Sunday, October 14, 2012

Funding: ADB and China still in partnership

[Apologies for the late posting of this article. We thought it was
useful still to circulate this piece despite being published in late

Funding: ADB and China still in partnership
By Paul J Davies
23 September 2012
Financial Times

The Diamer-Bhasha Dam, in a region of Pakistan formerly known as the
Northern Areas, near the border with Indian-administered Jammu and
Kashmir, is a planned $12bn, 4,500MW hydropower and reservoir project.

It would help significantly with both water and power shortages,
according to the government.

But as the project struggles to secure funding from foreign governments
and multilateral donors, it is providing a fascinating insight into the
strange, double-edged relationship between the Asian Development Bank
and China.

The two are in effect competitors in the Pakistan project and, if China
wins, the concern of international groups would be that it may undermine
the kind of standards the ADB would look to guarantee.

The multilateral bank has been criticised in Pakistan for dragging its
feet over the deal and even faced claims it had walked away.

But its country head told local press that it needed to ensure that
backing from other lenders is also in place before it can commit partial
funds and that the project complies with safeguards relating to
environment, resettlement and procurement, as well as meeting
transparency standards.

China is deeply interested in Pakistan as an overland supply route for
energy from the Gulf and looks likely to become more involved in
projects such as the deepwater port at Gwadar on the Arabian Sea.

With Diamer-Bhasha, as with other projects outside China historically,
Beijing is expected to overlook some of the more costly and awkward
aspects of higher standards if it is handed the work through an
uncompetitive tender. Russia, incidentally, is pitching for the same

The great irony of this is that one of the main reasons why the ADB
still lends money to China is to bring higher governance and safety
standards to the country - and thereby legitimise some of its own
infrastructure projects.

Rajat Nag, managing director-general of the ADB, says: "Why does China
borrow from us? It is an important question which our shareholders,
including China, constantly discuss."

China certainly does not need the money these days. It is the bank's
third largest shareholder and the only other country alongside the US
and Japan to have its own full-time seat on the board. Moreover, it has
held that position since 1986.

Where things have been changing as China has grown rapidly over the past
decade are in its borrowing.

For a long time it was the largest single borrower, but in the past two
years it has begun to drift down the rankings, to second in 2010 and
third in 2011. It still pulls down about $1.3bn a year from the bank,
but has also become a donor, helping the bank increase its capital base
by $110bn in 2009. Mr Nag says: "Over time it will become a major donor."

China nowadays is more likely to borrow from the ADB to support
investment in environmental technology and green measures, which
accounts for two-thirds of the ADB money it gets, says Mr Nag.

The rest goes to poorer regions such as the far western Xinjiang
province - which by coincidence is where any oil pipeline from Pakistan
would arrive in China. Mr Nag says there are three important reasons why
China still borrows from the ADB.

Firstly, the bank's presence in environmental projects and technology
helps the country gain access to "best practice" and equipment.

The second reason - and this, he says is the one that the Chinese
government itself most talks about - is that ADB guidelines will apply
to the whole of a project in which it is involved. These include
standards on environmental, social and economic safety and sustainability.

"This fact and our involvement make it easier for the government to
impose those standards within its own country," he says.

The final reason for lending to China is that it gives the country
access to information and knowledge about how pension funds and other
forms of institutional social savings work.

Mr Nag says, in spite of China's growing economic might on the world
stage, the thing to remember is that it still a poor country.

"Per capita income is still only about $3,700 and our cut-off is at
about $7,000," he says. "Graduation from ADB assistance usually occurs
within five years of reaching that cut-off income level."

As China's economic power continues to grow, and so its donations to the
bank, what about its influence over the direction of the ADB?

Mr Nag plays down this aspect, particularly in light of the big
reworking of how the bank functions and decides projects that was
undertaken in 2008 and given the title of Strategy 2020.

This, he says, has limited the bank's focus to five project types:
infrastructure, education, environment, financial sector development and
regional co-operation and integration.

Individual countries are also handed multiyear budgets and the ADB teams
then work with local governments to find suitable projects on which to
spend the money.

As third-biggest shareholder China still holds only about a 6.5 per cent
stake, significantly less than the US and Japan.

If China poses any threat to the ADB's mission, then it will do so as a
competitor from the outside on projects like Diamer-Bhasha rather than
from the inside as a member with growing economic clout.

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