CHAPTER-1

INTRODUCTION TO ASIAN DEVELOPMENT BANK

1.1 OVERVIEW

The Asian Development Bank (ADB) is a regional development bank established on 22

August 1966 to facilitate economic development of countries in Asia. The bank admits

the members of the United Nations Economic and Social Commission for Asia and the

Pacific. From 31 members at its establishment, ADB now has 67 members - of which 48

are from within Asia and the Pacific and 19 outside. ADB was modeled closely on the

World Bank, and has a similar weighted voting system where votes are distributed in

proportion with member's capital subscriptions. In 2012, both the United States and Japan

hold 552,210 shares, the largest proportion of shares at 12.756% each. China holds

228,000 shares (6.429%), India holds 224,010 shares (6.317%), the 2nd and 3rd largest

proportion of shares respectively. The headquarters of the bank is at Manila, Philippines,

and it has representative offices around the world.

Since its founding in 1966, ADB has been driven by an inspiration and dedication to

improving people’s lives in Asia and the Pacific. The main devices for assistance are

loans, grants, policy dialogue, technical assistance and equity investments.

Since its founding in 1966, ADB has been driven by an inspiration and dedication to

improving people’s lives in Asia and the Pacific. By targeting investments wisely, in

partnership with developing member countries and other stakeholders, it can alleviate

poverty and help create a world in which everyone can share in the benefits of sustained

and inclusive growth.

Whether it is through investment in infrastructure, health care services, financial and

public administration systems, or helping nations prepare for the impact of climate

change or better manage their natural resources, ADB is committed to helping developing

1
member countries evolve into thriving, modern economies that are well integrated with

each other and the world.

The main devices for assistance are loans, grants, policy dialogue, technical assistance

and equity investments. ADB is spreading information through regional forums, a

growing online presence and the publication of specialized papers, serials and books.

Economists, sociologists, engineers, gender experts and environmental scientists are

amongst the hundreds of professions at the bank working together to reduce poverty, and

ensure growth across the Asia and Pacific region is sustainable and inclusive.

The Asian Development Bank (ADB) is a regional development bank established on 22

August 1966 to facilitate economic development of countries in Asia. The bank admits

the members of the United Nations Economic and Social Commission for Asia and the

Pacific (UNESCAP, formerly known as the United Nations Economic Commission for

Asia and the Far East) and non-regional developed countries. From 31 members at its

establishment, ADB now has 67 members - of which 48 are from within Asia and the

Pacific and 19 outside. ADB was modeled closely on the World Bank, and has a similar

weighted voting system where votes are distributed in proportion with member's capital

subscriptions. In 2012, both the United States and Japan hold 552,210 shares, the largest

proportion of shares at 12.756% each. China holds 228,000 shares (6.429%), India holds

224,010 shares (6.317%), the 2nd and 3rd largest proportion of shares respectively.

President: Takehiko Nakao

Members: 67; 48 regional members; 19 nonregional members

Offices: Headquarters in Manila, Philippines, with 27 resident missions and

3 representative offices in Tokyo, Frankfurt, and Washington, DC

Founded: 1966

Source: www.adb.org

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1.2 HISTORY

1962-1972

ADB was originally conceived by some influential Japanese who formulated a "private

plan" for a regional development bank in 1962, which was later endorsed by the

government. The Japanese felt that its interest in Asia was not served by the World Bank

and wanted to establish a bank in which Japan was institutionally advantaged.[citation

needed] Once the ADB was founded in 1966, Japan took a prominent position in the

bank; it received the presidency and some other crucial "reserve positions" such as the

director of the administration department. By the end of 1972, Japan contributed $173.7

million (22.6% of the total) to the ordinary capital resources and $122.6 million (59.6%

of the total) to the special funds. In contrast, the United States contributed only $1.25

million for the special fund.

The ADB served Japan's economic interests because its loans went largely to Indonesia,

Thailand, Malaysia, South Korea and the Philippines, the countries with which Japan had

crucial trading ties; these nations accounted for 78.48% of the total ADB loans in 1967-

72. Moreover, Japan received tangible benefits, 41.67% of the total procurements in

1967-76. Japan tied its special funds contributions to its preferred sectors and regions and

procurements of its goods and services, as reflected in its $100 million donation for the

Agricultural Special Fund in April 1968.

Takeshi Watanabe served as the first ADB president from 1966 to 1972.

1972-1986

Japan's share of cumulative contributions increased from 30.4 percent in 1972 to 35.5

percent in 1981 and 41.9 percent in 1986. In addition, Japan was a crucial source of ADB

borrowing, 29.4 percent (out of $6,729.1 million) in 1973-86, compared to 45.1 percent

3
from Europe and 12.9 percent from the United States. Japanese presidents Inoue Shiro

(1972–76) and Yoshida Taroichi (1976–81) took the spotlight. Fujioka Masao, the fourth

president (1981–90), adopted an assertive leadership style. He announced an ambitious

plan to expand the ADB into a high-impact development agency. His plan and banking

philosophy led to increasing friction with the U.S. directors, with open criticism from the

Americans at the 1985 annual meeting.

During this period there was a strong parallel institutional tie between the ADB and the

Japanese Ministry of Finance, particularly the International Finance Bureau (IFB).

Since 1986

Its share of cumulative contributions increased from 41.9 percent in 1986 to 50.0 per-

cent in 1993. In addition, Japan has been a crucial lender to the ADB, 30.4 percent of the

total in 1987-93, compared to 39.8 percent from Europe and 11.7 percent from the United

States. However, different from the previous period, Japan has become more assertive

since the mid-1980s. Japan's plan was to use the ADB as a conduit for recycling its huge

surplus capital and a "catalyst" for attracting private Japanese capital to the region. After

the 1985 Plaza Accord, Japanese manufacturers were pushed by high yen to move to

Southeast Asia. The ADB played a role in channeling Japanese private capital to Asia by

improving local infrastructure.[3] The ADB also committed itself to increasing loans for

social issues such as education, health and population, urban development and

environment, to 40 percent of its total loans from around 30 percent at the time.

1.3 ORGANIZATION

The highest policy-making body of the bank is the Board of Governors composed of one

representative from each member state. The Board of Governors, in turn, elect among

4
themselves the 12 members of the Board of Directors and their deputy. Eight of the 12

members come from regional (Asia-Pacific) members while the others come from non-

regional members.

The Board of Governors also elects the bank's President who is the chairperson of the

Board of Directors and manages ADB. The president has a term of office lasting five

years, and may be reelected. Traditionally, and because Japan is one of the largest

shareholders of the bank, the President has always been Japanese. The current President is

Haruhiko Kuroda, who succeeded Tadao Chino in 2005. The headquarters of the bank is

at 6 ADB Avenue, Mandaluyong City, Metro Manila, Philippines, and it has

representative offices around the world. The bank employs approximately 3,000 people,

coming from 55 of its 67 member countries, and with more than half of the staff

being Filipino.

List of Presidents Name Dates Nationality

Takeshi Watanabe 1966–1972 Japan

Shiro Inoue 1972–1976 Japan

Taroichi Yoshida 1976–1981 Japan

Masao Fujioka 1981–1989 Japan

Kimimasa Tarumizu 1989–1993 Japan

Mitsuo Sato 1993–1999 Japan

Tadao Chino 1999–2005 Japan

Haruhiko Kuroda 2005–2013 Japan

Takehiko Nakao 2013– Japan

5
1.4 MEMBERS

ADB has 67 members (as of 2 February 2007). Names are as recognized by ADB.

The year after a member's name indicates the year of membership. The largest

shareholders of the ADB are Japan and USA, each holding 15.57% of the shares. At the

time a country ceases to be a member, the Bank shall arrange for the repurchase of such

country's shares by the Bank as a part of the settlement of accounts with such country in

accordance with the provisions of paragraphs 3 and 4 of this Article.

Republic of China (Taiwan) initially joined as "China" as a founding member

representing the whole of China. However, its share of Bank capital was based on the size

of Taiwan's capital, unlike the World Bank and IMF where the government in Taiwan had

had a share representing the whole of China prior to the People's Republic of China

joining and taking the Republic of China's seat. In 1986, a compromise was affected

when the People's Republic of China joined the institution. The ROC was allowed to

retain its membership, but under the name of Taipei, China a name it protests. Uniquely,

this allows both sides of the Taiwan Straits to be represented at the institution.

Regional Members

Members Year of Members Year of

Membership Membership

Afghanistan 1966 Tajikistan 1998

Armenia 2005 Thailand 1966

Australia 1966 Timor-Leste 2002

Azerbaijan 1999 Tonga 1972

Bangladesh 1973 Turkmenistan 2000

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Bhutan 1982 Tuvalu 1993

Brunei Darussalam 2006 Uzbekistan 1995

Cambodia 1966 Vanuatu 1981

China, 1986 Viet Nam 1966

Cook Islands 1976 Mongolia 1991

Fiji 1970 Myanmar 1973

Georgia 2007 Nauru 1991

HongKong, China 1969 Nepal 1966

India 1966 New Zealand 1966

Indonesia 1966 Pakistan 1966

Japan 1966 Palau 2003

Kazakhstan 1994 Papua New Guinea 1971

Kiribati 1974 Philippines 1966

Korea 1966 Samoa 1966

Kyrgyz Republic 1994 Singapore 1966

Lao PDR 1966 Solomon Islands 1973

Malaysia 1966 Sri Lanka 1966

Maldives 1978 Taipei,China 1966

Marshall Islands 1990 Micronesia, 1990

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Nonregional Members

Members Year of Membership Members Year of Membership

Austria 1966 Norway 1966

Belgium 1966 Portugal 2002

Canada 1966 Spain 1986

Denmark 1966 Sweden 1966

Finland 1966 Switzerland 1967

France 1970 Turkey 1991

Germany 1966 United Kingdom 1966

Ireland 2006 United States 1966

Italy 1966 The Netherlands 1966

Luxembourg 2003

8
 CHAPTER-2

POLICIES AND CORE AREAS

2.1 POLICIES AND STRATEGIES

Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank

2008-2020 is the paramount ADB-wide strategic framework to guide all its operations to

2020. It reaffirms both ADB's vision of an Asia and Pacific free of poverty and its

mission to help developing member countries improve the living conditions and quality of

life of their people.

Strategy 2020 identifies drivers of change that will be stressed in all its operations -

developing the private sector, encouraging good governance, supporting gender equity,

helping developing countries gain knowledge, and expanding partnerships with other

development institutions, the private sector, and with community-based organizations.

By 2012, 80% of ADB lending will be in five core operational areas, identified as

comparative strengths of ADB:

 Infrastructure, including transport and communications, energy, water supply and

sanitation and urban development

 Environment

 Regional cooperation and integration

 Finance sector development

 Education

ADB will continue to operate in health, agriculture, and disaster and emergency

assistance, but on a more selective basis.

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 ADB has developed a corporate results framework to assess its progress in implementing

Strategy 2020. Annually, it will monitor implementation through the ADB Development

Effectiveness Review.

ADB performs the following functions:

i. Promote investment in the region of public and private capital for development pur-

poses.

ii. Provide loans for the economic and social development of the member countries of

the region.

iii. Help member countries in coordinating their development policies and plans.

iv. Provide technical assistance for the preparation, financing and execution of

development projects and programs.

v. Undertake such other activities and provide such other services as may advance its

objectives.

vi. Provide financial and technical assistance to member countries for environmental

protection.

vii. Act as financial intermediary by transferring resources from global capital markets

to developing countries.

viii. Support public resource mobilization and management to member countries.

2.2 CORE AREAS

1. Agriculture Responding to Asia’s food crisis: Two-thirds of the world’s one

billion hungry reside in Asia and the Pacific and rising food prices are bringing

the specter of food shortages and under nutrition to millions more of the region’s

poor. In response to this regional food crisis, ADB has shifted its strategic focus

10
 from agriculture to a comprehensive multi-sector food security engagement with

the goal of curbing food insecurity, particularly among the poor and vulnerable.

2. Education A right not a privilege: Most developing countries in Asia and the

Pacific have earned high marks for a dramatic rise in primary education

enrollment rates in the last three decades, but daunting challenges remain,

threatening economic and social growth. With over $8.2 billion in loans and

grants to the education sector over the past forty years ADB has a long track

record in assisting its developing member countries (DMCs) achieve the goal of

quality education for all.

3. Clean Energy Green power for Asia's future growth: With energy demand

projected to almost double in the Asia and Pacific region by 2030, there is an

urgent need for innovative ways to generate power while at the same time

reducing greenhouse gas emissions. Compounding the problem is widespread

energy poverty across Asia with almost a billion people still without access to

electricity. As many of ADB’s developing member countries (DMCs) forge

ambitious plans to meet these challenges ADB is committed to helping them

achieve access to clean energy for all.

4. Finance Group : ADB has been supporting Financial Sector Development of

developing member countries in the Asia and Pacific region in many ways.

Financial sector operations since 1966 have accounted for 11% of total ADB

operations. In 2010, sovereign lending of $893.4 million supported the general

financial sector and capital market development for microfinance, small and

medium-sized enterprises, and regulatory reforms. Non-sovereign investments

reached $1.035 billion, largely supporting housing finance, microfinance, and

regional guarantees.

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5. Health Improving health in Asia and the pacific: Health is a human right and is

essential to development. Good health improves learning capacity, worker

productivity, and income. ADB is committed to improving health in Asia and the

Pacific by supporting better governance and spending, infrastructure development,

and regional collaboration to control communicable diseases. ADB is focusing on

its core areas of expertise in order to better support programs directed at

improving overall health in Asia and the Pacific. The emphasis will shift from

stand-alone projects to improving the health impact of infrastructure operations,

economic governance and public expenditure, regional public goods, partnerships,

and knowledge management.

6. Industry and Trade Promoting regional trade in Asia and the pacific: ADB’s

overarching goal of poverty reduction in Asia and the Pacific is contingent on the

growth of small- and medium-size enterprises (SMEs) and regional trade among

partners. The key objective is to boost productivity and help create more jobs for

750 million people. Essential to this is expanding and improving trade so the

benefits can be shared by all economies in the region.

7. Information and Communication Technology : ADB's work to improve access

to information and communication: Rapid advances in information and

communications technology (ICT) have created tremendous opportunities for

economic and social gains in the world’s poorest areas. A key infrastructure of

knowledge-based economies, ICT is a driving force for rapidly growing new

sectors including electronics and software development, business process

outsourcing and various internet services.

8. Public Sector Management and Governance : Poor governance holds back and

distorts the process of development, and has a disproportionate impact on the

12
 poorer and weaker sections of society. Assisting developing countries in

improving governance is therefore a strategic priority of ADB in its work to

eliminate poverty in Asia and the Pacific.

9. Social Protection Reducing risks, increasing opportunities: Income poverty

has fallen in Asia and the Pacific as millions of people have benefited from the

extraordinary economic gains of the past two decades but progress has been

highly uneven, leaving one in three Asians poor and vulnerable to economic,

social and environmental risks. During 1996–2008, ADB provided $2.3 billion in

loans to help developing member countries (DMCs) increase their social

protection programs so that those on the lower rungs of the economic ladder could

also benefit from the region’s growth.

10. Transport : Sustainable transport for all: Transport is an integral part of most of

the activities, goods and services required for supporting and improving people’s

lives. ADB assists member countries in developing Asia to building transport

infrastructure and services which contribute towards low-carbon, safe, accessible

and affordable transport systems.

11. Water : Water is one of our most precious resources, but it is threatened by

growth, misuse, and pollution. In Asia and the Pacific, many countries are in a

water crisis and the demand for water is huge and growing. “Water for All" is

ADB's vision and policy for Asia and the Pacific. ADB's Water Financing

Program works to increase investments and support reforms in cities, rural

communities, and river basins.

13
2.3 NOTABLE PROJECTS AND TECHNICAL ASSISTANCE

 ADB is providing a multi-tranche financing facility of up to US $500 million to

help Uzbekistan reconstruct around 230 km of poor quality roads, which will improve

road connectivity and safety, and boost trade along a key regional transport corridor

linking Asia to Europe which will be the Corridor 2 of the Central Asia Regional

Economic Cooperation (CAREC) Road Investment Program. The first tranche of

$130 million will be used to rehabilitate a 74-km section of A373 highway running

through the Fergana Valley, where a third of all Uzbeks live and a large proportion of

the country’s agricultural goods are produced. Assistance will also be given for road

safety and asset management improvements.

 Afghan Diaspora Project

 Funding Utah State University led projects to bring labor skills in Thailand

 Earthquake and Tsunami Emergency Support Project in Indonesia

 Greater Mekong Sub-regional Program

 ROC Ping Hu Offshore Oil and Gas Development

 Strategic Private Sector Partnerships for Urban Poverty Reduction in the Philippines

 Trans-Afghanistan Gas Pipeline Feasibility Assessment

 Loan of $1.2 billion to bail it out of an impending economic crisis in Pakistan and

ongoing funding for the countries growing energy needs, specifically Hydro-power

projects

 Micro finance support for private enterprises, in conjunction with governments,

including Pakistan and India.

 The Yichang-Wanzhou Railway project in the mountainous area of

western Hubei Province and north-eastern Chongqing Municipality, China. (A US

$500,000 loan, approved in 2003.)

14
 CHAPTER : 3

LENDING

3.1 INTRODUCTION

The ADB offers "hard" loans from ordinary capital resources (OCR) on commercial

terms, and the Asian Development Fund (ADF) affiliated with the ADB extends "soft"

loans from special fund resources with concessional conditions. For OCR, members

subscribe capital, including paid-in and callable elements, a 50 percent paid-in ratio for

the initial subscription, 5 percent for the Third General Capital Increase (GCI) in 1983

and 2 percent for the Fourth General Capital Increase in 1994. The ADB borrows from

international capital markets with its capital as guarantee. In 2009, ADB obtained

member-contributions for its Fifth General Capital Increase of 200%, in response to a call

by G20 leaders to increase resources of multilateral development banks so as to support

growth in developing countries amid the global financial crisis. For 2010 and 2011, a

200% GCI allows lending of $12.5-13.0 billion in 2010 and about $11.0 billion in

2011.With this increase, the bank's capital base has tripled from $55 billion to $165

billion.

3.2 EFFECTIVENESS

Given ADB's annual lending volume, the return on investment in lesson-learning for

operational and developmental impact is likely to be high; maximizing it is a legitimate

concern. All projects funded by ADB are evaluated to find out what results are being

achieved, what improvements should be considered, and what is being learned.

There are two types of evaluation: independent and self-evaluation. Self-evaluation is

conducted by the units responsible for designing and implementing country strategies,

15
programs, projects, or technical assistance activities. It comprises several instruments,

including project/program performance reports, midterm review reports, technical

assistance or project/program completion reports, and country portfolio reviews. All

projects are self-evaluated by the relevant units in a project completion report. ADB’s

project completion reports are publicly disclosed on ADB’s Internet site. Client

governments are required to prepare their own project completion reports.

Independent evaluation is a foundation block of organizational learning: It is essential to

transfer increased amounts of relevant and high-quality knowledge from experience into

the hands of policy makers, designers, and implementers. ADB’s Independent Evaluation

Department (IED) conducts systematic and impartial assessment of policies, strategies,

country programs, and projects, including their design, implementation, results, and

associated business processes to determine their relevance, effectiveness, efficiency, and

sustainability following prescribed methods and guidelines. It also validates self-

evaluations. By this process of evaluation, ADB demonstrates three elements of good

governance: accountability, by assessing the effectiveness of ADB's operations;

transparency, by independently reviewing operations and publicly reporting findings and

recommendations; and improved performance, by helping ADB and its clients learn from

experience to enhance ongoing and future operations.

Operations evaluation has changed from the beginnings of evaluation in ADB in 1978.

Initially, the focus was on assessing after completion the extent to which projects had

achieved their expected economic and social benefits. Operations evaluation now shapes

decision making throughout the project cycle and in ADB as a whole. Since the

establishment of its independence in 2004, IED reports directly to ADB’s Board of

Directors through the Board's Development Effectiveness Committee. Behavioral

autonomy, avoidance of conflicts of interest, insulation from external influence, and

16
organizational independence have made evaluation a dedicated tool—governed by the

principles of usefulness, credibility, transparency, and independence—for greater

accountability and making development assistance work better. Independent Evaluation at

the Asian Development Bank presents a perspective of evaluation in ADB from the

beginnings and looks to a future in which knowledge management plays an increasingly

important role.

In 2011, there has been a major shift in the nature of IED's work program from a

dominance of evaluations of individual projects to one focusing on broader and more

strategic studies. To select priority topics for evaluation studies, IED seeks input from the

Development Effectiveness Committee, ADB Management, and the heads of ADB

departments and offices. The current thrusts are to improve the quality of evaluations by

using more robust methodologies; give priority to country/sector assistance program

evaluations; increase the number of joint evaluations; validate self-evaluations to shorten

the learning cycle; conduct more rigorous impact evaluations; develop evaluation

capacity, both in ADB and in DMCs; promote portfolio performance; evaluate business

processes; and disseminate findings and recommendations and ensure their use. IED's

work program has also been reinterpreted to emphasize organizational learning in more

clearly defined results architecture and results framework. It entails conducting and

disseminating strategic evaluations (in consultation with stakeholders harmonizing

performance indicators and evaluation methodologies, and developing capacity in

evaluation and evaluative thinking. All evaluation studies are publicly disclosed on IED's

website (some evaluations of private sector operations are redacted to protect

commercially confidential information).IED's evaluation resources are displayed by

resource type, topic, region and country, and date. Earnings are also gathered in an online

Evaluation Information System offering a database of lessons, recommendations, and

17
ADB Management responses to these. Details of ongoing evaluations and updates on

their progress are made public too.

Beginning 2006, acting within the knowledge management framework of ADB, IED has

applied knowledge management to lesson learning, using knowledge performance

metrics.

Learning Lessons in ADB sets the strategic framework for knowledge management in

operations evaluation. Improvements have been made that hold promise not only in IED

but, more importantly, vis-à-vis its interfaces with other departments and offices in ADB,

developing member countries, and the international evaluation community. In the

medium term, IED will continue to improve the organizational culture, management

system, business processes, and information technology solutions, community of practice,

and external relations and networking for lesson learning. Among the new knowledge

products and services developed, Learning Curves are handy, two-paged quick references

designed to feed findings and recommendations from evaluation to a broader range of

clients. Evaluation News report on events in monitoring and evaluation. Evaluation

Presentations offer short photographic or PowerPoint displays on evaluation

topics. Auditing the Lessons Architecture highlights the contribution that knowledge

audits can make to organizational learning and organizational health.

Of the 1,106 ADB-funded projects evaluated and rated so far (as of December 2007),

65% were assessed as being successful, 27% partly successful and 8% as unsuccessful.

3.3 LENDING POLICIES FOR SOVEREIGN AND SOVEREIGN-

GUARANTEED BORROWERS

The lending operations of the Asian Development Bank (ADB) consist of ordinary and

special operations pursuant to Article 9 of the Agreement Establishing the Asian

18
Development Bank (the Charter). Loans under ordinary operations are financed from

ADB's ordinary capital resources (OCR) described in Article 7 of the Charter. Article 11

specifies to whom ADB may lend and the methods of operation. Article 13 authorizes

lending by ADB in local currencies that are not obtained from sales of gold or convertible

currencies to finance local expenditures of a project. Article 14 refers to the principles

under which ADB's lending operations are conducted.

Expenditures Financed by ADB

ADB loans finance the foreign exchange costs and local expenditures of projects, subject

to the rules on cost sharing and eligibility of expenditures.

A. LIBOR-Based Loans

1. Terms of Lending

ADB offers its sovereign and sovereign guaranteed borrowers London interbank offered

rate (LIBOR)-based loans (LBLs) that carry a floating lending rate consisting of the 6-

month LIBOR or another relevant floating rate benchmark, as applicable, and an effective

contractual spread and, where applicable, a maturity premium fixed over the life of the

loan. An LBL has market-based features that provide a transparent basis for borrowers to

compare the terms of ADB loan products with those of other lenders and to be amenable

to efficient intermediation by ADB on the best possible terms.

The LBL product provides a high degree of flexibility to borrowers, while providing low

intermediation risk to ADB. Borrowers are given (i) the choice of currency and interest

rate basis; (ii) various repayment options; (iii) the ability to change certain terms of the

original loan agreement at any time during the life of the loan, subject to certain

conditions; and (iv) the option to purchase a cap or a collar on the floating lending rate at

any time during the life of the loan.

19
Loans may be made on a floating-rate basis and may be denominated in euros, yen, US

dollars (standard currencies), or other foreign currencies in which ADB can efficiently

intermediate (nonstandard currencies). With a floating-rate loan, the lending rate is reset

every 6 months on each interest payment date. The lending rate is the cost-base rate plus

an effective contractual spread (fixed spread less permanent credit) and a maturity

premium, where applicable, that is fixed in the loan agreement. The cost-base rate is

equal to the 6-month LIBOR for US dollar- and yen-denominated loans, and the 6-month

euro interbank offered rate for euro-denominated loans, or an appropriate floating rate

benchmark for nonstandard currencies other than for local currency loans, and is reset

every 6 months.

The effective contractual spread is 20 basis points for loans negotiated from 1 October

2007 to 30 June 2010, 30 basis points for loans negotiated from 1 July 2010 to 30 June

2011, and 40basis points for loans negotiated on or after 1 July 2011. Borrowers may

direct ADB to implement a series of interest rate fixings automatically either by period or

by amount. For project loans, borrowers also may capitalize the interest.

The maturity premium is 10 basis points per annum for loans with an average loan

maturity of greater than 13 years and up to 16 years, and the maturity premium is 20 basis

points per annum for loans with an average loan maturity of greater than 16 years and up

to 19 years.

LBLs provide for rebates and surcharges. Since the principle of automatic cost pass-

through pricing is maintained for LBLs, ADB returns the actual sub-benchmark funding

cost margin achieved to its LBL borrowers through rebates. A surcharge could arise if

ADB’s funding cost is above the benchmark. The rebate and surcharge are calculated on

1 January and 1 July each year, based on the actual average funding cost margin for the

20
preceding 6 months for each currency. Rebates and surcharges shall be applied to the

upcoming interest period.

For loans negotiated before 1 October 2007, ADB’s Board of Directors may approve

certain waivers applicable to ADB loan charges, including the lending spread, front-end

fee, and commitment charge. Waivers will apply only to loans without arrears. The

waiver mechanism has been discontinued for loans negotiated on or after 1 October 2007.

A commitment charge of 15 basis points per year is levied on undisbursed balances of all

project and policy-based loans, beginning 60 days after the applicable loan agreement is

signed and accruing when the loan becomes effective. For project loans, borrowers may

capitalize the commitment charge.

The repayment term on an LBL is based primarily on the economic life of the project.

The financial condition of the borrowing entity and the revenue-earning capacity of the

project may also be taken into account. Subject to these primary project considerations,

the repayment period also takes into account the debt-service capacity of the borrowing

developing member country (DMC). The loan term, which comprises the repayment term

and the grace period, is subject to an average loan maturity limit of 19 years. The grace

period is based mainly on the time needed for the project to become operational but may

be modified to reflect country considerations (i.e., the debt-service capacity of the

borrowing DMC) and other project considerations (e.g., the social benefits of the project

and the revenue-earning capacity of the executing agency). Policy-based loans and

technical assistance loans have fixed repayment and grace periods that are shorter than

those for investment projects. ADB offers two types of repayment schedules for

borrowers:

(i) commitment-linked repayment schedules in which the loan’s repayment schedule

starts from the beginning of the interest period following loan signing, and (ii)

21
disbursement-linked repayment schedules in which disbursed amounts have individual

repayment schedules that start from the beginning of the interest period following

disbursement. In either case, repayment can be made on the basis of any of the following

options: (i) annuity-style method, (ii) straight-line repayment, (iii) bullet repayment, and

(iv) custom- tailored repayment to match the cash flow projections of the borrower.14

ADB does not participate in debt rescheduling agreements for sovereign loans.

2. Prepayment and Cancellation of Loan

Borrowers may prepay in part or in full the disbursed and outstanding loan balance at any

time during the life of a loan by notifying ADB in writing at least 45 days before the

prepayment. Partial prepayments are applied to the amortization schedule in inverse order

of maturity, with the most distant maturity being repaid first. Partial prepayment should

be at least equal to the entire principal amount of any one or more maturities of the loan.

In case of financial intermediation loans, the disbursed amount that has been withdrawn

last should be repaid first.

For floating-rate loans, borrowers may prepay outstanding amounts on the interest

payment date of the loan without a prepayment premium. However, prepayments of

floating-rate loans on dates other than interest payment dates are charged a prepayment

premium based on the difference, if any, between the rate at which the proceeds from the

prepayment can be reinvested and ADB’s funding cost for the period up to the next

interest payment date. In the event of prepayment of fixed-rate loans or floating-rate loans

that involve conversions, and if the corresponding hedge transactions have to be

terminated, the borrowers are charged the unwinding costs of the hedge transactions that

ADB incurs.

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With the concurrence of the guarantor (if any), borrowers may cancel all or part of the

undisbursed loan balance at any time during the life of the loan without a fee, subject to

the same notice period.

3. Loan Conversion Options

Borrowers may request a currency conversion of all or a portion of the principal amount

of the loan after review of its original currency choice and interest rate structure. At any

time after loan effectiveness, borrowers may (i) for conversions to any standard currency,

change the loan currency of all or part of the undisbursed or disbursed loan amounts at

any time during the life of the loan; (ii) for conversions to any nonstandard currency in

which ADB can effectively intermediate (other than for conversions to a local currency),

change the loan currency of all or a part of the undisbursed or disbursed loan amounts at

any time during the life of the loan, provided that ADB can enter into the necessary

hedging transaction; (iii) request an interest rate conversion from floating to fixed or vice

versa during the life of the loan; or (iv) establish an interest rate cap or collar on a floating

rate, subject to relevant swap market opportunities available to ADB. The use of the

conversion provisions in the loan agreement is subject to the relevant provisions of the

applicable loan regulations and conversion guidelines.

For conversions to a local currency, borrowers may request a conversion of all or a

portion of the withdrawn and outstanding amount of the loan on a case-by-case basis

upon the advice of the Treasury Department. Conversions to a local currency are

permissible only for fully disbursed loans. An annual fee of 2 basis points will be charged

on the outstanding principal hedged amount of the loan. Subject to availability in the local

market, local currency loans, upon conversion, can be offered at a floating rate or fixed

rate.

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Local currency conversions of withdrawn and outstanding loan balances will be an

approximate hedge only. They do not include the lending spread or any potentially

applicable rebates, surcharges, or waivers, which will remain in the original loan

currency.

Before conversion to a local currency can be undertaken, the loan agreement shall be

amended to allow for the conversion. The loan regulations applicable to local currency

ordinary operations shall apply to that portion of the loan converted to a local currency.

B. Local Currency Loans

1. Terms of Lending : In selected DMCs, ADB offers its borrower local currency loans

(LCLs) to finance the local expenditures of a project. An LCL has market-based features

that provide a transparent basis for borrowers to compare the terms of ADB loan products

with those of other lenders and to be amenable to efficient intermediation by ADB on the

best possible terms.

Loans may be made on a floating rate basis. With a floating rate loan, the lending rate is

typically reset every 3 or 6 months on each interest payment date. The lending rate is the

cost-base rate plus an effective contractual spread (fixed spread less permanent credit)

and a maturity premium, where applicable, that is fixed in the loan agreement. The cost-

base rate depends on whether financing in a local currency is based on back-to-back

funding or the pool-based approach. For back-to-back funding, the cost-base rate

comprises ADB’s cost of a funding transaction undertaken to finance a specific loan,

including related swap costs and negative carry, if any. For a pool-based funding

approach, the cost- base rate is based on the local floating-rate benchmark (equivalent to

LIBOR), adjusted by ADB’s funding spread over or below the benchmark.

The effective contractual spread is 20 basis points for loans negotiated from 1 October

2007 to 30 June 2010, 30 basis points for loans negotiated from 1 July 2010 to 30 June

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2011, and 40 basis points for loans negotiated on or after 1 July 2011.

The maturity premium is 10 basis points per annum for loans with an average loan

maturity of greater than 13 years and up to 16 years, and the maturity premium is 20 basis

points per annum for loans with an average loan maturity of greater than 16 years and up

to 19 years. The repayment term of an LCL is subject to an average loan maturity limit of

19 years.

A commitment fee of 15 basis points per year is levied on undisbursed balances of all

LCLs, beginning 60 days after signing of the applicable loan agreement and accruing

when the loan becomes effective.

LCLs funded under the pool-based approach provide for rebates and surcharges. Since the

principle of automatic cost pass-through pricing is maintained for LCLs, ADB returns the

actual sub-benchmark funding cost margin achieved to its qualifying LCL borrowers

through rebates. A surcharge could arise if ADB’s funding cost is above the benchmark.

The rebate and surcharge are calculated on 1 January and 1 July each year based on the

actual average funding cost margin for the preceding 6 months.

2. Prepayment and Cancellation of Loan : Borrowers may prepay in part or in full the

disbursed and outstanding loan balance during the life of a loan by notifying ADB in

writing at least 45 days before the prepayment. However, prepayment charges will apply

based on the estimated negative carry, if any, that ADB incurs as a result of the

prepayment for the remainder of the term of the prepaid loan. As in prepayments of

LBLs, the negative carry would be calculated based on the difference, if any, between the

rate at which the proceeds from the prepayment could be reinvested and ADB’s funding

liability for the prepaid amount. If a fixed-rate loan is prepaid, and the corresponding

hedge transactions terminated, the borrowers will be charged the unwinding costs of the

hedge transaction, if any. No prepayment charge will apply for floating-rate loans funded

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under the pool-based funding approach if prepayments occur on interest payment dates.

Borrowers may cancel all or part of the undisbursed balance at any time. No cancellation

charge will apply if ADB follows a pool-based funding approach for the specific local

currency. For back-to-back funding, if ADB has agreed with the borrower to pre-fund the

local currency requirement for a particular loan, and the borrower later decides to wholly

or partially cancel the loan, a cancellation charge will apply based on the same principle

used for prepayments (i.e., to compensate ADB for negative carry costs, if any, resulting

from the loan cancellation).

Charges for prepayment and cancellation, and their calculation principles, will be

included in the loan documents to ensure full transparency for borrowers.

3. Interest Rate Conversion Options : Borrowers will be allowed to change the interest

rate basis of an LCL at any time during the life of the loan by requesting a conversion to

fix or unfix their interest rate, subject to relevant swap market opportunities available to

ADB in the local market. The terms and conditions that ADB can achieve by executing

the necessary hedging transactions will be passed on to the borrower, plus a transaction

fee of 6.25 basis points, except for the first series of interest rate conversions for which no

fee shall be charged.

4. Currency Substitution : The local currency loan agreement includes a currency

substitution clause. This will allow ADB to temporarily substitute another currency for

the loan currency selected by the borrower if an extraordinary situation arises that

prevents ADB from providing the selected currency for funding the loan because of

access constraints in the local currency capital market.

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 CHAPTER : 4

ISSUES, CHALLENGES, AND ADB'S APPROACH

4.1 KEY ISSUES AND TRENDS

1. Rapid Urban Population Growth

In 2008, more than half of the world human population, 3.3 billion people, lived in urban

areas. By 2030, this is expected to balloon to almost 5 billion. Most of this growth will be

in developing countries. The urban population of Africa and Asia is expected to double

between 2000 and 2030 (UNFPA, 2007).

2. Rise of Megacities

Urban centers are increasing in size and number. At the beginning of the last century,

there were only 11 megacities in the world with populations of more than 1 million each.

By 2030, UN predicts that there will be more than 500 cities in the world with

populations of more than 1 million each; more than half of these cities will be in Asia. In

addition, the peri-urban areas in many big cities are rapidly expanding.

3. High urban poverty level

Asia's poor represent about 70% of the world's poor-nearly one in three Asians is poor.

Almost 25% of Asia's urban population is poor, and the rate is increasing, as there is a

continuous influx of poor people into cities.

4. Inadequate basic services

Large number of Asian cities cannot adequately provide urban basic services to the

increasing number of urban residents. Less than half of the cities population is covered by

water supply. A number of cities do not have efficient systems of solid waste collection.

Majority of the cities in developing countries do not have sewerage system connections,

and sanitary landfill facilities.

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5. Environmental degradation

With an increasing population density, especially in slums areas, environmental and

health problems are rising. In addition to mitigating air and noise pollution and

controlling wastes, managing the consumption of non-renewable resources have become

more serious concerns.

4.2 KEY CHALLENGES

As with any other organization, ADB has its challenges when it comes to managing

knowledge, promoting learning, and embracing change. In 2009, a series of staff

interviews, workshops, and desk review on knowledge management revealed 10 of the

most prominent challenges to learning ADB faces and the steps that could help overcome

them.

1. Sustaining Urban Areas as Engines of Growth

Cities are focal points for economic activities, and engines of economic growth. They are

centers of excellence for education, health care, culture, technological innovation,

entrepreneurship, social services, government administration, and communications with

the world. They create opportunities for jobs, employment and livelihood. They are as

well focal points for rural hinterlands to alleviate rural poverty.

2. Managing Urban Growth

The rapid rate of urbanization needs to be effectively managed to ensure that the potential

economic and social development arising from urbanization are optimized to reduce

poverty, improve the quality of life and protect the environment.

3. Bridging Supply And Demand Gap on Infrastructure Services

There exists an enormous gap between demand for infrastructure services and capacity to

finance urban development. In 2004, conservative estimates suggested about $250 million

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per year in infrastructure investments would be needed to support urban growth over the

next 25 years.

4. Strengthening Urban Management Capacity

Capacity of cities to manage urban growth and development, including preparedness to

respond to disasters, needs to be strengthened. Project-based approaches with short time

horizon adopted in some cities are unsustainable and did not effectively address long-term

goals.

5. Decentralizing Urban Administration

Many governments have decentralized responsibilities to local governments. This gives

local governments more strategic role in planning and decision-making in urban

development. However, funding may not have always matched with devolved functions.

Decentralization also requires collaboration between the central and local governments.

6. Responding To Globalization

Globalization has thrust cities into new frontiers making it more imperative for cities to

be globally competitive.

7. Maximize Learning from Evaluation

ADB has taken some interesting initiatives to leverage greater learning from its

evaluations, but the balance between accountability and learning would benefit from an

increased focus on the potential for learning.

4.3 KEY APPROACHES IN ADDRESSING ISSUES AND

CHALLENGES

1. Stakeholder Partnerships

Cities partner with private sector, other cities, and organizations to exchange information,

build capacities, expand resources and enhance revenues, and implement improvements

in urban management.

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2. Formulation of City Development Strategies

Several cities across the region have formulated development strategies based on long-

term visions and an analysis of their strengths, weaknesses, opportunities and threats.

Cities recognized the essential link and complementarity between national development

policies and city development strategies.

3. Inter-Local Cooperation

There is a growing appreciation for the linkages between rural and urban areas,

particularly in terms of inter-local cooperation in the face of the emergence of city-

regions or multi-modal metropolitan areas. City-regions are becoming the foci for

integrated urban development, which is blurring the traditional distinction between "rural"

and "urban".

4. Cities as Ecosystems

With the increasing interest in sustainable urban development, cities are now being

viewed as living ecosystems wherein a balance is sought among social, economic and

environmental concerns. Related to these specific approaches to energy efficiency,

disaster mitigation, as well as resource and cultural heritage conservation, are being

developed.

5. City Leaders as Economic Managers

City leaders have shifted from a purely political orientation to an entrepreneurial and

economic management approach. Some cities have initiated successful experiments in

innovative techniques adapted from the private business sector, such as asset

management.

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 CONCLUSION

Since the 1960s, ADB has been assisting its developing member countries (DMCs) meet

various challenge billions of dollars in funding for various projects, which have improved

urban transport, waste management, rural development, access to clean water and

sanitation and various other activities. Future ADB assistance aims to promote better city

management and a larger private sector role in the delivery of services. ADB support for

sustainable urban development is guided by its long-term strategic framework, Strategy

2020. ADB’s renewed assistance to the urban sector is grounded in a comprehensive

assessment of its DMCs urban issues and their fiscal and institutional structures.

Assistance not only funds project development, early stage investment and sustainability

needs but also makes full use of ADB’s flexibility and range of financial and technical

assistance instruments to catalyze private sector and capital market finance for urban

infrastructure projects.

With these view 5 major areas has been identified for ADB.

 City Cluster Economic Development (CCED)

 Urban Transport

 Waste Management

 Municipal Finance

 Urban Renewal and Slum Rehabilitation

These were few of the future projects and avenues that ADB is targeting with the view of

developing underdeveloped countries in Asia. Thus, Asian Development Bank has

distinguished itself as an organization which works especially for Asian countries. ADB

has various challenges to meet but it has a sound and strong structure which will enable it

to do so.

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 BIBLIOGRAPHY

BOOKS & REPORT :

 Kilby, Christopher (2002). "Donor Influence in MDBs: The Case of the Asian

Development Bank". The Review of International Organizations 68 (4): 509–528.

Retrieved 2010-09-16.

 Agreement Establishing the Asian Development Bank. Asian Development Bank.

Retrieved 2007-12-10

 http://www.adb.org, 11th December 2012 to 14th December 2012

 http://www.ruralpovertyportal.org, 12th December 2012

 http://en.wikipedia.org/wiki/Asian_Development_Bank, 11th December 2012

 Asian Development Bank Annual Report (December 2013)

WEBSITES :

 www.google.com

 www.scribd.com

 www.adb.com

 http://en.wikipedia.org/wiki/asiandevelopmentbank

 http://business.gov.in/business_financing/asiandevelopmentbank.php

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