was not less than 40% of loan amount. Total undisbursed determined on a case-by-case basis to cover ADB’s risk
balance of $6.8 billion of 97 PSCLs was transformed to exposure to specific borrowers and projects.
LBLs in 2002. In November 2003, ADB offered borrowers ADB also normally charges a front-end fee of 1% to
to transform their outstanding PMCLs of $6.5 billion into cover the administrative costs incurred in loan
PSCLs in Japanese yen to become effective on 1 January origination. In 2004, the Board of Governors approved the
2004. The transformation has eased borrower’s waiver of the entire front-end fee on all new public sectors
administration for loan service payments and loan loans approved from 1 January 2004 to 30 June 2005. In
accounting. Since November 2002, ADB has been offering 2005, the policy was extended to cover the period up to
local currency loans (LCLs) to private sector borrowers June 2006. Prior to that, 50 basis points waiver was
and expanded this to the public sector borrowers in applied to all public sector loans approved on or after
August 2005. 1 January 2003. In addition, ADB currently applies a
OCR Loan Approvals, Disbursements, progressive commitment fee of 75 basis points on
Repayments, and P repayments
Prepayments
repayments. In 2005, 32 OCR undisbursed loan balances for public sector project loans
public and private loans totaling $4.4 billion were and a flat commitment fee of 75 basis points for public
approved compared with 33 OCR public and private sector program loans.
sector loans totaling $4.1 billion in 2004. Disbursements Rebates and surcharges are standard features of
in 2005 totaled $3.5 billion which represented an public sector LBLs. To maintain the principle of cost
increase of 39.5% from the $2.5 billion disbursements in pass-through pricing, ADB returns the actual sub-LIBOR
2004. Regular principal repayments for the year were funding cost margin to its LBL public sector borrowers
$2.9 billion ($1.2 billion in 2004) while prepayments through rebates. A surcharge could arise if ADB’s funding
amounted to $0.6 billion ($2.8 billion in 2004). In 2005, cost exceeds the 6-month LIBOR, but that is a remote
11 loans were fully prepaid and one was partially prepaid. possibility unless ADB experiences serious credit
As of 31 December 2005, the total loans outstanding after deterioration. Rebate or surcharge rates are set on
provision for losses and unamortized front-end fees 1 January and 1 July every year and are based on the
amounted to $23.5 billion. actual average funding cost margin for the preceding
Status of Loans.
Loans One public sector OCR loan to 6-month period. Based on rebate rates, ADB returned an
Nauru and 10 private sector loans were in nonaccrual actual sub-LIBOR funding cost margin of $19.5 million
status at the end of 2005; the total outstanding balance to its LBL public sector borrowers during 2005. (See table
was $2.3 million ($2.3 million in 2004) and on next page.)
$49.2 million ($50.4 million in 2004), respectively.
Private sector loans in nonaccrual status decreased due to
sale of an Indonesian loan. The total loans in nonaccrual
Lending Ratesa
status of $51.5 million represented 0.2% of the total of
(% per annum)
outstanding OCR loans.
Lending Rates.
Rates The lending rates for PSCLs are 2005 2004 PSCLs
based on the previous semester’s average cost of 1 January 1.73 2.13 Japanese yen
borrowings. Interest rates for MBLs are either fixed or 6.06 6.27 US dollar
floating. The lending rates for MBLs are determined on 1 July 1.71 1.93 Japanese yen
the basis of 6-month LIBOR with reset dates of either 15 6.14 6.09 US dollar
March and 15 September or 15 June and 15 December. a Lending rates are set on 1 January and 1 July every year and are valid for
six months and are represented net of 20 basis points lending spread
Effective 2001, all public sector loans without specific waiver from July 2004.
provisions in the loan agreements were charged with a

9
Technical Assistance
Assistance. From 1967 to 1991, TA (PRG) is designed to facilitate cofinancing by providing
MANAGEMENT’S
DISCUSSION AND ANALYSIS

expenses were charged to OCR and other TA funding lenders/capital market investors of ADB-assisted projects
resources—the Technical Assistance Special Fund with coverage against specifically defined political risks.
(TASF), the Japan Special Fund (JSF), and trust/grant Coverage is available against any combination of the risks
funds. From 1992 to 2000, no TA expenses were charged of expropriation, currency inconvertibility or
to OCR. In 2001, the Board of Directors approved the nontransferability, political violence, and breach of
financing of high-priority TA programs out of OCR current contract, and is available for loans and other forms of debt
income within a rolling 4-year financing framework. The instruments. Equity instruments are ineligible for PRG
amount of financing required varies between years and is coverage. Tenors are based on the merits of the underlying
subject to the approval of the Board. In 2003, the Board project. All or part of outstanding debt service obligations
reverted to the practice of allocating OCR net income to to a lender may be covered. The cover may be for principal
the TASF and of financing TA activities through it and and/or interest payment obligations. For private sector
various other funding resources. projects, ADB can issue a PRG without a counter
Guarantees
Guarantees. ADB provides guarantees as credit guarantee from the host government; however, PRG
enhancements for eligible projects to cover risks that the exposure to such a project is currently subject to a
private sector cannot easily absorb or manage on its own. maximum of $150 million or 50% of the project cost,
Reducing these risks can make a significant difference in whichever is lower. Fees are market-based composed of
mobilizing debt funding for projects. ADB has used its guarantee fees, front-end fees, and standby fees. A PRG is
guarantee instruments successfully for infrastructure callable when a guaranteed event has occurred and such
projects, financial institutions, capital markets, and trade an event has resulted in debt service default to the lender.
finance. These instruments generally are not recognized In 2005, ADB approved a $50 million PRG cover with
in the balance sheet and have off-balance sheet risks. For partial government counter indemnity to mobilize
guarantees issued and modified after 31 December 2002 commercial debt for the Nam Theun 2 Hydroelectric
in accordance with Financial Accounting Standards Board Project in the Greater Mekong Subregion. The guarantee
(FASB) Interpretation No. 45 (FIN 45), “Guarantor’s was also made effective in 2005.
Accounting and Disclosure Requirements for Guarantees, Partial Credit Guarantees
Guarantees. A partial credit
Including Indirect Guarantees of Indebtedness to guarantee (PCG) provides comprehensive cover (of
Others,” ADB recognized at the inception of a guarantee commercial and political risks) for a specific portion of
the non-contingent aspect of its obligations. ADB’s total the debt service provided by cofinanciers. PCG is
exposure on signed and effective loan guarantees is particularly useful for projects in DMCs with restricted
disclosed in Note F of OCR Financial Statements. access to financial markets but which ADB considers
ADB offers two guarantee products—political risk creditworthy and financially sound. Since the 1997 Asian
and partial credit—designed to mitigate risk exposure of financial crisis, borrowers, project sponsors, cofinanciers,
commercial lenders and capital market investors. These and host governments have increasingly sought to hedge
guarantees are not issued on a stand-alone basis but are currency mismatch risks by borrowing in the same
provided for projects in which ADB participates. ADB currency as the revenues generated by the project. A PCG
cooperates with other multilateral, official, and private can cover local currency debt including domestic bond
sector lenders and insurers to provide guarantee products. issues or long-term loans from local financial institutions.
Political Risk Guarantees
Guarantees. A political risk guarantee For private sector transactions not supported by a counter

Rebate Rates Outstanding Guarantee Exposurea


(% per annum) ($ million)

US Japanese 2005 2004


dollar yen Partial credit guarantees 1,011.3 1,153.6
1 January 2005 0.35 0.39 Political risk guarantees 179.3 152.8
Others 1.0 –
1 July 2005 0.32 0.39 Total 1,191.6 1,306.4
a None of these amounts were subject to call as of 31 December 2005 and
2004.

10
guarantee from the host government, the exposure limit mechanism, approvals of private sector operations in

DISCUSSION AND ANALYSIS


MANAGEMENT’S
currently stands at $75 million or 25% of the project cost, excess of $1.5 billion have been allowed by the Board
whichever is less. Guarantee fees for private sector since September 2001. Private sector guarantee
transactions are market based. Fees for transactions operations include PRG commitments of $246.4 million
backed by the host government guarantee comprise a in five projects and PCG commitment of $120.1 million
standard guarantee fee of 40 basis points per annum on in three projects. Approximately $145.6 million in PRG
the present value of the outstanding guarantee obligation commitments have counter guarantees from the
plus a front-end fee to cover processing costs. Fees can be respective governments.
charged to the borrower or to the lender. In 2005, ADB ADB actively seeks to recycle funds in existing
approved a PCG facility without government counter investments after its development role in such
guarantee equivalent to $18.4 million for the Philippine investments has been limited. Divestments have been
Small and Medium Enterprise (SME) Development carried out in a manner consistent with good business
Support Project to encourage selected private sector practices and without destabilizing the companies
financial institutions to expand their SME portfolios. concerned. In 2005, ADB actively sought full and partial
Cofinancing
Cofinancing. ADB coordinates with development divestments of equity investments in the amount of
partners to maximize the impact of its assistance $76.2 million while $54.7 million in principal
programs to all DMCs by identifying official and/or repayments were received. ADB disbursed a total of
commercial cofinancing opportunities that directly $131.8 million in equity investments and $204.4 million
complement ADB projects. This includes the application in loans in 2005.
of credit enhancement products, such as guarantees, in
support of commercially attractive public and private Capital and Resources
sector projects and programs. Identifying the best Capital
Capital. Total shareholders’ equity on a statutory basis
financing solutions for public and private projects and decreased from $13.3 billion as of 31 December 2004 to
programs, especially with the use of ADB’s credit $12.3 billion as of 31 December 2005. This was primarily
enhancement products, has been the core of the due to (i) allocations to Asian Tsunami Fund (ATF),
cofinancing dialogue with DMCs. Total cofinancing in Pakistan Earthquake Fund (PEF), Asian Development
2005 amounted to $7.4 billion for 31 public and 3 private Fund (ADF), TASF of $560 million, $80 million, $40
sector projects, comprising of $5.2 billion of commercial million, and $32 million, respectively; (ii) the net effect
loan cofinancing (including $68.4 million guarantee of change in special drawing rights (SDR) value on capital
support for two projects); $1.8 billion of official loan and reserves of $175 million; (iii) unfavorable translation
cofinancing; and $353 million of grant cofinancing. In adjustments of $226 million, offset by (iv) net unrealized
addition, $78.5 million in grants were mobilized to gain on investments and equity investments of $15.8
cofinance 97 TA projects. million; (v) net income for the period of $109.3 million;
Private Sector Equity Investments and and (vi) capital subscriptions of $9 million.
Loans
Loans. ADB’s Charter mandates that its private sector On 31 December 2005, authorized and subscribed
operations promote the investment of private capital in capital was $50,163.5 million. Of the subscribed capital,
the region for development and empowers it to provide $3,528.2 million was paid-in and $46,635.3 million was
assistance in the form of equity investments, loans and callable. Callable capital can be called only if required to
other financing schemes without government guarantees. meet ADB’s obligations incurred on borrowings or
The Charter allows the use of OCR for equity guarantees under OCR. No call has ever been made on
investments in private enterprises of up to 10% of its ADB’s callable capital.
unimpaired paid-in capital together with reserves and To ensure it has adequate risk-bearing capacity, ADB
surplus, exclusive of special reserves. In 2005, the total reviews its income outlook annually. Based on that review,
equity portfolio of both outstanding and undisbursed the Board of Directors allocates a portion of the previous
amounts, net of provision for probable losses totaled year’s net income to reserves to ensure that the level is
$714.5 million. This represented about 56% of the ceiling commensurate with the income planning framework. In
defined by the Charter. addition, to the extent feasible, it allocates part of the net
As of 31 December 2005, the overall private sector income to support development activities in its DMCs. In
portfolio (equity investments, loans, and guarantees) was May 2005, the Board of Governors approved allocations of
about $1.7 billion. As an interim arrangement, pending 2004 net income as following: $288.0 million to ATF,
the implementation of an objective capital allocation $40.0 million to surplus, $40.0 million to the ADF, $37.9

11
million to ordinary reserve, $32 million to the TASF, diversify its funding sources across markets, instruments,
MANAGEMENT’S
DISCUSSION AND ANALYSIS

increased cumulative reserve adjustment account by $41.0 and maturities. To achieve that objective, ADB continued
million and reduced the loan loss reserve by $51.8 million. in 2005 a strategy of (i) issuing liquid benchmark bonds
In February 2004, the Board of Directors reviewed to maintain ADB's strong presence in key currency bond
ADB’s lending and borrowing limitations and approved markets, (ii) raising funds through cost-efficient
the following policies: (i) gross outstanding borrowings are opportunistic and private placement transactions to
limited to no more than the sum of callable capital from minimize borrowing costs, and (iii) emphasizing
non-borrowing members, paid-in capital, and reserves borrowings with longer maturity ranges to smooth ADB’s
(including surplus), subject to the Charter limit of 100% debt redemption profile. Also, in 2005 ADB pursued the
of callable capital; (ii) outstanding loan commitments objective of contributing to the development of regional
measured by the sum of outstanding disbursed and bond markets and of providing local currency financing for
undisbursed loans, equity investments, and guarantees,1 ADB’s private sector operations through local currency
are limited to no more than the sum of the total callable bond issues. All proceeds from new funding transactions
paid-in capital and reserves (including surplus but are invested until they are required for ADB’s ordinary
excluding special reserve). operations. Funding raised in any given year is utilized for
In March 2005, the Board of Directors reviewed the ADB’s ordinary operations, including loan disbursements
OCR resource position. The review followed a medium- and refinancing of maturing funding obligations.
term capital management approach within the approved 2005 F unding Operations
Funding Operations. In 2005, ADB
financial framework for assessing the adequacy of current completed 64 borrowing transactions raising about $4.0
and prospective lending and borrowing headroom. The billion in long- and medium-term funds compared with
review concluded that ADB’s capital position is sufficient $1.6 billion in 2004. The new borrowings were raised in
to support projected lending operations through 2007 and Japanese yen, New Zealand dollar, Philippine peso,
to maintain a prudent buffer against exchange rate renminbi, South African rand, Thai baht, and US dollar.
fluctuations and a margin for unutilized lending capacity. After swaps, $3.7 billion or 93% of the 2005 borrowings
As of 31 December 2005, headrooms for lending and were in US dollars and the remaining 7% were in Japanese
borrowings were $18.8 billion and $16.2 billion, yen, Philippine peso, and renminbi. The average maturity
respectively (compared with $22.5 billion and $19.6 of 2005 borrowings was 4.3 years compared with 7.9 years
billion, respectively in 2004). in 2004. Of the total 2005 borrowings, $1.5 billion was
Borrowings
Borrowings. ADB’s primary borrowing objective is to raised through two US dollar public offerings, $270
ensure availability of funds at the lowest possible cost for million through three local currency bond issues, and the
its operations. Subject to this objective, ADB seeks to rest through private placements. Additionally, ADB raised

TABLE 5: Borrowings
($ million)

2005 2004 2003 2002


Long Term
Total Principal Amount 3,965.6 1,629.5 4,141.0 5,944.9
Average Maturity to First Call (years) 4.3 7.9 7.6 7.2
Average Final Maturity (years) 8.0 10.7 13.7 9.9
Number of Transactions
Public Offerings 5 5 2 3
Private Placements 59 14 62 77
Number of Currencies (before swaps)
Public Offerings 4 5 2 1
Private Placements 4 1 4 5
Short Terma
Total Principal Amountb 761.0 90.0 28.0 2,830.0
Number of Transactions 13 1 1 36
Number of Currencies 2 1 1 2
a All euro-commercial paper.
b At year-end, the outstanding principal amount was $268 million in 2005, nil in 2004 and 2003, and $200 million in 2002.

1
ADB's financial policies require that political risk guarantee be charged against lending limitations at the nominal value of the guaranteed obligation,
plus the interest that will accrue for the succeeding interest period and partial credit guarantee at the present value of the guaranteed obligation.

12
$761 million in short-term funds under its Euro interest rate structure and currency composition of ADB’s

DISCUSSION AND ANALYSIS


MANAGEMENT’S
Commercial Paper Program. Table 5 shows details of 2005 outstanding borrowings as of 31 December 2005.
borrowings as compared to borrowings from 2002 to 2004.
Local Currency Bond Issues Issues. ADB’s local Liquidity Portfolio
currency bond issuances in 2005 are shown in Table 6. The liquidity portfolio helps to ensure the uninterrupted
The Thai baht, renminbi (RMB), and the Philippine peso availability of funds to meet loan disbursements, debt
bond issues are ADB’s inaugural issues in the domestic servicing, and other cash requirements. It also contributes
capital markets of those countries. The Thai baht and to ADB’s earning base. ADB’s Investment Authority
Philippine peso issues are also the first issues by a foreign governs liquid asset investments. Its primary objective is
and a supranational entity in those domestic markets as to maintain security and liquidity of funds invested.
well as the first issues in those countries rated triple A by
Fitch, Moody’s, and Standard and Poor’s. For the RMB,
ADB, together with the International Finance Corporation, TABLE 6: Local Currency Bond Issues
was the first foreign issuer of RMB-denominated bonds in
Market Principal Coupon Maturity
the People’s Republic of China (PRC). Amount Rate (%) (years)
Use of Derivatives
Derivatives. ADB undertakes currency and
People’s Republic
interest rate swaps to raise, on a fully hedged basis, of China RMB 1 billion 3.34 10
currencies needed for operations in a cost-efficient way Philippines PhP 2.5 billion 0.00 5
while maintaining its borrowing presence in major capital Thailand THB 4 billion 3.87 5
markets. Figures 1 and 2 show the effects of swaps on the

Figure 1: Effect on Currency Composition

a
Other currencies include Australian dollar, Canadian dollar, Euro, Hong Kong dollar, Indian rupee, Malaysian ringgit, New Taiwan dollar, New Zealand dollar,
Philippine peso, Pound Sterling, renmimbi, Singapore dollar, South African rand, Swiss franc, and Thai baht.
b
Other currencies include Indian rupee, Philippine peso, Pound Sterling, renminbi, and Swiss franc.

Figure 2: Effect on Interest Rate Structures

13
Subject to these two parameters, ADB seeks to maximize The operational cash portfolio is designed to meet
MANAGEMENT’S
DISCUSSION AND ANALYSIS

the total return on its investments. In compliance with net cash requirements over a 1-month horizon. It is
its Charter, ADB does not convert currencies for funded by equity and invested in short-term, highly liquid
investment; investments are made in the same currencies money market instruments. The portfolio performance is
in which they are received. At present, liquid investments measured against short-term external benchmarks.
are held in 20 currencies. The cash cushion portfolio holds the proceeds of
Liquid assets are held in government and ADB’s borrowing transactions pending disbursement. It is
government-related debt instruments, time deposits, and invested in short-term instruments, and the performance
other unconditional obligations of banks and financial is measured against short-term external benchmarks.
institutions, and, to a limited extent, in corporate bonds, The discretionary liquidity portfolio is funded by
mortgage-backed securities, asset-backed securities of issuing floating rate debt and is invested to maximize the
high credit quality, and derivatives. They are held in four spread earned between borrowing cost and investment
subportfolios—core, operational cash, cash cushion, and income on high-quality instruments. For 2005, the target
discretionary liquidity—all of which have different risk size of the discretionary liquidity portfolio was set at
profiles and performance benchmarks. The year-end $3.65 billion.
balance of the portfolios in 2005 and 2004 including
receivables for securities repurchased under resale Contractual Obligations
arrangements and excluding securities transferred under In the normal course of business, ADB enters into various
securities lending arrangements and pending sales and contractual obligations that may require future cash
purchases is presented in the table below. payments. The table below summarizes ADB’s significant
The core portfolio is invested to ensure that the contractual cash obligations on 31 December 2005 and
primary objective of a liquidity buffer is met. Cash inflows 2004. Long-term debt includes direct medium- and long-
and outflows are minimized to maximize the total return term borrowings excluding swaps but does not include any
relative to a defined level of risk. The portfolio is funded adjustment for unamortized premiums, discounts, or
largely by equity, and performance is measured against effects of applying FAS 133. Other long-term liabilities
external benchmarks with an average duration of about 2 include accrued liabilities and unfunded pension and
years. The remaining part of the core portfolio is funded postretirement benefits.
by debt and is invested to maximize the spread earned
between borrowing cost and investment income on high- Risk Management
quality investments. In its development banking operations, ADB assumes
various credit, market (interest rate and foreign
exchange), liquidity, and operational risks. Of these,
TABLE 7: Year-End Balance of Liquidity Portfolio credit risks in the loan and guarantee portfolios are the
($ million) most significant. ADB has adopted an integrated risk
2005 2004 management infrastructure designed to ensure that credit
Core Portfolio 7,353.1 7,387.3 and other risks are appropriately identified, measured,
Operational Cash Portfolio 933.4 319.3 monitored and managed. In November 2005, ADB
Cash Cushion Portfolio 450.1 1,491.5 established an independent Risk Management Unit
Discretionary Liquidity Portfolio 3,401.4 2,466.7

TOTAL 12,138.0 11,664.8

TABLE 9: Contractual Cash Obligations


($ million)
TABLE 8: Return on Liquidity Portfolio 2005 2004
(%)
Long-Term Debt 24,189.6 24,212.1
Annualized Financial Return
Undisbursed Loan Commitments 15,501.8 15,555.6
2005 2004 Undisbursed Equity
Core Portfolio 2.09 2.16 Investment Commitments 309.5 279.8
Operational Cash Portfolio 2.64 1.00 Guarantee Commitments 1,276.9 1,512.1
Cash Cushion Portfolio 1.76 0.65 Other Long-Term Liabilities 458.6 378.2
Discretionary Liquidity Portfolio 0.40a 0.42 a
TOTAL 41,736.4 41,937.8
a Spread over funding cost.

14
(RMU) with the mandate to manage credit risk of the In December 2004, ADB adopted an internal country

DISCUSSION AND ANALYSIS


MANAGEMENT’S
public and private sector loan and guarantee portfolios credit risk rating system to assess independently the
and ADB’s market and treasury-related risks. creditworthiness of its borrowers. ADB also began
Risk Bearing Capacity
Capacity. ADB’s income planning enhancing the credit risk model to incorporate Monte
framework establishes the equity-to-loan ratio (ELR) as Carlo simulations expected to be completed in early
the key measure of ADB’s risk bearing capacity. The ELR 2006.
measures the adequacy of equity capital to absorb Credit Risk of P rivate Sector Operations
Private Operations.
unexpected losses from a major credit event in the public ADB's private sector investments are usually not backed
sector loan and guarantee portfolios as well as the ability by government guarantees and are exposed to commercial
to generate adequate net income to absorb loss of loan and political risks. Managing and monitoring those risks
income while also matching growth in the loan and are important aspects in the project cycle. ADB evaluates
guarantee portfolios. Because ADB’s loan and guarantee not only the development impact of a project but also
portfolios are unavoidably highly concentrated in Asia, a analyzes its credit strength, financial, commercial, and
credit event of one borrower could have a significant technical viability, and good corporate governance. Each
impact due to high correlations. ADB has established a private sector project undergoes an in-depth credit
target ELR of 35% to accommodate this volatility. analysis and appraisal prior to approval with emphasis
In determining ELR, ADB’s equity capital is defined being given to the project’s financial sustainability and
as the sum of useable paid-in capital, the ordinary reserve, ability to pay its debt. RMU reviews the risk of new
the special reserve, and surplus. At 31 December 2005, proposals for loans and equity investments and ensures
ELR was 49.5% under the pre-FAS 133 basis (50.5% on that they are in line with ADB’s credit risk policy and
31 December 2004). ADB’s higher-than- target ELR that ADB is compensated properly for the risk undertaken
represents a very strong equity capital position relative to on an overall portfolio basis.
the credit risk of the loan and guarantee portfolios The current private sector strategy focuses on the
indicating that both net income and equity capital are infrastructure and financial market sectors. Nevertheless,
adequate to sustain a major credit event. ADB also ADB remains responsive to the changing needs of DMCs
protects the ELR from exchange rate fluctuations by and private investment opportunities in other sectors.
periodically aligning the currency composition of its The objective is to build a diversified private sector
equity to that of its loans. portfolio in terms of both countries and sectors while
Under the income planning framework, ADB utilizes managing concentration risks by establishing appropriate
the Loan Loss Reserve (LLR) to absorb expected losses limits for countries, industries, and groups. The total
from public sector loan and guarantee portfolios. Hence amount of ADB assistance to a single project, including
both expected and unexpected losses for public sector equity investments, loans, and guarantees, must not
loans and guarantees are addressed through adequate exceed 25% of the total project cost or $75 million,
LLR and ELR. On the other hand, loan loss provisions are whichever is lower. ADB uses an internal rating system to
made against impaired private sector loans and classify its exposure based on international credit
recognized in the Net Income. During 2006, RMU will standards that reflect the risk of timely and full recovery
review the loan loss provisioning and reserve policy for of investments. The rating system is used to monitor risk
private sector operations in conjunction with revising the exposure to individual projects.
internal risk system to enhance the credit risk ADB streamlined approval of investment recovery
management. operations. They generally involve negotiations for
Country Credit Risks
Risks. The income framework financial restructuring, foreclosure, or other remedies,
links the adequacy of net income and equity capital to including liquidation. Restructuring is undertaken only
the country credit risk of the public sector loan and when it is expected to improve ADB’s prospects for
guarantee portfolios. A credit risk model is used to recovery. If the financial condition of the entity has
estimate expected and unexpected losses in these deteriorated beyond recovery, ADB may have to proceed
portfolios, incorporating borrower’s default probability, with liquidation or other legally permissible forms of
loss given default, projected exposure, and default recovery.
correlations. In addition, ADB stress tests net income Counterparty Credit Risks Risks. Counterparty credit
projections to ensure net income is adequate to absorb the risk is the risk of loss when a derivative counterparty does
loss of loan income due to credit shocks and to support not honor its obligations measured by the aggregate
sufficient growth. positive replacement cost or the net positive marked-to-

15
market value of the derivatives. To mitigate counterparty performance measurements and attribution
MANAGEMENT’S
DISCUSSION AND ANALYSIS

credit risk, ADB has strict counterparty eligibility criteria. methodologies used for investment portfolios. Stress
In general, ADB will undertake swap transactions with testing and scenario analyses have been incorporated as
counterparts that have a minimum credit rating of A3/A- supplementary risk management tools, and ADB has
with Moody’s and/or Standard and Poor’s and have continued to expand on the architecture used to value
executed an International Swaps and Derivatives highly structured borrowings and related swap
Association Master Agreement and a credit support annex transactions.
(CSA) with ADB. In 2004, ADB upgraded its treasury system and
ADB utilizes a sophisticated computerized system automated a number of manual procedures related to
that allows for daily monitoring and managing of pricing and trade reconciliation. Currently, a daily risk,
counterparty credit risk exposure. Under the CSA performance, and attribution system is used to measure
arrangements, derivatives’ positions are marked-to-market and monitor ADB’s investment portfolios, thus providing
daily, and collateral calls, transfers, and adjustments with regular and timely risk and performance feedback to
counterparties are made in coordination with an external treasury management. In addition, ADB has outsourced
collateral manager. ADB also sets exposure limits on much of the risk analyses of its externally managed
individual counterparties based on their credit ratings and investment portfolios, thereby allowing ADB to
equity and daily monitors current and potential significantly bolster risk-metrics, stress testing, and
counterparty exposure against the limits. scenario analyses for its investments in mortgage- and
Market Risks.
Risks ADB controls the market risk of its asset-backed securities and corporate bonds.
liquid asset investments by adopting investment policy Liquidity Risks.
Risks The objective of ADB’s liquidity
guidelines which only allow for investments in policy is to ensure the availability of sufficient cash flows
government and government-related debt instruments, to meet all financial commitments despite uncertain
time deposits, and other unconditional obligations of conditions in the capital markets. The policy establishes
banks and financial institutions, and to a limited extent, minimum levels of liquidity to maintain expected
in corporate bonds, mortgage-backed securities, and asset- operations. ADB's liquidity requirements are primarily
backed securities of high credit quality. The principal determined by expected lending volumes and
source of investment risk arises from income volatility disbursements, redemption of current borrowings,
due to interest rate movements. ADB monitors and repayments and prepayments of loans, and cash from net
manages interest rate risks by employing various income. The policy defines ADB’s annual net cash
quantitative methods. All positions are marked-to- requirement (NCR) to meet large contractual obligations
market, and risk-sensitive measures, including potential for loan disbursements and debt redemption. ADB relies
exposure, are calculated and compared to internally on borrowings to meet most of these obligations. The
established risk limits on a daily basis. proxy NCR is the sum of loan disbursements net of
ADB manages its currency risk to ensure that the repayments and debt redemption for the year.
ELR as the measure of equity capital adequacy and risk- Prudential minimum liquidity is set at 40% of the
bearing capacity is immune from fluctuations in exchange next 3 years’ proxy NCR and represents the minimum
rates. ADB can achieve this by periodically aligning the amount of liquidity necessary for ADB to continue
currency composition of loans with that of equity thus operations even if its access to capital markets is
ensuring that fluctuations in exchange rates would have temporarily denied. Maintaining that level enables ADB
similar effects on both. ADB mitigates the market risks to cover normal NCR for 20 months and stressed NCR for
associated with the loan portfolio by passing on all 14 months without borrowing. In addition, ADB can raise
associated costs to borrowers and employing derivatives to discretionary liquidity, funded entirely by borrowings, to
closely match the characteristics of loans with those of provide flexibility in the funding and debt redemption
borrowings. schedule over time. The policy limits discretionary
ADB has an infrastructure designed to ensure that the liquidity to 50% of prudential minimum liquidity. Levels
market risks associated with its activities are fully of liquidity, NCR, and proxy NCR are monitored on an
identified, measured, monitored, and managed. In this ongoing basis and reviewed by the Board of Directors
regard, ADB has broadened its market risk management quarterly.
capabilities by (i) improving the risk metrics and Operational Risks
Risks. Operational risk represents the
assumptions that are used in the valuation and risk potential for loss resulting from inadequate or failed
analysis of its treasury activities and (ii) enhancing the internal processes or systems, human factors, or external

16
events including business disruptions and system failure, • $10.0 million reduction in gains realized from sales

DISCUSSION AND ANALYSIS


MANAGEMENT’S
transaction processing failures, and failure in execution of of equity investments.
legal, fiduciary, and agency responsibilities. ADB is
exposed to many types of operational risks and attempts Net unrealized (losses) gains on derivatives,
to mitigate them by maintaining a system of internal as required by F AS 133
FAS 133. Net unrealized losses on
controls and processes, and system upgrades. In addition, derivatives of $308.7 million (net unrealized gains of
ADB has a rigorous process for approving transactions that $41.0 million in 2004) were primarily due to the
requires reviews and authorization by all relevant parties weakening of certain major currencies against the US
to ensure all transactions are properly approved, dollars. This resulted in the reduction of the value of
documented, monitored, and controlled. ADB recently embedded derivatives in the structured borrowings, which
approved a strategy to strengthen the business continuity are required to be separately reported in the balance
plan to reduce the impact of disruption affecting business sheet, with changes in the fair value reported as part of
processes. net income. As the majority of the embedded derivatives
are highly sensitive to the expected foreign exchange rates
Summary of Financial Performance movements, the weakening of certain major currencies
Net Income
Income. Net income before net unrealized losses on decreased the value of the embedded derivatives in 2005.
derivatives, as required by FAS 133 and cumulative In contrast, the unrealized gains on derivatives of $41.0
change in accounting principle was $422.7 million, million as of 31 December 2004 resulted primarily due to
compared with $389.6 million in 2004. The increase of the favorable impact of the expected strengthening of
$33.1 million (8.5%) was predominantly due to the certain major currencies on the value of the embedded
following: derivatives (see Note M of OCR Financial Statements).
• $77.9 million increase in investment income, Cumulative Effect of Change in Accounting
including realized gains on sales, reflected the Principle
rinciple. The cumulative effect arising from the adoption
improved realized returns on the investment of the equity method for certain limited liability companies
portfolio due to higher interest rates in some capital that have characteristics of partnership (EITF 03-16) in
markets; 2005 resulted to a reversal of prior years’ income of $8.2
• $9.0 million increase in income from other sources million, net of a release of provisions of $3.6 million.
associated primarily with increase in share in the
net gain of equity investments accounted under the Critical Accounting Policies
equity method;
• $5.7 million decrease in provisions associated with
and Estimates
write-offs and write-downs resulting from Significant accounting policies are contained in Note B of
repayments and disposals of private sector loans, OCR’s financial statements. In the financial statements,
offset by; Management makes estimates in determining the fair
• $33.6 million reduction in net loan income after value of financial instruments. Estimates by their nature
borrowings and related expenses associated with are based on judgment and available information;
$2.0 million decrease in loan income and $31.6 therefore, actual results could differ and could have a
million increase in borrowing costs. The decrease in material impact on the financial statements.
loan income is primarily associated with the effect Fair V alue of F
Value inancial Instruments
Financial Instruments. Under
of the reduction in loan income due to $33.1 million statutory reporting, ADB carries its investments and
increase in lending spread waiver, $43.0 million derivatives, as defined by FAS 133, on a fair value basis.
decrease in prepayment premium received, offset by These derivatives include embedded derivatives in the
$74.1 million increase in interest and other charges. structured borrowing portfolio that are required to be
The $31.6 million increase in borrowing cost is separately valued and accounted for in the balance sheet.
associated mainly with the increase in the borrowing Fair values are usually based on quoted market prices. If
costs on pre-FAS 133 basis to 3.75% in 2005 (3.58% market prices are not readily available, fair values are
in 2004) resulting from the general increase in usually determined using market-based pricing models
interest rates in the U.S.; incorporating readily observable market data and require
• $17.4 million increase in administrative expenses judgment and estimates.
associated with increase in staff salaries, benefits The pricing models used for determining fair values
and consultant expenses; of ADB’s financial instruments are based on discounted

17
expected cash flows using observable market data. ADB qualification that payment of all installments except the
MANAGEMENT’S
DISCUSSION AND ANALYSIS

reviews the pricing models to assess the appropriateness first is subject to subsequent budgetary appropriations.
of assumptions to reasonably reflect the valuation of the Donors made their first payment with a total amount of
financial instruments. In addition, the fair values derived $562.8 million2 that includes $497.6 million to ADF
from the models are subject to ongoing internal and operations, $37.7 million for TASF, and $27.5 million for
external verification and review. The models use market- financing forgone interest of grants. In addition, the
sourced inputs such as interest rates, exchange rates, and following donor countries participated in the Accelerated
option volatilities. Selection of these inputs may involve Note Encashment program: Norway to increase its burden
some judgment and may impact net income. ADB share; Canada, Denmark, Finland, Sweden, Republic of
believes that the estimates of fair values are reasonable Korea and New Zealand to make additional
given existing controls and processes. contributions; and Austria and Spain to meet their burden
share. (For details of amounts released for operational
Special Funds commitment in 2005, see the column labeled “Addition” in Table 29
in the Statistical Annex.)
ADB is authorized by its Charter to establish and ADF VIII
VIII. Contributions pledged under ADF VIII
administer Special Funds. These are the Asian amounting to $151.8 million were paid and used for loan
Development Fund; Technical Assistance Special Fund; commitments in 2005. The remaining unpaid
the Japan Special Fund, including the Asian Currency contributions as of 31 December 2005 totaled
Crisis Support Facility; ADB Institute Special Fund $158.5 million, including $102.1 million of the US
(ADBISF); the Asian Tsunami Fund; and the Pakistan contributions in arrears and $56.4 million of the amount
Earthquake Fund. Financial statements for each fund are withheld by other donors.
prepared in accordance with generally accepted
accounting principles except for ADF’s which are special
TABLE 10: Asian Development Fund
purpose financial statements prepared in accordance with
Commitment Authority
ADF Regulations. ($ million)

Asian Development Fund 2005 2004

The ADF is ADB’s concessional financing window for Carryover from ADF VIII 114.9 a
b
DMCs with low per capita gross national products and ADF IX Contributions 497.6
ADF VII and VIII Contributions 151.8 3,464.2
limited debt repayment capacities. It is the only
OCR Net Income Transfer 40.0 350.0
multilateral source of concessional assistance dedicated
Loans Savings and
exclusively to reducing poverty and to improving the Cancellation 495.2 c

quality of life in Asia and the Pacific. Thirty donor Expanded Advance
members (regional and nonregional) have contributed to Commitment Authority 899.3 3,200.0
the Fund. Less: Provision for
Disbursement Risk 44.8 280.1
ADF IX IX. During the eighth replenishment of the
Total ADF IX Commitment
ADF (ADF IX), donors recommended a replenishment of Authority 1,658.8 d
7,229.3 e
$7.0 billion, consisting of $3.3 billion in new Less:
contributions from donors and $3.7 billion from internal Loans and Grants Committed 1,619.0 6,383.9
resources based on the exchange rate specified in Carryover of Conditional
Loans Committed 720.9
Resolution No. 300 of the Board of Governors. ADF IX
became effective on 29 April 2005 after instruments of ADF Commitment Authority
Available for Future Commitmentse 39.8 124.5 a
contribution deposited with ADB for unqualified
contribution reached an amount equivalent to 0.0 Less than 0.1 million.
a The US dollar equivalent of SDR 80.39 million at each year-end exchange
$1,169,951,232 or more than 50% of all pledged rates.
b Contributions received to finance forgone interest of grants are excluded
contributions, based on Board Resolution No. 300 foreign as they have been incorporated in the computation of EACA.

exchange rates. In 2005, 21 donors submitted their c Refers to resources made available from loan savings and cancellations to
directly finance additional loans under a special arrangement applicable
Instruments of Contribution totaling $2,263.6 million.2 during 2003 and 2004.
d Includes resources made available under the ADF IX period (starting 1
Canada and Taipei,China deposited qualified January 2005).
e Includes resources made available under ADF VIII period (2001-2004).
Instruments of Contributions, containing the f Total may not add due to rounding.

2 US dollar equivalent at exchange rates as of 31 December 2005.

18
Currency Management.
Management With a view to make ADB to $70,000 and Rs2.25 million ($52,000 equivalent),

DISCUSSION AND ANALYSIS


MANAGEMENT’S
more relevant, responsive and client oriented, ADB is respectively. At the end of 2005, total TASF resources
changing its currency management practices to benefit amounted to $1,257.5 million. Of this, $1,042.0 million
ADB borrowers. On 27 October 2005, the Board of was committed leaving an uncommitted balance of
Directors approved a currency management framework for $215.5 million. (For details, see Table 30 in the Statistical
ADF loans to be implemented beginning 1 January 2006. Annex.)
Under the new framework, while ADF donor contributions Operations and R esource P
Resource osition
Position
osition. TA
will continue to be made in national currencies, US commitments (approved and effective) increased from
dollars or SDR, ADB will convert these contributions $73.5 million in 2004 to $77.0 million in 2005 for 175
along with ADF loan reflows and liquidity portfolio into TA projects made effective during the year. In 2005, $11.3
the currencies that constitute the SDR. In addition, the million ($6.3 million in 2004) representing completed
borrowers’ obligations for new ADF loans will be and canceled TA projects were written back as a reduction
determined in SDR. The current practice of managing in TA, and the corresponding undisbursed commitment
ADF resources in as many as 15 currencies will be was eliminated. Revenue from investments increased
discontinued and an approach based on SDR will be from $5.0 million in 2004 to $7.2 million in 2005
introduced. because of higher yields in some capital markets. As a
ADF Loan Approvals, Disbursements, and result, the uncommitted balance available for future
Repayments
Repayments. In 2005, 40 ADF loans totaling $1.4 commitments increased from $99.2 million in 2004 to
billion were approved compared with 47 loans totaling $215.5 million in 2005. TASF funded 45% of all TA
$1.2 billion in 2004. Disbursements during 2005 totaled approved in 2005.
$1.2 billion, an increase of 18.2% from $1.1 billion in At the end of the year, TASF investments stood at
2004. At the end of the year, cumulative disbursements $254.2 million, up 5.7% from 2004. Other assets—due
from ADF resources were $22.1 billion. Loan repayments from banks and contributors, advances to consultants, and
during the year amounted to $433.7 million. At year-end, others—totaled $124.4 million. Accounts payable to
outstanding ADF loans amounted to $20.2 billion. OCR and others amounted to $2.5 million.
Status of L oans
Loans
oans. At the end of the year, 28 public
sector loans to Myanmar were in nonaccrual status. The Japan Special Fund
total of outstanding loans to Myanmar amounted to Review of Activities
Activities. TA funded by the JSF continued
$461.3 million comprising about 2.3% of the total to support ADB operations aimed at reducing poverty. In
outstanding ADF loans. March 2005, Japan contributed 2.8 billion yen ($27.2
Investment P ortfolio P
Portfolio osition
Position
osition. The ADF million equivalent) as a regular contribution. As of 31
investment portfolio3 amounted to $5.7 billion on 31 December 2005, Japan’s cumulative contribution to the
December 2005 compared with $5.6 billion in 2004. JSF since its inception in 1988 amounted to 104.8 billion
About 56% of the portfolio was invested in bank deposits, yen (about $904.2 million equivalent) comprising regular
and 44% was invested in fixed income securities. The contributions of 86.7 billion yen ($753.4 million
annualized rate of return on ADF investments in 2005
and 2004 was 3.4%. The portfolio was denominated in 11
currencies. Euros, pounds sterling, Australian dollars, and TABLE 11: Technical Assistance Special Fund
Canadian dollars accounted for 84% of the portfolio. Cumulative Resources
($ million)

Technical Assistance Special Fund 2005 2004


Review of Activities
Activities. In 2005, the Board of Governors Regularized Replenishment
approved an allocation of $32 million from 2004 OCR net Contributions 368.4 213.1
income to the TASF. With the effectivity of the eighth Allocations from OCR Net Income 663.0 631.0
replenishment of ADF (ADF IX) and the third regularized Direct Voluntary Contributions 88.8 88.6
replenishment of TASF, contributions of $155.4 million Income from Investment and
from 21 donors have been committed and $37.7 million Other Sources 140.8 132.8

have been received. In addition, Pakistan and India made Transfers from the TASF to the ADF (3.5) (3.5)

a wholly untied, direct, voluntary contribution amounting TOTAL 1,257.5 1,062.0

3
Includes securities purchased under resale arrangement.

19
equivalent) and supplementary contributions of 18.1 Asian Tsunami Fund
MANAGEMENT’S
DISCUSSION AND ANALYSIS

billion yen ($150.8 million equivalent). In 2005, ADB The Asian Tsunami Fund was established on 11 February
approved 49 TA for the JSF totaling $28.4 million 2005 in response to the special circumstances
inclusive of those that were approved but not yet effective surrounding the DMCs that were stricken by the effects of
(see table below). The uncommitted balance including the tsunami on 26 December 2004. ADB contributed
approved TA not yet effective as of 31 December 2005 $600 million to the Fund, of which $40 million
was $126.4 million. (For details, see Tables 31 and 32 in the unutilized funds, were transferred back to OCR. In
Statistical Annex.) addition, Australia and Luxembourg contributed $3.8
Sector Activities
Activities. In 2005, the JSF financed 14% million and $1.0 million, respectively.
of the total amount of TA approved by ADB including Review of Activities
Activities. At 31 December 2005, eight
33% of the total amount of project preparation TA during TAs and grants amounting to $572 million were made
the year. The breakdown of JSF approvals by sector is effective. The uncommitted resources of the Fund at year-
shown in the table below. end amounted to $6.3 million.

ADB Institute Special Fund Pakistan Earthquake Fund


The costs for operating the ADB Institute are met from The Pakistan Earthquake Fund was established in
the ADBISF which is administered by ADB in accordance November 2005 in response to the special needs of
with the Statute of ADB Institute. Japan made its 10th Pakistan subsequent to the earthquake on 8 October
contribution in the amount of ¥1.52 billion ($13.9 2005. The PEF is to serve as a dedicated fund to deliver
million equivalent) in June 2004. emergency grant financing for investment projects and
As of 31 December 2005, cumulative commitments TAs to support immediate reconstruction, rehabilitation
amounted to ¥13.2 billion (about $110.1 million and associated development activities. ADB contributed
equivalent) excluding translation adjustments. Of the $80 million to the Fund and $5.4 million contributions
total contributions received, $93.6 million had been used have been committed by Finland. The full contribution is
by the end of the year mainly for research and capacity- available for future commitments.
building activities including organizing symposia, forums,
and training; preparing research reports, publications, and Trust funds Managed by ADB
websites; and for associated administrative expenses. The
balance of net current assets excluding property, furniture, In addition to OCR and the Special Funds, ADB also
and equipment available for future projects and programs manages and administers the Japan Scholarship Program
was about $16.5 million. (JSP), the Japan Fund for Poverty Reduction (JFPR), the
Japan Fund for Information and Communication
Technology (JFICT), and channel financing arrangements
TABLE 12: Japan Special Fund Technical Assistance
of a number of trust funds provided by bilateral donors to
by Sector, 2005
support TA and soft components of loans. These funds do
$ Million %
not form part of ADB’s own resources.
Transport and Communications 6.8 24
Finance 5.9 21 Japan Scholarship Program
Agriculture and Natural Resources 3.3 12 The JSP was established in 1988 to provide an
Law, Economic Management
and Public Policy 3.0 11
opportunity for well-qualified citizens of DMCs to
Energy 2.8 10 undertake postgraduate studies in economics,
Water Supply, Sanitation management, science and technology, and other
and Waste Management 2.4 8 development-related fields at selected educational
Education 2.0 7 institutions in Asia and the Pacific. The JSP is funded by
Industry and Trade 1.0 3
Japan and administered by ADB. Currently, 20
Health, Nutrition, and Social Protection 0.7 2
institutions in 10 countries participate.
Multisector 0.5 2
Between 1988 and 2005, Japan contributed
TOTAL 28.4 100 $76.2 million. A total of 1,927 scholarships has been
Totals may not add due to rounding. awarded to recipients from 35 members. Of the total,
1,574 already completed their courses. Women have

20
received 612 scholarships. The number of new agencies have increased sharply in recent years in such

DISCUSSION AND ANALYSIS


MANAGEMENT’S
scholarships awarded annually grew from 49 in 1988 to areas as renewable energy, climate change, poverty
148 in 2005 (see www.adb.org/JSP). reduction, governance, water, gender and development,
and poverty and environment. Several thematic CFAs
Channel Financing Arrangements have been packaged as umbrella facilities to allow more
Official grant cofinancing plays a vital role in ADB than one donor to contribute.
operations, particularly in view of the continuing In 2005, ADB, with an initial contribution of $12.78
constraints on TASF and ADF resources. These grant million from Sweden, established the Cooperation Fund
funds support TA and finance mostly soft components of for Fighting HIV/AIDs in Asia and the Pacific. Norway
loan projects. Most grants are provided by bilateral donors also contributed $1.25 million to an existing Cooperation
under channel financing arrangements (CFAs). ADB acts Fund in Support of Managing for Development Results.
as administrator of the funds and applies its own Efforts continued to mobilize grant funds not only
guidelines and procedures in recruiting consultants, from official sources but also from private sector entities.
making disbursements, and supervising projects. Funds mobilized from private sector entities mostly
Under a CFA, the donor enters into a comprehensive cofinanced regional TA projects in the environment
agreement with ADB whereby the donor provides an sector.
untied grant fund to be administered by ADB, but the
fund does not become part of ADB’s own resources. The Japan Fund for Poverty Reduction
donor indicates its preferred sectors and recipient The JFPR was established in May 2000 as a trust fund to
countries. ADB regularly provides a list and description of support poverty reduction and social development
proposed TA projects that satisfy the donor’s preferences, activities that can add substantial value to ADB projects.
and they agree on the specific activities to be financed. Since 2000, Japan has contributed $344.9 million in
Funds provided under a CFA are usually transferred to an total. To date, $174.4 million for 72 projects have been
interest-bearing account and may also be invested by approved of which 19 projects valued at $28.4 million
ADB pending disbursement. Donors are provided with were approved in 2005. (See www.adb.org/JFPR and Table 32
regular financial statements and progress reports on the in the Statistical Annex.)
use of the funds. ADB is responsible for project
preparation, processing, and administration. CFAs may be Japan Fund for Information and
replenished with additional funds at the donor’s Communication Technology
discretion. The JFICT was established in July 2001 to assist DMCs
The primary advantage of CFAs is that funding for in bridging the digital divide to help reduce poverty. The
several individual TA projects may be provided under a JFICT had an initial contribution of ¥1.3 billion (about
single agreement. Accordingly, they minimize the need for $10.7 million) for a 3-year period. JFICT was originally
detailed negotiations on a case-by-case basis and foster scheduled to close by 31 July 2004 but was extended to
administrative efficiency. The first CFA was negotiated in accommodate new proposals. To date, $9.46 million for
1980. Since then, ADB has entered into CFAs with the 11 projects have been approved for implementation.
following bilateral development partners: Australia, (See www.adb.org/Documents/others/CLICK/R21_03.pdf.)
Belgium, Canada, Denmark, Finland, France, Italy, the
Netherlands, New Zealand, Norway, PRC, Spain, Sweden, Japan Fund for Public Policy Training
Switzerland, and United Kingdom. In 2005, PRC made a The JFPPT was established in March 2004 as a trust
contribution of $20 million to establish its first trust fund fund to enhance DMCs capacity building for public
(PRC Poverty Reduction and Regional Cooperation policy management focusing on regional economies in
Fund). United Kingdom provided an additional £30.0 transition.
million ($56.6 million equivalent) to its existing trust Since its inception, JFPPT was under the
fund while Australia has used its existing channel administration of ADBI. During the 4th quarter of 2005,
financing facility with ADB to channel $1.9 million of its its administration was transferred to ADB. Since its
contributions to seven projects. inception, Japan has contributed about $15.3 million in
In addition to the traditional type of CFA which may total, out of which, $2.0 million had been spent on
be used for several sectors, thematic CFAs with bilateral program support.

21
MANAGEMENT’S
DISCUSSION AND ANALYSIS

22
STATEMENTS
FINANCIAL
Report of Independent Auditors to the Asian Development Bank

In our opinion, the accompanying balance sheets and the related statements of income and
expenses, cash flows, and changes in capital and reserves present fairly, in all material respects,
in terms of United States dollars, the financial position of the Asian Development Bank—
Ordinary Capital Resources at 31 December 2005 and 2004, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of
the management of the Asian Development Bank. Our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by man-
agement, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

Our audits were conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying summary statements of loans and of borrowings
as at 31 December 2005 and 2004, and of statement of subscriptions to capital stock and voting
power as at 31 December 2005 are presented for purposes of additional analyses and are not
required parts of the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic financial statements and in our opinion,
is fairly stated in all material respects in relation to the basic financial statements taken as a
whole.

PricewaterhouseCoopers
Certified Public Accountants

Singapore
8 March 2006

23
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
BALANCE SHEET
31 December 2005 and 2004
Expressed in Thousands of United States Dollars (Note B)
FINANCIAL
STATEMENTS

ASSETS

2005 2004

DUE FROM BANKS (Notes B and C) $ 81,662 $ 76,405

INVESTMENTS (Notes B, C, D, and L)


Government and government-guaranteed obligations $ 4,034,905 $ 4,882,882
Time deposits 3,707,813 2,842,131
Other securities 3,370,039 11,112,757 2,965,082 10,690,095

SECURITIES TRANSFERRED UNDER SECURITIES


LENDING ARRANGEMENT (Notes B and D) 2,770,965 2,040,302

SECURITIES PURCHASED UNDER


RESALE ARRANGEMENT (Notes B and D) 1,118,748 1,330,948

LOANS OUTSTANDING (OCR-5) (Notes A, B, E, and Q)


(Including FAS 133 adjustment of $757 - 2005 and
$870 - 2004 and unamortized front-end fee of
$11,077 - 2005 and $28,349 - 2004)
Members and guaranteed by members 22,923,271 23,790,425
Private sector 634,982 490,476

23,558,253 24,280,901
Less—provision for loan losses 79,464 23,478,789 84,304 24,196,597

EQUITY INVESTMENTS (Notes A, B, and G) 404,975 257,437

ACCRUED INCOME
On investments 99,334 90,673
On loans 239,528 338,862 238,899 329,572

RECEIVABLE FROM MEMBERS (Note K)


Nonnegotiable, noninterest-bearing demand
obligations (Note C) 172,966 207,181
Subscription installments 38 173,004 - 207,181

RECEIVABLE FROM SWAPS (Notes B, H, and Q)


Borrowings 9,733,074 9,583,846
Others 1,582,337 11,315,411 1,567,602 11,151,448

OTHER ASSETS
Property, furniture, and equipment (Notes B and I) 163,586 164,274
Investment related receivables 244,718 175,440
Unamortized issuance cost of borrowings 39,257 48,584
Miscellaneous (Note N) 128,651 576,212 121,353 509,651

TOTAL $ 51,371,385 $ 50,789,636


The accompanying notes are an integral part of these financial statements (OCR-8).

24
OCR-1
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
BALANCE SHEET
31 December 2004 and 2003
Expressed in Thousands of United States Dollars (Note B)

STATEMENTS
FINANCIAL
LIABILITIES, CAPITAL, AND RESERVES

2005 2004

BORROWINGS (OCR-6) (Notes B and J)


(Including FAS 133 adjustment of $2,519 - 2005
and $2,585 - 2004) $ 24,398,499 $ 23,921,444

ACCRUED INTEREST ON BORROWINGS 262,138 264,682

PAYABLE FOR SWAPS (Notes B, H, J, and Q)


Borrowings $ 9,354,776 $ 8,841,324
Others 1,586,604 10,941,380 1,809,722 10,651,046

PAYABLE UNDER SECURITIES LENDING ARRANGEMENT


(Note B) 2,795,081 2,061,489

ACCOUNTS PAYABLE AND OTHER LIABILITIES


Investment related payables 345,535 325,508
Undisbursed technical assistance commitments (Note M) 9,731 20,806
Miscellaneous (Notes B, E, I, and N) 321,881 677,147 277,884 624,198

TOTAL LIABILITIES 39,074,245 37,522,859

CAPITAL AND RESERVES (OCR-4)


Capital stock (OCR-7) (Notes B and K)
Authorized and subscribed
(SDR35,097,280,000 - 2005,
SDR34,991,710,000 - 2004) 50,163,489 54,161,568
Less—”callable” shares subscribed 46,635,308 50,352,179

“Paid-in” shares subscribed 3,528,181 3,809,389


Less—subscription installments not due 10,980 9,874

Subscription installments matured 3,517,201 3,799,515


Less—capital transferred to the
Asian Development Fund 68,047 73,692

3,449,154 3,725,823

Net notional amounts required to maintain value of


currency holdings (Notes B and K) (586,105) (642,944)
Ordinary reserve (Note L) 8,957,392 8,865,414
Special reserve (Note L) 193,629 189,539
Loan loss reserve (Note L) 167,000 218,800
Surplus (Note L) 117 312,117
Cumulative revaluation adjustments account (Note K) 234,833 193,870
Net income after appropriation (OCR-2) (Note L) 105,202 427,080
Accumulated other comprehensive income (OCR-4)
(Notes B and L) (224,082) 12,297,140 (22,922) 13,266,777

TOTAL $ 51,371,385 $ 50,789,636

25
OCR-2
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
STATEMENT OF INCOME AND EXPENSES
For the Years Ended 31 December 2005 and 2004
Expressed in Thousands of United States Dollars (Note B)
FINANCIAL
STATEMENTS

2005 2004

REVENUE (Note M)
From loans (Notes B and E)
Interest $967,387 $926,955
Commitment charge 50,898 50,521
Other 18,044 $1,036,329 60,869 $1,038,345

From investments (Notes B and D)


Interest 377,379 265,557

From other sources—net (Notes E and R) 18,210 9,166

TOTAL REVENUE $1,431,918 $1,313,068

EXPENSES (Note M)
Borrowings and related expenses (Note J) 893,218 861,657
Administrative expenses (Note O) 135,689 118,321
Technical assistance to member countries (3,446) (2,404)
Provision for losses (Notes B and E) (3,477) 2,254
Other expenses 4,248 3,044

TOTAL EXPENSES 1,026,232 982,872

NET REALIZED GAINS (LOSSES)


From investments (Note M) (2,097) 31,812
From equity investments 17,736 27,729
From borrowings 1,023 11
Others 306 (158)

NET REALIZED GAINS 16,968 59,394

NET UNREALIZED (LOSSES) GAINS ON


DERIVATIVES, AS REQUIRED BY FAS 133 (308,743) 40,963

NET INCOME BEFORE CUMULATIVE EFFECT OF


CHANGE IN ACCOUNTING PRINCIPLE 113,911 430,553

CUMULATIVE EFFECT OF CHANGE


IN ACCOUNTING PRINCIPLE (Note B) (4,619) –

NET INCOME 109,292 430,553

APPROPRIATION OF GUARANTEE FEES


TO SPECIAL RESERVE (Note L) 4,090 3,473

NET INCOME AFTER APPROPRIATION


TO SPECIAL RESERVE $ 105,202 $ 427,080
The accompanying notes are an integral part of these financial statements (OCR-8).

26
OCR-3
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
STATEMENT OF CASH FLOWS
For the Years Ended 31 December 2005 and 2004
Expressed in Thousands of United States Dollars (Note B)

STATEMENTS
FINANCIAL
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and other charges on loans received $ 918,237 $ 956,798
Interest on investments received 378,032 297,764
Interest received for securities under resale arrangement 4,898 2,092
Interest and other financial expenses paid (768,295) (787,601)
Administrative expenses paid (80,164) (69,895)
Technical assistance disbursed (6,962) (16,805)
Others–net 7,714 18,386
Net Cash Provided by Operating Activities 453,460 400,739
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of investments 11,265,412 8,686,524
Maturities of investments 91,142,586 100,823,059
Purchases of investments (103,542,060) (110,933,031)
Net receipts from securities under resale arrangement 107,904 909,387
Principal collected on loans 3,491,031 3,952,679
Loans disbursed (3,401,301) (2,393,583)
Net currency and interest rate swaps 4 1,323
Property, furniture, and equipment acquired (11,473) (8,266)
Purchases of equity investments (131,757) (41,718)
Sales of equity investments 82,798 47,859
Net Cash (Used in) Provided by Investing Activities (996,856) 1,044,233
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds of new borrowings 4,681,615 1,720,375
Borrowings redeemed (3,580,596) (4,482,563)
Matured capital subscriptions collected1 3,190 2,830
Borrowing issuance expenses paid (6,286) (719)
Demand obligations of members encashed 36,442 40,639
Net currency and interest rate swaps 127,655 151,559
Resources transferred to ADF (40,000) (150,000)
Resources transferred to TASF (32,000) (50,000)
Resources transferred to ATF (560,000) –
Resources transferred to PEF (80,000) –
Net Cash Provided by (Used in) Financing Activities 550,020 (2,767,879)
Effect of Exchange Rate Changes on Due from Banks (1,367) 1,364
Net Increase (Decrease) in Due from Banks 5,257 (1,321,543)
Due from Banks at Beginning of Year 76,405 1,397,948
Due from Banks at End of Year $ 81,662 $ 76,405
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income (OCR-2) $ 109,292 $ 430,553
Adjustments to reconcile net income to net cash provided by operating activities:
Net unrealized losses (gains) on derivatives 308,743 (40,963)
Depreciation and amortization 98,633 146,632
Change in accrued income, including interest and commitment charges added to loans (136,808) (88,928)
Net gain from sales of investments and early redemption of borrowings (11,821) (62,248)
Change in accrued interest and other expenses 112,451 16,881
Change in undisbursed technical assistance commitments (11,075) (19,886)
Provision for losses charged (7,212) 4,950
Change in administrative expenses receivable from ADF (7,070) 3,693
Others–net (1,673) 10,055
Net Cash Provided by Operating Activities $ 453,460 $ 400,739
1 Supplementary disclosure of noncash financing activities:
Nonnegotiable, noninterest-bearing demand promissory notes amounting to $4,225 ($2,912 - 2004) were received from members.
The accompanying notes are an integral part of these financial statements (OCR-8). 27
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
STATEMENT OF CHANGES IN CAPITAL AND RESERVES
For the Years Ended 31 December 2005 and 2004
Expressed in Thousands of United States Dollars (Notes B and K)
FINANCIAL
STATEMENTS

Net Cumulative Accumulated


Notional Revaluation Net Income Other
Capital Maintenance Ordinary Special Loan Loss Adjustments After Comprehensive
Stock of Value Reserve Reserve Reserve Surplus Account Appropriations Income Total
Balance–
1 January 2004 $3,570,562 $(620,805) $8,892,584 $186,066 $ – $116,645 $ 372,257 $ 435,886 $(100,755) $12,852,440

Comprehensive income
for the year 2004
(Note L) 3,473 427,080 77,833 508,386
Change in SDR value
of paid-in shares
subscribed 153,065 153,065
Change in subscription
installments not due 5,142 5,142
Change in SDR value of
capital transferred to
Asian Development Fund (2,946) (2,946)
Change in notional
maintenance of value (22,139) (22,139)
Allocation of 2003 net
income to surplus
(Note L) 195,472 (195,472) –
Allocation of 2003 net
income to TASF and
ADF (Note L) (200,000) (200,000)
Allocation of 2003 net
income to loan loss
reserve (Note L) 218,800 (218,800) –
Reduction of cumulative
revaluation account by
2003 FAS 133 adjustment
(Note L) (178,387) 178,387 –
Charge to ordinary reserve
for change in SDR value
of capital stock (Note L) (27,170) (27,170)
Balance–
31 December 2004 $3,725,823 $(642,944) $8,865,414 $189,539 $218,800 $312,117 $ 193,870 $ 427,080 $ (22,922) $13,266,777
(Forward)

28
OCR-4

STATEMENTS
FINANCIAL
Net Cumulative Accumulated
Notional Revaluation Net Income Other
Capital Maintenance Ordinary Special Loan Loss Adjustments After Comprehensive
Stock of Value Reserve Reserve Reserve Surplus Account Appropriations Income Total

Balance–
31 December 2004 $3,725,823 $(642,944) $8,865,414 $189,539 $ 218,800 $ 312,117 $193,870 $ 427,080 $ (22,922) $13,266,777
(Forward)

Comprehensive income
for the year 2005
(Note L) 4,090 105,202 (201,160) (91,868)
Change in SDR value of
paid-in shares subscribed (289,693) (289,693)
Change in subscription
installments not due (1,572) (1,572)
Additional paid-in shares
subscribed during the year 8,951 8,951
Change in SDR value of
capital transferred to
Asian Development Fund 5,645 5,645
Change in notional
maintenance of value 56,839 56,839
Allocation of 2004 net
income to ordinary
reserve, surplus and
cumulative revaluation
account and transfer from
loan loss reserve (Note L) 37,917 (51,800) 40,000 40,963 (67,080) –
Allocation of 2004 net
income to ATF, TASF, and
ADF (Note L) (360,000) (360,000)
Allocation of Surplus to
ATF and PEF (Note L) (352,000) (352,000)
Credit to ordinary reserve
for change in SDR value of
capital stock (Note L) 54,061 54,061

Balance–
31 December 2005 $3,449,154 $(586,105) $8,957,392 $193,629 $ 167,000 $ 117 $234,833 $ 105,202 $(224,082) $12,297,140

Note: Figures may not add due to rounding.

Accumulated Other Comprehensive Income (Note L)


For the Years Ended 31 December 2005 and 2004
Expressed in Thousands of United States Dollars (Note B)

FAS 133 Accumulated Unrealized Minimum Accumulated Other


Adjustments and Translation Investment Holding Pension Liability Comprehensive
Amortization Adjustments Gains (Losses) Adjustment Income

2005 2004 2005 2004 2005 2004 2005 2004 2005 2004

Balance, 1 January $(6,442) $(11,437) $ (20,326) $(125,520) $14,272 $45,504 $(10,426) $ (9,302) $ (22,922) $(100,755)
Amortization 3,876 4,995 – – – – – – 3,876 4,995
Other comprehensive
income for the year – – (226,356) 105,194 15,825 (31,232) 5,495 (1,124) (205,036) 72,838

Balance, 31 December $(2,566) $ (6,442) $(246,682) $ (20,326) $30,097 $14,272 $ (4,931) $(10,426) $(224,082) $ (22,922)

The accompanying notes are an integral part of these financial statements (OCR-8).

29
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
SUMMARY STATEMENT OF LOANS
31 December 2005 and 2004
Expressed in Thousands of United States Dollars (Note B)
FINANCIAL
STATEMENTS

Undisbursed Loans
Loans Balances of Not Yet Total Percent of
Borrowers/Guarantors Outstanding1 Effective Loans2 Effective3 Loans Total Loans

Afghanistan $ 35,000 $ – $ – $ 35,000 0.09


Azerbaijan – – 59,000 59,000 0.15
Bangladesh 288,034 403,404 225,000 916,438 2.34
China, People’s Rep. of 5,552,543 3,580,611 1,363,800 10,496,954 26.87
Fiji Islands 72,596 81,711 – 154,307 0.39
India 3,111,471 3,244,836 1,139,533 7,495,840 19.18
Indonesia 8,365,416 947,044 535,100 9,847,560 25.20
Kazakhstan 70,399 40,680 – 111,079 0.28
Korea, Rep. of 139,341 – – 139,341 0.36
Lao People’s Dem. Rep. 26,121 43,879 – 70,000 0.18
Malaysia 314,858 6,629 – 321,487 0.82
Marshall Islands 3,816 – – 3,816 0.01
Micronesia, Fed. States of – – 4,800 4,800 0.01
Mongolia 4,500 – – 4,500 0.01
Myanmar – – – – –
Nauru 2,300 – – 2,300 0.01
Nepal 31,243 – – 31,243 0.08
Pakistan 1,834,274 1,281,408 387,300 3,502,982 8.97
Papua New Guinea 170,276 71,298 – 241,574 0.62
Philippines 2,676,084 605,894 223,337 3,505,315 8.97
Sri Lanka 203,166 200,558 150,000 553,724 1.42
Thailand 201,238 24,599 – 225,837 0.58
Uzbekistan 329,437 352,662 – 682,099 1.75
Viet Nam 137,217 123,750 360,000 620,967 1.59
23,569,330 11,008,963 4,447,870 39,026,163 99.88
Regional – 16,500 28,500 45,000 0.12
TOTAL – 31 December 2005 23,569,330 11,025,463 4,476,370 39,071,163 100.00
Provision for losses (79,464) – – (79,464)
Unamortized front-end fee (11,077) – – (11,077)
NET BALANCE – 31 December 2005 $23,478,789 $11,025,463 $4,476,370 $38,980,622
Made up of loans to:
Members and guaranteed by members $ 22,920,971 $ 10,934,499 $ 3,788,345 $ 37,643,815
Private sector 557,818 90,964 688,025 1,336,807
Net balance – 31 December 2005 $ 23,478,789 $ 11,025,463 $ 4,476,370 $ 38,980,622
TOTAL – 31 December 2004 $24,309,250 $10,501,879 $5,053,684 $39,864,813
Provision for losses (84,304) – – (84,304)
Unamortized front-end fee (28,349) – – (28,349)
NET BALANCE – 31 December 2004 $24,196,597 $10,501,879 $5,053,684 $39,752,160
Made up of loans to:
Members and guaranteed by members $ 23,788,125 $ 10,344,131 $ 4,700,180 $ 38,832,436
Private sector 408,472 157,748 353,504 919,724
Net balance – 31 December 2004 $ 24,196,597 $ 10,501,879 $ 5,053,684 $ 39,752,160

1 Amounts outstanding on the multicurrency fixed lending rate loans totaled $200,030 ($286,791 - 2004), on pool-based loans totaled $12,828,090
($14,879,834 - 2004) and on LIBOR-based loans and market-based loans totaled $10,541,209 ($9,142,625 - 2004). The average yield on loans was 4.35%
(4.16% - 2004).
2 Of the undisbursed balances, ADB has made irrevocable commitments to disburse various amounts totalling $205,674 ($205,928 - 2004).
3 Excludes multitranche financing facilities of $1,520,000 (nil - 2004). No loan from these facilities was approved in 2005.
4 Includes undisbursed commitment relating to Revolving Credit Facility of Trade Financing Facilitation Program amounting to $16,500.
The accompanying notes are an integral part of these financial statements (OCR-8)

30
OCR-5

STATEMENTS
FINANCIAL
MATURITY OF EFFECTIVE LOANS

Twelve Months Five Years


Ending Ending
31 December Amount 31 December Amount

2006 $1,391,705 2015 10,400,279


2007 1,486,394 2020 7,971,305
2008 1,676,088 2025 5,276,228
2009 1,862,284 2030 2,484,811
2010 1,973,074 2035 57,565
2037 15,060

Total $34,594,793 4

SUMMARY OF CURRENCIES RECEIVABLE ON LOANS OUTSTANDING

Currency 2005 2004 Currency 2005 2004

Euro $ 2,436 $ 6,025 Philippine peso 34,856 –


Japanese yen 4,961,336 6,034,805 Swiss franc 23,262 37,050
Indian rupee 75,977 20,836 United States dollar 18,471,463 18,210,534

Total $23,569,330 $24,309,250

31
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
SUMMARY STATEMENT OF BORROWINGS
31 December 2005 and 2004
Expressed in Thousands of United States Dollars (Note B)
FINANCIAL
STATEMENTS

Borrowings Swap Arrangements2


Principal Outstanding1 Payable (Receivable)3
2005 2004 2005 2004
Australian dollar $ 1,781,100 $ 1,854,960 $(1,765,589) $(1,841,031)
Canadian dollar 516,840 479,169 (527,379) (476,539)
Chinese yuan 123,913 – – –
Euro 1,300,396 1,495,866 (1,382,359) (1,635,741)
Hong Kong dollar 167,632 205,756 (164,330) (211,344)
Indian rupee 111,123 114,482 7,160 11,800
(8)
Japanese yen 3,779,260 4,718,762 2,894,589 3,400,155
(1,721,168) (1,772,389)
Malaysian ringgit 105,834 105,263 (105,675) (104,585)
New Taiwan dollar 213,242 218,955 (204,263) (209,561)
New Zealand dollar 319,153 – (308,832) –
Philippine peso 31,168 – (129) –
Pound sterling 316,125 5 189,613 3,548 –
Singapore dollar 120,301 122,268 (117,923) (122,363)
South African rand 677,131 – (662,065) –
Swiss franc 525,343 861,432 (234,229) (546,636)
Thai baht 97,501 – (91,116) –
United States dollar 14,267,934 6 13,845,588 6,449,479 5,429,369
(2,448,017) (2,663,649)
Subtotal 24,453,996 24,212,114 $ (378,298) $ (742,522)
Unamortized discounts/
premiums and transition adjustments 99,680 74,302
Embedded derivatives (155,177) (364,972)
FAS 133 Adjustments – –
Total $24,398,499 $23,921,444

MATURITY STRUCTURE OF BORROWINGS OUTSTANDING7


Twelve Months Five Years
Ending Ending
31 December Amount 31 December Amount
2006 $3,497,383 2015 5,460,727
2007 5,818,405 2020 1,315,894
2008 3,209,866 2025 299,928
2009 2,543,882 2030 460,979
2010 1,777,261 2035 65,423
over 2035 4,248 8
Total $24,453,996

1 Includes zero coupon and deep discount borrowings which have been recorded at their discounted values. The aggregate face amounts and discounted values
of these borrowings (in United States dollar equivalents) are:

Aggregate Face Amount Discounted Value


Currency 2005 2004 2005 2004
Australian dollar $ 966,174 $1,028,940 $ 730,752 $ 736,378
Canadian dollar 689,388 664,424 516,840 479,169
Philippine peso 47,143 – 31,168 –
South African rand 15,760 – 12,056 –
Swiss franc 371,891 431,502 221,632 244,313
United States dollar 1,772,903 1,782,903 1,084,934 1,055,588
2 Include currency and interest rate swaps. At 31 December 2005, the remaining maturity of swap agreements ranged from less than one year to 30 years.
Approximately 71.67% of the swap receivables and 75.46% of the payables are due before 1 January 2011.

32
OCR-6

STATEMENTS
FINANCIAL
Net Currency Obligation3 Weighted Average
2005 2004 Cost (%) After Swaps4
$ 15,511 $ 13,929 31.81
(10,539) 2,630 (6.80)
123,913 – 3.45
(81,963) (139,875) 0.16
3,302 (5,588) 0.03
118,283 126,274 5.39

4,952,681 6,346,528 1.19

159 678 7.95


8,979 9,394 (11.33)
10,321 – 1.53
31,039 – 19.08
319,673 189,613 12.21
2,378 (95) 0.36
15,066 – 0.26
291,114 314,796 5.35
6,385 – 0.40
18,269,396 16,611,308 4.35

$24,075,698 $23,469,592 3.76

1.28
5.04

INTEREST RATE SWAP ARRANGEMENTS


Average Rate (%)
Receive Pay
Notional Amount Fixed Floating9 Maturing Through10
Receive Fixed Swaps:
Australian dollar11 $ 67,972 2.68 (0.33) 2022-2032
Euro12 84,965 4.40 3.62 2010
Indian rupee 111,124 5.40 6.02 2014
Philippine peso 30,789 7.76 2010
United States dollar 8,303,627 3.61 3.93 2006-2018
United States dollar13 42,483 2.14 (0.33) 2016-2027
Receive Floating Swaps:
Japanese yen 654,658 0.28 0.62 (0.33) 2009-2032
Total $9,295,618

3 Adjusted by the cumulative effect of the adoption of FAS 133 effective 1 January 2001.
4 Calculation is based on average carry book value of borrowings net of fair value of swaps. Thus, the weighted average cost may be negative if the related swaps
payable exposure is in a different currency and the fair value of swaps receivable exceeds the carry book value of borrowings.
5 Consists of long-term borrowings of $169,691 and short-term borrowings of $146,434.
6 Consists of long-term borrowings of $14,149,934 and short-term borrowings of $118,000.
7 Bonds with put and call options were considered maturing on the first put or call date.
8 Of this amount, $4,248 will mature in March 2036.
9 Represent average current floating rates, net of spread.
10 Swaps with early termination date were considered maturing on the first termination date.
11 Consists of dual currency swaps with interest receivable in Australian dollar and interest payable in Japanese yen.
12 Consists of a dual currency swap with interest receivable in Euro and interest payable in Japanese yen.
13 Consists of dual currency swaps with interest receivable in United States dollar and interest payable in Japanese yen.
The accompanying notes are an integral part of these financial statements (OCR-8).

33
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER
31 December 2005
Expressed in Thousands of United States Dollars (Note B)
FINANCIAL
STATEMENTS

SUBSCRIBED CAPITAL VOTING POWER


Number of Percent Par Value of Shares Number of Percent
MEMBER Shares of Total Total Callable Paid-in Votes of Total

REGIONAL
Afghanistan 1,195 0.034 $ 17,080 $ 11,620 $ 5,460 14,904 0.340
Armenia 10,557 0.301 150,888 140,283 10,605 24,266 0.553
Australia 204,740 5.834 2,926,287 2,721,359 204,929 218,449 4.979
Azerbaijan 15,736 0.448 224,910 209,088 15,822 29,445 0.671
Bangladesh 36,128 1.029 516,367 480,206 36,161 49,837 1.136
Bhutan 220 0.006 3,144 2,816 329 13,929 0.317
Cambodia 1,750 0.050 25,012 20,753 4,259 15,459 0.352
China, People’s Rep. of 228,000 6.496 3,258,736 3,030,467 228,269 241,709 5.510
Cook Islands 94 0.003 1,344 1,258 86 13,803 0.315
Fiji Islands 2,406 0.069 34,388 31,973 2,415 16,115 0.367
Hong Kong, China 19,270 0.549 275,420 256,125 19,295 32,979 0.752
India 224,010 6.383 3,201,708 2,977,498 224,210 237,719 5.419
Indonesia 192,700 5.490 2,754,203 2,561,338 192,866 206,409 4.705
Japan 552,210 15.734 7,892,572 7,339,845 552,727 565,919 12.900
Kazakhstan 28,536 0.813 407,856 379,285 28,571 42,245 0.963
Kiribati 142 0.004 2,030 1,887 143 13,851 0.316
Korea, Rep. of 178,246 5.079 2,547,617 2,369,229 178,387 191,955 4.375
Kyrgyz Republic 10,582 0.302 151,245 140,654 10,591 24,291 0.554
Lao PDR 492 0.014 7,032 6,274 758 14,201 0.324
Malaysia 96,350 2.745 1,377,102 1,280,655 96,447 110,059 2.509
Maldives 142 0.004 2,030 1,887 143 13,851 0.316
Marshall Islands 94 0.003 1,344 1,258 86 13,803 0.315
Micronesia, Fed. States of 142 0.004 2,030 1,887 143 13,851 0.316
Mongolia 532 0.015 7,604 7,075 529 14,241 0.325
Myanmar 19,270 0.549 275,420 256,125 19,295 32,979 0.752
Nauru 142 0.004 2,030 1,887 143 13,851 0.316
Nepal 5,202 0.148 74,351 69,134 5,217 18,911 0.431
New Zealand 54,340 1.548 776,665 722,282 54,384 68,049 1.551
Pakistan 77,080 2.196 1,101,681 1,024,529 77,152 90,789 2.069
Palau 114 0.003 1,629 1,515 114 13,823 0.315
Papua New Guinea 3,320 0.095 47,452 44,150 3,302 17,029 0.388
Philippines 84,304 2.402 1,204,932 1,120,562 84,370 98,013 2.234
Samoa 116 0.003 1,658 1,486 172 13,825 0.315
Singapore 12,040 0.343 172,084 160,035 12,049 25,749 0.587
Solomon Islands 236 0.007 3,373 3,144 229 13,945 0.318
Sri Lanka 20,520 0.585 293,286 272,748 20,539 34,229 0.780
Taipei,China 38,540 1.098 550,841 512,279 38,562 52,249 1.191
Tajikistan 10,134 0.289 144,842 134,652 10,191 23,843 0.543
Thailand 48,174 1.373 688,537 640,313 48,224 61,883 1.411
Timor-Leste 350 0.010 5,002 4,645 357 14,059 0.320
Tonga 142 0.004 2,030 1,887 143 13,851 0.316
Turkmenistan 8,958 0.255 128,034 119,030 9,004 22,667 0.517
Tuvalu 50 0.001 715 657 57 13,759 0.314
Uzbekistan 23,834 0.679 340,652 316,798 23,855 37,543 0.856
Vanuatu 236 0.007 3,373 3,144 229 13,945 0.318
Viet Nam 12,076 0.344 172,599 152,803 19,795 25,785 0.588
Total Regional (Forward) 2,223,452 63.351 $31,779,132 $29,538,523 $2,240,609 2,854,066 65.056

34
OCR-7

STATEMENTS
FINANCIAL
SUBSCRIBED CAPITAL VOTING POWER
Number of Percent Par Value of Shares Number of Percent
MEMBER Shares of Total Total Callable Paid-in Votes of Total

Total Regional (Forward) 2,223,452 63.351 $31,779,132 $29,538,523 $2,240,609 2,854,066 65.056

NONREGIONAL
Austria 12,040 0.343 172,084 160,035 12,049 25,749 0.587
Belgium 12,040 0.343 172,084 160,035 12,049 25,749 0.587
Canada 185,086 5.274 2,645,379 2,460,131 185,248 198,795 4.531
Denmark 12,040 0.343 172,084 160,035 12,049 25,749 0.587
Finland 12,040 0.343 172,084 160,035 12,049 25,749 0.587
France 82,356 2.347 1,177,090 1,094,649 82,440 96,065 2.190
Germany 153,068 4.361 2,187,755 2,034,537 153,218 166,777 3.802
Italy 63,950 1.822 914,018 850,001 64,017 77,659 1.770
Luxembourg 12,040 0.343 172,084 159,978 12,106 25,749 0.587
The Netherlands 36,294 1.034 518,739 482,422 36,318 50,003 1.140
Norway 12,040 0.343 172,084 160,035 12,049 25,749 0.587
Portugal 12,040 0.343 172,084 159,978 12,106 25,749 0.587
Spain 12,040 0.343 172,084 160,035 12,049 25,749 0.587
Sweden 12,040 0.343 172,084 160,035 12,049 25,749 0.587
Switzerland 20,650 0.588 295,144 274,463 20,682 34,359 0.783
Turkey 12,040 0.343 172,084 160,035 12,049 25,749 0.587
United Kingdom 72,262 2.059 1,032,819 960,498 72,321 85,971 1.960
United States 552,210 15.734 7,892,572 7,339,845 552,727 565,919 12.900
Total Nonregional 1,286,276 36.649 18,384,357 17,096,785 1,287,572 1,533,038 34.944

TOTALS 3,509,728 100.000 $50,163,489 $46,635,308 $3,528,181 4,387,104 100.000


Notes: Figures may not add due to rounding.
The accompanying notes are an integral part of these financial statements (OCR-8).

35
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

NOTE A—NATURE OF OPERATIONS AND Article 12, paragraph 3 of the Charter provides that
LIMITATIONS ON LOANS, GUARANTEES, equity investments shall not exceed 10% of the unim-
AND EQUITY INVESTMENTS paired paid-in capital together with reserves and surplus,
exclusive of the special reserve. At 31 December 2005,
Nature of Operations such equity investments represented approximately 5.6%
(4.0% – 2004) of the paid-in capital, reserves, and sur-
The Asian Development Bank (ADB), a multilateral plus, as defined.
development finance institution, was established in 1966
with its headquarters in Manila, Philippines. ADB and NOTE B—SUMMARY OF SIGNIFICANT
its operations are governed by the Agreement Establish- ACCOUNTING POLICIES
ing the Asian Development Bank (the Charter). Its
purpose is to foster economic development and co- Functional Currencies and Reporting Currency
operation in the Asian and Pacific region and to contri-
bute to the acceleration of the process of economic The currencies of members are all functional currencies
development of the developing member countries as these are the currencies of the primary economic
(DMCs) in the region, collectively and individually. With environment in which ADB generates and expends cash.
the adoption of its poverty reduction strategy at the end The reporting currency is the United States dollar, and
of 1999, ADB made reducing poverty in the region its the financial statements are expressed in thousands of
main goal. ADB provides financial and technical assis- current United States dollars.
tance (TA) for projects and programs, which will con-
tribute to achieving this purpose. Translation of Currencies
Mobilizing financial resources, including cofinancing,
is an integral part of ADB’s operational activities. In addi- Assets and liabilities are translated from their functional
tion, ADB, alone or jointly, administers on behalf of donors, currencies to the reporting currency at the applicable
including members, their agencies and other development rates of exchange at the end of the reporting period.
institutions, funds restricted for specific uses, which in- Income and expense amounts are translated for each semi-
clude TA grants as well as regional programs. monthly period generally at the applicable rates of ex-
ADB’s ordinary operations comprise loans, equity change at the beginning of each period; such practice
investments, and guarantees. During the years 2001 and approximates the application of average rates in effect
2002, limited technical assistance to member countries during the period. Translation adjustments other than
to support high priority TA programs was included. ADB those relating to maintenance of Special Drawing Right
finances its ordinary operations through borrowings, paid- (SDR) capital values (see Notes K and L), are charged or
in capital, and reserves. credited to “Accumulated translation adjustments” and
reported in “CAPITAL AND RESERVES” as part of
Limitations on Loans, Guarantees, and “Accumulated other comprehensive income.”
Equity Investments In October 2005, the Board of Directors approved
the adoption of daily exchange rates for accounting and
Article 12, paragraph 1 of the Charter provides that the financial reporting purposes effective 1 January 2006. The
total amount outstanding of loans, equity investments, use of daily exchange rates will allow transactions de-
and guarantees made by ADB shall not exceed the total nominated in non-US dollar to be translated using ex-
of ADB’s unimpaired subscribed capital, reserves, and change rates at time of transactions.
surplus, exclusive of the special reserve. At 31 Decem-
ber 2005, the total of such loans, equity investments, Valuation of Capital Stock
and guarantees aggregated approximately 68.3% (64.7%
– 2004) of the total subscribed capital, reserves, and The authorized capital stock of ADB is defined in Arti-
surplus as defined. cle 4, paragraph 1 of the Charter “in terms of United

36
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004 CONTINUED

STATEMENTS
FINANCIAL
States dollars of the weight and fineness in effect on 31 criteria does not make fully evident ADB’s risk manage-
January 1966” (the 1966 dollar) and the value of each ment strategies.
share is defined as 10,000 1966 dollars. The capital stock The initial application of FAS 133 gave rise to a
had historically been translated into the current United transition loss of $81,657,000 in other comprehensive in-
States dollar (ADB’s unit of account) on the basis of its come and a gain of $34,656,000 was reported in net
par value in terms of gold. From 1973 until 31 March income. The allocation between net income and other
1978, the rate arrived at on this basis was $1.20635 per comprehensive income was based upon the economic
1966 dollar. Since 1 April 1978, at which time the Sec- hedging relationships that existed before the initial
ond Amendment to the Articles of Agreement of the application of this statement.
International Monetary Fund (IMF) came into effect, The amount recorded in other comprehensive in-
currencies no longer have par values in terms of gold. come as transition loss is being reclassified into earnings
Pending ADB’s selection of the appropriate successor to in the same period or periods in which the underlying
the 1966 dollar, the capital stock has been valued for transaction affect earnings.
purposes of these financial statements in terms of the
SDR at the value in current United States dollars as Investments
computed by the IMF, with each share valued at
SDR10,000. All investment securities and negotiable certificate of
As of 31 December 2005, the value of the SDR in deposits held by ADB other than derivative instruments
terms of the current United States dollar was $1.42927 are considered by Management to be “Available for Sale”
($1.54784 – 2004) giving a value for each share of ADB’s and are reported at estimated fair value, which repre-
capital equivalent to $14,292.70 ($15,478.40 – 2004). sents their fair market value. Time deposits are report-
However, ADB could decide to fix the value of each share ed at cost. Unrealized gains and losses are reported in
at $12,063.50 based on the 31 March 1978 par value of “CAPITAL AND RESERVES” as part of “Accumulated
the United States dollar in terms of gold. other comprehensive income.” Realized gains and losses
are included in income from investments and are mea-
Derivative Financial Instruments sured by the difference between amortized cost and the
net proceeds of sales. With respect to exchange traded
All derivative transactions are reported in accordance with futures, realized gain or loss is reported based on daily
Statement of Financial Accounting Standards (FAS) No. settlement of the net cash margin.
133, “Accounting for Derivative Instruments and Hedg- Interest on investment securities and time depo-
ing Activities,” along with its amendments, collectively sits are recognized as realized and reported, net of
referred as FAS 133, effective 1 January 2001. FAS 133 amortizations of premium and discounts.
requires that derivative instruments be recorded in the
Balance Sheet as either assets or liabilities measured at Securities Transferred Under Securities Lending
fair value. Arrangement and Securities Purchased Under
ADB uses derivative instruments for asset/liability Resale Arrangement
management of individual positions and portfolios, as well
as for the reduction of transaction costs. In applying FAS ADB accounts for transfers of financial assets in accor-
133 for purposes of financial statement reporting, ADB dance with FAS 140, “Accounting for Transfers and
has elected not to define any qualifying hedging rela- Servicing of Financial Assets and Extinguishments of
tionships. Rather, all derivative instruments, as defined Liabilities - a replacement of FAS 125.” In general, trans-
by FAS 133, have been marked to fair value, and all fers are accounted for as sales when control over the
changes in fair value have been recognized in net income. transferred assets has been relinquished. Otherwise the
ADB has elected not to define any qualifying hedging transfers are accounted for as repurchase/resale agree-
relationships, not because economic hedges do not exist, ments and collateralized financing arrangements. Secu-
but rather because the application of FAS 133 hedging rities transferred under securities lending arrangements

37
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

are recorded as assets and reported at estimated fair value Effective 2000, ADB levies front-end fees on all new
and the cash collateral received recorded as a liability. public sector loans. These fees are deferred and amor-
Securities received under resale arrangements are nei- tized over the life of the loans after offsetting deferred
ther recorded on ADB’s balance sheet nor repledged under direct loan origination costs. In 2004, entire front-end
securities lending arrangements. ADB monitors the fair fee on all new public sector loans approved during the
value of the securities received under resale arrangements, year was waived. In 2005, the policy was extended to
and if necessary, requires additional collateral. cover the period up to June 2006.
ADB levies a commitment charge on the undis-
Loans bursed balance of effective loans. Unless otherwise pro-
vided by the loan agreement, the charges take effect
ADB’s loans are made to or guaranteed by members, with commencing on the 60th day after the loan signing date
the exception of loans to the private sector, and have and are credited to loan income.
maturities ranging between 3 and 30 years. ADB requires
its borrowers to absorb exchange risks attributable to Guarantees
fluctuations in the value of the currencies which it has
disbursed. Loan interest income and loan commitment ADB extends guarantees to public sector and private
fees are recognized on accrual basis. In line with ADB’s sector borrowers. Guarantees are regarded as outstand-
principle of cost pass through pricing, any variation in ing when the underlying financial obligation of the bor-
the actual cost of borrowings is passed to LIBOR-based rower is incurred. ADB would be required to perform
borrowers as surcharge or rebate. under its guarantees if the payments guaranteed were
It is the policy of ADB to place loans in nonaccrual not made by the debtor, and the guaranteed party called
status for which principal, interest, or other charges are the guarantee by demanding payments from ADB in
overdue by six months. Interest and other charges on accordance with the term of the guarantee.
nonaccruing loans are included in income only to the Prior to 1 January 2003, guarantees in the absence
extent that payments have been received by ADB. ADB of any call, were not reflected in the financial statements
maintains a position of not taking part in debt resche- but disclosed as a note to the financial statements (see
duling agreements with respect to public sector loans. Note F) in accordance with the provisions of FASB No.
In the case of private sector loans, ADB may agree to 5, Accounting for Contingencies. FASB Interpretation
debt rescheduling only after alternative courses of ac- No. 45 (FIN 45), “Guarantor’s Accounting and Disclo-
tion have been exhausted. sure Requirements for Guarantees, Including Indirect
ADB determines that a loan is impaired and there- Guarantees of Indebtedness to Others,” which came into
fore subject to provisioning when principal or interest is effect in 2003, requires the recognition of two types of
in arrears for one year for public sector loans (unless there liabilities that are associated with guarantees: (a) the
is clear and convincing evidence warranting the defer- stand-by ready obligation to perform, and (b) the con-
ment or acceleration of such provisioning) and six months tingent liability. ADB recognizes at the inception of a
for private sector loans. If the present value of expected guarantee, a liability for the stand-by ready obligation to
future cash flows discounted at the loan’s effective in- perform on guarantees issued and modified after 31
terest rate is less than the carrying value of the loan, a December 2002. The liability is included in “Miscella-
valuation allowance is established with a corresponding neous liabilities”.
charge to provision for loan losses. Front-end fee income on guarantees received is de-
ADB’s periodic evaluation of the adequacy of the ferred and amortized over the period of the guarantee
provision for loan losses is based on its past loan loss ex- contract and the unamortized balance of deferred front-
perience, known and inherent risks in existing loans, and end fee of guarantee is included in “Miscellaneous
adverse situations that may affect a borrower’s ability to liabilities.”
repay.

38
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004 CONTINUED

STATEMENTS
FINANCIAL
Equity Investments Accounting and Reporting Developments

Investments in equity securities which are considered In March 2004, the Emerging Issues Task Force (EITF)
as “Available for Sale” are reported at estimated fair value. issued EITF 03-16 which requires that investments in
Investments in equity securities without readily deter- limited liability companies (LLC) that have characte-
minable fair values are reported at cost less impairment. ristics of partnership to be accounted using equity
ADB applies equity method of accounting to in- method. This became effective for ADB in 2005.
vestments where the ADB has the ability to exercise In May 2005, FASB issued FAS No. 154, Accounting
significant influence, limited partnership (LLPs) with Changes and Error Corrections. This statement is effective
larger than 3% ownership, and to certain limited liabil- for accounting changes and corrections of errors made in
ity companies (LLCs) that maintain a specific owner- the calendar years beginning after 15 December 2005.
ship account for each investor. As this standard requires that, in the absence of specific
Equity investments with poor credit ratings are as- transitional provisions applying to a change in account-
sessed for impairment at each quarter. When an impair- ing policy (including adoption of a new standard), any
ment is identified and is deemed to be other than such change should be applied retroactively, it will af-
temporary, the equity investment is written down to the fect ADB’s application and presentation of accounting
impaired value, which becomes the new cost basis of the change in its financial reporting in future fiscal years.
equity investments. Impairment losses are not reversed In November 2005, FASB issued an FASB Staff
for subsequent recoveries in the value of the equity in- Position (FSP) FAS 115-1/124-1, The Meaning of Other-
vestments, until it is sold. Than-Temporary Impairment and Its Application to Certain
Equity investments with readily determinable fair Investments. This FSP addresses the determination as to
values are reported at fair value, with unrealized gains when an investment is considered impaired, whether that
and losses excluded from net income and reported in impairment is other than temporary, and the measure-
“CAPITAL AND RESERVES” as part of “Accumulated ment of an impairment loss. The statement is effective
other comprehensive income.” for reporting periods beginning after 15 December 2005
and will affect ADB’s financial reporting in future fiscal
Property, Furniture, and Equipment years.
In January 2003, FASB issued FASB Interpretation
Property, furniture, and equipment are stated at cost and, No. 46 (FIN 46). During December 2003, FASB replaced
except for land, depreciated over estimated useful lives FIN 46 with FASB Interpretation No. 46, Consolidation
on a straight-line basis. Maintenance, repairs, and minor of Variable Interest Entities – an interpretation of ARB
betterments are charged to expense. No. 51 (FIN 46R). Fin 46 and FIN 46R (collectively
referred to as FIN 46) define certain variable interest
Accounting Estimates entities (VIE) and requires parties to such entities to
assess and measure variable interests in the VIE for the
The preparation of the financial statements in confor- purpose of determining possible consolidation of the VIE.
mity with generally accepted accounting principles re- Variable interests can arise from equity investments,
quires Management to make estimates and assumptions loans, and guarantees. An entity that will absorb a ma-
that affect the reported amounts of assets and liabilities jority of VIE’s expected losses or receive expected resid-
and disclosure of contingent liabilities at the end of the ual return is deemed to be the primary beneficiary of
year and the reported amounts of revenues and expen- the VIE and is subject to consolidation according to the
ses during the year. The actual results could differ from provisions of FIN 46. ADB is required to disclose infor-
those estimates. mation about its involvement in VIE where ADB holds
significant variable interest.

39
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

Statement of Cash Flows to limited amounts, investments may be made in corpo-


rate bonds rated A or better, AAA-rated asset-backed
For the purposes of the Statement of Cash Flows, ADB securities, and AAA-rated mortgage-backed securities.
considers that its cash and cash equivalents are limited Securities may be lent, borrowed, and sold short.
to “DUE FROM BANKS.” In addition, ADB may purchase and sell exchange
traded financial futures and option contracts, and enter
Reclassification into currency and interest rate swaps, and forward rate
agreements. Exposure to interest rate risk may be ad-
Certain reclassifications of prior year’s amounts and in- justed within defined bands to reflect changing market
formation have been made to conform to the current year’s conditions. These adjustments are made through the pur-
presentation. chase and sale of securities, and financial futures. Ac-
cordingly, financial futures are held for risk management
NOTE C—RESTRICTIONS ON USE OF purposes. At 31 December 2005, the notional amount of
CURRENCIES AND DEMAND outstanding purchase and sales futures contracts were
OBLIGATIONS OF MEMBERS $103,750,000 and $27,700,000, respectively,
($110,900,000 and $21,800,000 – 2004).
In accordance with Article 24, paragraph 2(i) of the Included in “Other securities” as of 31 December
Charter, the use by ADB or by any recipient from ADB 2005 were corporate bonds and other obligations of banks
of certain currencies may be restricted by members to amounting to $2,653,610,000 ($2,300,457,000 – 2004)
payments for goods or services produced and intended and asset/mortgage-backed securities of $716,429,000
for use in their territories. With respect to the curren- ($664,625,000 - 2004).
cies of 42 DMCs for 2005 (39 – 2004), cash in banks The currency compositions of the investment port-
(due from banks) and demand obligations totaling folio as of 31 December 2005 and 2004 expressed in
$51,124,000 ($50,625,000 – 2004) and $170,856,000 United States dollars are as follows:
($173,672,000 - 2004), respectively, may be, but are not
currently so restricted. Currency 2005 2004

In accordance with Article 24, paragraphs 2(i) and Australian dollar $ 351,594,000 $ 352,369,000
(ii) of the Charter, one member (one – 2004) has res- Canadian dollar 232,121,000 216,094,000
Euro 656,701,000 636,785,000
tricted the use by ADB or by any recipient from ADB of Japanese yen 2,765,649,000 3,066,061,000
its currency to payments for goods or services produced Pound sterling 254,016,000 220,103,000
Swiss franc 224,222,000 249,739,000
in its territory. As such, cash in banks (due from banks) United States dollar 6,071,043,000 5,460,428,000
and investments totaling $19,000 ($1,000 – 2004) and Others 557,411,000 488,516,000

$2,824,000 ($2,789,000 – 2004), respectively, have been Total $ 11,112,757,000 $10,690,095,000


restricted. None of the demand obligations held by ADB
in 2005 was restricted (nil – 2004).
The estimated fair value and amortized cost of the
NOTE D—INVESTMENTS investments by contractual maturity at 31 December 2005
are as follows:
The main investment management objective is to main- Estimated Amortized
tain security and liquidity. Subject to these parameters, Fair Value Cost
ADB seeks the highest possible return on its investments. Due in one year or less $ 4,930,902,000 $ 4,933,838,000
Investments are governed by the Investment Authority Due after one year
through five years 3,987,196,000 4,006,123,000
approved by the Board of Directors in 1999. ADB is Due after five years
restricted by its Investment Authority to invest in go- through ten years 2,194,659,000 2,216,830,000
vernment and government-related debt instruments and Total $11,112,757,000 $11,156,791,000
in time deposits. In the US dollar portfolio only and up

40
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004 CONTINUED

STATEMENTS
FINANCIAL
Additional information relating to investments in As of 31 December 2005, gross unrealized losses
government and government-guaranteed obligations and amounted to $57,248,000 ($40,671,000 – 2004) from go-
other securities is as follows: vernment and government-guaranteed obligations, corpo-
2005 2004 rate bonds and mortgage/asset-backed securities,
As of 31 December resulting from the market movement. There were 17 gov-
Amortized cost $ 7,448,978,000 $ 7,858,833,000 ernment and government obligations (four – 2004), 52
Estimated fair value 7,404,944,000 7,847,964,000
Gross unrealized gains 13,214,000 29,802,000 corporate obligations (two – 2004), 78 mortgage/asset-
Gross unrealized losses (57,248,000) (40,671,000) backed security positions (23 – 2004) that sustained
For the years ended unrealized losses for over one year, representing 12.05%
31 December: (4.33% - 2004) of the investments. Comparative details
Change in net unrealized
losses from prior year (33,165,000) (46,687,000) for 2005 and 2004 are as follows:
Proceeds from sales 11,265,412,000 8,686,523,000
Gross gain on sales 18,941,000 54,363,000
Gross loss on sales (21,025,000) (21,167,000)

One year or less Over one year Total


For the year 2005 Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Government and government-guaranteed
obligations $1,734,260,000 $ 7,963,000 $ 618,592,000 $21,432,000 $2,352,852,000 $29,395,000
Corporate bonds 740,136,000 5,682,000 632,562,000 14,663,000 1,372,698,000 20,345,000
Mortgage/Asset-backed securities 390,275,000 5,287,000 88,117,000 2,221,000 478,392,000 7,508,000

Total $2,864,671,000 $18,932,000 $1,339,271,000 $38,316,000 $4,203,942,000 $57,248,000

One year or less Over one year Total


For the year 2004 Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Government and government-guaranteed
obligations $ 943,767,000 $15,177,000 $423,984,000 $14,511,000 $1,367,751,000 $29,688,000
Corporate bonds 850,070,000 7,864,000 6,749,000 153,000 856,819,000 8,017,000
Mortgage/Asset-backed securities 233,935,000 2,215,000 31,746,000 751,000 265,681,000 2,966,000

Total $2,027,772,000 $25,256,000 $462,479,000 $15,415,000 $2,490,251,000 $40,671,000

Asset/Mortgage-backed Securities
Securities: Asset/Mortgage- out open positions prior to maturity. Therefore, cash
backed securities are instruments whose cash flow is based receipts or payments are limited to the change in mar-
on the cash flows of a pool of underlying assets or mort- ket value of the future contracts.
gage loans managed by a trust.
NOTE E—LOANS
Exchange Traded Futures
Futures: Futures are contracts for
delayed delivery of securities or money market instru- Loans
ments in which the seller agrees to make delivery at a
specified future date of a specified instrument at a spe- ADB does not currently sell its loans, nor does it believe
cified price or yield. Initial margin requirements are met there is a comparable market for its loans. The estima-
with cash or securities, and changes in the market prices ted fair value of all loans is based on the estimated cash
are generally settled daily in cash. ADB generally closes flows from principal repayments, interest and other

41
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

charges discounted at the applicable market yield curves its borrowers. Provision for loan losses is made against
for ADB’s borrowing cost plus lending spread. The esti- impaired public sector and private sector loans.
mated fair value of public sector loans is not generally The carrying amount and estimated fair value of loans
affected by credit risks based on ADB’s experience with outstanding at 31 December 2005 and 2004 are as follows:

2005 2004
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value

Fixed rate multicurrency loans $ 148,881,000 $ 177,136,000 $ 228,457,000 $ 280,769,000


Pool-based single currency (JPY) loans* 3,893,573,000 4,420,741,000 4,994,867,000 5,703,209,000
Pool-based single currency (US$) loans 8,930,128,000 9,739,443,000 9,879,842,000 11,095,700,000
LIBOR-based loans 10,370,249,000 10,465,957,000 9,040,796,000 9,091,361,000
Fixed rate loans 27,292,000 31,537,000 33,840,000 41,011,000
Local currency loans 108,666,000 112,357,000 18,795,000 19,803,000

Total $23,478,789,000 $24,947,171,000 $24,196,597,000 $26,231,853,000

* Transformed from pool-based multicurrency loans effective 1 January 2004.

Prior to 1 July 1986, the lending rate of ADB was based In November 2003, ADB offered borrowers to trans-
on a multicurrency fixed lending rate system under which form their outstanding pool-based multicurrency loans
loans carried interest rates fixed at the time of loan appro- of $6.5 billion to pool-based single currency loans in
val for the entire life of the loans. Effective 1 July 1986, Japanese yen. The transformation facilitates borrower’s
ADB adopted a multicurrency pool-based variable lending administration for loan service payments and loan ac-
rate system. In addition, in July 1992, ADB introduced a counting. The transformation became effective on
United States dollar pool-based variable lending rate 1 January 2004.
system, and in November 1994, a market-based lending In 2005, ADB received prepayments for 12 loans
rate system was made available to financial intermediaries amounting to $597,423,000 ($2,790,488,000 – 2004) and
in the public sector and to the private sector borrowers. collected prepayment premiums of $16,457,000
Commencing 1 July 2001, ADB offered LIBOR- ($59,427,000 – 2004) which have been included in “Other
based loans (LBLs) in the following currencies – Euro, income from loans.” Ninety-five percent of the prepaid
Japanese yen, and United States dollar. The new LBL amounts were pool-based single currency US dollar loans
lending facility offers borrowers the flexibility of (i) choice in 2005 compared to 51% for pool-based single currency
of currency and interest rate basis; (ii) options to link US dollar and 42% for Japanese yen loans, in 2004.
repayment schedules to actual disbursements for finan- Since 1988, ADB has charged front-end fees for
cial intermediary borrowers; (iii) change the original loan private sector loans. Effective 1 January 2000, ADB le-
terms (currency and interest rate basis) at any time during vies front-end fee of 1% for public sector loans for which
the life of the loan; and (iv) options to cap or collar the the loan negotiations are completed after that date. In
floating lending rate at any time during the life of the addition, a flat commitment fee of 0.75% is charged for
loan. LBL terms are available for all loans for which the new program loans and the progressive commitment fee
invitation to negotiate is issued on or after 1 July 2001. of 0.75% is maintained for project loans. Effective 1
With the introduction of LBLs, all other loan windows January 2000, the lending spread applied to all outstan-
are no longer offered to borrowers. In November 2002, ding pool-based OCR public sector loans and new pub-
ADB offered local currency loans (LCLs) to private sec- lic sector market-based loans was increased from 0.4%
tor borrowers. In August 2005, ADB also offered LCLs to 0.6%.
to public sector borrowers.

42
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004 CONTINUED

STATEMENTS
FINANCIAL
Waivers of Lending Spread and Front-End Fee Loans in Nonaccrual Status

In 2004, the Board of Governors approved the waiver of One public sector loan to Nauru remained in nonaccrual
the entire 1% front-end fee on all new public sector loans status as of 31 December 2005 (one to Nauru - 2004).
approved during 1 January 2004 to 30 June 2005 (waiver The principal outstanding for this loan as of 31 Decem-
of 50 basis points on public sector loans approved in 2003) ber 2005 was $2,300,000 ($2,300,000 – 2004) of which
and waiver of 20 basis points of the lending spread on $596,000 ($462,000 – 2004) was overdue. The loan in
public sector loans outstanding from 1 July 2004 – 30 nonaccrual status resulted in $144,000 ($144,000 - 2004)
June 2005 for borrowers that do not have loans in ar- not being recognized as income from public sector loans
rears. In 2005, the policy was extended to cover the period for the year ended 31 December 2005. The accumulat-
up to June 2006. ed interest and other charges on this loan that were not
The front-end fees received for the year ended 31 recognized as income as of 31 December 2005 would have
December 2005 were $11,714,000 ($23,734,000 – 2004). totaled $846,000 ($702,000 - 2004).
Administrative expenses relating to direct loan origina- Ten private sector loans were in nonaccrual status
tion of $24,481,000 for the year ended 31 December 2005 as of 31 December 2005 (eleven – 2004). The principal
($22,421,000 – 2004) were deferred and offset against outstanding at that date was $49,162,000 ($50,426,000
front-end fees earned. The excess, if any, is amortized – 2004) of which $40,585,000 ($38,735,000 – 2004) was
over the life of each loan. overdue. Loans in nonaccrual status resulted in
Undisbursed loan commitments and an analysis of $11,096,000 ($9,582,000 – 2004) not being recognized
loans by borrowing member countries as of 31 Decem- as income from private sector loans for the year ended
ber 2005 are shown in OCR-5. The carrying amounts of 31 December 2005. The accumulated interest and other
loan outstanding by loan products at 31 December 2005 charges on these loans, net of loan charges of $4,745,000
and 2004 are as follows: waived and written off due to restructuring of loans in
2005 2004 nonaccrual status of prior year, that were not recognized
Public Sector as income as of 31 December 2005 would have totaled
Fixed rate multicurrency loans $ 148,881,000 $ 228,457,000 $52,839,000 ($46,488,000 – 2004).
Pool-based single currency (JPY) loans* 3,889,612,000 4,988,817,000
Pool-based single currency (US$) loans 8,933,196,000 9,882,950,000
LIBOR-based loans 9,960,837,000 8,717,307,000 Loan Loss Provision
22,932,526,000 23,817,531,000
ADB has not suffered any losses of principal on public
Less: Provision for loan losses (2,300,000) (2,300,000)
Unamortized front-end fee (9,255,000) (27,106,000) sector loans. During the year, no additional loan loss
provision ($2,060,000 – 2004) was provided against public
(11,555,000) (29,406,000)
sector loans. Loan loss provisions have been made against
Sub-total 22,920,971,000 23,788,125,000
impaired private sector loans (see Note M).
Private Sector Information pertaining to loans which were sub-
Pool-based single currency (JPY) loans* 5,282,000 8,067,000
Fixed rate loans 51,150,000 58,334,000 ject to loan loss provisions at 31 December 2005 and 2004
LIBOR-based loans 469,539,000 404,482,000 is as follows:
Local currency loans 110,833,000 20,836,000 2005 2004
636,804,000 491,719,000 Loans not subject to loss provisions $23,487,887,000 $24,218,977,000
Loans subject to loss provisions 81,443,000 90,273,000
Less: Provision for loan losses (77,164,000) (82,004,000)
Total $23,569,330,000 $24,309,250,000
Unamortized front-end fee (1,822,000) (1,243,000)
Average amount of loans
(78,986,000) (83,247,000) subject to loss provisions $ 88,184,000 $ 94,680,000
Related interest income on
Sub-total 557,818,000 408,472,000 such loans recognized
in the year $ 1,209,000 $ 1,585,000
Total $23,478,789,000 $24,196,597,000 Cash received on related
interest income on
*Transformed from pool-based multicurrency loans effective 1 January 2004. such loans $ 1,195,000 $ 1,531,000

43
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

The changes in the provision for loan losses during 2005 and 2004 are as follows:

2005 2004

Public Private Public Private


Sector Sector Total Sector Sector Total

Balance 1 January $2,300,000 $82,004,000 $84,304,000 $ 240,000 $82,141,000 $82,381,000


Provision(written back) charged during the year – (3,477,000) (3,477,000) 2,060,000 194,000 2,254,000
Provision written off – (664,000) (664,000) – (565,000) (565,000)
Translation adjustment – (699,000) (699,000) – 234,000 234,000

Balance 31 December $2,300,000 $77,164,000 $79,464,000 $2,300,000 $82,004,000 $84,304,000

Cofinancing NOTE F—GUARANTEES

ADB functions as lead lender in cofinancing arrangements ADB extends guarantees to public sector and private
with other participating financial institutions who also sector borrowers. Such guarantees include (i) partial
provide funds to ADB’s public and private sector bor- credit guarantees where only certain principal and/or
rowers. In such capacity, ADB provides loan administra- interest payments are covered; and (ii) political risk
tion services, which include loan disbursements and loan guarantees, which provide coverage against well-defined
collections. The participating financial institutions have sovereign risks. While counterguarantees from the host
no recourse to ADB for their outstanding loan balances. government are required for all public sector guarantees,
Loans administered by ADB on behalf of partici- guarantees for private sector projects may be provided
pating institutions as at 31 December 2005 and 2004 with or without a host government counterguarantee. A
are as follows: counterguarantee takes the form of a member govern-
ment agreement to indemnify ADB for any payments it
2005 makes under the guarantee. In the event that a guaran-
No.of tee is called, ADB has the contractual right to require
Amount Loans
payment from the government, on demand, or as ADB
Public sector loans $802,678,000 40 may otherwise direct.
Private sector loans 107,609,000 10
Guaranteed payments under partial credit guaran-
Total $910,287,000 50 tees are generally due 10 or more years from the loan
inception date. ADB’s political risk guarantee is callable
2004 when a guaranteed event has occurred and such an event
No.of has resulted in debt service default to the guaranteed
Amount Loans lender.
Public sector loans $815,777,000 39 The committed and outstanding amount of these
Private sector loans 121,480,000 10 guarantee obligations as of 31 December 2005 and 31
Total $937,257,000 49 December 2004 covered:

During the year ended 31 December 2005, a total of


$965,000 ($735,000 - 2004) was received as compensa-
tion for arranging and administering such loans. This
amount has been included in “Income from other
sources.”

44
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004 CONTINUED

STATEMENTS
FINANCIAL
2005 2004
Committed Outstanding Committed Outstanding
Amount Amount Amount Amount

Partial Credit Guarantees


with counterguarantee $1,024,030,000 $1,006,123,000 $1,156,735,000 $1,153,593,000
without counterguarantee 5,502,000 5,219,000 – –

$1,029,532,000 $1,011,342,000 $1,156,735,000 $1,153,593,000

Political Risk Guarantees


with counterguarantee 145,558,000 113,237,000 253,167,000 100,508,000
without counterguarantee 100,858,000 66,098,000 102,233,000 52,252,000

246,416,000 179,335,000 355,400,000 152,760,000

Others 950,000 950,000 – –

Total $1,276,898,000 $1,191,627,000 $1,512,135,000 $1,306,353,000

None of these amounts were subject to call as of ported in “CAPITAL AND RESERVES” as part of “Ac-
31 December 2005 (nil – 31 December 2004). The com- cumulated other comprehensive income.”
mitted amount represents the maximum potential As of 31 December 2005, there were eight equity
amount of undiscounted future payment that ADB could investments (eight – 2004) with total fair value of
be required to make, inclusive of standby portion for $1,786,000 ($1,504,000 – 2004) that sustained unreal-
which ADB is committed but not currently at risk. The ized losses for over one year amounting to $309,000
outstanding amount represents the guaranteed amount ($488,000 - 2004).
utilized under the related loans, which have been dis- Approved equity investment facility that has not
bursed as of the end of a reporting period, exclusive of been disbursed was $309,528,000 at 31 December 2005
the standby portion. ADB estimates that the present value ($279,815,000 – 2004).
of guarantees outstanding at 31 December 2005 was
$754,542,000 ($715,733,000 – 2004). NOTE H—DERIVATIVE INSTRUMENTS
As of 31 December 2005, a total liability of
$15,839,000 ($10,842,000 – 2004) relating to stand-by The fair value of outstanding currency swap agreements
ready obligation for one partial credit risk guarantee (nil and interest rate swap agreements is determined at the
– 2004) and three political risk guarantees (two -2004) estimated amount that ADB would receive or pay to
has been included in “Miscellaneous liabilities” on the terminate the agreements using market-based valuation
balance sheet. models. The basis of valuation is the present value of
expected cash flows based on observable market data.
NOTE G—EQUITY INVESTMENTS
Interest rate swaps:
swaps Under a typical interest rate
ADB’s investments in equity securities issued by private swap agreement, one party agrees to make periodic pay-
enterprises located in DMCs include $87,427,000 invest- ments based on a notional principal amount and an in-
ments in limited partnership and limited liability com- terest rate that is fixed at the outset of the agreement.
panies which are accounted for on the equity method The counterparty agrees to make floating rate payments
($20,016,000 in limited partnership and $7,472,000 in based on the same notional principal amount. The terms
Asian Finance and Investment Corporation Ltd. (AFIC) of ADB’s interest rate swap agreements usually match
– 2004). In June 2005, ADB divested its holdings in AFIC. the terms of particular borrowings.
Accumulated net unrealized gains on equity invest-
ments reported at market value were $110,331,000 at Currency swaps:
swaps Under a typical currency swap
31 December 2005 ($28,946,000 – 2004) and were re- agreement, one party agrees to make periodic payments

45
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

in one currency while the counterparty agrees to make NOTE J—BORROWINGS


periodic payments in another currency. The payments
may be fixed at the outset of the agreement or vary based The key objective of ADB’s borrowing strategy is to raise
on interest rates. A receivable is created for the currency funds at the lowest possible cost for the benefit of its
swapped out, and a payable is created for the currency borrowers. ADB uses financial derivative instruments in
swapped in. The terms of ADB’s currency swap agree- connection with its borrowing activities to increase cost
ments usually match the terms of particular borrowings. efficiency, while achieving risk management objectives.
Included in Receivable/Payable from Swaps-Others Currency swaps enable ADB to raise operationally need-
are interest rate and currency swaps that ADB has en- ed currencies in a cost-efficient way and to maintain its
tered for the purpose of hedging specific investments borrowing presence in the major capital markets. Inte-
and loans. rest rate swaps are used generally to reduce interest rate
ADB entered into investments related swap tran- mismatches arising from lending operations.
sactions with total notional amount of $2,087,111,000 ADB issues structured debt, which includes em-
as of 31 December 2005 ($2,125,611,000 – 2004). bedded derivatives and simultaneously enters into cur-
ADB entered into currency and interest rate swaps, rency and/or interest rate swaps to fully hedge the effects
amounting to $10,804,000 and $17,284,000 as at 31 of such embedded derivatives. Borrowings are reported
December 2005, respectively ($5,342,000 and on the balance sheet at their carrying book value adjus-
$12,525,000 – 2004 respectively) to better align the ted for any unamortized premium or discounts, and in-
composition of outstanding loans with funding sources clude the fair value of embedded derivatives of
and assist borrower’s financial management. $155,177,000 as of 31 December 2005 ($364,972,000 –
2004) that are required to be separately accounted for
NOTE I—PROPERTY, FURNITURE, AND under FAS 133.
EQUIPMENT
NOTE K—CAPITAL STOCK, CAPITAL TRANSFERRED
In 1991, under the terms of an agreement with the TO ASIAN DEVELOPMENT FUND,
Philippines (Government), ADB returned the former MAINTENANCE OF VALUE OF
headquarters premises, which had been provided by the CURRENCY HOLDINGS, AND
Government. In accordance with the agreement as sup- MEMBERSHIP
plemented by a memorandum of understanding, ADB
was compensated $22,657,000 for the return of these Capital Stock
premises. The compensation is in lieu of being provided
premises under the agreement and accordingly, is de- The authorized capital stock of ADB as of the end of
ferred and amortized over the estimated life of the new 2005 consists of 3,509,728 shares (3,499,171 – 2004), all
headquarters building as a reduction of occupancy ex- of which have been subscribed by members (3,499,171
pense. The amortization for the year ended 31 Decem- – 2004). Of the subscribed shares, 3,262,876 (3,253,061
ber 2005 amounted to $337,000 ($331,000 – 2004) – 2004) are “callable” and 246,852 (246,110 – 2004) are
reducing depreciation expense for the new headquarters “paid-in.” The “callable” share capital is subject to call
building from $4,471,000 ($4,471,000 – 2004) to by ADB only as and when required to meet ADB’s obli-
$4,134,000 ($4,140,000 – 2004). At 31 December 2005, gations incurred on borrowings of funds for inclusion in
the unamortized deferred compensation balance (inclu- its ordinary capital resources (OCR) or on guarantees
ded in “ACCOUNTS PAYABLE AND OTHER LIABI- chargeable to such resources. The “paid-in” share capital
LITIES - Miscellaneous”) was $8,639,000 ($8,639,000 has been paid or is payable in installments, partly in
– 2004). At 31 December 2005 accumulated deprecia- convertible currencies and partly in the currency of the
tion for property, furniture, and equipment was subscribing member which may be convertible. In ac-
$124,312,000 ($112,545,000 – 2004). cordance with Article 6, paragraph 3 of the Charter, ADB
accepts nonnegotiable, noninterest-bearing demand

46
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004 CONTINUED

STATEMENTS
FINANCIAL
obligations in satisfaction of the portion payable in the members in order to maintain the value of currency
currency of the member, provided such currency is not holdings in terms of the SDR. In view thereof, the no-
required by ADB for the conduct of its operations. The tional MOV amounts of receivables and payables are offset
settlement of such amounts is not determinable and, against one another and shown as net notional amounts
accordingly, it is not practicable to determine a fair val- to maintain value of currency holdings in the “CAPITAL
ue for these receivables. AND RESERVES” portion of the Balance Sheet. The
As of 31 December 2005, all matured installments carrying book value for such receivables and payables
amounting to $3,517,201,000 ($3,799,515,000 – 2004) approximates its fair value.
were received except for $38,000 from one country (nil The net notional amounts as of 31 December 2005
– 2004). Installments not due aggregating $10,980,000 consisted of (a) the increase of $497,298,000
($9,874,000 – 2004 are receivable as follows: ($732,935,000 - 2004) in amounts required to maintain
the value of currency holdings to the extent of matured
For the Year ending 31 December: and paid capital subscriptions due to the increase in the
value of the SDR in relation to the United States dollar
2006 $5,678,000 2007 $2,651,000 2008 $2,651,000 during the period from 1 April 1978 to 31 December 2005
and (b) the net decrease of $88,807,000 (increase of
Capital Transferred to Asian Development Fund $89,991,000 – 2004) in the value of such currency hold-
ings in relation to the United States dollar during the
Pursuant to the provisions of Article 19, paragraph 1(i) same period. In terms of receivable from and payable to
of the Charter, the Board of Governors has authorized members, they are as follows:
the setting aside of 10% of the unimpaired “paid-in”
2005 2004
capital paid by members pursuant to Article 6, paragraph
2(a) of the Charter and of the convertible currency portion Notional MOV Receivables $791,945,000 $912,255,000
Notional MOV Payables 205,840,000 269,311,000
paid by members pursuant to Article 6, paragraph 2(b)
of the Charter as of 28 April 1973 to be used as a part of Total $586,105,000 $642,944,000
the Special Funds of ADB. The resources so set aside
amounting to $68,047,000 as of 31 December 2005 Membership
($73,692,000 - 2004) expressed in terms of the SDR on
the basis of $1.42927 ($1.54784 - 2004) per SDR As of 31 December 2005, ADB is owned by 64 member
($57,434,000 in terms of $1.20635 per 1966 dollar—see countries, 46 countries from the region and 18 countries
Note B), were allocated and transferred to the Asian from outside the region (see OCR–7). During 2005, Arme-
Development Fund. nia has subscribed to 10,557 shares of ADB’s capital stock.

Maintenance of Value of Currency Holdings NOTE L—RESERVES

Prior to 1 April 1978, the effective date of the Second Ordinary Reserve and Net Income
Amendment to the IMF Articles, ADB implemented
maintenance of value (MOV) in respect of holdings of Under the provisions of Article 40 of the Charter, the
member currencies in terms of 1966 dollars, in accor- Board of Governors shall determine annually what part
dance with the provisions of Article 25 of the Charter of the net income shall be allocated, after making pro-
and relevant resolutions of the Board of Directors. Since vision for reserves, to surplus and what part, if any, shall
then, settlement of MOV has been put in abeyance. be distributed to the members. As of 31 December 2005,
Inasmuch as the valuation of ADB’s capital stock of the net income for the year ended 31 December 2004,
and the basis of determining possible MOV obligations $37,917,000 was allocated to ordinary reserve (nil – 2004),
are still under consideration, notional amounts have been $40,000,000 to Surplus ($195,472,000 – 2004), and
calculated provisionally as receivable from or payable to $288,000,000, $40,000,000 and $32,000,000 were

47
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

allocated to ATF, ADF and TASF, respectively in ADB’s public sector loans and guarantees portfolio. In
($150,000,000 and $50,000,000 to ADF and TASF, 2005, the estimated loan loss reserve requirement was
respectively – 2004). $167,000,000 resulting to a decrease of $51,800,000. The
The restatement of the capital stock for purposes estimated expected loss is determined using ADB’s credit
of these financial statements on the basis of the SDR risk model net of loan loss provisions taken up in accor-
instead of the 1966 dollar (see Note B) resulted in a net dance with generally accepted accounting principles.
credit of $54,061,000 to the Ordinary Reserve during the
year ended 31 December 2005 (charge of $27,170,000 – Surplus
2004). That credit is the decrease in the value of the
matured and paid capital subscriptions caused by the Surplus represents funds for future use to be determined
change during the year in the value of the SDR in rela- by the Board of Governors. In the first half of 2005, the
tion to the United States dollar not allocated to mem- Board of Governors approved the initial transfer of
bers as notional maintenance of value adjustments in $312,000,000 from Surplus to the Asian Tsunami Fund
accordance with resolutions of the Board of Directors. (ATF) to finance the needs of the tsunami-affected
developing member countries and allocated $40,000,000
Cumulative Revaluation Adjustments Account out of 2004 net income to Surplus ($195,472,000 – 2004).
In the last quarter of 2005, unutilized ATF fund of
In May 2002, the Board of Governors approved the allo- $40,000,000 was transferred back to Surplus and
cation of net income representing the cumulative net $80,000,000 was transferred from Surplus to the Pakistan
unrealized gains (losses) on derivatives, as required by Earthquake Fund.
FAS 133 to a separate category of Reserves - “Cumula-
tive Revaluation Adjustments Account.” During the year, Comprehensive Income
the 2004 net unrealized gains on derivatives of
$40,963,000 resulted in an increase (decrease of Comprehensive income has two major components: net
$178,387,000 – 2004) of the balance of the Cumulative income and other comprehensive income comprising gains
Revaluation Adjustments account at 31 December 2005 and losses affecting equity that, under generally accept-
to $234,833,000($193,870,000 – 2004). ed accounting principles, are excluded from net income.
Other comprehensive income includes such items as the
Special Reserve effects of the implementation of FAS 133, unrealized
gains and losses on available-for-sale securities and list-
The Special Reserve includes commissions on loans and ed equity investments, currency translation adjustments
guarantee fees on guarantees set aside pursuant to Article and minimum pension liability adjustment.
17 of the Charter. Special Reserve assets consist of term
deposits and government and government-guaranteed ob- NOTE M—INCOME AND EXPENSES
ligations and are included under the heading “INVEST-
MENTS.” For the year ended 31 December 2005, Total income from loans for the year ended 31 Decem-
guarantee fees amounting to $4,090,000 ($3,473,000 – ber 2005 was $1,036,329,000 ($1,038,345,000 – 2004).
2004) were appropriated to Special Reserve. The average yield on the loan portfolio during the year
was 4.35% (4.16% – 2004), excluding premium received
Loan Loss Reserve on prepayment and other loan income. Premium on
prepaid loans collected during 2005 amounted to
In 2004, the Board of Directors approved the creation of $16,457,000 ($59,427,000 – 2004).
Loan Loss Reserve through an allocation of $218,800,000 Total income from investments including net rea-
out of prior year net income. The Loan Loss Reserve lized losses on sales, net unrealized losses on derivatives,
forms part of Capital and Reserves to be used as a basis and interest earned for securities transferred under
for capital adequacy against the estimated expected loss securities lending and resale arrangements for the year

48
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004 CONTINUED

STATEMENTS
FINANCIAL
ended 31 December 2005 was $371,357,000 As of 31 December 2005, the net cumulative amount
($281,793,000 – 2004). The annualized rate of return of TA commitments that had been charged to OCR cur-
on the average investments held during the year, based rent income in the prior years amounted to $69,751,000
on the portfolio held at the beginning and end of each ($73,197,000 – 31 December 2004) out of which
month, was 2.96% (2.21% – 2004) excluding unrealized $60,020,000 ($52,391,000 – 2004) had been disbursed.
gains and losses on investments and 2.44% (1.81% – 2004) For the year ended 31 December 2005, write-back
including unrealized gains and losses on investments. of provision for losses of $3,477,000 corresponded to pri-
Income from other sources primarily includes div- vate sector loans. For the year ended 31 December 2004,
idends received for the year ended 31 December 2005 the provision for losses totaled $2,254,000 which includes
amounting to $3,409,000 ($10,540,000 – 2004) and $194,000 for private sector loans and $2,060,000 for public
share in the net gain of equity investments of sector loans.
$3,497,000 (net loss of $13,185,000 – 2004) accounted Other expenses of $4,248,000 ($3,044,000 – 2004)
for on the equity method. included non-borrowings related financial expenses such
Total interest expense incurred for the year ended as fees paid to external asset managers and bank charges.
31 December 2005 amounted to $881,540,000 Net unrealized losses on derivatives of $308,743,000
($845,304,000 – 2004). Other borrowings and related ex- (net unrealized gains of $40,963,000 – 2004) were made
penses consist of amortization of borrowings’ issuance costs up of:
and other expenses of $11,678,000 ($16,353,000 – 2004). 2005 2004
Administrative expenses (other than those pertai- Unrealized (losses) gains on
ning directly to ordinary operations and special opera- Borrowings related swaps $ (55,522,000) $(123,277,000)
Investments related swaps (3,925,000) (15,577,000)
tions) for the year ended 31 December 2004 were Loan related swaps 258,000 (2,012,000)
apportioned between OCR and the Asian Development Embedded derivatives in
structured borrowings (241,700,000) 186,604,000
Fund in proportion of the relative volume of operational FX Forward (3,548,000) –
activities of each fund. Of the total administrative Amortization of the FAS 133
transition adjustment (4,306,000) (4,775,000)
expenses of $335,921,000 ($305,893,000 – 2004),
$175,751,000 ($165,151,000 – 2004) was accordingly Total $(308,743,000) $ 40,963,000
charged to the Asian Development Fund. The balance of
administrative expenses after allocation was reduced by NOTE N—OTHER ASSETS AND LIABILITIES—
the deferral of direct loan origination costs of $24,481,000 MISCELLANEOUS
($22,421,000 – 2004) related to new loans for the year ended
31 December 2005 (see Notes B and E). At 31 December 2005 and 2004, ADB had the following
During 2005, the Bank offered an enhanced sepa- receivables from/payables to special funds and trust funds
ration program to eligible staff to resign before their resulting from administrative arrangements and opera-
normal retirement date. Administrative expenses for 2005 ting activities.
include the $4,661,000 termination benefits for staff who 2005 2004
accepted the program. Amounts receivable from:
Following the approval by the Board of Directors Asian Development Fund (Note M) $ 32,064,000 $ 24,994,000
Technical Assistance Special Fund – 51,000
in June 2003 of the resumption of direct net income Japan Special Fund 109,000 50,000
allocation to TASF to finance technical assistance (TA) Asian Development Bank Institute
Special Fund 177,000 186,000
operations, no new TA commitments during the year were Staff Retirement Plan 584,000 1,015,000
charged to OCR current income as “TECHNICAL Agency Trust Funds (net) – 808,000
ASSISTANCE TO MEMBER COUNTRIES.” Total $ 32,934,000 $ 27,104,000
Accordingly the write-back in the amount of $3,446,000 Amounts payable to:
for the year represented cancellations of the undisbursed Technical Assistance Special Fund $ 24,000 $ –
Agency Trust Funds (net) 328,000 –
amounts of completed TA projects committed in prior
Total $ 352,000 $ –
periods ($2,404,000 – 2004).

49
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

NOTE O—STAFF RETIREMENT PLAN AND and tolerance for risk, taking into account the nature and
POSTRETIREMENT MEDICAL BENEFITS duration of the Plan’s liabilities. The Plan’s assets are
diversified among different markets and different asset
Staff Retirement Plan classes. The use of derivatives for speculation, leverage
or taking risks is prohibited. Selected derivatives are used
ADB has a contributory defined benefit Staff Retirement for hedging and transactional efficiency purposes.
Plan (the Plan). Every employee, as defined under the The Plan’s investment policy is periodically re-
Plan, shall, as a condition of service, become a partici- viewed and revised to reflect the best interest of the
pant from the first day of service, provided that at such Plan’s participants and beneficiaries. The current poli-
a date, the employee has not reached the normal retire- cy, adopted in January 2003, specifies an asset-mix struc-
ment age of 60. The Plan applies also to members of the ture of 70% of assets in equities and 30% in fixed income
Board of Directors who elect to join the Plan. Retire- securities. At present, investments of the Plan’s assets
ment benefits are based on length of service and highest are divided into three categories: US equity, Non-US
average remuneration during two years of eligible service. equity, and US fixed income.
The Plan assets are segregated and are not included in As of 31 December 2005 and 2004, the breakdown
the accompanying Balance Sheet. The costs of adminis- of the fair value of plan assets held is as follows:
tering the Plan are absorbed by ADB, except for fees paid
2005
to the investment managers and related charges, inclu-
Amount Percentage
ding custodian fees, which are borne by the Plan.
Equity Securities
Participants are required to contribute 9 1/3% of US $ 471,767,000
their salary to the Plan and may also make additional Non-US 300,554,000
voluntary contributions. ADB’s contribution is deter- 772,321,000 71.4%
mined at a rate sufficient to cover that part of the costs Fixed Income Securities 299,334,000 27.7
of the Plan not covered by the participants’ contributions. Other Assets(Liabilities)–net 9,478,000 0.9
Total $1,081,133,000 100.0%

Expected Contributions
2004
Amount Percentage
The expected amount of contributions to the Plan for 2006
amounts to $66,287,000 ($64,020,000 – 2004) representing Equity Securities
US $ 441,188,000
ADB’s contributions of $20,627,000 ($19,734,000 – 2004), Non-US 247,264,000
based on budgeted contribution rate of 16% (16% – 2004), 688,452,000 70.1%
participants’ mandatory contributions of $12,025,000 Fixed Income Securities 236,099,000 24.1
($11,507,000 – 2004) and discretionary contributions of Other Assets(Liabilities)–net 56,733,000 5.8
$33,635,000 ($32,779,000 – 2004). Total $ 981,284,000 100.0%

Investment Strategy All investments excluding time deposits are valued


using market prices. Time deposits are reported at cost.
Contributions in excess of current benefits payments are Fixed income securities include US government and
invested in international financial markets and in a variety government guaranteed obligations, corporate bonds and
of investment vehicles. The Plan employs six external time deposits. Other assets include forward exchange
asset managers and one global custodian who function contracts in various foreign currencies transacted to hedge
within the guidelines established by the Plan’s Invest- currency exposure in the investment portfolio, which are
ment Committee. The investment of these assets, over reported at fair value.
the long term, is expected to produce higher returns than For the year ended 31 December 2005 the net return
short-term investments. The investment policy incor- on the Plan assets was 8.0% (11.1% – 2004). ADB expects
porates the Plan’s package of desired investment return, the long-term rate of return on the assets to be 8%.

50
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004 CONTINUED

STATEMENTS
FINANCIAL
Assumptions Postretirement Medical Benefits Plan

The assumed overall rate of return takes into account In 1993, ADB adopted a cost-sharing plan for retirees’
long-term return expectations of the underlying asset medical insurance premiums. Under the plan, ADB is obli-
classes within the investment portfolio mix, and the gated to pay 75% of the Group Medical Insurance Plan pre-
expected duration of the Plan’s liabilities. Return ex- miums for retirees, including retired members of the Board
pectations are forward looking and, in general, not much of Directors, and their eligible dependents who elected to
weight is given to short-term experience. Unless there participate. The cost-sharing plan is currently unfunded.
is a drastic change in investment policy or market envi- Generally accepted accounting principles require
ronment, the assumed investment return of 8% on the an actuarially determined assessment of the periodic cost
Plan’s assets is expected to remain broadly the same, of postretirement medical benefits.
year to year. The following table sets forth the pension and post-
retirement medical benefits at 31 December 2005 and
2004:

Pension Benefits Postretirement Medical Benefits

2005 2004 2005 2004

Change in benefit obligation:


Benefit obligation at beginning of year $1,111,357,000 $ 975,471,000 $ 173,874,000 $ 149,181,000
Service cost 35,993,000 32,952,000 8,112,000 6,930,000
Interest cost 68,057,000 62,290,000 10,823,000 9,672,000
Participants’ contributions 43,495,000 40,732,000 – –
Actuarial loss 12,203,000 37,256,000 (43,783,000) 10,191,000
Amendments – – 80,480,000 –
Benefits paid (44,652,000) (37,344,000) (2,168,000) (2,100,000)

Benefit obligation at end of year $1,226,453,000 $1,111,357,000 $ 227,338,000 $ 173,874,000

Change in plan assets:


Fair value of plan assets at beginning of year $ 981,284,000 $ 858,593,000 $ – $ –
Actual return on plan assets 81,916,000 102,393,000 – –
Employer’s contribution 19,090,000 16,910,000 2,168,000 2,100,000
Plan participants’ contributions 43,495,000 40,732,000 – –
Benefits paid (44,652,000) (37,344,000) (2,168,000) (2,100,000)

Fair value of plan assets at end of year $1,081,133,000 $ 981,284,000 $ – $ –

Funded status $ (145,320,000) $ (130,073,000) $(227,338,000) $(173,874,000)


Unrecognized actuarial loss 97,825,000 92,302,000 130,580,000 53,588,000
Unrecognized prior service cost 24,121,000 28,359,000 (45,940,000) (2,542,000)
Unrecognized transition obligation – – – 479,000

Net amount recognized $ (23,374,000) $ (9,412,000) $(142,698,000) $(122,349,000)

Amounts recognized in the Balance sheet


consist of:
Accrued benefit liability $ (52,426,000) $ (48,197,000) $(142,698,000) $(122,349,000)
Intangible asset 24,121,000 28,359,000 N/A N/A
Accumulated other comprehensive income 4,931,000 10,426,000 N/A N/A

Net amount recognized $ (23,374,000) $ (9,412,000) $(142,698,000) $(122,349,000)

Weighted-average assumptions as of 31 December


Discount rate 5.75% 6.00% 5.75% 6.00%
Expected return on plan assets 8.00% 8.00% N/A N/A
Rate of compensation increase varies with age
and averages 4.75% 5.00% 4.75% 5.00%

51
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

For measurement purposes, a 9.0% annual rate of 31 December 2005. The rate was assumed to decrease
increase in the per capita cost of covered health care gradually to 5.0% for 2010 and remain at that level
benefits was assumed for the valuation as at thereafter.

Pension Benefits Postretirement Medical Benefits

2005 2004 2005 2004

Components of net periodic benefit cost:


Service cost $ 35,993,000 $ 32,952,000 $ 8,112,000 $ 6,930,000
Interest cost 68,057,000 62,290,000 10,823,000 9,672,000
Expected return on plan assets (75,822,000) (71,317,000) – –
Amortization of prior service cost 4,238,000 4,238,000 (385,000) (385,000)
Amortization of transition obligation – (7,000) 479,000 2,409,000
Recognized actuarial (gain) loss 586,000 (73,000) 3,488,000 3,266,000
Net periodic benefit cost $ 33,052,000 $ 28,083,000 $22,517,000 $21,892,000

The accumulated benefit obligation of the pension NOTE P—FAIR VALUE OF FINANCIAL
plan as of 31 December 2005 was $1,133,559,000 INSTRUMENTS
($1,029,412,000 – 2004).
A one-percentage-point change in assumed health The carrying amounts and estimated fair values of ADB’s
care trend rates would have the following effects: significant financial instruments as of 31 December 2005
and 2004 are summarized on the next page.
1- Percentage- 1-Percentage- Additional fair value information, including methods
Point Increase Point Decrease
used to estimate certain values, is included in the notes
Effect on total service and referenced in the table.
interest cost components $ 4,802,000 $ (3,647,000)
Fair value of a financial instrument is defined as
Effect on postretirement
benefit obligation 46,241,000 (36,257,000) the amount at which the instrument could be exchanged
in a current transaction between willing parties, other
than in a forced or liquidation sale.
Estimated Future Benefits Payments The carrying amount of time deposits is a reaso-
nable estimate of fair value.
The following table shows the benefit payments expected If available, quoted market values are used to de-
to be paid in each of the next five years and subsequent termine fair values. Financial instruments for which
five years. The expected benefit payments are based on market quotations are not readily available are valued
the same assumptions used to measure the benefit ob- using valuation models. The basis of valuation is the
ligation at 31 December 2005: present value of expected cash flows based on observable
market data.
Postretirement
Pension Benefits Medical Benefits
NOTE Q—CREDIT RISK
2006 $ 48,163,000 $ 4,213,000
2007 52,207,000 4,995,000 ADB is exposed to risk if the borrowers fall in arrears on
2008 56,402,000 5,842,000
2009 59,367,000 6,729,000 payments. ADB manages country risk for lending ope-
2010 61,517,000 7,610,000 rations through continuous monitoring of creditworthi-
2011-2015 364,097,000 51,262,000 ness of the borrowers and rigorous capital adequacy
framework. Guarantees involve elements of credit risk
which are also not reflected on the balance sheet. Cre-

52
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004 CONTINUED

STATEMENTS
FINANCIAL
2005 2004

Carrying Estimated Carrying Estimated


Amounta Fair Value Amounta Fair Value

On-balance sheet financial instruments:

ASSETS:

Due from banks $ 81,662,000 $ 81,662,000 $ 76,405,000 $ 76,405,000


Investments (Note D) 11,112,757,000 11,112,757,000 10,690,095,000 10,690,095,000
Securities transferred under
securities lending arrangement 2,770,965,000 2,770,965,000 2,040,302,000 2,040,302,000
Securities purchased under
resale arrangement 1,118,748,000 1,118,748,000 1,330,948,000 1,330,948,000
Loans outstanding (Note E) 23,478,789,000 24,947,171,000 24,196,597,000 26,231,853,000
Equity investments (Note G) 404,975,000 404,975,000 257,437,000 257,437,000
Other assets
Nonnegotiable, noninterest-bearing
demand obligations 172,966,000 100,974,000 207,181,000 134,641,000
Receivable from swaps - others (Note H) 1,582,337,000 1,582,337,000 1,567,602,000 1,567,602,000
Receivable from swaps - borrowings (Note H) 9,733,958,000 9,733,958,000 9,583,846,000 9,583,846,000
Future guarantee receivable 15,839,000 15,839,000 10,842,000 10,842,000

LIABILITIES:

Borrowings (Note J) 24,660,637,000 24,960,951,000 24,186,126,000 25,238,996,000


Other liabilities
Payable for swaps - others (Note H) 1,586,604,000 1,586,604,000 1,809,722,000 1,809,722,000
Payable for swaps - borrowings (Note H) 9,354,776,000 9,354,776,000 8,841,324,000 8,841,324,000
Guarantee liability 15,839,000 15,839,000 10,842,000 10,842,000

2005 2004

Outstanding Present Outstanding Present


Amount Value Amount Value

Off-balance sheet financial instruments:

Guarantees (Note F) $ 1,107,048,000 $ 691,908,000 $ 1,254,101,000 $ 679,908,000

a
The carrying amount for borrowings and swaps are inclusive of accrued interest.

dit risk represents the potential loss due to possible non- ADB has a potential risk of loss if the swap coun-
performance by obligors and counterparties under the terparty fails to perform its obligations. In order to re-
terms of the contract. duce such credit risk, ADB only enters into long-term
As of 31 December 2005, ADB has a significant con- swap transactions with counterparties eligible under
centration of credit risk to Asian and the Pacific region ADB’s swap guidelines which include a requirement that
associated with loan and guarantee products with credit the counterparties have a credit rating of A-/A3 or higher
exposure determined based on fair value of loans and and requires certain counterparties with executed Credit
outstanding guarantees amounting to $26,138,798,000 Support Annex, to provide collateral in form of cash or
($27,538,206,000 – 2004). other approved liquid securities based on mark-to-mar-
ADB undertakes derivative transactions with its ket exposure.
eligible counterparties and transacts in various financial As of 31 December 2005, ADB had received colla-
instruments as part of liquidity and asset/liability ma- teral of $213,954,000 ($219,421,000 – 2004) in connec-
nagement purposes that may involve credit risks. For all tion with the swap agreements. ADB has also entered
securities, ADB manages credit risks by following the into master swap agreements which contain legally en-
guidelines set forth in the Investment Authority. (See forceable close-out netting provisions for all counterpar-
Note D.) ties with outstanding swap transactions.

53
OCR-8
ASIAN DEVELOPMENT BANK—ORDINARY CAPITAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
31 December 2005 and 2004
FINANCIAL
STATEMENTS

NOTE R—SPECIAL AND TRUST FUNDS ADB, their agencies and other development institutions,
projects/programs supplementing ADB’s operations. Such
ADB’s operations include special operations, which are projects/programs are funded with external funds admi-
financed from special fund resources, consisting of the nistered by ADB and with external funds not under ADB’s
Asian Development Fund, the Technical Assistance administration. ADB charges administrative fees for
Special Fund, Japan Special Fund, the Asian Develop- external funds administered by ADB. The funds are
ment Bank Institute Special Fund, the Asian Tsunami restricted for specific uses including technical assistance
Fund and the Pakistan Earthquake Fund. to borrowers and technical assistance for regional pro-
The OCR and special fund resources are at all times grams. The responsibilities of ADB under these arrange-
used, committed, and invested entirely separate from ments range from project processing to project
each other. The Board of Governors may approve alloca- implementation including the facilitation of procurement
tion of the net income of OCR to special funds, based of goods and services. These funds are held in trust with
on the funding and operational requirements for the ADB and are held in a separate investment portfolio which
funds. The administrative and operational expenses is not commingled with ADB’s funds, nor are they in-
pertaining to the OCR and special funds are charged to cluded in the assets of ADB.
the respective special funds. The administrative expenses Special funds and funds administered by ADB on
of ADB are allocated amongst OCR and special funds behalf of the donors are not included in the assets of
and are settled on a regular basis between the OCR and OCR. The breakdown of the total of such funds together
the special funds. with the funds of the special operations as of 31 Decem-
In addition, ADB, alone or jointly with donors, ad- ber 2005 and 2004 is as follows:
ministers on behalf of the donors, including members of

2005 2004

Total Net No.of Total Net No.of

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