Focus on the Global South
c/o CUSRI, Chulalongkorn University, Bangkok 10330, THAILAND
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E-mail : [email protected] • Web page http://www.focusweb.org
April 2001

More than eighteen months ago, the Asian Development Bank (ADB) publicly declared poverty reduction to be its overarching goal and committed that from then on, all ADB programmes -- whether grants, loans or technical assistance -- would be poverty focussed. The ADB paraded this commitment across the region, much like the Emperor in the folk tale who paraded through the streets of his kingdom to show the public his new clothes. All went well until a child, with both clarity and innocence, pointed out that the Emperor had no clothes on, let alone new clothes. In a similar vein, many across the Asia-Pacific region-call them critics, anti-globalisers, protestors, or even children -- are asking, what and where is the ADB’s poverty reduction strategy?

Answers to these questions are elusive. The institution has tried hard to use poverty language to spin a new image for itself. ADB management and staff are vehement in their insistence that the institution is changing and that poverty reduction is at the heart of all their programmes. However, experience from country and regional programme levels contradicts this rhetoric as the ADB’s loan portfolios and project priorities show little success in addressing the diverse needs of those identified as "poor."

What is clear though is that the poverty reduction strategy has been enormously beneficial to the ADB in shoring up its own financial resources. The Asian Development Fund (ADF) -- the concessionary financing arm of the ADB that many staff call "cheap money" -- has increased significantly. By the end of the year 2000, the ADF VIII replenishment was the highest ever in ADF history. Financing for "poverty focussed" technical assistance grants has also increased. For example, the new Spanish Cooperation Fund for Technical Assistance will provide untied money for project preparation, advisory services and project implementation. Japan and Europe have also contributed additional resources into special anti-poverty programmes, giving the institution much more capital to play around with. Notable among these is the Japan Fund for poverty reduction (initial contribution, US $ 90 million) through which, the ADB apparently finances projects that countries would not borrow for, such as children’s shelters, social development activities, etc.

According to a senior ADB staff person in the poverty reduction unit, the centrality of poverty reduction in the ADB’s operations is demonstrated by changes in the institution’s staffing, programme priorities and overall approach. He claims that the fact that ADB staff can have open discussions with outsiders about the organisation, is itself evidence of positive change resulting from the poverty reduction strategy.¹ At the same time, it appears that the adoption of anti-poverty rhetoric is resulting in growing dissatisfaction within the organisation’s ranks as its long-standing and rigid institutional structures prove to be increasingly incapable of accommodating new ideas.

For example, over the past year or so, the ADB has apparently hired sixteen "poverty experts" and re-deployed other staff with "poverty expertise" in key positions within the organisation. However, according to an ADB staff person, most of these "young and dynamic" recruits are located in project divisions rather than at country or programme levels. He identifies this as a serious strategic mistake since staff with poverty expertise are generally too junior to influence project designs, or country and regional programmes. Also, there are too few senior level "poverty experts" in the organisation, and majority of the senior positions and career opportunities continue to be dominated by those with hard technical qualifications.²

According to a source within the ADB, a major bottleneck in the ADB’s poverty reduction strategy appears to be its own senior programme staff, majority of who are economists, have been in the institution for far too long, are convinced that they know all they need to about poverty and are reluctant to accept change or new ideas. Those in the infrastructure divisions are trying to change, "to become poverty focussed because they are always under pressure," whereas those in education, health and agriculture divisions "think they are already poverty oriented, but they are not." When put under pressure to "produce something on poverty," programme staff come up with "window dressing," which they then "ram down peoples’ throats."

According to the same source, it has been equally difficult to change the mindset of country programme staff, who simply cannot understand why things must be done differently. In general, "the ADB is not great on personnel," and this shortcoming is evident in continuing conflict between a majority that favour the project approach (making loans) and a minority that advocate a programme approach (developing more overall analysis).

Problems with personnel aside, a more fundamental bottleneck in the ADB’s poverty reduction strategy is the organisation’s understanding of poverty itself. Although ADB staff insist that poverty analyses and poverty "partnership agreements" have become de-rigeur in many countries, they are hard put to show how these analyses result in responsive projects or programmes. The ADB's much proclaimed poverty analyses continue to be based on standard economic models that calculate poverty head count ratios, consumption and income trends, poverty gap and severity indices, and inequality co-efficients. While such arithmetic has its uses, it does not advance an understanding of the diverse forms of poverty that exist in the region, or of the different strategies by which families and communities combat adversity.

Karti Sandilya, the outgoing manager of the poverty reduction recently said, "We need to see what makes people poor, what keeps them poor, and what we can do to help them escape the poverty."³ Clearly the ADB has not had much success with this. For the most part, the organisation continues to identify "the poor" as an undifferentiated mass of people who consume less than a certain amount of fixed goods in a given time. And the solution, (of course) lies in ensuring that they acquire the means to consume more of these fixed goods through (no need to hold your breath) pro-poor economic growth! There is, however, little analysis of the effects of broader policy environments, political and social structures, external economic and financial forces, or even the impacts of the ADB’s own loan programmes on the incidence and perpetuation of poverty.

Participatory Poverty Assessments (PPAs) are gaining popularity with the ADB in order to show the "human face" of poverty. However, they do not inform the ADB’s overall poverty analysis or country assistance strategies in any noticeable manner. In both Cambodia and the Lao PDR, PPAs were conducted by ADB appointed experts, ostensibly to get inputs "from the poor" towards developing "pro-poor" national programmes. In both countries, however, the ADB's Resident Representatives were unable to provide even a single example of what the organisation would do different from previous years.

According to a senior ADB staff person in the poverty reduction unit, a positive example of how poverty analysis has influenced a country programme is the People’s Republic of China. Now, after the poverty analyses have been conducted, in addition to financing super expressways, large-scale power projects and other large infrastructure, the ADB is also providing loans for rural roads, de-centralised power and social protection.⁴

"The voices of the poor moved many of us, specially those of us who have soft hearts," said the ADB’s Resident Representative in Cambodia about the PPA process recently carried out in the country.⁵ That may be so, but an unflagging support for markets as the principle avenue of development remains at the heart of the ADB’s poverty reduction strategy.

As a senior ADB staff person in the poverty reduction unit put it, "market means competition, so better ideas win." He later also admitted that markets exploit poor people and that "land and capital markets are distorted, only two percent of total credits go to poor people." And so, "ADB wants a real market that works for the poor, and not a distorted market that works for the rich."⁶ It should be noted though that the ADB’s approach to making the market work for the poor is not through support for domestic regulation and protection, or through ensuring adequate opportunities, access and services for the poor, but rather, by expanding the private sector’s share in physical, financial and social infrastructure.

For example, in the Lao PDR, an important question for the ADB appears to be "How do you focus on poverty reduction without skewing investments?"⁷ According to the ADB Resident Representative, poverty reduction requires grant assistance in social sectors, where there are already other donors. Instead, the ADB is looking at "hard sectors" where it can support investment for increased revenues. Likely sectors are: hydro-power development for export, rural electrification, road networks, and basic infrastructure in civil aviation to further open up areas for tourism, more private investments and services. All these sectors necessitate private sector involvement, with the ADB pushing for public-private "partnerships" with the Lao Government as equity holder.

According to the Resident Representative, the Lao Government has no choice regarding private sector involvement if it wants to meet its development targets. The ADB’s strategy in the Lao PDR is to boost private sector involvement in service delivery (including financial and social services) as well as support private sector development in general. The ADB feels that it has an "important advisory and supportive role" in expanding private sector involvement in such diverse areas as banking, hydropower, mining, forest plantations and value-added agricultural production. How would this reduce poverty? His response: "without private sector involvement, rural people will be subjected to "ordinary standards of living;" and also, private sector development will "reduce economic pressures on the government while increasing their capacity".⁸

This approach is also mirrored in the ADB’s regional approach to poverty reduction. A region-wide project aimed at poverty reduction in remote watersheds in the Greater Mekong Subregion clearly emphasises the importance of private sector led, bankable investment projects in remote watershed areas in the Lao PDR, Cambodia, Yunan, Vietnam and Myanmar, all of which are rich in natural resources. A recent project report states, "In particular, ADB will give greater emphasis to development of agro-climatic areas that have been bypassed by green revolution technology. ... Likewise, ADB will vigorously seek new ways to promote private sector activity in rural areas."⁹ The report identifies a number of activities in areas such as irrigation, health, water, agricultural inputs, roads and market infrastructure, all of which are identified as bankable investment projects for private sector providers with ADB financing.

The ADB’s private sector development strategy is a window for undisciplined foreign investment that does not necessarily respond to national trade and industry priorities. The strategy does little to develop robust and internationally competitive domestic private sectors among its poorer borrowing countries. This is especially the case among smaller countries in transition from centrally planned to free market economies, and those that have undergone protracted periods of violent conflict. In many of these countries the necessary expertise for key revenue generating sectors such as energy, industry, mining and plantations is often not available nationally. Private sector involvement in these sectors, more often than not, means opening up the country to foreign companies, who bring with them their own experts, personnel, know-how, technology and demands. Domestic private sector actors usually serve as local gateways for external/foreign investors, with little guarantee that these investments will contribute meaningfully towards developing the technical, institutional and financial capacities required for a strong, domestic private sector.

Going further afield, the ADB has committed US $ 16 billion in investments and US $ 340 million in technical assistance grants towards the South Asia Growth Quadrangle (SAGQ), which includes Bangladesh, Bhutan, India and Nepal.¹⁰ The ADB investment programme for the SAGQ will involve an "economic corridor" around the four countries, which includes a combination of highways, railroads and other related infrastructure for ports, toll-ways, etc. The SAGQ is the private sector’s delight with the sub-region’s "huge force of hardworking and disciplined workers at relatively’ low wages."

The ADB is projecting the South Asia sub-region as "the largest concentration of poor people in the world," or, about 500 million out of 900 million persons living in poverty. In the name of poverty reduction in the various countries of the sub-region (including Pakistan and Sri Lanka), the ADB is already supporting physical infrastructure in transportation, energy, water resources utilisation and natural resource extraction (with significant private sector involvement in construction, operation and management); financial sector reforms; privatisation of power and water utilities, and; increasing the proportion of private sector providers and actors through overall restructuring and divestment of public enterprises.

Among the newly independent countries of Central Asia, the ADB has supported the Central Asian Regional Economic Cooperation (CAREC) programme, as well as provided individual in-country support for broad based economic and institutional reforms that encourage private sector development. In October, 2000, the ADB approved a loan for US $ 70 million to rehabilitate part of the old "Silk Road" that connects Europe to the People’s Republic of China. In order to encourage private sector involvement, the project will establish a pool of equipment that private sector companies can rent out for road construction and maintenance. In November, 2000, the ADB provided a US $ 45 million loan to Kazakhstan to restructure already privatised farms. New reforms would include agricultural taxation, water fees, new agricultural inputs and encouragement of private investment in agriculture.¹¹

The Pacific Islands too have their share of the ADB’s "pro-poor," market development efforts. In March 2001, the ADB approved a new, Pacific strategy that focuses on streamlining the countries’ public sectors and increasing private investment. Across the Pacific islands, the strategy would include differing levels of policy and public sector reforms, governance activities (which generally involve the restructuring of legal and administrative sectors) and boosting private investment in social and physical infrastructure.¹²

Despite this continuing flurry of private sector activity, a question still remains unanswered: how do these projects create markets that work for the poor, or reduce poverty? The answer is not quite that simple after all. An ADB staff person in the poverty reduction unit admitted that "the ADB still needs to come up with creative ideas of how the private sector and poverty reduction go together," and also about "how the private sector can be used to work with the public sector."¹³

The second point is more easily explained through an example of ADB supported public-private partnership for oil exploration in Azerbaijistan. The private company gets the funds for exploration, while the government is responsible for environmental clean up. Why does the polluter not pay? Well, in this case, according to the ADB, the polluter was the government, although under the former Soviet Union. And what about new pollution through exploration and resource extraction? Well, environmental clean up and protection is public responsibility after all so the government must take that on.

So how exactly does this public-private partnership help the poor? Using the example of water privatisation in the Philippines an ADB staff person explained that the private sector goes to rich areas for profit, while the public sector (with an ADB loan) goes to the poor areas.

A key component of the ADB’s poverty reduction strategy and private sector development efforts is good governance. Good governance includes a range of issues such as corruption, accountability, compliance to operational guidelines for the environment, resettlement and indigenous peoples, etc. But like a number of other labels that the organisation has recently adopted, putting good governance into practice remains a big unknown among ADB staff and management.

An ADB source admitted that the organisation has "not done much about governance in the past" and "has no interest in these issues." At the same time, it needs to have governance in its strategy. According to the same source, the political aspects of governance such as human rights are definitely out. Instead the ADB is concentrating on the "functional aspects of governance," for example, audit systems, legal and administrative systems, adherence to environmental and social policies, and misuse of project funds. But the organisation has not had much success with these either, going by examples of ADB supported projects that violate both existing national laws as well as its own guidelines.

The US $ 750 million Samut Prakarn Wastewater Treatment Project in Thailand is one of the more recent and better known examples of malpractice, corruption and poor compliance. Local residents have demonstrated that no environmental and social impact assessments, and no public consultations were conducted before project construction began. The site is expected to produce 50 tons of sludge everyday, which would flow into the sea and destroy local fisheries and mussel farming, resulting in a serious decline in living standards of people in and around the area. Equally serious are charges that the land for the wastewater plant was acquired by less than legal means. Despite complaints filed by local residents to the ADB’s senior management and requests by Thai senators to the ADB to review the project, the ADB has steadfastly defended the project and claimed that local residents’ charges are unfounded. Instead, the ADB has speeded up construction on the project and claims that since more than 40 percent of construction has been completed, the project cannot be halted.¹⁴

Another example of poor operations and governance is the Theun Hinboun Hydroelectric project in the Lao PDR, which has, from its very inception, been characterised by poor decision making processes, inadequate environmental impact assessments, conflicts of interest, and a general refusal on the part of the ADB to accept the project’s potential for severe socio-economic impacts. In late 1998, following overwhelming evidence gathered by outside sources and the ADB’s own consultants, the organisation finally acknowledged that the project was seriously harming local residents and promised timely and adequate compensation to negatively affected families. What followed, however, were more delays and procrastination, and the recently announced compensation plan is a shocking example of negligence and irresponsibility. Three quarters of the amount earmarked for the compensation package will be spent on further studies, assessments and monitoring, which will no doubt be conducted by the ADB’s usual coterie of consultants. The plan fails to provide direct compensation for loss of livelihoods and instead proposes so-called development activities with benefits that are neither guaranteed nor timely. Only US $ 137,500 (in a package that totals more than US $ 3 million) has been allocated as direct compensation and that too, for the purchase of water pumps for gardens!¹⁵

Both the Samut Prakarn and the Theun Hinboun projects contradict the ADB’s lending guidelines that local citizens should not be left worse off by ADB financed projects. They also contradict some of the key operational principles in its new environment policy (currently being drafted), for example, "No significant, unmitigated environmental harm," and "Costs of environmental measures to take into account benefits of mitigation." And finally, both projects demand closer scrutiny of decision-making processes, and the allocation and use of funds. So much for anti-corruption, compliance with environmental guidelines and reducing poverty!

Most ADB old-timers, however, are insistent that ADB operational guidelines are good, thorough and generally adhered to. According to a senior ADB staff person, the ADB’s policies on environment and resettlement are "too progressive" and the main problem is that they "water down the real issue of poverty."¹⁶

The ADB is generally quick to point out that actual decision-making and implementation in most controversial projects is in the hands of project implementers and national governments, and not the direct responsibility of the organisation itself. At the same time, however, the organisation continues to finance projects and programmes that are poorly conceived, badly managed, undemocratic, and violate even its own (minimal) guidelines.

The ADB’s governance efforts are directed primarily at reforming government policies and structures so that they provide "enabling environments" for private sector development and greater involvement of market actors in all manner of services, from health and education to banks, roads and power plants. In fact, the organisation has introduced new performance criteria by which those countries that perform well on poverty and governance get more ADF (concessional) financing and those that perform poorly get less.

Not surprisingly, the ADB has not developed any procedures by which to assess its own governance, accountability and internal decision making processes for projects and programmes. It has shown no interest in examining conflicts of interest arising from its simultaneous roles as policy "advisor", project financier and credit provider. A close look at its project contracts shows a relatively small group of private companies and consultants, who move from project to project, country to country. But no need to worry. As a senior ADB staff put it "the poverty reduction strategy helps to create more open dialogue."¹⁷

The ADB seems to see little contradiction between its operations and its stated poverty reduction goals. In the eyes of senior ADB staff the ADB is a development institution that makes loans and given today’s economic climate, it is simply not possible for the ADB to function as a grant making institution. "No-one is giving grants anymore, but with the poverty reduction strategy, we are getting lots of resources. Our problem is to do the right thing."¹⁸ According to the same staff, if the ADB changes from a loan making to a grant making institution, its resources will go down from $ 6 billion a year to just about $ 2-3 billion a year. But at the same time, it must maintain its anti-poverty focus in order to keep the cash coming in.

The same staff person also pointed out that a significant shift from loan making to grant making is not in the hands of the management, but must be taken up with the Japanese, Americans and Europeans who finance the ADB. Instead, the main questions the ADB should be asking itself are: 1) "Are we making loans that help poor people and that bring down the incidence of poverty," and; 2) "Do we have the right analysis at the country programme level to do the right thing?"¹⁹

Many ADB staff seem confident that, they are doing the right things and making the right loans. In the run-up to the 34^th Annual General Meeting to be held in Honolulu, senior management have made numerous statements in the media about how the ADB is a shy, well-intentioned and misunderstood group with the goal of stamping out poverty, unlike the picture painted by its critics. When addressing a gathering of Honolulu City Council Members, Bindu Lohani from the ADB said, "If you really travel in the countries where we work, you’ll have a totally different perception."²⁰

In the eyes of ADB staff, the poverty reduction strategy appears to have influenced the institution in the way it relates to the outside world as well. Two years ago, ADB staff could not openly talk with press and NGOs, but now, because of the poverty reduction strategy, the organisation even has an NGO Centre managed and supervised by senior staff and management. The Office of External Relations (OER) too has changed the way it now deals with the media and other outsiders. In preparation for the upcoming Annual General Meeting, senior management and staff are doing a lot more media outreach than in previous years, and publicising their commitment to poverty reduction through workshops and panel discussions, most notably in Honolulu.

That said, senior ADB staff at country and regional levels are usually unable to explain how their respective programmes have been re-worked to reflect a poverty focus. Nor are they able to discuss how they will monitor their respective programmes for impacts on the decrease or increase in poverty. Most of them cannot even show clear links between the policy reforms they demand of borrowing countries and benefits for specific populations identified as poor. The default assumption remains that economic growth will in one way or another benefit the poor and if it is made "pro-poor" it will benefit the poor more than if it is "pro-rich."

Manila based staff say that they are currently in the process of developing a poverty impact instrument that is different from previous beneficiary assessment instruments. But for now, we have only the word of the ADB itself that it is doing the right thing.

An important element in the ADB’s new positioning as an anti-poverty institution is the assertion of its "Asian" identity, in contrast to its Big Brother, the World Bank. Senior ADB staff in country programmes as well as the Head Office in Manila claim that governments feel closer to the ADB [than to the World Bank] because the ADB is "an organisation with a heart." And also because, "the ADB does not push any particular ideology, but has the country’s best interests at heart."²¹ The World Bank, on the other hand, "puts up a structure that everyone must follow."²²

As an example, a senior ADB staff person brought up a disagreement between the World Bank and the ADB regarding operations in Uzbekistan. Since the World Bank and the International Monetary Fund (IMF) decided to pull out of the country, they insisted that the ADB do so as well. But the ADB decided to stay on and broaden its portfolio. As a result, the ADB is now closer to the government of Uzbekistan and has developed better understanding and policy dialogue with them.

According to the same staff person, the Uzbekistan Government finds the World Bank too "Americanised" and "harsh," and resents the manner in which the World Bank "rams its ideas down their throats." In contrast, the ADB as an "Asian" institution has a "softer approach," and is incrementalist in its operations -- it proceeds "step-by-step."

This conflict is particularly evident in the struggle for supremacy regarding poverty reduction strategies. According to an ADB source, World Bank staff "fly in with their experts, walk into the statistics departments and tell them what to do." This approach apparently resulted in the World Bank being thrown out of Uzbekistan. The ADB, on the other hand, located its staff within government research centres and within three months, it was able to produce a study on living standards. In Cambodia, the World Bank and the ADB are embroiled in a test of wills regarding which of their respective documents the Royal Cambodian Government should accept as the national poverty reduction strategy. Each claims that its own document is the better one in terms of national ownership, quality and participation.

Despite open denials of conflicts with the World Bank, senior ADB staff are extremely proud of the few acts of resistance that they have been able to mount against their Big Brother. All policy conditionalities and reforms in the Asia-Pacific region must be jointly discussed among the World Bank, the IMF, the ADB and the Japanese Government. Previously, the ADB had by and large toed the line of the Big Brother(s) from Washington DC. But now, with their new poverty reduction strategy, and a newfound energy provided by the Meltzer Commission Report, the institution feels confident of taking more independent positions.

Perhaps the ADB is too quick in being lulled into the false sense of security provided by its "Asian-ness." Growing, region-wide critiques of its operations, decision-making structures and projects show that one does not necessarily need another Meltzer Commission to challenge the institution’s relevance and legitimacy.

According to an ADB source, the ADB’s adoption of the poverty reduction strategy was an accident. One fine day, based on his own personal interest, ADB President Tadao Chino said, "let’s go poverty, and then it was out there."

Apparently, neither the ADB, nor the Japanese Ministry of Finance were prepared for this. But once President Chino’s words were out there, both the ADB and the Japanese Ministry of Finance had to quickly follow through with it. And of course, all the donors were extremely happy as well and kept up the pressure on the ADB to develop a poverty reduction strategy. Within three months of the announcement, even the Japanese Bank for International Cooperation (JBIC) had a poverty reduction strategy -- they copied the ADB’s strategy.

The same ADB source happily declared, "President Chino threw a ball in the air and it was a good ball to put in the air; after all, who could be against poverty reduction?" But surely, the ADB is familiar with the laws of gravity--what goes up must come down. And the ball is coming down fast. Like the Emperor’ s new clothes, the ADB’s poverty reduction strategy is proving itself to be an institutional delusion and people across the region are saying, "but look, the ADB has no poverty reduction strategy at all!"

* Shamali Guttal is the Co-ordinator of State, Market and Civil Society Programme at Focus on the Global South
[email protected]

1 | Telephone Discussion with Mr. Armin Bauer, ADB Manila office, April 19, 2001.

2 | Ibid.

3 | Asian Development Bank is Misunderstood, its Leaders Say, in the Honolulu Star Bulletin, Wednesday, March 21, 2001.

4 | Ibid.

5 | Meeting with Mr. Urooj Malik, Phnom Penh, March 19, 2001.

6 | Telephone Discussion with Mr. Armin Bauer, ADB Manila office, April 19, 2001.

7 | Meeting with Mr. Paul Turner, Vientiane, April 4, 2001.

8 | Ibid.

9 | Poverty Reduction and Environmental Management in Remote Greater Mekong Sub-region Watersheds, Phase II, Interim Report, Volume I: Project Progress and Summary of Findings, Draft, July 2000, Margules Poyry, in association with ANZDEC Limited, New Zealand and GFA-Agrar, Germany.

10 | Subregional Cooperation Galore in Asia-Pacific, Violeta Perez-Coral, NGO Forum on The ADB, April, 2001.

11 | Ibid.

12 | Ibid.

13 | Telephone Discussion with Mr. Armin Bauer, ADB Manila office, April 19, 2001.

14 | For more information about the project, see for example, papers and updates by the Bank Information Centre (BIC) in Washington DC, USA, and by TERRA (Towards Ecological Recovery and Regional Alliance) in Bangkok, Thailand. Contact information for representatives from affected communities in Klong Dan can also be obtained from these organisations.

15 | Theun Hinboun Update: A Review of the Theun-Hinboun Power Company’s Mitigation and Compensation Programme, Bruce Shoemaker, December, 2000.

16 | Telephone Discussion with Mr. Armin Bauer, ADB Manila office, April 19, 2001.

17 | Ibid.

18 | Ibid.

19 | Ibid.

20 | Asian Development Bank is Misunderstood, its Leaders Say, in the Honolulu Star Bulletin, Wednesday, March 21, 2001

21 | Meeting with Mr. Paul Turner, Vientiane, April 4, 2001.

22 | Telephone Discussion with Mr. Armin Bauer, ADB Manila office, April 19, 2001.

The development of infrastructure in Asia has traditionally been initiated, managed and owned by the state. Governments have financed infrastructure development by using tax revenues or by borrowing money from commercial banks and international financial institutions such as the Asian Development Bank (ADB). Whilst the private sector has often been sub-contracted to carry out construction work, governments have retained control over the resulting assets and revenue stream and have borne virtually all project costs and associated risks.¹

The demand for infrastructure investment in the region has increased dramatically over the last two decades in response to rapid industrialization and urbanization in Southeast Asia and the gradual transition from centrally planned to market economies in the Mekong sub-region. Governments are no longer able to finance infrastructure development predominantly from the public purse. Governments are also reducing their involvement in the design, construction and management of infrastructure in response to the prevailing emphasis on privatization and private sector development in both development discourse and in the policy prescriptions of multilateral agencies such as the World Bank (WB) and the International Monetary Fund (IMF).

Despite large increases in private capital flows to developing countries over the last decade, the private sector remains reluctant to invest in infrastructure projects in emerging market economies such as the Lao PDR, Cambodia and Vietnam because of the political and commercial risks involved. These include: long lead times for project feasibility, design and approval processes; large up-front costs; frequent cost overruns and construction delays; a high frequency of disputes;² restricted and relatively inflexible markets for project outputs; problems with currency exchange and profit repatriation; vulnerability to regulatory and policy change and weak legal and dispute resolution systems. As a result, only seven per cent of infrastructure spending in Southeast and East Asia in 1995 was financed from commercial sources - predominantly Japanese banks - and most of this was concentrated in middle income countries. In post crisis Asia, private capital flows are being used to fund mergers and acquisitions by transnational corporations or to restructure external debt rather then invest in new plant and equipment.

The multilateral development banks (MDBs) have tried to increase the level of private sector involvement in infrastructure projects in emerging market economies through the extensive promotion of turn-key contracts and build-own-transfer (BOT) projects. MDBs have tried to reduce the risks faced by private investors in BOT projects in a number of ways. These include: contributing their own funds to the project; helping investors mobilize finance from other sources such as export credit agencies and commercial banks; providing political risk insurance and by extending partial credit guarantees. In addition, the MDBs have used their substantial political leverage over governments to create a policy, regulatory and institutional environment that favors private sector interests overall.

Risks and the contingent liabilities in BOT projects are rarely, if ever, removed however. They are more often reallocated between the various stakeholders involved in the project. Institutional capacity, ideology and economic and political power -- rather then the public good -- are often the key determining factors in this zero sum game. Reducing the risk to private sector investors and their multilateral supporters typically means increasing the risk to borrowing governments, taxpayers, consumers and communities affected by the development of large-scale infrastructure.

This expanded support from the MDBs to the private sector is part of a larger reconfiguration of their role that began in the early 1990s, initially with the WB. In response to declining donor support and the dramatic increase in private capital flows, the WB refocused on providing strategic policy advice and mobilizing private capital flows to developing countries. Both are now done in the name of poverty reduction. However, the macro-economic framework for the ostensibly nationally owned but WB and IMF Board approved poverty reduction strategies remains largely unchanged however. Most poverty strategies retain the neo-liberal emphasis on privatization, deregulation and liberalization that characterized WB/IMF structural adjustment programs and emergency lending in the 1980s and 1990s.

Other bilateral and multilateral agencies are now following suit. The ADB has recently adopted poverty reduction as its overarching objective. It has also adopted a private sector policy and strategy that entreats Bank staff "to think private sector at all times". Like the World Bank, the ADB has expanded its role in strategic policy advice, increased program as opposed to project lending and increased its involvement in privatization programs and BOT projects.

This articles examines the changing role of the ADB in infrastructure provision with a particular focus on trends in project finance and its support for build-operate-transfer schemes such as the Theun-Hinboun hydropower project in the Lao PDR. In particular it examines the reallocation of risks, contingent liabilities -- and profits -- associated with the transition from public to private sector provision of infrastructure.

Since it was founded in 1966, the ADB has approved $82 million in loans to its developing member countries (DMCs). Project lending grew rapidly in the 1980s, from approximately $1 billion per annum in the late 1970s to $5 billion in 1992. Since then, lending has stagnated with the exception of a spike in 1997 due to unprecedented lending to crisis-affected countries in Southeast Asia.

The ADB’s ordinary capital resources (OCR) are raised through bond issues on global capital markets using the callable component of member government subscriptions as collateral. The Asian Development Fund (ADF) is replenished approximately every four years by grants from member governments and by an annual transfer of the Bank’s operating profits. The ADB is gradually increasing the proportion of OCR relative to ADF lending i.e. the proportion of non-concessional or hard loans relative to concessional or soft loans.

The ADB is also expanding its role in co-financing i.e. mobilizing funds from other sources for ADB supported projects. These funds usually come from bilateral and multilateral institutions, export credit agencies (ECAs) and private banks. Cofinancing is mostly used for traditional infrastructure projects, particularly in the "bankable" energy, transport, agribusiness and resource exploitation sectors. These three sectors account for 75% of the funds mobilized by the Bank using cofinancing arrangements between 1970 and 1998. Cofinancing has more then doubled over the last five years, increasing from $1.5 billion in 1994 to $3 billion in 1999, equivalent to 61% of the ADB’s total lending in that year. The ADB is also gradually increasing the proportion of commercial co-financing relative to official co-financing. Commercial cofinancing exceeded official co-financing for the first time in 1998.

The increase in OCR relative to ADF lending and the increase in commercial relative to official cofinancing will have a particular impact on low-income countries that have little or no access to global capital markets and depend on soft loans for the provision of basic social infrastructure. It is also likely to reinforce an existing bias in the ADB towards "bankable" projects i.e. projects in the profitable energy, telecommunications and transport sub-sectors that generate hard currency receipts which can be used to repay ADB hard loans and other commercial cofinancing. In more general terms, it will reinforce the export orientated, capital and resource intensive development model that has been traditionally supported by the MDBs and their bilateral and corporate backers.

To add salt to the wound, the cost of ADB loans has increased significantly over the last two years. The scale of the Bank’s emergency assistance to crisis-affected countries in 1997 significantly weakened its financial position. In response, borrowing countries asked donor countries to increase their capital subscriptions and replenish the ADF. Whilst agreement was reached on the replenishment of the ADF in late 2000, an increase in OCR now appears unlikely because of opposition from the US and European member countries. Donors also forced the ADB to increase its service charges and interest rates, reduce the term of loans to crisis-affected countries and temporarily halt the transfer of Bank operating profits to the ADF in order to shore up the Bank’s financial position. This effectively transferred the burden of refinancing the ADB from donor to borrower governments.

Like global capital flows, ADB lending is geographically skewed in favor of larger DMCs. Just 8 of the 39 DMCs account for $69.1 billion of the $82 billion lent by the ADB since its founding in 1966. These include Indonesia, Pakistan, Philippines and Thailand, all of which were key strategic allies of the US during the Cold War and/or were important sources of natural resources and primary commodities for Japan during the 1960s and 1970s, and investment sites for Japanese industry in the 1980s and 1990s.

Large-scale lending to non-aligned or former Soviet bloc countries such as China, India and Vietnam has either been a relatively recent phenomenon or has been periodically suspended due to US opposition. Only one of the top eight recipients -- Bangladesh -- is classified as a Least Developing Country (LDC). The other 12 LDCs which are members of the ADB have received less then 3% of total ADB lending to date. This concentration is likely to be reinforced by the emphasis on non-concessionary lending, commercial co-financing and private-sector led development.

In summary, the key trends in ADB project financing over the last decade have been: a) an increase in the proportion of hard, relative to soft loans; b) an increase in cofinancing in both relative and absolute terms; c) an increase in the proportion of commercial cofinancing; d) an increase in the cost of both soft and hard loans; e) an expanded geographic focus albeit from a very narrow base determined largely by geopolitical and commercial interests.

These trends are complemented by the shift in bank lending from project to program loans, the unprecedented participation in crisis lending in 1997 and increasing policy coherence and collaboration - at least at senior management level - between the WB, IMF, regional development banks and bilateral donors. As a result, the ADB is now playing a much greater role in macro-economic and sectoral policy formulation and is expanding the scope and number of conditions attached to Bank lending. Not only is Bank lending becoming more expensive, it comes with more strings attached.

Despite a brief flirtation with an Asian, particularly Japanese development model, the ADB has largely fallen into line with the Anglo-American neo-liberal orthodoxy that has held sway in the WB and the IMF since the early 1980s. Japan’s preference for project lending, investment in public infrastructure, protection for infant industries and a strong regulatory role for the state has given way to the US emphasis on private sector development, private capital flows as an alternative to ODA, a reduced role for the state, policy based lending and structural adjustment.

For example, attempts by the ADB to establish an Asian Monetary Fund that would have provided quick disbursing loan to crisis affected countries without the harsh conditions attached to IMF loans was blocked by the US. Similarly the proposed currency swap arrangements between central banks in the ASEAN Plus 3 ³ grouping have only been allowed to proceed under IMF supervision.

These changes have occurred despite declining US financial contributions and protracted delays in payment. This reflects the preeminence given to the maintenance of the US relationship by Japan and the slow-down in the Japanese economy over the last decade, undermining the appeal of the Japanese model. It also reflects the high degree of integration between regional economies and the US economy, and lingering concerns held by smaller Asian states about a Japanese dominated ADB.

The transnational corporate sector has been a principal beneficiary of ADB lending since its was founded in 1966. To date, the ADB has financed contracts worth more then $54 billion from OCR and ADF sources combined. Thirty seven percent of contracts for goods, related services and civil works (GRSCW) have gone to companies from donor countries. Sixty nine percent of consulting contracts have gone to companies from donor countries, particularly from Japan, the US, Australia, Canada and Germany. Whilst the percentage of GRSCW contracts going to developed country companies has fallen over the last decade, the percentage of consulting contracts going to developed country companies has actually increased.

This is of particular concern because of the ADB’s expanding involvement in macro-economic policy advice, public sector reform and the development of sector specific strategies and policies. Many of the consulting companies bidding for ADB contracts were established in the 1970s and 1980s in order to benefit from the ideologically driven processes of privatization and deregulation initiated by conservative governments in the US, the UK, Canada and New Zealand. This severely proscribes the range of policy alternatives offered to DMCs.

This pre-existing emphasis on the private sector in Bank lending has now been codified and institutionalized through the Bank’s private sector strategy. This argues that "a strong and dynamic private sector is crucial to long-term, rapid economic growth, a necessary condition for sustained poverty reduction".⁴ It also argues in favor of "creating the enabling environment for domestic and private foreign investors and shifting the role of government from owner-producer to facilitator-regulator".⁵ The public provision of infrastructure is seen as inherently inefficient, returning low or negative yields on capital investment, resistant to technological or methodological innovation, providing low quality service and "crowding out" the private sector.

According to the ADB, the privatization of state-owned enterprises and/or the unbundling and corporatization of public utilities will improve efficiency, end cross-subsidization and reap windfall profits for the state that can - theoretically at least - be reallocated to social infrastructure and poverty reduction. The contracting out of government services will reduce the cost and enhance the scope and quality of service provision through enhanced competition and responsiveness to consumer demand. It will, in addition, stimulate the development of the private sector, boost private sector employment (replacing jobs lost in the public sector) and enhance GDP growth, a necessary precondition for poverty reduction.

The key strategic thrusts in the strategy are: a) supporting DMC governments in creating enabling conditions for business; b) generating business opportunities in ADB-financed public sector projects; c) catalyzing private investment through direct financing, credit enhancements and risk mitigation instruments.

Key components of the strategy include:

1. support for private sector involvement in infrastructure development particularly through: contracting out the design, construction, supply and management of public sector projects; supporting privatization programs; the provision of partial risk and partial credit guarantees; support for Build-Operate-Transfer schemes (BOT) schemes; and cofinancing including catalyzing investment from ECAs and commercial banks.
2. creating enabling conditions for private sector development through changes in macro-economic policy and sector approaches with a particular emphasis on: investment, trade and price liberalization; reduced barriers to competition; flexible land and labor markets; a credible and transparent legal framework, particularly in relation to contract law and private property rights; protection against nationalization; provisions for currency exchange and the repatriation of local currency profits; the commercialization of government services, particularly the introduction of full cost recovery and user fees; and the unbundling, commercialization and privatization of public utilities.
3. catalyzing private investments through: support for pilot projects with significant demonstration effects; equity investments; cofinancing; partial risk guarantees and partial credit guarantees.

The changing role of the ADB in the Mekong sub-region is illustrated through the following introduction to BOT projects and the accompanying case study on the Theun-Hinboun hydropower project in the Lao PDR.

BOT projects have been promoted by the WB, ADB, IFC, ECAs, international financiers and specialist BOT project developers since the mid 1980s. In a typical BOT project, the project sponsor - usually a consortium of companies - is granted a concession by the state to design, finance, build and operate an infrastructure asset for a set period, usually between 25 and 55 years. During the concession period, the company is allowed to sell its production e.g. power from a hydropower plant at a rate high enough to repay debt over 10 to 15 years and to generate profit at an internal rate of return greater then the industry standard of 15%. At the end of the concession period, ownership of the asset is transferred to the state at no cost.

Proponents argue that BOT schemes introduce private sector efficiency and innovation into the design, financing, construction and management of infrastructure projects; introduce competition through competitive tendering and allow governments to obtain high quality infrastructure assets with minimal financial obligations and risks.

BOT projects are highly complex in finance and management terms. They typically involve many players, including the host government, commercial banks, export credit agencies, multilateral and bilateral development agencies, the project sponsor (which may be a consortium of companies), construction and engineering companies which tender for and win subcontracts let by the project sponsor, legal and financial intermediaries, consulting companies, research institutes and NGOs.

As noted previously, investors are often reluctant to invest in large-scale infrastructure projects in developing countries because of the high - whether real or perceived - commercial and political risks involved. As a result, the allocation of risks and contingent liabilities between the many parties involved in BOT projects is the key factor in deciding whether a project will proceed or not. Key features of risk management in BOT projects include:

• Projects are usually financed on a non-recourse basis i.e. in the event of default, financiers do not have access to the assets of the sponsoring companies, only the assets and the revenue stream of the project itself
• BOT projects are usually highly geared with a debt to equity ratio of 70:30 i.e. they are largely financed by borrowing money from commercial banks, development agencies and export credit agencies.
• Project consortia usually involve a number of international companies with complementary expertise in, for example, construction, management and finance. It may also include the host government or its intermediary e.g. Electricity de Lao.
• MDBs and ECAs provide concessional finance, partial risk and enclave guarantees and political leverage over host governments. The guarantees provide comfort to commercial financiers and lower the cost of borrowing for project sponsors.
• A complex web of interlocking contractual agreements, incorporating incentives and penalties, guarantees, withdrawal options, buyout clauses etc.

The rights and responsibilities of the participants, together with the associated risks and liabilities, are allocated to the different parties through this complex set of contracts. These typically include: concession agreements between the host government and the project sponsor; a shareholder agreement between the companies sponsoring the project; construction contracts between the project sponsor and construction companies; loan agreements between financiers and the project sponsor; loan and project agreements between multilateral, bilateral and export credit agencies and the host government, etc.

The Theun-Hinboun hydropower project was the first of several planned hydropower projects to be completed in the Theun-Kading River Basin in central Lao PDR. A feasibility study was conducted in 1992, construction commenced in 1994 and the dam began commercial operation in March 1998. The Theun-Hinboun is a trans-basin diversion scheme. The 25 meter high dam diverts water from the Theun River through a 5.2 km tunnel to a 210 MW power plant in the Nam Hai catchment, a tributary of the Hinboun River.

Although initially conceived as a public sector project, the dam was designed, financed and built by the Theun Hinboun Power Company (THPC). This is a Lao registered, joint venture company with a paid up capital of $110 million. The shareholders are the Lao state electricity utility Electricite de Lao (66%), Nordic Hydropower (22%) and MDX Lao (22%). The THPC will own, operate and maintain the dam for 30 years before handing it over to the Lao government. As this was the first joint venture in the power sector in the Lao PDR, the ADB provided technical assistance to the Lao government to develop the necessary legislative framework. Almost all of the electricity generated by the Theun Hinboun is sold under a 25 year contract to the Electricity Generating Authority of Thailand (EGAT).

Nordic Hydropower (NH) was established in 1993 by the two largest Nordic hydro utilities, Sweden’s Vattenfal and Norway’s Statkraft. Both utilities faced widespread opposition to further hydropower development in the Nordic region and, with the support of Nordic aid and export credit agencies, have aggressively sought out new investment sites in developing countries. MDX Lao is owned by GMS Power and the Crown Property Bureau of Thailand. GMS Power is a subsidiary of the Bangkok-based real estate and infrastructure company MDX Public Company Ltd. Both MDX and SEATEC, a Bangkok-based consulting company, were established by Dr. Subin Pinkayan, a former employee of the Mekong Committee and former foreign minister and commerce minister in the Chatichai administration in Thailand.

The design and construction of the Theun Hinboun hydropower project cost $240.2 million. The THPC used its own capital of $110 million and borrowed a further $130.2 million from a combination of Thai-based commercial banks ($64.8 million), Nordic export credit agencies ($58.6 million) and the Lao PDR Ministry of Finance ($6.9 million).⁶ Hence the ADB claims that the project has a conservative debt:equity ratio of 54:46. However, Electricity de Lao borrowed $51.5 million from the Lao Ministry of Finance to finance most of its equity share in the THPC, with the balance coming from a combination of grant aid from the Norwegian Agency for Development Cooperation (NORAD) and a soft loan from the Nordic Investment Bank. The Ministry of Finance in turn borrowed $57.7 million from the Asian Development Fund, the soft loan facility of the ADB, to cover both the loan to EdL and the loan to the THPC. If EdL’s equity in the THPC is treated as debt, then the THPC’s debt to equity ratio jumps to 81:19.

The THPC, with financial support from NORAD and the Nordic Development Fund, contracted Norconsult, a Norwegian consulting company, to undertake a project survey (including an environmental impact assessment), develop the detailed design and to supervise the construction of the power plant. Supplementary environmental studies were sub-contracted to a number of research institutes, consulting companies and NGOs including the Wildlife Conservation Society, MIDAS and the Norwegian Institute for Nature Research. The THPC, with the support of Nordic export credit agencies, subsequently contracted some of the largest hydropower companies in Europe to undertake civil, mechanical and steel works. These included ABB Generation, based in Sweden and Switzerland, for electrical works ($36.7 million) and Kvaerner Energy A.S. of Norway for mechanical works including the supply of turbines ($13.6 million).⁷ No Lao-owned consulting or construction companies were awarded contracts.

The rights and obligations of the various parties involved in the Theun Hinboun project are outlined in six primary contracts that were drafted with the assistance of the ADB and its financial advisor Citibank.⁸ These include the completion guarantee, the shareholder agreement, the power purchase agreement, the license agreement, the ADB loan agreement and the ADB project agreement. Contracts such as the shareholder agreement, which defines the relationship between shareholders and their responsibilities, are not justicable in the Lao PDR but rather in Singapore under the UN Commission on International Trade Law.

Under the terms of the power purchase agreement (PPA), EGAT agrees to purchase 95% of the power produced by the THPC on a take-or-pay ⁹ basis at a fixed price for the next 25 years, with an option to renegotiate the tariff after 10 years. The tariff is set in US $, payable half in US$ and half in Thai baht. EGAT has, in effect, agreed to purchase the power regardless of falling demand in post-crisis Thailand and regardless of cheaper generating alternatives now available in Thailand. Without such an agreement guaranteeing a long-term revenue stream, Thai commercial banks would not have provided loans for the project.

The license agreement authorizes the THPC to plan, finance, construct, own and operate the project for a period of 30 years at which point ownership is transferred to the Lao government. It grants the THPC access to land and to the Nam Theun River without attributing a value to either of these resources. If this had been the case, the Lao Government could have used both as equity in the THPC rather then borrowing from the ADB. It protects the THPC from any detrimental upstream development (with the exception of the Nam Theun II). It waives taxes and duties on capital equipment and grants the THPC a tax holiday for the first five years of commercial operation. It transfers responsibility for environmental impacts, including compensation, to the Lao government, although the THPC is required to cover the cost of mitigation and compensation.

The ADB loan agreement requires the Lao Government to uphold all obligations under the license agreement, bringing comfort to the THPC. If the Lao government breaches the license agreement then it puts at risk future lending from the ADB and other bilateral and multilateral institutions.

Project revenues i.e. payments from EGAT are paid into an off-shore or escrow account managed by Indosuez Bank. Every six months, Indosuez distributes the revenues, first to the THPC for operation and maintenance costs, then to the commercial lenders for interest and principal repayments, then to the Lao Government for taxes and royalties and finally to the shareholders as dividends based on their equity share in the THPC. The balance is retained by the THPC. As the principal shareholder in the THPC, the Lao Government has a vested interest in maximizing dividends, which (unless one assumes that private profit is always in the public interest), conflicts with its role as regulator of the power industry in the Lao PDR.

The THPC commenced sales to EGAT in 1999. Sales were on average 16% lower then that projected in ADB loan documents, due largely to lower then anticipated water flows. This problem will be exacerbated by the anticipated construction of another trans-basin diversion project, the Nam Theun II, upstream from the Theun-Hinboun. Power production would then fall to the equivalent of that generated by a much smaller 91 MW power station, significantly below that "guaranteed" in the PPA with EGAT.

The THPC’s mitigation and compensation report acknowledges that post-project flows are inadequate to prevent profound environmental damage from taking place in the downstream Nam Kading. The original Norplan study recommended a minimum dry season flow past the dam of 10 cubic meters per second but only 5 cubic meters per second is currently being released. The mitigation and compensation report acknowledges that a flow of 40 cubic meters per second (50% of the dry season flow in the driest year every 20 years) is in fact necessary to prevent significant environmental damage but notes that this would cost in excess of $8 million per year in lost revenue. It would also reduce the power generation capacity of the Theun-Hinboun to such an extent that EGAT could insist on renegotiating the PPA at a much lower tariff, threatening the financial viability of the THPC.¹⁰ The report goes on to recommend abandoning any minimum dry season flow what-so-ever.

The livelihoods of between four and five thousand households in both the Theun-Kading and Hai-Hinboun river basins have been moderately to severely affected by the project, through a combination of loss of fisheries, flooded vegetable gardens, loss of drinking water supply, lowered water tables, impaired boat and pedestrian access, inundation of agricultural lands, bank erosion and loss of fishing equipment.¹¹ As noted above, the initial license agreement, brokered by the ADB, limited the THPC’s responsibility for mitigation and compensation to $1 million, almost all of which was spent on project infrastructure, consultants, government training and similar activities. The severity of projects impacts was at first denied by both the ADB and the THPC but in response to sustained pressure from international agencies and following further investigation by fisheries experts engaged by the ADB, the THPC designed a new mitigation and compensation program (MCP). The MCP acknowledges the extent of the social and environmental impact of the project and proposes a 10 year program costing between $2.74 and $4.65 million. However the plan has been criticized because of limited participation by local villagers in its formulation; it underestimates project impacts in the lower Nam Kading watershed and it allocates the bulk of the confirmed mitigation budget to further studies, assessments, plans and monitoring with only $137,500 allocated for direct compensation to villagers.

The ADB estimates that total revenue for the first twelve years of operation will reach $736.6 million and net income ¹² will be $407.6 million. This will allow the THPC to pay dividends of $393.9 million to shareholders, including $260 million to EdL and $89 million each to MDX Lao and NH. All shareholders are projected to recover their equity through dividend payments by the 6^th year of operation and all debts to be repaid by the 12^th year of operation. Profitability will increase significantly once the commercial debts are repaid, subject to the renegotiation of the power tariff with EGAT in the 10^th year of commercial operation. On this basis, the project can be considered a financial success, at least in narrow commercial terms. Not so for the three to four thousand households whose livelihoods have been negatively affected by the project. As noted above, the MCP will cost the THPC between $2.74 and $4.65 million spread over ten years, less then 1% of project revenues over the same period.

Proponents of the Theun-Hinboun argue that the dividends will enable the Lao government to finance poverty reduction programs. However, dividends payable to EdL are usually transferred immediately to Lao Government bank accounts and credited against EdL’s debts to the government, including debt service payments, export royalties and arrears of sales and income taxes.¹³ EdL has borrowed heavily from multilateral agencies to fund its investment program. These loans are denominated in foreign currencies and debt servicing costs have increased dramatically with the collapse in the value of the Lao kip. This suggests that hard currency revenue from the ADB-financed Theun Hinboun will be used to repay other multilateral debt. Furthermore, EdL heavily subsidizes the domestic market and export revenues have declined as domestic demand has increased, putting further strains on EdL’s financial position.¹⁴ Given this, the claim that project revenues can be used for poverty reduction are highly questionable.

Furthermore, the power tariff is higher then that now being paid by EGAT for electricity generated by independent power producers (IPPs) in Thailand using combined-cycle technology. The THPC tariff is protected under contract from such competitive pressure until 2008. In effect, Thai consumers are subsidizing the THPC and its commercial and multilateral lenders.

In summary, THPC profits accrue at the expense of irreversible damage to the Nam Kading downstream of the project site and moderate to severe damage to the livelihoods of four to five thousand households in the Theun-Kading and Hai-Hinboun river basins. The THPC profits by both externalizing these social and environmental costs and by over-charging Thai electricity consumers.

The principal beneficiaries of the Theun-Hinboun power project are: the plethora of predominantly European and principally Nordic construction, engineering, consulting, legal, financial, research and non-government organizations that assisted with the feasibility studies, design and construction of the project, who have already been paid $240 million up-front and will benefit from the legislative changes in favor of private sector development engineered by the ADB; the commercial banks and export credit agencies that provided high interest loans to the THPC and are guaranteed first payment from project revenues; MDX, Vattenfal, Statkraft and EdL, the shareholders in the THPC, who will receive $394 million in dividends in the first 12 years of project operation; and finally the multilateral agencies, including the ADB, that have financed EdL’s past expansion and will be repaid from EdL’s dividend stream as it is appropriated by the Lao Ministry of Finance.

And what about the three to four thousand households whose livelihoods have been severely affected by the Theun-Hinboun project? They get to fight over $134,000 for water pumps….

As the Theun-Hinboun case study shows, private sector participation in the design, financing, management and ownership of infrastructure produces winners and losers. Risk and contingent liabilities are not removed but rather identified, often artificially or unrealistically priced and then reallocated through mechanisms such as: fixed price turn-key contracts; "off-take" agreements which require government agencies to purchase project outputs at a fixed price on a take-or-pay basis; linking tariffs to inflation and debt servicing costs; use of third country law in the event of disputes etc. All too often the risks and liabilities are reallocated to affected communities and the host government.

In addition, most infrastructure projects in emerging market countries have very little in the way of pure non-recourse financing. In most cases, private finance is publicly guaranteed through political risk and partial credit guarantees which lower effective interest rates and guarantee repayment by publicly financed institutions, invalidating claims by BOT proponents that BOT projects free governments from commercial risk.

In summary, the key problems associated with the growing dependence of developing countries on private sector finance and private sector involvement in infrastructure provision are:

• Private sector flows, particularly portfolio investment and commercial lending, are very susceptible to investor confidence and are highly volatile as a result.
• The cost of commercial lending has increased in the wake of the financial crisis and is being used to restructure existing debt liabilities rather then invest in new plant and equipment.
• FDI flows are increasingly skewed: they are concentrated in relatively few middle income countries in northeast Asia and then in only a few "bankable" sectors.
• FDI flows are increasingly being used to fund mergers and acquisitions by transnational corporations rather then investment in new plant and equipment.
• The private sector is unlikely to invest in poorer countries, particularly in rural areas and in sectors with low rates of return.
• The regulatory and policy changes required for BOT projects are often initiated and drafted by the project sponsors and their multilateral backers and are promulgated without democratic participation or oversight.
• BOT contracts preclude subsequent policy and regulatory change that would have a negative impact on project revenues for the life of the concession agreement, further reducing sovereignty in policy making.
• The contracts governing the allocation of risks and contingent liabilities are usually regarded as "commercial in confidence", reducing transparency and participation by affected communities in critical issues such as the allocation of land and water rights and compensation.
• The feasibility and design studies for infrastructure projects are often undertaken by international consulting companies with limited local knowledge or experience and/or with close links to the project sponsors which precludes objectivity in, for example, environmental impact assessments (EIAs).
• The legal, financial and managerial complexity of BOT projects work in favor of the project sponsors (that often specialize in BOT projects), particularly in least developed countries with limited institutional capacity and limited if any experience with BOT projects.
• The high cost and complexity of large-scale infrastructure projects, particularly in least developed countries, may skew development priorities, staff and resource allocation and institutional capacity in favor of the project and import and capital intensive development models in general.
• The contracting out of infrastructure projects to the private sector reduces the institutional capacity of the state to design and deliver public goods.
• The high levels of debt financing, imported equipment and profit repatriation involved in BOT projects exacerbates balance of payments problems, increases a country’s debt stock and reinforces the often pre-existing emphasis on export-orientated industrialization in order to generate sufficient hard currency to meet debt service commitments.
• The provision of guarantees by MDBs and ECAs, backed by taxpayers or funded by contributions from member governments, protects project sponsors from market risk and encourages moral hazard. This may allow commercially non-viable projects to proceed because project sponsors know they can recoup losses from taxpayer funded agencies or the host government.
• Governments typically grant access to resources such as land and water to the project sponsor at no cost. In many countries in the Mekong sub-region, collective property rights to these resources are poorly codified, if at all, and hence easily repudiated without compensation.
• Many large-scale infrastructure projects involve involuntary resettlement programs that have high failure rates.
• Governments often grant substantial tax and royalty exemptions to the project sponsors in order to attract foreign investment, reducing government revenue available for direct poverty alleviation programs.
• Companies involved in the sponsoring consortia are often able to recoup their investment up-front through profits on construction, financial services and management contracts. This reduces their commitment to the long-term viability of the project.
• If governments hold equity in a BOT project then they have a vested interest in maximizing revenues in order to increase dividend payments. This can conflict with their role as independent regulators acting in the public interest or as advocates for affected communities.
• Off-take agreements i.e. a commitment to purchase a fixed quanity of project outputs e.g. electricity at a fixed price for a fixed period by government agencies such as EGAT disadvantages consumers through maintaining an artificially high price.
• Revenue flows are typically allocated in order of priority to the project sponsor for operation and maintenance costs, then to commercial and bilateral and multilateral financiers, then to the host government for taxes and royalties (if any) and finally to the project sponsor for the distribution of dividends.
• Governments may be asked to forgo dividends in the event of declining profitability due, for example, to reduced water flows to a hydropower plant.
• Government dividends, royalties and taxes may be appropriated for debt servicing rather then being sequestered for poverty alleviation.
• Governments are required to provide counter-guarantees to participating MDBs and ECAs without any corresponding guarantee from the project company. If for example the sponsor defaults on payment for imports then the debt is added to the stock of bilateral debt owed by the host government to the ECAs home government.
• ECAs generally do not adhere to internationally recognized social, environmental, political and human rights standards. They are highly secretive and intensively competitive, often bidding for projects that have been rejected by bilateral and multilateral agencies on social and environmental grounds. This encourages a race to the bottom in project design.
• The provision of export credit finance is conditional on the project sponsor purchasing from a particular supplier in the ECA home country. This drives up project costs and reinforces dependence on imported and potentially inappropriate or outmoded technology.
• Governments are typically required to assume responsibility for open-ended environmental and social impacts. The financial liability of the project sponsor for remedial action is often capped in advance. This means that social and environmental costs are externalized.
• Social and environmental programs are often poorly designed by international consulting agencies with little or no participation by affected communities.
• Severe environmental damage -- a key concern for intergenerational equity -- is either ignored or consistently undervalued.

The uncritical privileging of the role of the private sector and private capital in development discourse, in MDB policy development and programs and in the delivery of public goods by national governments has had disastrous consequences for the poor. The processes that this has unleashed - privatization, the introduction of user fees, the contracting out of public services, BOT projects, reduced transparency and participation in project design and policy formulation, increased external indebtedness, the diversion of MDB and bilateral funds into non-concessionary lending and into middle income countries and "bankable" sectors - have all profited the private sector at public cost.

Furthermore it has undermined the capacity of socially progressive and activist states to design, finance and deliver high quality public goods and instead reinforced a model of dependent development. Progressive taxation reform and the redistribution of productive assets in order to expand the domestic market and expand the tax base are part of the solution to financing such public goods, as is increased grant aid and a much greater reliance on endogenous technologies and expertise in their design and delivery. As Keynes once said, let sources of finance be national. Let the design and delivery of public goods be likewise.

* Chris Adams is a visiting researcher with Focus on the Global South. He is currently on extended leave from Oxfam Australia -- Community Aid Abroad.
[email protected]

1 | Jonathan Cornford and Michael Simon, Breaking the Banks: The Impact of the Asian Development Bank and Australia’s Role in the Mekong Region, Oxfam Community Aid Abroad, 2001, p. 30

2 | Build-operate-transfer projects are often disparagingly referred to as build-operate-litigate projects.

3 | ASEAN plus South Korea, Japan and China

4 | ADB, Private Sector Development Strategy, March 2000 p.1

5 | ibid.

6 | The terms of the ADB loan to Lao PDR Ministry of Finance are 1% service charge p.a. with a repayment period of 40 years and a grace period of 10 years. The Ministry of Finance then re-lent funds to EdL at an interest rate of 6.5% with a repayment period of 25 years and a grace period of 5 years. It also re-lent ADB funds to THPC at an interest rate of 10% with a repayment period of 16 years and a grace period of 4 years. The commercial interest rates provided by Thai banks are assumed to be between 10 and 12% with a 12 year term.

7 | Other contractors included: Vianini Lavori and Vianini Thai Construction and Development Company Joint Venture ($12.7 million); Recchi S.p.A -- CMC of Italy ($63.9 million); ATB Caldereria S.p.A. of Italy ($19.01 million); John Holland Lao ($3.03 million), TEDA Company ($12.7 million).

8 | Citibank, America’s largest financial institution and number six in the Fortune 500 list, is the target of a global campaign by student activists and the Rainforest Action Network, for its involvement in environmentally destructive projects such as the World Bank funded Chad Cameroon pipeline and the Three Gorges Dam in China, as well as for predatory lending and "red-lining" i.e. under-serving disadvantaged communities. Robert Rubin, former US Secretary of Treasury, is the co-chair of Citibank.

9 | Under a take-or-pay agreement, the buyer agrees to purchase a fixed quantity of project outputs at a fixed price, regardless of need.

10 | Wayne White, Theun Hinboun: An Assessment of Early Project Performance, March 2001.

11 | Bruce Shoemaker, A Review of the Theun-Hinboun Power Company’s Mitigation and Compensation Program, December 2000.

12 | After payments to THC for operation and maintenance, interest and principal repayments and royalties and taxes to the Lao government are deducted.

13 | Hydropower Development Strategy Study, January 2000, p. 43.

14 | Ibid, p. 28

While embracing the new mantra of poverty reduction, development institutions have not abandoned the push towards openness and privatization. Multilateral organizations like the Asian Development Bank put emphasis on the role of the private sector in growth and poverty reduction. To date, however, the private sector is still narrowly defined to include those private entities able to participate in bank project activities. Knowing the predilection of the ADB for large-scale infrastructure projects, only big contractors and suppliers -- in short, big business -- qualify as private sector.

In March 2000, the ADB updated its Private Sector Development Strategy (PSDS). Partly in recognition of the Bank’s dwindling resources, the PSDS signals a reorientation of the Bank’s role from project fund provider to a facilitator of resources, with the private sector as both targets and clients. This role is also in keeping with the changed roles they assigned to government. The ADB is in effect encouraging governments to shift from "owner-producer" to "facilitator-regulator" of private activities.¹

Instruments for private sector operation may take the form of direct loan, equity investments, or complementary financing. Direct loans are those made to the private sector entity. Equity investments are when the ADB owns part of the enterprise, to a maximum of 25 percent and only if it is not the largest single investor. Complementary financing schemes (CFS) are when the ADB acts as the "lender of record". CFS loans are funded by commercial lenders. As a service to lenders, the ADB provides partial credit and partial risk guarantees. Partial credit guarantees are comprehensive guarantees of principal and/or interest for long-term maturities beyond the normal tenure for commercial lenders. Partial risk guarantees cover sovereign and political risk.²

Table 1 shows the trend in ADB private sector approvals. Loans take up bulk (47%) of cumulative approvals. From the mid-1990s, complementary loans have been increasing both in absolute and relative terms. In 1999, they represented 55 percent of total cumulative approvals. A total of 122 private sector projects have been approved since 1983.