[Senate Hearing 111-743]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 111-743

  BANKING ON REFORM: CAPITAL INCREASE PROPOSALS FROM THE MULTILATERAL 
                           DEVELOPMENT BANKS

=======================================================================

                                HEARING

                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 15, 2010

                               __________

       Printed for the use of the Committee on Foreign Relations












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                COMMITTEE ON FOREIGN RELATIONS         

             JOHN F. KERRY, Massachusetts, Chairman        
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
RUSSELL D. FEINGOLD, Wisconsin       BOB CORKER, Tennessee
BARBARA BOXER, California            JOHNNY ISAKSON, Georgia
ROBERT MENENDEZ, New Jersey          JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland         JIM DeMINT, South Carolina
ROBERT P. CASEY, Jr., Pennsylvania   JOHN BARRASSO, Wyoming
JIM WEBB, Virginia                   ROGER F. WICKER, Mississippi
JEANNE SHAHEEN, New Hampshire        JAMES M. INHOFE, Oklahoma
EDWARD E. KAUFMAN, Delaware
KIRSTEN E. GILLIBRAND, New York
                  David McKean, Staff Director        
        Kenneth A. Myers, Jr., Republican Staff Director        

                              (ii)        





                            C O N T E N T S

                              ----------                              
                                                                   Page

Chin, Curtis, U.S. Executive Director, Asian Development Bank, 
  Manila, Philippines............................................    19
    Prepared statement...........................................    22
    Responses to questions submitted for the record by Senator 
      Richard G. Lugar...........................................    63
    Response to question submitted for the record by Senator 
      Robert Menendez............................................    70
Kerry, Hon. John F., U.S. Senator from Massachusetts, opening 
  statement......................................................     1
Lago, Marisa, Assistant Secretary for International Markets and 
  Development, U.S. Department of the Treasury, Washington, DC...     5
    Prepared statement...........................................     8
    Attachment submitted with prepared statement.................    42
    Responses to questions submitted for the record by Senator 
      Richard G. Lugar...........................................    54
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     4
Solomon, Ian, U.S. Executive Director, World Bank................    12
    Prepared statement...........................................    14
    Responses to questions submitted for the record by Senator 
      Richard G. Lugar...........................................    61
    Responses to questions submitted for the record by Senator 
      Robert Menendez............................................    70

              Additional Material Submitted for the Record

Arnavat, Gustavo, U.S. Executive Director of the Inter-American 
  Development Bank, prepared statement...........................    52
    Responses to questions submitted for the record by Senator 
      Richard G. Lugar...........................................    65
Hudson, James L., U.S. Executive Director of the European Bank 
  for Reconstruction and Development, prepared statement.........    50
    Responses to questions submitted for the record by Senator 
      Richard G. Lugar...........................................    68
Jones, Walter, U.S. Executive Director of the African Development 
  Bank, prepared statement.......................................    47
    Responses to questions submitted for the record by Senator 
      Richard G. Lugar...........................................    67

                                 (iii)

  

 
  BANKING ON REFORM: CAPITAL INCREASE PROPOSALS FROM THE MULTILATERAL 
                           DEVELOPMENT BANKS

                              ----------                              


                     WEDNESDAY, SEPTEMBER 15, 2010

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room SD-419, Dirksen Senate Office Building, John F. Kerry 
(chairman of the committee) presiding.
    Present: Senators Kerry and Lugar.

            OPENING STATEMENT OF HON. JOHN F. KERRY,
                U.S. SENATOR FROM MASSACHUSETTS

    The Chairman. The hearing will come to order. Thank you all 
for being here with us today and particularly our witnesses.
    I am delighted to be joined by my colleague and partner in 
these efforts, Senator Lugar, and appreciate his knowledge and 
leadership with respect to the multilateral development bank 
issues.
    In the world we are living in today, it is fair to say that 
with the challenges we face globally in the economy and the 
challenges of radical extremism, religious fanaticism, 
extremism, and so forth, and countless numbers of young people 
in populations that are growing far more rapidly than the job 
base, development is, in my judgment, the single most 
effective, important tool we have available to us. And for my 
money, rather than have 6 billion bucks a month being spent in 
Afghanistan the way it is, I would love to see a lot more 
invested around the world in some of the things that are crying 
out for alternatives for some of those young people to spend 
their lives doing.
    So that is the context within which we come here today to 
talk about proposed increases in the capital that we provide to 
multilateral development banks. And we are joined by three 
policymakers who can speak directly to the new burdens that 
these banks have taken on and the challenges that they are 
going to have to meet over the course of these next years.
    For a lot of years, the multilateral development banks have 
played a crucial and usually unsung role in fostering global 
development. The World Bank and four other multilateral banks 
that service Asia, Europe, Africa, and the Americas offer 
loans, technical assistance, and grants to developing nations. 
They finance projects that role back poverty, educate girls, 
combat corruption, spread economic opportunity, and generally 
lay the foundations for a stable, well-governed society.
    There are extraordinary examples of the successes around 
the world of what the development banks have achieved. Where it 
matters most to our interests currently in places like Pakistan 
and Afghanistan, the World Bank and Asian Development Bank have 
been very valuable partners. For many years, they have placed 
good people in harm's way in order to further our common goals.
    And the global financial crisis has driven home both the 
importance of institutions like these and the need to expand 
them in order to match the scale of our global challenges. From 
2007 to 2008, total net private financial flows to the 
developing world, unfortunately, fell precipitously. In 2009, 
as the crisis took hold, the economic crisis, and the markets 
fell, current account balances of developing nations shrunk by 
half.
    As the flow of capital to many developing nations cratered, 
the World Bank increased lending from $13.5 billion in 2008 to 
a record $33 billion in 2009. And so as devastating as the 
global financial crisis has been, there is no question in any 
sound analyst's mind that that crisis would have been far worse 
without the rapid response, technical advice, and billions of 
dollars of capital that the multilateral development banks 
provided.
    So now today these banks are coming to us and to others and 
saying we need an increase in capital. At a time when budgets 
are strained, obviously people are going to sit there and kind 
of scratch their heads and say, what, I mean, how is this going 
to work?
    So we have to measure very carefully on a cost-benefit 
analysis, a risk analysis. And needless to say, the banks are 
going to have to make their case. I believe it is a case that 
can be made, and I believe my colleague, Senator Lugar, shares 
that view. It is a case that can be made to us and to the other 
donors, but it is going to have to be.
    I would advise a cautious approach to ensure that in taking 
several difficult steps at once--and there are difficult steps 
to take in this--that the support of the United States 
Congress, which really represents the support of the American 
people, that that is maintained.
    But I am convinced the multilateral development banks have 
a strong case to make in asking for these greater 
contributions. They have protected the developing world from 
the worst of the financial crisis, and because the MDBs accept 
contributions from many regional and global partners, this is 
not a burden that we, the United States, carry alone. This is 
not something American taxpayers are doing and no one else is 
doing. There is a huge global contribution and commitment to 
this effort. In fact, for every dollar that we directly 
contribute, we enable $100 worth of lending to the developing 
world.
    As the largest shareholder in all but one of the major 
multilateral development banks, we are obviously deeply 
invested in seeing that these institutions remain relevant and 
effective. Going forward, it is going to be important to 
address questions of how nations share power within these 
institutions. The question of how we decide leadership at 
institutions like the World Bank is going to have to be taken 
in a thoughtful and measured way. In trying to make these 
institutions more representative, we also have to be careful 
not to make them less effective. And this is not an easy 
discussion, but while we can support a fundamentally merit-
based approach from top to bottom, we still need to reach an 
understanding about what that merit-based means in practice.
    Finally, even as these banks grow and restructure, they are 
going to have to do more to address 21st century challenges. 
That includes food security, empowering women, but especially 
the urgent and fundamentally linked challenges of climate 
change and energy poverty. As we invest limited public 
resources, we need to ensure that these banks are all 
supporting the clean energy and climate priorities of the 
planet, and our ways to do that that I think will have 
fundamentally salutary effect on all of our economies. Some 
countries are rushing to that effort today with great success 
economically, I might add. I regret that the United States is 
not sufficiently yet engaged in that, but I hope that it will 
be over a period of time.
    We have a series of difficult questions to confront, 
including how to reform our current institutions and build the 
multilateral development banks of the 21st century. It is clear 
that these banks represent an increasingly important tool, a 
vital tool to enhance global stability and advance our own 
interests.
    I will just say quickly I was recently in Syria meeting 
with President Assad, and President Assad defined to me the 
needs of Syria in terms of energy and technology and education 
and health. He is, in many ways, looking to the West, not the 
East, in order to try to provide for those needs. But 
ultimately he was very clear to me. He is the leader of a 
secular country the borders theocracy. He is a leader of an 
Arab country that borders a Persian country. He is the leader 
of a Suni majority country that borders a Shia majority nation. 
I think any of us making judgments about the long-term future 
of Syria ought to see that it is not necessarily written to the 
East. It could be written to the West.
    But he faces a fundamental challenge. He has got about 
500,000 young people who turn 18 every year--each year--and 
those 500,000 people do not have jobs and they may not have 
educational opportunity unless there is reform in development 
in that country. That is replicated in Egypt, in Jordan, in 
Saudi Arabia, in Pakistan, Bangladesh, Afghanistan, Yemen. Run 
the list through Africa and other countries.
    It is not just their challenge, folks. It is our challenge 
too because if we do not address the future economic needs and 
transformation of those societies, we have already begun to see 
what the other side of that coin looks like. So this is an 
important challenge for me and one of the most important 
reasons that I believe these multilateral development banks are 
such a critical tool for us as we engage in this global 
struggle that we all face with respect to extremism and 
opportunity and exploitation.
    We are joined today by three policymakers who are at the 
center of these discussions. Marisa Lago is the Treasury 
Department's Assistant Secretary for Markets and International 
Development. Ambassador Curtis Chin is the U.S. Executive 
Director to the Asian Development Bank, and Ian Solomon serves 
as U.S. Executive Director to the World Bank. So we are 
delighted to have all three of you here bringing your expertise 
to this.
    And I am delighted to be able to share this effort with a 
terrific partner, the ranking member of the committee, Senator 
Lugar, who has spent years trying to eradicate corruption and 
bring transparency to the multilateral development bank 
process. I am pleased to recognize him now for his opening 
statement.
    Senator Lugar.

          OPENING STATEMENT OF HON. RICHARD G. LUGAR,
                   U.S. SENATOR FROM INDIANA

    Senator Lugar. Well, thank you very much, Mr. Chairman. I 
deeply appreciate your generous comments about my efforts, and 
I simply want to affirm that much of my opening statement will 
second the motions that you have made in your very 
comprehensive statement.
    And I join you in welcoming our distinguished witnesses. We 
appreciate your appearance before our committee and the 
opportunity to visit with you again.
    The administration is requesting funds for the multilateral 
development banks through the regular budget process. This 
provides the Foreign Relations Committee and Congress with an 
opportunity to carefully examine these increases. In 2009, the 
administration waited until late in the process of a 
Supplemental Appropriation bill to request a $100 billion loan 
for the IMF. Consequently, on that occasion, Congress did not 
have a full opportunity for hearings or authorizing legislation 
addressing whether those additional funds should have been 
conditioned on reforms.
    The United States has strong national security and 
humanitarian interests in alleviating poverty and promoting 
progress around the world. That is why the Congress has 
supported appropriations for loan and grant programs through 
the development banks. But the American people must have 
confidence that our funds are managed effectively, efficiently, 
and transparently. We must ensure that our contributions 
promote the United States interests.
    The current request arrives in the context of the worst 
economic crisis since the Great Depression. We need to consider 
the impact of additional funding on our own bottom line, as 
well as on how funding might help strengthen United States 
influence in the global economy and contribute to the United 
States national security. Maintaining our shareholding and 
leadership positions at the International Monetary Fund, the 
World Bank, and regional development banks remains an important 
foreign policy tool that in many circumstances can be more cost 
effective than other mechanisms we might employ.
    Given global financial linkages, we cannot achieve a full 
economic recovery in isolation from the rest of the world. In 
the face of job losses, wealth evaporation, homelessness, 
hunger, and other outcomes, the economic viability of many 
nations will be tested. There is evidence the global crisis has 
been tempered by the actions of the International Monetary 
Fund, the World Bank, and the regional development banks. They 
have provided steady finance during a period of extreme 
uncertainty and turbulence.
    Although the development banks have performed a valuable 
function, their operations can be improved significantly. Seven 
years ago, I began a review of the multilateral development 
banks that studied whether funds were being used effectively 
and efficiently and projects were benefiting legitimate 
development and financial goals. I chaired six hearings on that 
topic that included examinations of individual projects and 
policies of the respective banks. In March of this year, I 
issued a report entitled ``The International Financial 
Institutions: A Call for Change.'' The report outlined concrete 
recommendations for the development banks, including 
prioritizing projects designed to deliver sustained, long-term 
development; refocusing attention on the impact of projects, 
rather than their size and goals; strengthening anticorruption 
efforts by increasing financial resources for internal controls 
and embedding oversight funds into projects; and requiring 
budget disclosure and financial management standards for any 
loans going directly to a country's budget.
    During the negotiation process for the general capital 
increases, each development bank committed to specific reforms 
of their operations. Part of our interest today is to examine 
whether additional reforms are warranted in advance of capital 
increases and how implementation of these reforms will be 
monitored. The administration and the other donor countries of 
the G20 should be firm in requiring the implementation of 
reforms before transferring funds for the general capital 
increases. It is also imperative that our Government examine 
capital increases for each bank as a unique request, because 
each financial institution has its own distinct management 
challenges.
    Once again, I thank the chairman for calling this timely 
hearing, and I look forward to engaging with our witnesses.
    The Chairman. Thank you, Senator Lugar, and I appreciate 
that last point particularly; it is an important one.
    We will ask for your testimony. We will start from your 
left to right, Secretary Lago, and then just run down the 
table. Thank you very much.
    Madam Secretary

STATEMENT OF MARISA LAGO, ASSISTANT SECRETARY FOR INTERNATIONAL 
   MARKETS AND DEVELOPMENT, U.S. DEPARTMENT OF THE TREASURY, 
                         WASHINGTON, DC

    Ms. Lago. Thank you, Chairman Kerry, Ranking Member Lugar. 
Thank you for the opportunity to discuss the multilateral 
development banks, which for ease of conversation, we will 
refer to as the MDBs throughout the testimony.
    I will focus my remarks on addressing the fundamental 
question of why the MDBs merit our continued support, which 
both of you have so articulately expressed. First, I will 
discuss how the work of the MDBs directly supports the 
administration's objectives. Second, I will review the reform 
agenda that we have pursued and are continuing to pursue at 
these institutions, and third, I will address the issue of 
resources and continued U.S. investment in the MDBs.
    Turning to the first topic, we believe that the MDBs are 
sound investments even in this tight fiscal environment because 
of their substantial leveraging capacity. Further, the MDBs 
have instituted a set of fiscal controls to ensure that their 
funds are well spent, thus giving us assurance that the U.S. 
dollars that finance the MDBs' projects are, indeed, going to 
their intended purposes.
    In addition to their fiscal effectiveness, the MDBs deserve 
our support because of their key role in furthering the U.S.'s 
international agenda. Specifically, the MDBs foster economic 
growth both at home and abroad, protect our national security 
interests, address transnational challenges, and support the 
very poorest members of the global community. I will briefly 
address each of these four policy goals.
    The MDBs were explicitly established to generate and 
support sustainable, broad-based economic growth in poor 
countries and in emerging markets. As the MDBs help developing 
nations stabilize and grow, we build new markets for U.S. 
exports and we create jobs here at home. In addition, we 
routinely turn to the MDBs to shore up emerging markets and 
systemically important economies in times of economic distress.
    As both the chairman and the ranking member have observed 
in the past, the MDBs responded decisively to the G20's request 
to accelerate and expand lending in the wake of the financial 
crisis, and at a time when very few private sector banks were 
lending, the MDBs increased their lending by $100 billion above 
their preplanned crisis levels.
    The MDBs also play a vital role in helping us achieve and 
then safeguard our national security objectives. The 
President's National Security Strategy identifies the 
acceleration of sustainable development as one of its core 
elements. The U.S. Government advances its objectives through 
our leadership position within the MDBs.
    Afghanistan is an excellent case in point. For our military 
successes to take hold, we need to help the Afghan Government, 
its people, its youth, strengthen their economy. A major 
project that is financed by the Asian Development Bank is the 
construction of the railway line that will connect Hairaton to 
Mazar-e-Sharif. This will link Afghanistan to Uzbekistan and 
thus open up a corridor to Central Asia, Russia, and Europe. 
While the cost of the project is $165 million, its benefits 
will greatly exceed this amount because the railroad is 
expected by 2016 to more than double the value of Afghanistan's 
official trade with its neighboring countries.
    And in Pakistan much more recently, the World Bank and the 
Asian Development Bank are moving rapidly to mobilize $3 
billion of assistance to help support the reconstruction 
efforts as the flood waters recede.
    Because of their diverse membership, the MDBs are at the 
forefront of efforts to create coordinated and effective 
solutions to transnational challenges such as food security and 
climate change. Because of the very diffuse nature of these 
challenges, they can only be addressed successfully in 
multilateral channels through which the community of countries 
owns both the problem and the tools to resolve it.
    Finally, the MDBs advance United States interests by 
supporting the very poorest members of the global community, 
countries like Haiti and Liberia. The MDBs are particularly 
important in mobilizing assistance for these poorest countries 
when they suffer from a sudden external shock, like a natural 
disaster.
    Now as noted by the members of the committee, the MDBs' 
effective response to the global financial crisis led to an 
accelerated depletion of the capital at the MDBs, thus 
prompting the World Bank and the regional development banks to 
seek new donor resources. In assessing each institution's 
capital needs, we examined the financial and also the 
institutional capacities of each of the MDBs, and we focused, 
as part of our reform agenda, on policies that were designed to 
strengthen financial discipline, improve governance and 
accountability, and enhance development impact and 
effectiveness. Many of these reforms were directly responsive 
to the concerns raised during consultations with Congress and 
specifically with the members and the staff of this committee. 
Thank you so much for the helpful input, which is reflected in 
the reforms that were achieved.
    Turning to the specific reforms, as a result of our focus 
on fiscal responsibility, the MDBs are adopting economic models 
that include revised loan pricing policies that cover 
administrative costs, incorporate transfers to the concessional 
windows of the MDBs, thus ensuring more resources for the 
poorest borrowers, and also reforms that build up internal 
capital.
    We pushed for, and achieve, improvements in internal 
governance, including stronger anticorruption, transparency, 
and whistle blower policies. We also focused on strengthening 
institutional policies that reward the quality rather than just 
the quantity of lending. We believe that these reforms will 
provide further impact for each U.S. dollar that is invested in 
the MDBs and will also be translated into more impact on the 
ground.
    As my final topic, I will address the issue of the MDBs' 
request for capital increases.
    All of the reforms that we sought and achieved were linked 
to the size and the structure of the capital commitments that 
we were prepared to negotiate for each institution. In some 
cases, we made a commitment lower than what management and even 
other donor shareholders had sought. We also pursued innovative 
mechanisms that would further leverage U.S. dollars, such as 
temporary capital commitments and the creation of triggers for 
the return of unused capital to shareholders. As a result of 
these institution-by-institution negotiations, the 
administration's requests for these general capital increases 
will range from 30 percent at the World Bank to 70 percent at 
the IDB, and 200 percent at the Asian and African Development 
Banks.
    For the current fiscal year, the administration is seeking 
authorization and appropriations only for the general capital 
increase at the Asian Development Bank, which my colleague, 
Executive Director Curtis Chin, will discuss in detail.
    Even during this tight financial environment when we have 
such difficult choices to make, we share the belief of the 
committee members here present, that the investments in the 
MDBs are critical to furthering U.S. objectives. The United 
States has proudly been a leading force within these 
institutions since their founding and our continued leadership 
is required today if we are going to continue to reshape these 
institutions so that they become the forces of good in the 21st 
century global economy. We have to continue doing our part if 
we wish to continue influencing these institutions and then 
benefiting from their positive impact on the ground.
    We look forward to continuing to work closely with this 
committee, as we have throughout the general capital increase 
process.
    Thank you.
    [The prepared statement of Ms. Lago follows:]

Prepared Statement of Marisa Lago, Assistant Secretary of the Treasury 
  for International Markets and Development, Department of Treasury, 
                             Washington, DC

    Chairman Kerry, Ranking Member Lugar and members of the committee, 
thank you for this opportunity to testify on the multilateral 
development banks (MDBs) and why they merit our continued strong 
support.
    I want to begin my remarks today by underscoring President Obama's 
strong commitment to multilateralism. This commitment is reflected 
through our leadership in the G20, and is embodied in the President's 
National Security Strategy, which identifies sustainable development--
the core mandate of the MDBs--as essential to enduring global stability 
and security.
    In addition to being central to the President's development and 
economic growth agenda, the MDBs are sound investments, even in a tight 
fiscal environment, because of their substantial leveraging capacity 
and oversight. For example, for every dollar we entrust, the World Bank 
can support current lending of $26.
    The MDBs have instituted a set of controls, both within their 
institutions and in borrowing countries, to ensure that funds are well 
spent. The application of these safeguards offers assurance to the 
American taxpayer that U.S. dollars used to finance MDB projects are, 
indeed, going to their intended purposes.
    To further illustrate why these institutions deserve continued U.S. 
support, I will discuss today the reasons why these institutions remain 
indispensable to the United States and how they further our agenda. 
Specifically, I'll discuss their role in: (1) fostering economic 
growth, both at home and abroad; (2) protecting our national security 
interests; (3) addressing transnational challenges, such as food 
security and climate change; and, (4) supporting the very poorest 
members of the global community. In addressing these substantial 
benefits, I will also discuss our approach to the recent general 
capital increase (GCI) requests at the MDBs.
                       supporting economic growth
    The MDBs were established to generate and support sustainable, 
broad-based economic growth in poor countries and emerging markets. 
Through our leadership in these institutions, we seek to ensure that 
the MDBs advance principles that we espouse, such as the importance of 
private-sector-led growth, and the need for strong, transparent, and 
accountable institutions.
    We have a strong stake in ensuring the success of the MDBs' efforts 
because by helping developing nations stabilize and grow, we build new 
markets for U.S. exports and create jobs here at home. In short, our 
investments in the MDBs help generate new engines of growth that 
benefit the U.S. economy and the global economy, as a whole.
    In addition, we routinely turn to the MDBs to shore up emerging 
markets and systemically important economies in times of economic 
distress. In each major financial crisis in every region, the MDBs have 
proved vital in staunching economic meltdowns. We need only examine 
their role during the recent global financial crisis as evidence of our 
reliance on the MDBs during hard economic times.
    As the chairman and ranking member have rightly observed in the 
past, the MDBs responded decisively to the G20 request to accelerate 
and expand lending in the wake of the financial crisis. At a time when 
few banks were lending, the MDBs increased their lending by $100 
billion above planned precrisis levels. In Eastern Europe--where the 
crisis hit especially hard--the European Bank for Reconstruction and 
Development (EBRD) helped spearhead an initiative to stabilize market 
expectations and restore confidence in the financial sectors of Eastern 
Europe. In Asia, where trade finance evaporated following the crisis, 
the Asian Development Bank established an $850 million facility to 
support trade. Decisive actions such as these proved critical to global 
stabilization efforts, and helped underpin renewed economic growth 
around the world.
                           national security
    The MDBs also play a vital role in helping us achieve and safeguard 
our national security objectives. The President's National Security 
Strategy identifies the acceleration of sustainable development as one 
of its core elements. The strategy details the imperative of fighting 
global poverty, increasing food security, and tackling climate change 
as key to America's security and prosperity. It also recognizes that 
countries that achieve sustained development gains make more capable 
partners, and can better engage in and contribute to the global 
economy. The United States Government advances these objectives through 
our leadership at the MDBs.
    Afghanistan is an excellent case in point. For our military 
successes to take hold, we need to help the Afghan Government and its 
people strengthen their economy. But to achieve this objective, a 
number of challenges must be overcome. For example, Afghanistan's 
isolation and lack of infrastructure impede the flow of goods and 
services necessary to support a more diverse and dynamic economy. A 
major project financed by the Asian Development Bank (AsDB) has the 
potential to address these obstacles and dramatically improve the 
country's economic prospects. Specifically, the AsDB is financing 
construction of the Hairaton-Mazar-e-Sharif railway line, which will 
link Afghanistan with Uzbekistan, and consequently Central Asia, 
Russia, and Europe. The project cost is $165 million, but its benefits 
will greatly exceed this amount, as the railroad is expected to 
increase the value of official trade with neighboring countries from 
$4.7 billion in 2005 to $12 billion in 2016.
    In Pakistan, the World Bank and AsDB are moving rapidly to mobilize 
a $3 billion assistance package to help support reconstruction efforts 
after the flood waters recede.
    Both banks are working on a joint comprehensive Damage and Needs 
Assessment, which is to be completed by mid-October. In addition, the 
AsDB has approved funds from its Asia-Pacific Disaster Response Fund 
for immediate emergency assistance, and announced plans to establish a 
special flood reconstruction fund to facilitate donor cofinancing of 
AsDB projects. The United States is also working closely with the 
development banks to coordinate its response. The MDB's forceful 
response will help Pakistan maintain economic stability as the country 
recovers from this disaster.
    It is because of efforts like these that the MDBs are recognized 
within the national security community as important partners in 
reconstruction and ongoing economic stability. The beneficial role of 
the AsDB in Afghanistan and Pakistan, as well as Central Asia and the 
Caucasus, prompted General Petreaus to write to Secretary Geithner to 
express his ``sincere appreciation of the great work the AsDB team is 
doing'' and welcome our ``continued strong partnership with the AsDB.''
                        transnational challenges
    Because of their diverse membership, the MDBs are uniquely 
qualified to help us address critical global priorities. Through U.S. 
leadership, in tandem with other major shareholders, the MDBs are at 
the forefront of efforts to create coordinated and effective solutions 
to transnational challenges, such as food security and climate change. 
These complex challenges, which know no geographic boundaries, will 
seriously imperil our prospects for global prosperity and poverty 
reduction if left unaddressed. And, because of the diffuse nature of 
the challenges, they can only be addressed successfully via 
multilateral channels, through which all countries own the problem and 
the tools to resolve it.
Food Security
    With more than 1 billion people suffering from chronic hunger in 
the world today, and with the related challenges of climate change, 
water shortages, and land scarcity, investment in agriculture 
represents one of the most effective ways to promote economic growth, 
strengthen stability and alleviate hunger. As part of the 
administration's Feed the Future initiative, Treasury has partnered 
with other countries, the World Bank, other multilateral organizations 
and civil society organizations to establish the Global Agriculture and 
Food Security Program (GAFSP).
    President Obama and the other G20 Leaders called for this program 
at the Pittsburgh summit less than a year ago. And today, the 
multilateral fund is already operational and making high-impact 
investments in poor countries, working through implementing partners 
such as the International Fund for Agricultural Development, the 
African Development Bank, and the World Bank. The fund has mobilized 
pledges and contributions totaling $880 million from a variety of 
governments, as well as the Bill and Melinda Gates Foundation. In June, 
the fund awarded $224 million in grants to five poor countries with 
sound and country-led agricultural reform strategies--Bangladesh, 
Haiti, Rwanda, Sierra Leone, and Togo.
Tackling Climate Change
    The administration is also leading efforts to forge a global 
solution to the climate challenge, and is pursuing a global agreement 
with meaningful participation from all countries. Key to that effort is 
our work throughout the MDBs and especially our contribution to two 
multilateral programs, the Global Environment Facility (GEF) and the 
Climate Investment Funds (CIFs).
    These programs address the climate challenge in developing 
countries from three perspectives. First, they help the poorest and 
most vulnerable countries prepare for and respond to the impacts of 
climate change, which helps reinforce stability and security. Second, 
these programs spur the deployment of the clean energy technologies 
(including energy efficiency, wind, solar and geothermal) that will not 
only curb the growth of greenhouse gas emissions, but will provide the 
clean energy jobs of the future. Third, they contribute to the 
reduction of emissions from deforestation and forest degradation in 
developing countries-a critical component of the global effort. A good 
example is the GEF-supported Amazon Region Protected Area Program, 
which is the largest program for conservation and sustainable use of 
tropical forests in the world.
    Our participation in these multilateral environmental programs 
magnifies our ``bang for the buck'' in two important ways. First, our 
contributions bring in other donors; specifically our contributions 
bring in almost $5 for every $1 the U.S. contributes. Second, these 
programs leverage MDB, government, and private sector sources. For 
example, the Clean Technology Fund, part of the CIF, in the past year 
approved clean energy investment plans that blend $4.3 billion of fund 
money with other financing to mobilize total planned investments of 
over $40 billion--leveraging nearly $10 from other sources, including 
the MDBs, for each CTF dollar spent.
                         supporting the poorest
    I also want to highlight the role of the MDBs in supporting the 
very poorest members of our global community. These are countries like 
Haiti and Liberia that have no capacity to tap financial markets, and 
lack the domestic resources to invest adequately in their people or 
their country. For these countries, the MDBs provide low interest and 
grant financing, funds that are absolutely essential for leveraging 
growth and lifting people out of poverty.
    The MDBs are particularly vital in mobilizing assistance for the 
poorest countries suffering from sudden external shocks, such as 
natural disasters. Following the earthquake in Haiti, for example, the 
World Bank and Inter-American Development Bank (IDB) moved swiftly to 
support the devastated nation.
    And, although the MDBs were not founded to be front-line responders 
to disasters and humanitarian responses, both the World Bank and the 
IDB provided vital assistance in the immediate aftermath of the 
disaster. For example, the IDB worked closely with the U.S. Government 
and money transfer agencies in Haiti, to ensure an adequate supply of 
cash so that Haitians in need could receive remittances sent by 
relatives abroad. And the IDB is financing the design, construction and 
maintenance of temporary housing, assisting businesses to restore 
production, helping microfinance institutions resume lending, and 
rebuilding the government's financial and administrative capacity.
    The World Bank helped coordinate Haiti's post-disaster needs 
assessment and quickly established a multidonor trust fund that, to 
date, has received over $130 million in donor support. The World Bank 
has acquired and equipped offices for destroyed government ministries, 
provided solar lanterns, funded water supply systems, and is continuing 
to focus on infrastructure, agriculture, and disaster risk mitigation, 
among other sectors.
    The substantial financial support provided by the MDBs is only one 
of several benefits that they offer to the poorest countries. The MDBs 
also work actively with recipient governments to develop coherent 
development frameworks; mobilize additional bilateral funds, 
predominantly in the form of grants; provide technical assistance to 
build institutional capacity; and help capacity-strained countries work 
effectively with multiple development partners.
    This year, the concessional facilities at the World Bank and the 
African Development Bank (AfDB) that support the poorest countries are 
being replenished. Because the global financial crisis drained 
institutional resources faster than anticipated, the G20 called for 
ambitious replenishments of the concessional facilities for both 
institutions. Strong support from the United States will help provide 
the World Bank and the African Development Fund with resources 
necessary to help preserve fragile development gains and make further--
and much needed--progress toward achieving the Millennium Development 
Goals.
                       mdb resources and reforms
    During the global financial crisis, the G20 recognized the vital 
role of the MDBs in mitigating its impact, and called on them to 
strengthen capacity on food security, fragile states, climate change, 
and private-sector-led growth. However, the rapid increase in lending 
levels led to an accelerated depletion of capital at the MDBs, 
prompting the World Bank and the regional development banks to seek new 
donor resources. (Because it was capitally constrained before the 
crisis, the AsDB request was already under consideration when the 
financial crisis hit.) In response, G20 leaders committed to ``help 
ensure that the World Bank and the regional development banks have 
sufficient resources to fulfill these four challenges and their 
development mandates.''
    To assess each institution's financial and institutional 
capacities, as well as their capital needs, this administration 
conducted detailed analyses and held numerous discussions. During this 
process, we did not take a ``one size fits all'' or ``bigger is 
better'' approach. Rather, we carefully considered the medium- and 
long-term capacity of each MDB (which, in turn, reflected the impact of 
crisis-related lending, as well as each bank's own financial management 
policies). We also considered the potential for escalating demand for 
MDB resources, especially in Africa, while at the same time promoting a 
focus on core mandates to avoid the risk of mission creep at the MDBs.
                           our reform agenda
    We pressed hard for robust reforms that we believed would have a 
positive and enduring impact on the MDBs. At each MDB, we focused on 
policies designed to strengthen financial discipline and protect 
capital, improve governance and accountability, and enhance development 
impact and effectiveness. During the negotiations, we transformed these 
policy priorities into concrete reform proposals, tailored to each 
institution. Many of our priority reforms were directly responsive to 
concerns raised during consultations with Congress, and I would like to 
thank the committee and its staff for their helpful input in the 
negotiations.
    I would also like to share briefly some examples of the significant 
and concrete outcomes that we achieved.
Fiscal Discipline
    Fiscal responsibility is the first area of reform we targeted 
because we believe it is fundamental to ensuring appropriate burden-
sharing between donor countries and borrowers in the MDBs. 
Specifically, we emphasized the need for revised loan pricing policies 
that fully cover administrative costs, incorporate transfers to the 
concessional windows--ensuring more resources for the poorest 
borrowers--and build up internal capital. As a result of our efforts:

   The World Bank agreed to overhaul its budget process to 
        ensure that decisions on pricing, compensation and 
        administrative costs are closely integrated and aligned with 
        the Bank's strategic priorities;
   The AfDB agreed to a comprehensive financial model that has 
        parameters on loan pricing, locks in a minimum level of 
        transfers to low-income countries, covers administrative 
        expenses, and supports capital adequacy.
   The IDB agreed to adopt a new income allocation model that 
        sets loan prices consistent with the IDB's financial 
        constraints and priorities, including annual grants to Haiti of 
        $200 million and provision of highly subsidized loans to its 
        poorest borrowers. The IDB also crafted a new capital adequacy 
        policy and investment guidelines that we believe successfully 
        address the risks associated with the Bank's portfolio losses 
        in 2008.
   The EBRD adopted a new Economic Capital Policy to provide it 
        with additional lending flexibility while protecting its AAA 
        status, despite its high risk predominantly private sector 
        portfolio.
Governance and Accountability
    We also pushed for--and achieved--improvements in internal 
governance, since we share the view of the members of this committee 
that anticorruption efforts and transparency are absolutely integral to 
the credibility of the MDBs. An example of the significant new 
commitments that we obtained is the World Bank's revised disclosure 
policy. This policy now reflects a presumption of disclosure, a major 
improvement over past practice, which only allowed disclosure of a 
narrowly drawn list of documents. Similarly, the IDB and AfDB each 
committed to a new disclosure policy that meets international best 
practices.
    In addition, the IDB enhanced the scope and credibility of its 
inspection panel, a forum for citizens who believe they have been 
adversely affected by MDB operations. The IDB also committed to update 
its environmental and social safeguards in line with international best 
practices by the first quarter of 2011. As an example, current 
international best practice would require the IDB to tighten its 
oversight of financial intermediaries to ensure their lending practices 
comply with environmental and social conventions.
    Finally, the Asian Development Bank agreed to take a number of 
steps to strengthen its audit function and, at the end of 2009, adopted 
a new whistleblower policy.
Development Impact and Effectiveness
    Third, we focused on strengthening institutional policies that 
reward the quality, rather than quantity, of lending--another key to 
development effectiveness. Successes here include a commitment at the 
IDB to employ metrics intended to improve the quality of the loan 
portfolio by measuring the degree to which the economic rationale of 
potential projects is well articulated and evaluable, risks are 
assessed, and monitoring and evaluation plans are in place. In 
addition, both the World Bank and AfDB agreed to improve measurement 
and aggregation of project impacts and related country development 
outcomes, rather than focusing solely on outputs.
    In sum, I believe that we succeeded in securing robust reforms, and 
in many cases, promoted an upward harmonization of policies across the 
MDBs. Of course, as significant as these commitments are, the key will 
be their effective and timely implementation. At the IDB, which has an 
especially robust agenda, shareholders agreed that the IDB's 
independent evaluator should assess the timing and effectiveness of 
their implementation in a report to shareholders in March 2013.
                       general capital increases
    All of the reforms we sought and have achieved were linked to the 
size and structure of the capital commitments that we were prepared to 
negotiate for each institution. In some cases, we made a commitment 
lower than what management and other shareholders were seeking. We also 
used innovative mechanisms, such as temporary capital commitments and 
the creation of triggers for the return of unused capital to 
shareholders. As a result, the administration's commitments for general 
capital increases have ranged from 30 percent at the World Bank, 70 
percent at the IDB, and 200 percent at the AfDB.
    For the current fiscal year, the administration seeks authorization 
and appropriations for the general capital increase at the AsDB only. 
Mr. Curtis Chin, our outgoing executive director at the AsDB, will 
address the details of the administration's request and why we believe 
it merits the committee's immediate support. I want to take this 
opportunity to thank Mr. Chin for his pivotal role in securing a number 
of robust reforms at the AsDB, which I believe are making the 
institution more effective, accountable, and transparent.
                               conclusion
    While this is only a brief summary of the unique, sizable, and 
enduring benefits of supporting multilateral development banks, I hope 
I have conveyed a sense of the
vitality and necessity of these institutions to the United States 
global agenda. Ideally, a time will come when the world is sufficiently 
prosperous and stable to no longer require support from the MDBs and 
other donors, but today the world still requires U.S. leadership, 
support, and strategic investment. The MDBs should remain our partners 
in this effort.
    In the coming year, this administration will continue its intense 
focus on timely implementation of the reform agenda, and will push for 
further improvement in order to make the MDBs the most effective 
partners possible. However, the United States must do its part if we 
wish to continue influencing these institutions. We must be a member in 
good standing that pays its fair share. We look forward to working 
closely with this committee on securing the legislation necessary to 
meet our MDB commitments, and retaining our leadership and influence.

    The Chairman. Thank you very much, Madam Secretary.
    Mr. Director, thank you.

 STATEMENT OF IAN SOLOMON, U.S. EXECUTIVE DIRECTOR, WORLD BANK

    Mr. Solomon. Chairman Kerry, Ranking Member Lugar, thank 
you for the opportunity to testify today. I will discuss how 
continued U.S. support for the World Bank is vital to U.S. 
interests. I will address the World Bank's response to the 
financial crisis, its request for capital, and how the United 
States has worked to enact reforms that improve results, 
transparency, and accountability for the institution.
    The global financial crisis, as we know, has caused real 
suffering here at home and abroad, and in 2009, President Obama 
and other world leaders called on the World Bank to help shore 
up the global economy. In response, the World Bank committed 
over $106 billion and accelerated disbursements to an 
unprecedented $80 billion in 2 years. This was an extraordinary 
countercyclical response that improved confidence and 
macroeconomic stability, helped maintain public spending 
programs for millions of poor and vulnerable families, and 
strengthened financial sectors to ensure access to credit for 
small- and medium-sized businesses.
    In heeding the call of world leaders, the World Bank 
stretched its balance sheet, and as a consequence, the Bank's 
capital position will decline below prudential levels by 2012 
unless action is taken. The effect of this decline would be a 
drop in lending from an average of $15 billion per year, in 
real terms, before the crisis to less than $8 billion a year 
starting next year.
    To restore the IBRD's lending capacity and maintain its 
credit rating, the Bank is seeking an increase in capital of 
approximately $80 billion. This would require a U.S. 
contribution of $865 million over 5 years. The administration 
supports this capital increase for the World Bank for the 
following reasons.
    First, the U.S. contribution would enable the Bank to 
continue to assist countries in the fragile global recovery. 
Developing countries and their emerging markets now contribute 
about half of global growth and are leading the recovery in 
world trade with an import demand rising twice as fast in 
developing countries as in high-income countries, creating 
greater demand for U.S. exports.
    Second, a capital increase for the IBRD secures support for 
IDA by enabling IBRD income transfers to IDA. IDA is among the 
most effective tools we have for fighting global poverty and 
supporting good governance and stronger institutions in the 
developing world.
    Third, U.S. support for the Bank's long-term capital 
adequacy is important for the Bank's AAA credit rating and the 
value of U.S. capital and our influence in the IBRD.
    Finally and most importantly, the capital increase will 
strengthen the Bank's capacity to complement U.S. bilateral 
programs and support U.S. policy priorities for promoting our 
national security, poverty reduction, and economic growth, 
playing a key role, as the chairman said, to lay the 
foundations for stable, well-governed societies.
    For example, the Bank has renewed its commitment to 
agriculture and food security, improving agricultural 
productivity, the role of women in agriculture, and reducing 
the vulnerability of farmers. The Bank supports and helps to 
multilateralize the administration's important Feed the Future 
initiative.
    On climate issues, with United States leadership, the Bank 
has increased financing for renewable energy and energy 
efficiency projects by 88 percent and works with countries to 
invest for sustainable growth. In fragile states such as 
Liberia and Pakistan, the Bank is increasing its presence and 
employing innovative approaches to improve development 
effectiveness and results.
    And critically, the Bank supports strong governance, 
transparency, and anticorruption activities which not only 
gives us confidence that our resources are used for the 
purposes intended, but also addresses the debilitating 
development challenge of corruption.
    While indispensable, the Bank is also imperfect. As you 
said, Senator Lugar, it can be improved significantly. It needs 
to reform if it is to meet the great challenges of the 21st 
century. Thus the administration successfully made reform a 
central tenet of the capital increase negotiations.
    First, the World Bank has agreed to a new financial 
framework to ensure it will be prepared for future crises with 
a sound and sustainable business model.
    Second, the Bank has become significantly more open, 
transparent, and accountable through its new access to 
information policy and by expanding free access to its 
institutional knowledge and development data.
    Third, the Bank is improving its focus on results by 
expanding results tracking, increasing the use of impact 
evaluation on projects, institutionalizing learning from 
projects, linking staff performance to results, and creating a 
corporate scorecard to improve management's accountability.
    Fourth, the Bank adopted a new strategy based on its 
comparative advantages and greater selectivity which aligns it 
with U.S. priorities such as addressing our transnational 
challenges, promoting sustainable global growth and private 
sector development, and rebuilding fragile states.
    The reform agenda has seen progress already. We are working 
to ensure vigorous implementation of the entire reform agenda.
    In conclusion, after careful review, the administration 
determined that the package of reforms and additional capital 
is essential to the Bank's ability to work with us in effective 
partnership. Not supporting the capital increase could 
jeopardize the Bank's credit rating, halve the size of the 
IBRD, and end IBRD support to IDA. In this regard, I am 
confident that the World Bank is a worthy and necessary 
investment of strong, continued U.S. support.
    Thank you. I look forward to answering your questions.
    [The prepared statement of Mr. Solomon follows:]

       Prepared Statement of Ian Solomon, U.S. Executive Director
                           of the World Bank

    Chairman Kerry, ranking member Lugar, members of the committee, 
thank you for the opportunity to testify.
    The World Bank is a critical partner in fighting poverty and 
promoting sustainable economic growth around the globe. As the Bank's 
leading shareholder for more than 65 years, the United States has 
helped shape the global development agenda, advancing maternal and 
child health, education, good governance, private sector growth, civil 
society, and responses to pressing global challenges such as food 
security, fragile states, and climate change, among other issues. 
Through U.S. investments in the World Bank, we have strengthened our 
policy objectives by helping to build a more peaceful and prosperous 
world.
    Today I will discuss how continued U.S. support of the World Bank 
is vital to U.S. interests. I will address the World Bank's response to 
the financial crisis, the institution's request for additional capital, 
and how the United States is working with the institution to enact a 
robust reform agenda. I am pleased to be joined on this panel by 
Assistant Secretary of the Treasury, Marisa Lago, and by the United 
States Executive Director for the Asian Development Bank, Curtis Chin.
                    response to the economic crisis
    As Secretary Geithner remarked last week, this has been a terribly 
savage recession. In the United States and around the world, millions 
of people have lost their jobs, businesses large and small have shut 
down, families are struggling to regain their savings and livelihoods. 
Flows of private capital to developing countries dropped precipitously 
from a peak of $1.2 trillion in 2007 to $454 trillion in 2009, and 
estimates are that, due to the crisis, an additional 64 million people 
will fall into the ranks of extreme poverty, surviving on less than 
$1.25 per day. This has led some economists to estimate that 10 years 
worth of development gains in some world regions has been erased.
    In early 2009, President Obama and other world leaders called on 
the World Bank to help shore up the global economy and protect the 
world's poorest by increasing lending in both middle-income and low-
income countries. In response, the World Bank Group (WBG)--comprising 
the International Bank for Reconstruction and Development (IBRD), the 
International Development Association (IDA), the International Finance 
Corporation (IFC), and the Multilateral Investment Guarantee Agency 
(MIGA)--committed to triple its lending to over $100 billion over 3 
years and to bolster antipoverty efforts.
    Given the depth of the crisis and the demand among developing 
countries for countercyclical lending, the World Bank exceeded this 
goal. It made $47 billion in commitments in FY09, $58.5 billion in 
FY10, and plans an estimated $33 billion in commitments for this year. 
Importantly, the Bank accelerated disbursements of funds to an 
unprecedented $80 billion in 2 years, more money than any other 
multilateral development bank (MDB). The World Bank was in a position 
to help address these extraordinary needs of developing countries 
thanks to years of sound financial management and accumulation of 
reserves.
    Applying lessons from the Asian Financial Crisis and other 
financial crises, the Bank proved to be a strong partner in 
coordination with other donors and the IMF, focusing its response on 
its comparative advantages in protecting the vulnerable through support 
for social safety nets, supporting financing for infrastructure 
investment, and securing financial sectors to ensure credit for small- 
and medium-sized enterprises, which are vital engines of economic 
growth worldwide.
    While we are still in the early days of assessing the World Bank 
Group's overall results, let me highlight a few examples. In Colombia 
and Mexico, the Bank supported conditional cash transfer programs, 
which expanded assistance to 2.7 million and 5.8 poor families 
respectively, through programs that promote school attendance and 
medical care for children. In Tanzania, the Bank provided interest-free 
credit to improve the access of the poor and vulnerable to job 
opportunities. In hard-hit regions of Central Asia, the Bank's 
infrastructure investments, which account for 29 percent of the overall 
increase in Bank commitments, improved regional transportation 
infrastructure. A clean energy project in Turkey helped reduce 
greenhouse gas emissions by an estimated 1.7 million tons of CO2 
equivalents.
    The IFC, with a focus on private sector investments, developed a $5 
billion risk-sharing mechanism through the Global Trade Liquidity 
Program (GTLP) to help build confidence between trade financiers who 
were concerned about counterparty bank risk. In one project, the GTLP 
supported a $100 million loan to a bank in South Africa to support 
trade in consumer goods, commodities, and small machinery in Africa. 
The IFC also launched a local currency bond to support lending to small 
and medium enterprises and strengthen capital markets in Central 
Africa, and developed a bank recapitalization fund to support banks of 
systemic importance.
    MIGA, which provides political risk insurance, has been on the 
front line addressing financial sector vulnerabilities in Eastern and 
Central Europe by providing guarantees to key financial institutions in 
the region, helping to keep down borrowing costs and providing 
reassurance to banking regulators and investors.
    For the poorest countries, the response by the WBG has also been 
rapid, though constrained by IDA's overall financing envelope, which is 
replenished every 3 years by donors. IDA is the multilateral fund to 
support the poorest people in the world and plays an essential role 
helping 79 low-income countries achieve sustainable growth and respond 
to both economic crises and natural disasters. IDA increased its 
lending by 25 percent and accelerated the pace of disbursements to 
provide appropriate fiscal support for countries. At the same time, the 
IFC increased its investments in IDA countries to almost 50 percent of 
all projects to catalyze additional private-sector growth and provide 
advisory services to improve the business climate.
    These examples point to successes of the Bank's response, but we 
also know that there were areas of weakness as well. The World Bank's 
Independent Evaluation Group's (IEG) initial review of the crisis 
response noted that the Bank should have recognized the impact of the 
crisis earlier, and that in some cases, it underestimated the 
challenges associated with implementing new initiatives. Additionally, 
the Bank's analytical work in certain sectors and countries was uneven. 
Emerging lessons to be incorporated in the Bank's strategies going 
forward include: the continued importance of ensuring country ownership 
even in the face of global response in order to ensure the best 
results, the need to better anticipate crises in order to allow the 
Bank to intervene more effectively earlier and with better donor 
coordination, and the recognizing the value of the Bank's knowledge, 
which is generated through economic diagnostics and on-the-ground 
analysis, in helping the Bank and countries prioritize expenditures 
when resources are constrained.
    The reach and effectiveness of the World Bank Group as demonstrated 
by its response to crisis and the ongoing recovery efforts underscore 
the importance of the Bank to advancing, in the words of President 
Obama, ``the common security and prosperity of all people.''
             investing for the future: the capital increase
    In responding to the crisis and helping fill the void created by 
the fall-off in private investment and government budgets, the World 
Bank stretched its historically strong balance sheet. As a result the 
Bank's equity to loan ratio, the traditional measure of the Bank's 
capital adequacy, is projected to fall below its prudential ratio of 23 
percent starting in July 2013, unless some action is taken. The effect 
of this decline would be a drop in lending authority from an average of 
$15 billion a year in real terms before the crisis to less than $8 
billion a year starting next year. This level would be less than a 
quarter of current projections for lending this year and is a small 
fraction of projected demand going forward.
    To restore its capacity and better meet demand for its services, 
the Bank is seeking a 31-percent increase in capital, approximately $80 
billion, through a number of measures, including increasing loan prices 
and securing shareholder contributions of both paid-in and callable 
capital. With a capital increase of this level, the Bank would have to 
scale back its elevated crisis lending to precrisis levels but could 
continue lending about $15 billion annually while sustaining its AAA 
credit rating. Without this capital increase, the Bank would need to 
sharply curtail its lending program.
    The administration supports the general capital and selective 
capital increases for the World Bank, which would require a 
contribution from the United States of $865 million over 5 years. This 
would be the first capital increase for the Bank since 1988, and would 
provide a highly effective way to advance several important policy 
objectives.
    First, the U.S. contribution would be leveraged 55 times by the 
Bank and enable additional development lending of $48 billion over the 
next 10 years. The increase would enable the Bank to continue to assist 
countries in the fragile global recovery and to strengthen emerging and 
development markets for more balanced economic growth, including 
greater demand for U.S. exports.
    Second, capital for the IBRD also secures support for IDA and the 
world's poorest. Every $1 contribution to capital will leverage close 
to $8 in income transfers from IBRD to IDA for a total of $6.6 billion 
IBRD income transfers to IDA over the next 10 years. Moreover, without 
the capital increase, annual IBRD support on which IDA has come to rely 
would be impossible to fund for years to come--placing a greater burden 
for IDA contributions on the shoulders of IDA donors. In this context, 
the upcoming IDA16 replenishment is a critical moment for not only 
shoring up IDA's capacity to help countries meet their development 
objectives but for building contingent support within IDA to enable a 
better and more robust crisis response capacity.
    Third, the U.S. contribution to the capital increase will 
demonstrate U.S. support for the Bank's long-term capital adequacy, 
which we believe is important for the Bank's AAA credit rating and the 
value of the U.S. capital in the IBRD.
    Finally, and most importantly, the contribution will strengthen the 
Bank's capacity to complement U.S. bilateral programs and support U.S. 
policy priorities. Hence, there is no viable alternative to the capital 
increase without jeopardizing the Bank's credit rating, halving the 
size of the IBRD, and ending IBRD support to IDA. We want to continue 
to support the Bank's effective engagement throughout the development 
world. In particular, the Bank uses its global reach, expertise, strong 
fiduciary controls, and leverage to address many pressing global 
challenges, disseminate development knowledge and standards, and 
advocate sound economic and development policies at the country level. 
Some examples include:
    Food Security. After years of neglect by nearly all donors, the 
Bank has revamped its commitment to the agricultural sector through the 
Agricultural Action Plan that focuses on improving productivity gains, 
strengthening value addition, reducing risk and vulnerability of 
farmers, and enhancing environmental sustainability of agricultural 
practices. This renewed commitment is a strong complement to the 
recently launched Global Agricultural Food Security Program (GAFSP), a 
multidonor trust fund championed by the United States and other G20 
members, that will catalyze investments in country-developed 
agricultural development plans. With the risk of another food price 
shock on the horizon, the Bank's experience from the 2008 food and fuel 
crisis provides timely assistance to the world's poorest countries to 
mitigate the shocks. For example, the Bank helped the Senegalese 
authorities implement a school feeding program. Similarly, Bank 
assistance in Nepal supported the supply of fertilizer, local seed 
development, and small irrigation schemes for remote communities.
    Climate Change. The United States has been at the forefront of 
pushing the World Bank to help countries develop low-carbon growth 
strategies with alternatives to traditional fossil-fuel based plans, 
and including climate issues in the Bank's country strategies. In 
recent years, the Bank has moved climate change from the periphery to 
the center of its mission to reduce poverty and support growth. The 
Bank's growing focus on climate is evident in three areas: (1) the 
development process itself; (2) financing, and, (3) knowledge and 
capacity-building. This has translated into an 88-percent increase in 
renewable energy and energy efficiency financing. In addition to its 
engagement with borrowing countries, the Bank has become a go-to source 
for research and data on climate and its impact on development.
    Afghanistan. The United States has also benefited from the Bank's 
knowledge of working in fragile states. For example, in Afghanistan we 
turned to the Bank to set up the Afghanistan Reconstruction Trust Fund 
(ARTF) following the fall of the Taliban as a means to help meet the 
recurrent costs of running the government. The ARTF has expanded to 
support other national programs, such as the Afghan-owned and 
successful community-driven National Solidarity Program, which is 
helping communities build inclusive government through the selection 
and construction of development projects. Among other things, the ARTF 
leverages the Bank's comparative advantage as a fiduciary agent with 
strong financial management systems.
    Governance, Accountability, Transparency. The U.S. relies on the 
Bank as a strong advocate of improving governance and transparency in 
developing countries. Its strong governance program not only gives us 
confidence that our aid dollars to the Bank are being used for the 
purposes intended, but also addresses the debilitating development 
challenge of corruption. For example, the Bank helped improve 
accountability mechanisms in Indonesia's Urban Poverty Program, which 
currently disburses about $100 million per year to over 8,000 villages 
across the country, through the election of 100,000 volunteers to serve 
as project overseers; the establishment of a Web site to report on 
implementation details, status of disbursement, details on project-
related expenses; and a complaints-handling mechanism. The Bank also 
supports revenue transparency initiatives to promote government and 
private sector accountability through the Extractive Industries 
Transparency Initiative (EITI) and has recently launched the Stolen 
Assets Recovery (STAR) initiative to work with developing countries and 
financial centers to prevent the laundering of the proceeds of 
corruption and to facilitate more systematic and timely return of 
stolen assets.
    Disaster Response and Recovery. The United States benefits from the 
Bank's repository of development knowledge and capacity to react 
quickly. In the wake of the devastating earthquake in Haiti and the 
rising flood waters in Pakistan, the United States called upon the Bank 
for advice on the response, to assess the needs, to strengthen local 
institutions, to help coordinate donors, and to help lead the 
reconstruction. The Bank has significant comparative advantages in this 
regard given its experience in events such as the 2004 tsunami, 2005 
Pakistan earthquake, and numerous droughts and floods and other 
calamities throughout the years.
    Private Sector Growth and Standards. Primarily through the IFC, the 
Bank plays a leading role helping to ``crowd in'' private sector 
finance, and in a way that strengthens environmental and social 
safeguards. For example, IFC's performance standards ensure not only 
that IFC must operate at increasingly high levels of responsibility, 
but the standards have been adopted, following IFC's lead, by almost 70 
private sector financial institutions. The ``Equator Principles,'' as 
they are known, now govern the way many of the world's largest lenders 
measure and treat environmental and social sustainability.
    Gender. Recognizing that inclusive growth is also smart growth, the 
Bank has been a leader in promoting economic opportunity for women. For 
example, in Tanzania by training commercial bank staff to better serve 
women entrepreneurs and enhance their financial literacy, women-owned 
small- to medium-sized businesses were able to access over $5 million 
in lending.
   ensuring the effectiveness of u.s. investments: reform and results
    While the Bank continues to be an indispensable partner, it is also 
an institution in need of reform. This past spring, Secretary Geithner 
said that ``leverage alone is not sufficient to justify a substantial 
new financial commitment,'' rather it must be accompanied by ``full 
implementation of a bold reform agenda, so that the world's leading 
development institution is vital and fully effective in meeting the 
challenges of the 21st century.''
    Recognizing the importance of a World Bank that is fully effective 
in meeting our challenges as well as the opportunity presented by the 
capital increase negotiations, the administration increased its 
pressure for a robust set of reforms. Our persistence has been 
successful in the following ways:
    First, the Bank has agreed to a unified financial framework to 
align financial decisions with the Bank's strategic priorities for the 
first time, enhance budgetary discipline, ensure loan prices cover 
costs, and create clear rules for transfers to IDA. The financial 
reform measures will help ensure that the Bank can be financially 
prepared for future crises with a sound and financially sustainable 
business model.
    Second, we have emphasized the need for the Bank to be more open 
and accountable. In response the Bank has adopted a new access to 
information policy. This new policy will set the standard of best 
practice among global development institutions and help ensure the 
World Bank is transparent and accountable to all stakeholders. In 
addition, the Bank has moved to expand free access to its institutional 
knowledge and valuable development data through its OpenData 
initiative. The Bank is also piloting additional transparency 
innovations, including the use of geo-spatial mapping technology to 
illustrate the geography of investments made by the World
Bank and other development partners alongside poverty and other 
demographic indicators.
    Third, the Bank is improving its development effectiveness with 
increased attention on measuring and learning from results. This 
includes the commitment to develop a new compensation framework that 
will link performance to results, the creation of a corporate scorecard 
to improve management accountability for results, growing use of impact 
evaluation, and the expansion of the IDA Results Measurement System, 
which the U.S. championed, to the IBRD.
    Fourth, the Bank developed a new strategy based on its comparative 
advantages, recognizing that it should not do everything and does not 
do everything best. The United States has been instrumental in helping 
to shape the strategic focus in alignment with our priorities, which 
includes: (1) Targeting the poor and vulnerable, especially in sub-
Saharan Africa; (2) creating opportunities for growth with a special 
focus on agriculture and infrastructure; (3) promoting global 
collective action on issues from climate change and trade to 
agriculture, food security, energy, water and health; (4) strengthening 
governance and anticorruption efforts; and (5) focusing on crisis 
response.
    Commitments to reform have been made and progress in implementation 
has already been realized. Our task now is to stay vigilant and ensure 
vigorous implementation of the entire reform agenda.
                               conclusion
    A strong World Bank complements our government's capacity on 
development issues that demand attention. Nearly every day I receive 
requests from Treasury, the State Department, USAID, the National 
Security Council, the Commerce Department, USTR, and other agencies and 
government offices regarding work the World Bank is doing in countries 
from Afghanistan to Sudan, or on issues from fragile states to energy 
policy. We know that the World Bank's efforts can help us achieve our 
objectives, and our ongoing support of the institution ensures it.
    After a long and careful review, the administration determined that 
the general capital and selective capital increases are essential to 
the Bank's ability to work with us in effective partnership, both in 
recovery from crisis and on priority issues into the future. Not 
supporting the capital increase could jeopardize the Bank's credit 
rating, halve the size of the IBRD, and end IBRD support to IDA. We are 
confident that the package of capital and reforms will benefit all 
shareholders of the Bank, our interests, and especially the clients and 
beneficiaries of World Bank Group work across the developing world.
    Finally, I take very seriously the responsibility to ensure that 
taxpayer resources are spent responsibly and seek to advance America's 
interests as effectively and efficiently as possible. In this regard, I 
am confident that the World Bank is a worthy and necessary investment 
of strong, continued support.

   STATEMENT OF CURTIS CHIN, U.S. EXECUTIVE DIRECTOR, ASIAN 
             DEVELOPMENT BANK, MANILA, PHILIPPINES

    Mr. Chin. Thank you, Ranking Member Lugar. Thank you for 
this opportunity to discuss the Asian Development Bank, which I 
will in shorthand refer to as the AsDB.
    To complement my detailed written testimony submitted to 
this committee, I will highlight briefly this morning how the 
AsDB has furthered U.S. goals including contributing to broad 
and sustainable economic growth and development at home and 
abroad, supporting our national security objectives, and 
responding to the financial crisis in line with the G20 call 
for support. I will also address the administration's request 
for a general capital increase and our ambitious reform agenda 
at the AsDB.
    First, though, allow me to note that I am concluding my 
tenure as the U.S. Executive Director for the Asian Development 
Bank. It has been a great honor and privilege for me to 
represent the United States on the board of directors of this 
institution and it is certainly also a great honor to appear 
here again today before this committee.
    In summary, let me note that I believe the state of the 
Asian Development Bank today is sound. Key institutional 
reforms are taking hold, but certainly continued U.S. 
engagement and oversight will be essential to ensure that it is 
not two steps forward but three steps back.
    With strong, continued U.S. support and attention, the 
Asian Development Bank has responded to the region's needs, 
including in times of crisis. The Asian Development Bank has 
complemented the United States own response to crises ranging 
from the devastating Indian Ocean tsunami some 5 years ago to 
the ongoing recent floods in Pakistan.
    In response to the G20's call to accelerate and expand 
lending to mitigate the impact of the global economic crisis on 
the world's poorest, the Asian Development Bank responded in 
force. It increased lending to the benefit of nations as 
diverse as Georgia in the Caucasus region, to Bangladesh in the 
heart of South Asia, to the small Pacific island nation of 
Tonga. This crisis-related assistance included program and 
project lending, grants, private sector loans and guarantees, a 
countercyclical support facility, and a trade finance 
facilitation program. AsDB also approved commitment authority 
for some $400 million to the region's poorest nations through 
its Asian Development Fund, or ADF.
    Yet, despite the numerous success stories in the Asia and 
Pacific region, inequality and poverty remains a fact of life 
for the some 1.8 billion people who live on less than $2 a day. 
Today some 900 million people in the region struggle on less 
than $1.25 a day, and Asia and the Pacific remains home to two-
thirds of the world's poor.
    Further, all too often the burden of poverty falls on 
societies most vulnerable. This includes women and children, 
the region's many indigenous peoples, the landless, and the 
marginalized.
    As a founding member of the Asian Development Bank, the 
United States has been successful in many ways in ensuring that 
the institution's limited resources complement U.S. foreign 
policy goals, as well as our own official development 
assistance efforts in the region. Indeed, failed development 
contributes too often to failed nations. With strong U.S. 
support, the AsDB can continue to help the nations of the 
region to help themselves as they themselves commit to put in 
place the rule of law, the governance systems, and the 
conditions to ensure an environment for further sustainable 
economic growth and development.
    For example, the Asian Development Bank is the largest 
provider of nonmilitary assistance to Pakistan, averaging as 
much as $1.5 billion per year these last few years. With strong 
U.S. encouragement, the AsDB is now providing some $2 billion 
of reconstruction and development assistance to Pakistan as it 
grapples with the massive flooding that has so captured the 
world's headlines. Attention rightly is also being paid to 
ensure strict compliance with AsDB and government 
anticorruption measures and procurement rules.
    In addition, the Asian Development Bank is now one of the 
largest donors to Afghanistan, along with the United States, 
the United Kingdom, and the World Bank. AsDB's infrastructure 
projects include reconstruction of portions of Afghanistan's 
main highway artery and the construction of the country's first 
railway link to Uzbekistan, opening up alternative routes for 
national and international trade, as well as for humanitarian 
relief. In the energy sector, the Asian Development Bank is 
helping Afghanistan to expand its national power grid. In the 
agriculture and natural resources sector, AsDB is financing an 
effort to develop and rehabilitate irrigation and water 
resources infrastructure.
    The United States also directly benefits from strong, 
continued support to the Asian Development Bank. U.S. 
businesses and consultants routinely and successfully pursue 
Asian Development Bank projects. Since the institution's 
inception in 1966, U.S. firms have won contracts worth $7.16 
billion under AsDB-funded procurement. In 2009, U.S. firms won 
$508 million in contract awards. For the last 5 years, the 
United States has been the No. 1 recipient of procurement 
contracts among the biggest donor nations, and for every $1 
that the United States has contributed to the AsDB since the 
institution was founded, U.S. companies have won some $1.63 in 
procurement contracts. In 2008 and 2009 alone, U.S. 
contractors, suppliers, and consultants from more than 25 
States representing every region in the country benefited from 
AsDB projects. These awards represent a true cross section of 
American companies in States as varied as the great State of 
Indiana, but certainly also Delaware, Massachusetts, New 
Jersey, Wisconsin, Virginia, among many others. With strong 
U.S. support to the Asian Development Bank, this will continue.
    Despite all these achievements, though, we must certainly 
remain vigilant that U.S. taxpayer funds are employed with the 
highest standards of efficiency. For that reason, we have been 
successful in working with our partners at the Asian 
Development Bank to help shape and drive a robust program for 
reform of the Asian Development Bank. Such reforms include: 
one, improving risk management and internal controls and other 
institutional reforms, particularly in the areas of 
anticorruption and integrity; two, strengthening the governance 
of human resources; three, ensuring strong safeguards in the 
areas of resettlement, indigenous peoples, and the environment; 
four, bringing new focus to the Asian Development's work in the 
middle-income countries, including reorienting lending to 
China; and five, providing more resources to the very poorest 
countries in the region. Implementation to date remains mixed 
to strong, underscoring as ever the need for continued, strong 
U.S. engagement.
    Through a very active U.S. role on the Audit Committee of 
the Board of the Asian Development Bank, we have also helped 
win progress in a range of areas that some members of this 
committee have long pressed U.S. administrations, past and 
present, to achieve. As examples, the Asian Development Bank 
has introduced strengthened protections for whistle blowers and 
witnesses.
    The Asian Development Bank also have established strong, 
separate offices focused on internal audit and on 
anticorruption and integrity and elevated its risk management 
operations to office level with added authority and resourcing.
    The AsDB also became the first of the multilateral 
development banks, the MDBs, to introduce a comprehensive 
development effectiveness review, somewhat akin to a corporate 
scorecard. This regular report, posted on the AsDB's Web site, 
outlines where the institution is ahead of, on track, or 
falling behind in key areas.
    This is not to say, though, that there is not much more to 
be done. Indeed, there is. Change has come incrementally, and a 
fully engaged United States at the AsDB can help drive further 
change. In the months ahead, strong U.S. involvement and 
engagement also will be critical as we work to ensure robust, 
credible reviews of the AsDB's information technology 
governance and organization, as well as its public 
communications policy and its accountability mechanism. Now is 
not the time for the United States to pull back from what has 
been a strong and beneficial ownership stake in the Asian 
Development Bank.
    As has been noted, the Board of Governors of the Asian 
Development Bank recently approved the fifth general capital 
increase for the institution, the first in some 15 years, and 
the United States has pledged to participate.
    For fiscal year 2011, the administration is requesting 
capital subscription for General Capital Increase V, or GCI V. 
In addition, the administration is requesting $115.3 million 
for the second installment of a 4-year commitment under the 
agreement of the ninth replenishment of the Asian Development 
Fund which provides grant assistance to the region's poorest 
nations.
    These contributions that are important to the continuity of 
the AsDB's development assistance. More importantly, these 
commitments are crucial to our ability to engage and shape the 
Asian Development Bank, and the assistance it provides, in ways 
that are favorable to U.S. interests.
    From my perspective of having served for nearly 3\1/2\ 
years as U.S. Executive Director and having for many more years 
than that worked and lived in the Asia Pacific region, first as 
the son of a U.S. military officer and then as a member of the 
private sector, I can attest the money is needed and it is very 
much in America's interest. A strong, focused Asian Development 
Bank that continues with the United States as its coequal 
largest shareholder is very much in America's interests.
    The AsDB has responded to date, slowly but increasingly 
surely, to our calls for change and for added transparency and 
accountability. Clearly reform is an ongoing process. Indeed, 
reform is a never-ending process.
    As I prepare to step down from my post, my hope is that 
reforms achieved through strong U.S. involvement at the Asian 
Development Bank will not be lost. A general capital increase 
fully subscribed to by the United States will help ensure a 
continued, strong U.S. role and will help ensure that the Asian 
Development Bank will continue to move forward changing to meet 
the needs of a region that has changed faster than the 
institution designed to serve it. Achieving this and further 
progress on reforms will require strong, continued U.S. support 
and engagement that is to the benefit of not just the people of 
the Asia and Pacific region but also the United States.
    Thank you very much, Senators.
    [The prepared statement of Mr. Chin follows:]

 Prepared Statement of Curtis S. Chin, U.S. Executive Director to the 
              Asian Development Bank, Manila, Phillipines

    Mr. Chairman, Ranking Member Lugar, members of the Senate Foreign 
Relations Committee, thank you for the invitation to discuss the Asian 
Development Bank (AsDB).
    The AsDB is an integral part of the United States engagement in the 
Asia and Pacific region, and today I will discuss how the institution 
has been central to furthering our goals in the region, including 
responding to the financial crisis, supporting our national security 
objectives, and driving broad and sustainable economic growth and 
development. I will also address the administration's request for a 
General Capital Increase and our ambitious reform agenda.
    First, I would like to note that I am concluding my tenure as the 
U.S. Executive Director for the AsDB, and that it has been a great 
honor and privilege for me to represent the United States on the board 
of directors of the institution. I believe the state of the AsDB today 
is sound, and that continued U.S. involvement and leadership will be 
essential to maintaining strength of impact in the region.
    You may well already know of the status of many of these and other 
reforms through my having met routinely with committee staff members 
for more than 3 years as part of my regular twice yearly consultation 
trips to Washington, DC. Indeed, our push for change has benefited from 
those updates and interactions, and several of the changes that we have 
achieved stemmed in no small part from the suggestions and 
encouragement of this committee. Key institutional reforms are taking 
hold, but continued U.S. engagement and oversight will be essential to 
ensure that it is not two steps forward, three steps back.
    As of December 31, 2009, the AsDB had provided some $155.89 billion 
in loans for 2,205 projects in 41 countries, $5.19 billion for 315 
grant projects and $3.809 billion for 6,863 technical assistance 
projects. Much of this assistance takes the form of financing for 
large-scale infrastructure projects, particularly in transport, energy, 
and agriculture, all with the aim of improving people's ability to 
engage in economic activity and access critical public resources.
    The AsDB is the largest regional development bank of which the 
United States is a member. Today, there are some 67 members of the 
AsDB--48 from the Asia and Pacific region. As of December 31, 2009, 
Japan and the United States were the coequal largest shareholders, each 
having contributed some 14.198 percent of the institution's capital 
stock. That large shareholding in turn brings, of course, influence, 
and also underscores the critical roles of as well as expectations of 
both the United States and Japan at the institution.
    With strong U.S. support and attention, the AsDB has over these 
past four and one-half decades responded to the region's needs, 
including in times of crisis. In the last 5 years alone, we have seen 
the AsDB complement the United States own response to crises ranging 
from the devastating Indian Ocean tsunami and earthquakes that have hit 
the region, to spiraling food prices that threatened to add hundreds of 
thousands more to the ranks of the poor and hungry, to the ongoing 
floods that have impacted thousands of people in Pakistan today.
    In response to the G20's call to accelerate and expand lending to 
mitigate the impact of the global economic crisis on the world's 
poorest, the AsDB responded in force. It increased lending to the 
benefit of nations as diverse as Georgia in the Caucasus region, to 
Bangladesh in the heart of South Asia, to the small Pacific island 
nation of Tonga. Ultimate beneficiaries ranged from schoolchildren in 
Mongolia who might have otherwise gone hungry to rural villagers in 
Indonesia. This crisis-related lending assistance including some $5.4 
billion for program and project lending, grants, private sector loans 
and guarantees; $2.5 billion for a Countercyclical Support Facility; 
and $850 million for a Trade Finance Facilitation Program. AsDB also 
approved commitment authority for some $400 million to the region's 
poorest nations through its Asian Development Fund (AsDF).
    Yet, despite the numerous success stories in the Asia and Pacific 
region, inequality and poverty remains the fact of life for the some 
1.8 billion people who live on less than $2 a day, according to the 
AsDB. Beyond the images of sparkling skyscrapers are still the all too 
common images of people who go to sleep hungry and who collectively 
drive home the reality that the Millennium Development Goals will not 
be fully met in many Asia-Pacific nations. Today, according to AsDB 
statistics, 903 million people in the Asia and Pacific region struggle 
on less than $1.25 a day, and the region remains home to two-thirds of 
the world's poor. Further, all too often, the burden of poverty falls 
on society's most vulnerable: this includes women and children, the 
region's many indigenous peoples, the landless and the marginalized.
                     the united states and the asdb
    As a founding member of the Asian Development Bank, the United 
States has been successful in many ways in ensuring that the 
institution's limited resources complement U.S. foreign policy goals as 
well as our own official development efforts in the region. The AsDB 
and the Asia and Pacific region are as important to the United States 
now as at any time since the AsDB's establishment some 45 years ago. 
That was a time when conflicts threatened Southeast Asia, and many of 
today's Asian and Pacific island nations had yet to forge their own 
independent paths forward two decades after the close of the Second 
World War. Today, sadly, conflict or unrest continues in many parts of 
the region, and the demands on--and the benefits of continued 
engagement and leadership by--the United States continue as strong as 
ever.
    In many ways, the AsDB's work today is also a crucial contributor 
to the United States security. As an apolitical, international body, 
the AsDB has the power to convene, bringing sometimes less than 
friendly neighbors together in a shared goal of a more prosperous and 
peaceful region--a goal in which the United States, as a Pacific 
nation, certainly shares.
    To frame the United States strategic foreign priorities, officials 
have spoken of the importance of the three Ds: diplomacy, defense, and 
development. Here too, from a U.S. perspective, the AsDB plays a 
critical role. At the Asian Development Bank and in the Asia and 
Pacific region, we bear witness to these interlinkages. Indeed, failed 
development contributes too often to failed nations. With strong U.S. 
support, the AsDB can continue to help the nations of the region to 
help themselves, as they themselves commit to put in place the rule of 
law, the governance systems, and the conditions to ensure an 
environment for further sustainable economic growth and development.
    For example, the AsDB is the largest provider of nonmilitary 
assistance to Pakistan, averaging as much as $1.5 billion per year. 
With strong U.S. encouragement, the AsDB is now providing some $2 
billion of reconstruction and development assistance to Pakistan as it 
grapples with the massive flooding that has captured the world's 
headlines. Attention rightly is also being paid to ensure strict 
compliance with AsDB and government anticorruption measures and 
procurement rules. The AsDB assistance focuses on reconstruction of 
Pakistan's battered transportation and energy infrastructure. Even 
before the flooding crisis, my own Board oversight visits to Pakistan--
to the cities of Islamabad, Lahore, and Karachi as well as to rural 
communities that are benefiting from AsDB-supported water and 
sanitation projects and mountain villages benefiting from earthquake 
reconstruction efforts--underscored to me that AsDB was clearly a 
leader among multilateral organizations delivering assistance to 
Pakistan.
    In addition, the AsDB is now one of the largest donors to 
Afghanistan, along with the United States, the United Kingdom and the 
World Bank. Since the AsDB's resuming of operations in Afghanistan in 
2002, AsDB projects are now helping the country recover from nearly 30 
years of continuous conflict. AsDB's infrastructure projects in the 
transport sector include the reconstruction of significant portions of 
Afghanistan's main highway artery and the construction of the country's 
first railway link to Uzbekistan, opening up alternative routes for 
national and international trade, as well as for humanitarian relief to 
Afghanistan. In the energy sector, AsDB funding is helping Afghanistan 
to expand its national power grid and connect to Tajikistan's grid, 
allowing Afghanistan to import surplus electrical power from its 
northern neighbor. In the agriculture and natural resources sector, 
AsDB is financing a $303 million effort to develop new irrigation and 
water resources infrastructure, and rehabilitate and upgrade existing 
infrastructure. My predecessor as U.S. Executive Director and I have 
both traveled in our Board oversight role to Afghanistan to meet with 
our U.S. Embassy Kabul colleagues, Afghan Government counterparts and 
AsDB staff. To all of them as well as to our American colleagues on the 
front lines of diplomacy, defense, and development in both Afghanistan 
and Pakistan, let me pause to encourage and applaud their work under 
difficult circumstances.
    The AsDB is also a major provider of assistance to Bangladesh, 
India, and Indonesia, homes of some of the largest Muslim populations 
in the world. These are also countries that have deep challenges in 
poverty and have been afflicted by numerous natural disasters.
                        benefiting u.s. business
    The United States also directly benefits from strong, continued 
support to the Asian Development Bank. U.S. businesses and consultants 
routinely--and successfully--pursue AsDB projects. According to the 
AsDB, since the institution's inception in 1966, U.S. firms have won 
contracts worth $7.16 billion under AsDB-funded procurement. The AsDB 
reports that in 2009, U.S. firms won $508 million in contract awards. 
For the last 5 years, the United States has been the number one 
recipient of procurement contracts among the biggest donor nations. 
(The others are Japan, Germany, United Kingdom, and Australia.) Using 
numbers from the AsDB Controller's office for the period January 1, 
1967 to December 31, 2009, AsDB
staff also recently informed the U.S. Department of Commerce that for 
every one dollar that the United States has contributed to the AsDB 
since the institution was founded, U.S. companies have won some $1.63 
in procurement contracts.
    Regarding its relationship with the business community, the U.S. 
Commercial Service has noted that the AsDB is among the most open of 
the multilateral banks, and AsDB staff regularly meet with U.S. company 
representatives. It is also not only large companies that benefit from 
AsDB projects and programs. Small- and medium-sized enterprises also 
benefit from AsDB procurement, and these firms are integral to fueling 
economic growth.
    In 2008 and 2009 alone, U.S. contractors, suppliers, and 
consultants from more than 25 states, representing every region in the 
country benefited from AsDB projects. AsDB contract awards for those 2 
years show that in the North and Northeast, companies in New Hampshire, 
Maine, Vermont, Massachusetts, New York, New Jersey, Delaware, and 
Pennsylvania have all landed AsDB contracts; in the South, companies in 
Alabama, North Carolina, South Carolina, Virginia, and Maryland have 
won AsDB contracts; in the Midwest, companies in Illinois, Wisconsin, 
Ohio, Indiana, Kansas, Missouri, Nebraska, and Iowa have landed AsDB 
contracts; and in the West, companies in Colorado, Utah, California, 
Washington, and Hawaii have also benefited from AsDB contract awards. 
These awards represent a true cross section of American companies.
    As further illustrations of the interest of U.S. companies in AsDB 
projects, the U.S. Commercial Service maintains an up-to-date database 
of approximately 1,700 contacts that have asked to receive monthly 
project alerts for all current and planned AsDB projects, and in just 
the first 9 months of this fiscal year, the Commercial Service AsDB 
Liaison Office in Manila counseled nearly 125 U.S. companies who were 
seeking information about how to do business with the AsDB. They also 
arranged 85 individual meetings at the Bank for interested firms.
    The U.S. Government works hand in hand in assisting U.S. companies 
in becoming aware of AsDB project opportunities as far in advance as 
possible, and in intervening on their behalf, as appropriate. With 
strong U.S. support, this will continue.
                     a continuing focus on reforms
    Despite all these achievements, however, we must remain vigilant 
that U.S. taxpayer funds are employed with the highest standards of 
efficiency.
    For that reason, we have been successful in working with our 
partners at the Asian Development Bank to help shape and drive a robust 
program for reform of the AsDB. Such reforms include: (1) improving 
risk management and internal controls, and other institutional reforms 
particularly in the areas of anticorruption and integrity; (2) 
strengthening the governance of human resources; (3) ensuring strong 
safeguards in the areas of resettlement, indigenous peoples, and the 
environment; (4) bringing new focus to the AsDB's work in the Middle 
Income Countries, including reorienting lending to China; and, (5) 
providing more resources to the very poorest countries in the region. 
Implementation remains mixed to strong, underscoring as ever the need 
for continued U.S. engagement.
    Through a very active U.S. role on the Audit Committee of the Board 
of the AsDB, we also have helped win progress in a range of areas that 
some members of this committee have long pressed U.S. administrations, 
past and present, to achieve through our engagement at the AsDB. As 
examples, the AsDB has introduced strengthened protections for 
whistleblowers and witnesses. The AsDB also has established strong, 
separate offices focused on internal audit, and on anticorruption and 
integrity, and elevated its Risk Management operations to office-level, 
with added authority and resourcing. The AsDB these last 3 years also 
became the first of the multilateral development banks to introduce a 
comprehensive Development Effectiveness Review, somewhat akin to a 
corporate scorecard. The regular report, posted on the AsDB's Web site, 
outlines where the institution is ahead of, on track or falling behind 
in key areas.
    This is not to say though that there is not much more to be done. 
Indeed there is. The AsDB's own corporate scorecard makes this clear. 
Change has come incrementally, and a fully engaged United States at the 
AsDB can help drive further change. Let me cite one area where our 
continued U.S. focus and engagement, I believe, can continue to help us 
win progress. As members of this committee might know, the AsDB 
continues to decline to make public the names of firms and individuals 
that it has barred from future work at the AsDB although it 
acknowledges that there is some deterrent effect to publicizing its 
debarment list. With strong U.S. urging, AsDB now publishes and make 
publicly available on its Web site the names of firms and individuals 
that have been: debarred by AsDB for second or subsequent integrity 
violations; debarred by AsDB for sanctions violations (for example, 
attempting to participate in an AsDB-financed activity while 
ineligible); debarred by AsDB but who AsDB has found impossible to 
notify (so-called ``process avoiders''); or cross-debarred by AsDB 
pursuant to a Cross-Debarment Agreement (Agreement for Mutual 
Enforcement of Debarment Decisions) entered into in April 2010 by the 
World Bank Group, the AsDB, the African Development Bank, the Inter-
American Development Bank, and the European Bank for Reconstruction and 
Development. Continued U.S. engagement is necessary to achieve further 
improvement in the disclosure of firms and individuals debarred from 
MDB procurement activities.
    Firms and individuals who are on AsDB's publicized list subsequent 
to the Cross-Debarment Agreement being declared in force are subject to 
cross-debarment by the other MDBs. The list of firms and individuals 
sanctioned by AsDB as first-time violators is published on AsDB's 
intranet for AsDB staff and AsDB's Board of Directors. Currently, AsDB 
shares this debarment list via e-mail with international organizations, 
government agencies that implement AsDB projects, bilateral aid 
organizations and others with a demonstrated need to know. AsDB also is 
currently developing a password enabled Web site to provide all of the 
foregoing with direct access to the list of initially sanctioned firms 
and individuals, and expects to have the site operational before the 
fourth quarter of 2010.
    In the months ahead, strong U.S. involvement and engagement--in 
part through full participation in a General Capital Increase for the 
institution--will also be critical as we work to ensure robust, 
credible reviews of the AsDB's Information Technology governance and 
organization, as well as of its Public Communications Policy and its 
Accountability Mechanism. Now is not the time for the United States to 
pull back from what has been a strong and beneficial ownership stake in 
the Asian Development Bank.
    As has been noted, the Board of Governors of the AsDB--with 
Secretary of Treasury Geithner serving as the governor for the United 
States--recently approved the fifth General Capital Increase for the 
institution, the first in some 15 years, and the United States has 
pledged to participate. For FY 2011, the administration is requesting 
capital subscription for General Capital Increase V (GCI V). 
Participation in the GCI requires $106.6 million for FY 2011 (and a 
similar amount for the following 4 years for a total U.S. 5-year 
commitment of approximately $533 million). This will allow the AsDB to 
continue lending at a sustainable level of $10 to $11 billion for the 
next 10 years.
    In addition, the administration is requesting $115.3 million for 
the second installment of a 4-year commitment under the agreement of 
the ninth replenishment of the Asian Development Fund. The U.S. total 
4-year commitment for AsDF 10 of $461 million contributed to a total 
$11 billion replenishment, allowing the AsDB to provide up to $2.75 
billion in grant assistance per year via the Asian Development Fund to 
the poorest nations of the region.
    These contributions are important to the continuity of the AsDB's 
development assistance; failure to fully fund these commitments impairs 
the ability of the AsDB to deliver timely assistance. Furthermore, 
these commitments are crucial to our ability to engage and shape the 
AsDB and the assistance it provides in ways that are favorable to U.S. 
interests.
    Six months ago, in March of this year, the ranking member of this 
committee transmitted to the full Committee on Foreign Relations a 
report entitled ``The International Financial Institutions: A Call for 
Change.'' This report followed on an oversight project on the 
multilateral development banks that had begun some 7 years earlier, 
focused on ensuring that the MDBs' financing reached the intended 
people and projects. In it the report said, ``As the requests for 
capital are negotiated with the international donor community, there is 
a window of opportunity for significant reform.'' The report also said 
that ``Congress must be able to assure taxpayers that the money is 
needed, and that it will be used efficiently.''
    These are critical points. From my perspective, though, of having 
served for nearly 3\1/2\ years as U.S. executive director at the AsDB, 
and having for many more years than that worked and lived in the Asia 
and Pacific region, first as the son of a U.S. military officer and 
then as a member of the private sector, I can attest: the money is 
needed and is in America's interests. Further, a strong, focused Asian 
Development Bank that continues with the United States as its coequal, 
largest shareholder is very much also in America's interests.
    The AsDB has responded to date, slowly but increasingly surely, to 
our calls for change and for added transparency and accountability. 
Clearly reform is an ongoing process. Indeed, reform has rightly been 
called also a never ending process. As I prepare to step down from my 
post as U.S. executive director, my hope is that reforms achieved 
through strong U.S. involvement at the AsDB will not be lost. A General 
Capital Increase fully subscribed to by the United States will help 
ensure a strong U.S. role; and that the Asian Development Bank will 
continue to move forward, changing to meet the needs of a region that 
has changed faster than the institution designed to serve it. Achieving 
this and further progress on reforms will require strong, continued 
U.S. support and engagement. That is to the benefit of not just the 
people of the Asia and Pacific region, but also of the United States.

    The Chairman. Well, thank you very much and thank you for 
your service there.
    By prior understanding, Senator Lugar knows I am going to 
be very, very brief in the questions. I am already late for a 
meeting that I had to be at. He is going to continue the 
hearing and close out if necessary. And I will leave the record 
open for a week in the event that other colleagues want to 
submit questions. I know I want to submit some additional ones 
in writing.
    But let me just very quickly ask you, Director Chin, 
picking up on your last comment about reforms being ongoing and 
never-ending. That may be true, but be advised that for 
Congress to get excited about recapitalizing and to moving 
forward, there is a certain de minimis level of expectation 
with respect to what has to be done now. I mean, reforms may be 
ongoing, but nobody is going to accept that major 
accountability and transparency or other kinds of steps is 
somehow going to be never-ending. That is not going to satisfy 
people. And I think that there is going to be a higher 
expectation of performance and standard as we go forward here.
    The G20 has called for more open, transparent merit-based 
selection for the IMF and the World Bank, and I would just like 
to ask quickly, Secretary Lago, what is the administration's 
position on exactly how that ought to be implemented in 
practice?
    Ms. Lago. Thank you, Chairman.
    This is a topic that has been introduced in the G20 
discussions, and the United States has been clear about the 
benefit that we have seen from U.S. leadership in the World 
Bank, and we also know that any decision with respect to 
changing the understandings with respect to the appointments of 
the head of the World Bank and the IMF is something that would 
have to be done across the IFIs and only after consideration at 
the most senior political levels. We have been well served. 
American interests have been well served and the World Bank has 
been well served by having strong, competent, capable American 
leadership.
    The Chairman. What is the interpretation of that with 
respect to what the merit-based selection process might produce 
in terms of enabling a candidate from a nontraditional country 
to actually lead one of the institutions? Can you say?
    Ms. Lago. I think that different countries within the G20 
may have different understandings. We believe that we need to 
have tremendously competent, capable leadership as we do have 
at the World Bank. It has been well served by----
    The Chairman. You would see that as somewhat limited then.
    Ms. Lago. Excuse me?
    The Chairman. It would be somewhat limited then in your 
judgment.
    Ms. Lago. That is the understanding that is in place, and 
if the understanding were to change, it would have to be a 
discussion about more transparency and accountability--
something where America thrives. But any change would have to 
be discussed only at the highest political levels and in the 
context of all of the IFIs, including the IMF. And again, I 
reiterate we have been very well served by the American 
leadership, and the World Bank has been well served by that 
leadership.
    The Chairman. And what would you say, Mr. Solomon and 
perhaps Ms. Lago, is your impression of the level of 
coordination between the World Bank and the regional 
development banks? Are you satisfied at the level of 
coordination between the regional development banks and the 
World Bank?
    Mr. Solomon. Thank you, Chairman.
    I think the issue of improving coordination between all the 
international financial institutions is an important priority. 
I think we have seen some good progress; I think in certain 
countries extraordinary progress. In other places, there is 
more work that needs to be done. I think we have seen some good 
work between the Asian Development Bank and the World Bank 
working together in the damage needs assessments in Pakistan, 
for example. We have seen some good cooperation between the 
World Bank----
    The Chairman. Can it be improved in your judgment?
    Mr. Solomon. I think coordination can also be improved. I 
think there is----
    The Chairman. Is there an ongoing effort to actually do 
that?
    Mr. Solomon. From my perspective, absolutely there is an 
ongoing effort, and I think it is something that we continue to 
press. If I get a sense from someone in the U.S. Government 
that calls every day from various U.S. agencies----
    The Chairman. Is there a specific set of proposals as to 
how that coordination could be improved that are on the table 
in writing?
    Mr. Solomon. I am aware of broad coordination, but on 
particular issues, like there is a group of all the procurement 
officers, for example, across the different multilateral banks 
that work together to implement cross-debarment process that 
this committee was so effective in championing to try to 
improve how procurement is done on a coordinated basis and 
improve information-sharing about corrupt practices. We are 
taking information we get in one Bank and applying it across 
the board. As you know, as the President of the Bank said, Bob 
Zoellick said, ``To cheat and steal from one, get punished by 
all.'' That level of coordination I think has been very 
important.
    I think there are additional ways we can improve 
coordination around the way we set up some of the new targeted 
trust funds, so for example, the food security trust fund. The 
World Bank administers the fund, but the implementing entities 
can be other multilateral development banks. So it is a way of 
trying to get them all working together on the same process.
    The Chairman. Well, I thank each of you.
    Again, the record will be left open.
    Senator Lugar, thank you very much.
    Senator Lugar [presiding]. Thank you, Mr. Chairman.
    Secretary Lago, in your written statement, you noted that 
as the administration weighed the capital requests of the 
various development banks, it considered the capacity of each 
MDB, demand for MDB resources, and focus on the core mandates 
of each MDB. Would you please explain how the administration 
arrived at the general capital increase requests for each of 
the MDBs? Why do the requests vary so widely? For example, the 
request for the Inter-American Development Bank is almost five 
times more than the request for the African Development Bank.
    Ms. Lago. Thank you very much, Ranking Member Lugar.
    In looking at the request for the general capital 
increases, we looked both at the base number. The different 
banks started from very different capitalization levels. So we 
considered both the absolute number but also the percentage 
increase. So the IDB started out at three times the level of 
the African Development Bank.
    The second thing that we considered was the capacity within 
each institution. What we saw during the crisis was that the 
institutions markedly upped their game. They increased their 
lending, at the request of the G20, to unprecedented levels.
    And we evaluated the capital needs of the institutions. 
Absent the GCIs, the institutions would fall back--would only 
have resources at levels far below their precrisis lending 
levels, let alone the lending level during the crisis.
    And finally, we considered what the needs were within the 
recipient countries, within the areas of operation, and by 
looking at all of those factors and also at the extent of the 
reform agenda, we reached the requests that were made here, 
that we are making today.
    Senator Lugar. So you have had to conduct a very careful 
study literally of each individual country as a component of a 
larger group that would be borrowing from the banks and you 
have also considered where the banks started with the capital 
levels. I ask that question simply because there is this very 
large difference in the requests and your explanation appears 
to offer a detailed response to those who would question why 
this is the case.
    Now, second, during the capital increase negotiations, the 
administration secured commitments from the development banks 
to make many reforms regarding fiscal discipline, governance, 
and effectiveness. While the Inter-American Development Bank 
will have an independent assessment of these reforms, how will 
implementation by the other development banks be evaluated? And 
should implementation fall short of commitment, will donors 
adjust their capital increase contributions?
    In addition, what additional steps will you have to take to 
see development banks make the improvements required in their 
operations?
    Ms. Lago. Thank you, Senator.
    It is clear that the mechanism that we have in place at the 
IDB is a cutting-edge mechanism of the midterm review. And as 
Chairman Kerry had asked about coordination among the banks, 
the American executive directors are always looking at a best 
practice in one bank and seeing how it can be exported across 
the other banks. I think of that as a race to the top. It is 
the kind of competition that serves us well.
    With respect to all of the MDBs, we have extremely active 
and engaged executive directors. It is not a ceremonial post. 
It is a working post. We pride ourselves on the extent to which 
we interact with management both through our executive 
directors and their offices and myself personally as well with 
the senior management at the Bank. We serve on key committees 
including, as Executive Director Chin mentioned, the Audit 
Committee which is clearly one of the key controls.
    And finally, it is well known within the banks that the 
U.S. contribution--and we are a sizable donor in each of these 
institutions--is appropriated on a year-by-year basis. It is 
not a blank check. And so through our active participation, our 
day in, day out presence within these institutions, we drive 
the reform agenda.
    The GCI and the reform agenda that was negotiated at that 
time is critically important, but as important as reaching the 
agreement is our day in, day out overseeing of its 
implementation.
    Senator Lugar. Well, that is very helpful.
    Is it conceivable that the other banks may eventually adopt 
such a procedure? Granted, as you point out, day by day you are 
looking into these accounts. This is not something that is just 
simply left to its own accord after a period of time.
    Ms. Lago. I think at this point we are pleased with the 
pace of reform and the implementation, and if we were to see 
that there was slippage, that would be the time at which we 
would raise it. At this point, the agreements have not only 
been reached by the Board of Directors but endorsed by the 
management and are in the process of implementation. And as I 
said, we will continue to keep our eyes on the implementation 
of the reforms. It will not come as any surprise to senior 
management that in talking about the GCIs, we spoke first of 
the reform agenda and then of the amount of capital.
    Senator Lugar. Do other countries monitor operations in the 
same way that the United States does? For example, as you 
approach these things, if you were one of the examiners, you 
could say not only is the administration of our country 
interested, but you are getting questions from Congress and 
even the press largely because of hearings such as this. Does 
the same dialogue occur in other nations that are a part of the 
structure of these banks?
    Ms. Lago. We actually are very fortunate in having key 
partners in the other donor nations, and within each bank, the 
leadership structure is slightly different. So for instance, in 
the Asian Development Bank, we and Japan have the same 
shareholding percentage and are the two largest shareholders, 
and so they are strong partners in implementing the reform. In 
many of the development banks, the United Kingdom has been a 
strong presence, and the executive directors routinely work 
with their colleagues as we are trying to advance a reform 
agenda.
    If I could turn it over to our Executive Director Solomon 
who might be able to give us some examples.
    Senator Lugar. Very good.
    Executive Director Solomon.
    Mr. Solomon. Thank you, Ms. Lago. Thank you, Mr. Chairman 
or Ranking Member Lugar.
    I work quite closely with the other executive directors, 
and I think that there is a variety. Some are deeply engaged 
and their Parliaments and other governments are very much on 
top of every single decision the Bank makes, and other times 
it's a somewhat complicated situation because some executive 
directors represent not one country but a group of countries. 
So their ability to get the feedback from their capitals that 
we benefit from here can be more complicated. But on a number 
of decisions, a number of individual loan projects, we will 
work very closely with other chairs, and they are often hearing 
from their governments as well as their Parliaments.
    Senator Lugar. Let me just continue with a couple of 
questions for you, Executive Director Solomon.
    The current global financial crisis led to an increase in 
lending at the MDBs across the board and a particularly 
dramatic increase at the World Bank in particular. Are these 
unprecedented high lending levels expected to return to 
precrisis levels, or are we seeing a perpetual increase in the 
volume of lending by the World Bank? And are there any 
additional measures that can be taken to ensure that the 
increased lending does not result in inappropriate debt levels 
for the poor countries?
    Mr. Solomon. Thank you for the question about lending 
levels and debt. I think both are critically important to how 
we view our roles in these institutions.
    The extraordinary response from the World Bank was 
unprecedented. It was also necessary, but it was also 
unsustainable at that level. So when we looked at the capital 
increase request and looked at the role of the Bank going 
forward as we continue with recovery and get beyond the crisis. 
The level of capital we were comfortable with was a level of 
capital that would enable the Bank to return to its precrisis 
lending levels of lending. So the answer to your question is 
``No,'' this is not a perpetual increase in lending. It is a 
return to precrisis levels.
    And I think that means that the Bank is going to have to be 
increasingly selective, increasingly careful about where it 
spends its money, and increasingly realizing that its value 
added in the world of development is not always going to be the 
volume of resources but the development knowledge it brings to 
the table, its ability to identify and scale up innovative 
solutions to problems.
    So the volume game is one. It was an issue that you spent a 
lot of time working on. The interest in big, large lending 
volumes is a culture in some of the banks about a pressure to 
lend. You have documented that in your reports. We need to 
change that culture to one that is focused on results and 
meeting the development needs, and I think there has been great 
progress on a much greater focus on results. I can talk more 
about that if you would like.
    The issue of debt is one that we take very seriously and 
worry about greatly. I think we do not want to get back in the 
cycle of lend and forgive. That is not effective for 
development. For the World Bank and particularly in IDA for the 
poorest countries, they have implemented a debt sustainability 
framework at the World Bank. So we very clearly look at every 
country's situation before deciding whether or not loans are 
appropriate and have also increased the amount of grants that 
are given because some of these countries cannot afford to pay 
back loans. So grants are the more appropriate development 
instrument to use. We will continue to monitor this, both the 
poorest countries and the middle-income countries. Every time 
we review a potential investment, one of the things we look at 
whether it is a sustainable investment for that country.
    Senator Lugar. Well, I appreciate your thoughtful answers. 
This is a subject, as you pointed out, that was addressed in 
our extensive report. And it is a dilemma for anyone who is a 
compassionate observer of the world because the number of 
situations that could be assisted by appropriate lending and 
correspondent appropriate spending on the part of the borrower 
are legend. Yet at the same time, it is difficult to understand 
the level of debt that could be sustained by a particular 
borrower without there being a perpetual lend-and-forgive 
situation, which, to say the least, does not lend confidence to 
the international banking system. At the same time, there has 
to be funding at the precrisis level so that when huge crises 
do occur, there will be funds for borrowers to draw on and 
utilize. But I appreciate very much the sophistication with 
which you and the other executive directors approach this.
    Let me ask one more question of you. Do you see an inherent 
contradiction between providing general budget support, 
especially in poor countries with weak government institutions, 
and ensuring that funds are not stolen or appropriated for 
other purposes? For instance, given the World Bank's increasing 
interest in budget support and in sectorwide programs, what 
should the World Bank do to ensure that these funds are used as 
intended in these countries with weak institutions and perhaps 
weak accounting?
    Mr. Solomon. Thank you.
    I think the question of the appropriate lending instrument 
and what is the appropriate oversight role for us as the major 
shareholder of the World Bank I think is an important issue. 
Let me be clear. No matter what instrument is used--whether it 
is an investment loan for an individual project or budget 
support--we need to have the same standards on safeguards to 
ensure that the poor benefit. We need to be applying the same 
level of oversight and analysis to make sure that is an 
appropriate investment.
    And I think as we look at some of the budget support 
operations, we need to make sure that the prior actions and the 
policy reforms that we hope to be getting for the budget 
support are actually being achieved and that the evaluation of 
the investments is robust so we know where were results 
achieved. Are we learning from the examples of budget support 
that we have given in the past?
    I think it is important to realize that to tackle some of 
these development challenges, policy reform is quite important 
in a lot of these countries. So we need to have a range of 
instruments we can provide. Sometimes it will be building a 
particular infrastructure project, for example. Other times it 
will need to be a close, longtime engagement with the 
Department of Education, for example, about how to improve 
enrollment of women in schools, girls in schools. So I think 
having a range of instruments is very important, but having 
strict standards of oversight and accountability for them is 
also important.
    Senator Lugar. Thank you very much.
    Executive Director Chin, I have some questions for you. I 
wanted to ask, first of all, with regard to China, China's 
rising financial and strategic power is a crucial factor in our 
approach to global problems generally. What is China's role at 
the Asian Development Bank? How much of the ADB's financing 
goes to China, and why is the ADB lending to China when it is 
the major lender to other countries? Namely, Chinese buy some 
of our Treasury bonds from time to time.
    Mr. Chin. Thank you, Ranking Member Lugar. Those are 
important questions and ones that I actually always ask the 
Asian Development Bank.
    Let me share with you some of the factual numbers and 
figures--you know, when I pose that question, what they respond 
to me with, but then I also want to share with you some broader 
thoughts on what we are doing to change that situation that you 
described.
    Number-wise, China is both a major shareholder and, as you 
noted, a major borrower from the Asian Development Bank. 
Shareholder-wise, as of December of last year, China was the 
third-largest shareholder in this institution. So Japan and the 
United States----
    Senator Lugar. Behind the United States and Japan?
    Mr. Chin. I'm sorry. Japan and the United States are 
coequal largest. China was No. 3 as of December of last year.
    Senator Lugar. About what percentage----
    Mr. Chin. Sorry. The United States and Japan together are 
about--each have about 15 percent, and if you look at China, it 
is about 5 percent. But clearly those numbers will change based 
on how all the shareholders subscribe to this GCI, again 
underscoring the importance of a full subscription from the 
United States. So that is the role as a shareholder.
    In terms of a borrower, if you look at just historically, 
if you add up all of the borrowing from China, about 20 percent 
of the Bank's hard window lending, what they call from its 
ordinary capital resources, has gone to China. But then when 
you look at it in the more recent years, China has now 
voluntarily capped its sovereign guaranteed borrowing at about 
$1.5 billion a year. It could go up. I think I looked at the 
most recent figures. It went up to 1.9 when it included a 
nonsovereign borrowing.
    But to the question as to why does China borrow, I broke it 
down. You will see that China has made clear that its borrowing 
really is not about the money. In some cases, the money that 
the ADB will lend to China might only be 10 percent of the 
overall size of a project. And let me just highlight one which 
would be this past year they came to the ADB to borrow, I 
think, about $400 million for a loan to help with 
reconstruction of the Sichuan province area that was devastated 
by that earthquake with tens of thousands of peoples dying. 
They borrowed specifically to gain some of the knowledge that 
came with the borrowing. So, for example, to help them 
strengthen building codes so that schools would not collapse on 
their young people.
    And I think with strong U.S. pressure, we are continuing to 
see the Bank encourage China that when it looks at its 
relationship with the ADB, that it no longer be based on 
additional borrowing. And actually there is a bank commitment 
that by 2020 the relationship with China is no longer one of 
borrowing, but one of the knowledge that they can benefit from 
by engaging with the Bank.
    The only other thing I would note there--and this is again 
very much in the United States interest. Even if China were to 
only borrow a little bit for a project, that overall project 
will have to follow the strong environmental, indigenous 
peoples, and resettlement safeguards that the United States 
insists on for everything that is part of that project. And so 
clearly that is to the benefit of the world also.
    Senator Lugar. These are very important points, both the 
fact that the Chinese might borrow in order to benefit from the 
Bank's expertise and knowledge in, as you say, reconstructing a 
school in a fashion appropriate for an area vulnerable to 
earthquakes, but then they also take on the obligations of 
following environmental and other standards that are conditions 
of borrowing the funds. So it is an interesting interplay in 
terms of money and the sharing of knowledge.
    Let me ask, should the United States not fund or only 
partially fund the capital increase request for the ADB that 
has already been submitted to the Congress? How would that 
impact United States shareholding and influence at the Asian 
Development Bank?
    Mr. Chin. Very clearly it will weaken the United States 
influence. In the long run, if the United States does not 
fulfill its subscription, clearly our shareholding will go 
down. Right now, the United States and Japan are, I think, seen 
as both not just major shareholders but as leaders at the Bank, 
and my fear would be the unintended message that maybe the ADB 
is seen as less. I think the chairman referred to it in his 
opening comments as a critical tool, one more tool in our box 
to help advance kind of our U.S. interests. Clearly that would 
be at risk over time if, indeed, the subscription was not 
fulfilled.
    Senator Lugar. Speaking of U.S. interests, given the Asian 
Development Bank's sizable funding in Afghanistan and Pakistan, 
how is it coordinating with the United States and other donors? 
How do the ADB's investments complement the activities of the 
United States in Afghanistan and Pakistan?
    Mr. Chin. Sure. I would argue that Afghanistan is one of 
the biggest success stories for actually the ADB in its 
coordination with the United States. Pakistan, getting better, 
as my colleague, Ian Solomon, said, but it is coordinated at a 
number of levels. I would say first at the individual country 
level, the Asian Development Bank representative office will 
work closely with our U.S. mission, our U.S. Embassy there, but 
certainly also with the other major development partners in 
that country.
    So specific examples from Afghanistan. I just had in my 
office in Manila representatives of the U.S. Corps of Engineers 
who are working very closely with the Asian Development Bank in 
finishing that section of the Ring Road through a very 
cooperative arrangement.
    This Sunday I was with the U.S. COO of USAID about a 
possible partnership arrangement between ADB and USAID as 
another step forward in trying to better coordinate our 
approach in countries that are so critical to our United States 
interests in not just Afghanistan, but Pakistan.
    In his old role, General Petraeus, when he was head of 
Central Command--you know, now he is head of our Afghanistan 
command--he wrote in a letter to Secretary Geithner of the 
great coordination that was taking place between ADB and our 
U.S. Government in some key countries of interest to the United 
States. There he flagged not just Pakistan and Afghanistan, but 
also the nation of Georgia in the Caucasus region.
    Senator Lugar. Well, that is a very interesting point. And 
I presume a majority of the shareholders share the desire to 
make these loans to Afghanistan and Pakistan in the midst of 
warfare or certainly conflict in which there could be some 
disagreements or debates over American policy or the policies 
of our NATO allies and others who are involved there. But at 
least you have not found that to be the case apparently as 
these loans have been made.
    Mr. Chin. Yes, very much the case. We have to look at each 
country individually. In Afghanistan, the assistance is really 
all grant-based given the poverty of Afghanistan. But 
unanimously, the shareholders of the Asian Development Bank 
supported the replenishment of the Asian Development Fund. So 
that is the concessional window which benefits Afghanistan and 
thus the request from the administration for the funding of 
that replenishment.
    Pakistan likewise. I think I and colleagues from both the 
Asia region and non-Asian countries at the board very much push 
the Bank to respond quickly with an eye, of course, always to 
good governance and corruption for the situation in Pakistan. 
But the members are very much behind that mission of poverty 
reduction in the Asia Pacific region.
    Senator Lugar. I have one final question. As a member of 
the Asian Development Bank Executive Board, you have championed 
reform of its human resources system. What improvements has the 
ADB made in this regard, and have they impacted operations? And 
what more should it do to attract and to retain highly 
qualified men and women?
    Mr. Chin. Thank you, Ranking Member Lugar.
    Indeed, the United States has very much championed human 
resources reform at this institution. The unkind people would 
say I terrorized the institution, but clearly people are at the 
heart of development. This is where implementation succeeds or 
falls apart. Through constant U.S. pressure, we have a number 
of changes both small and large. You know, the small ones would 
be introductions of things like flex time, spousal employment, 
address some of the gender issues with regard to the staffing 
at ADB.
    But much larger, we address things at a governance level. 
For the first time ever, the Asian Development Bank accepted a 
new standing committee of our Board of Directors, a Human 
Resources Committee. So once a month, the Director General of 
the Bank's Budget and Personnel Division is called before us to 
address concerns that we have about what more needs to be done.
    So these are some steps. Clearly there needs to be more 
done, and I think again the importance of the full U.S. 
subscription to a GCI which will allow us to continue to push 
this Bank forward--clearly the Bank's Human Resources 
Department needs to further professionalize--that indeed this 
principle of a merit-based, competitive process for selection 
of the staff is applied. And I think we are getting there, and 
I think that is one of the great benefits of this GCI process. 
We were able to push things. Indeed, I read some of the 
transcripts of some of the hearings that you all had 7 years 
ago, and some of these same issues were raised back then. 
Indeed, with great pride, I would say our U.S. Government was 
able to get some of those things that have been long pushed for 
by administrations present and past.
    Senator Lugar. Well, I join Chairman Kerry in 
congratulations to you on your service. We thank you for 
testifying today, that your service did not end before this 
hearing, and that you have been available once again to be most 
helpful to us. We appreciate that.
    Executive Director Solomon, I have a couple of questions. 
Over the years, many have discussed the ``pressure to lend'' 
culture of the development banks which rewards staff for 
designing the largest loans rather than implementing the most 
successful loans. Currently the executive boards review the 
projects at their inception but not all together at their 
completion. Would you concur with the committee's report I 
commissioned that recommended loans be reviewed upon 
completion, as well as to promote a ``pressure to succeed'' 
culture?
    Mr. Solomon. Thank you for raising this issue of pressure 
to lend. I think it is something that I spend a lot of time 
figuring out how we can change this to move the Bank away from 
quantity, more toward quality. And I think there is good 
progress by getting the Bank to focus more on results, results 
being both preparing for tracking results by getting good 
baseline information, actually measuring what is happening and 
making sure you have proper incentives for people to do the 
measuring and the tools to do the measuring, and then learning 
from those results before you do another project. And the Bank 
does spend a lot of time on projects at the beginning, but also 
at every project that is completed has a project completion 
report and the independent evaluation group does an assessment 
of the project. And I spend a lot of time at the Bank looking 
at the IAG reports on projects before we go and agree to 
another project. So for a country assistance strategy, for 
example, we will always be studying what the IAG said of the 
previous period of investments made in that country and then 
asking the team, well, have you learned the lessons from the 
previous assessments?
    And I think there has been a mixed record on learning from 
results. I think the trend is very positive. I think the use of 
project completion reports and the important role of the IAG is 
more greatly appreciated. But I welcome the opportunity to 
discuss projects at the beginning, in the middle, and the end, 
and then going back and seeing years later have we applied the 
lessons we have learned from that experience.
    Senator Lugar. Thank you for your response. The G20 has 
called for changes to the selection process for the leadership 
of the International Monetary Fund and World Bank and for more 
representation of emerging markets in these institutions. Is 
the administration willing to agree to give up the presidency 
of the World Bank, which could undermine our ability to promote 
innovation at this flagship institution? Should leadership of 
regional banks not likewise be discussed? Also, what is the 
administration's view of current calls for the United States to 
give up its veto at the IMF, which could erode American support 
for that institution?
    Ms. Lago. If I might answer that question.
    Senator Lugar. Yes.
    Ms. Lago. Clearly in the leadup to the G20 meeting that 
will be occurring in Seoul, there has been a lot of 
discussions. The United States is proud of the support that we 
provide to the World Bank and the IMF and of our voting shares 
there. And as you note, in the IMF it has a veto on certain key 
decisions. And the administration has been strongly supportive 
of looking at the share structure of the IMF to ensure that the 
body maintains its legitimacy by giving increasing voice to 
emerging and developing countries. Clearly that review of the 
shareholding is something that needs to be done and that is 
underway. We do not believe that that calls into question the 
U.S. veto.
    And as I had mentioned earlier, with respect to the 
presidency of the institutions, we believe that the United 
States benefits from having strong leadership, having provided 
strong American leadership at the World Bank and that the World 
Bank itself benefits from it. Discussions on these topics would 
have to occur at the highest political levels and in the 
context of looking at the leadership structure across the IFIs.
    Senator Lugar. So it would be, as you say, a question that 
would be answered through deliberation at the highest 
leadership levels as opposed to simply crafting a formula 
consisting of each nation's shareholding percentage, capital 
contributions, and other figures?
    Ms. Lago. Certainly with respect to the shareholding 
percentage in each of the institutions, it is linked to the 
capital contributions, and in agreeing the capital 
contributions, we certainly had a keen eye to maintaining our 
leadership position within these institutions. We know that our 
ability to lead, to influence, is because of the quality of the 
team that we have, but it is also because of the influence, 
that we have with our shareholding.
    Senator Lugar. Well, it is sort of theme and variation that 
we have discussed with the Executive Director Chin in the Asian 
Development Bank. Our current shareholding percentage in the 
ADB is roughly equivalent with that of the Japanese leadership. 
If we were to fall well behind, then there would be some 
obvious ramifications and questions about leadership.
    Let me just ask, Secretary Lago, one further question, 
before agreeing to providing the development banks with more 
funds: Has the international community commissioned a review of 
potential cost savings at each development bank? If not, is 
such a study forthcoming?
    Ms. Lago. Thank you, Ranking Member, for raising the 
question of the fiscal discipline within the institutions. That 
was a key factor, not just the effectiveness of their loans for 
the development impact in country, but also how well are they 
marshaling their resources.
    I will point to two specific examples. At the World Bank, 
the Bank, as was noted, markedly increased its lending into the 
crisis and without increasing its internal resources. There has 
not been an increase in its budget since 2006. And we, through 
the GCIs, were able to put in place an internal check and 
balance. Part of the fiscal regime within each of the 
institutions requires a transfer of funds from the hard-loan 
windows to the concessional windows. This is particularly 
evident if one looks at the IDB. And so since the loan pricing 
structure is borne by member countries, there is an internal 
pressure to keep costs under control, and we think that that is 
an effective mechanism since it is the borrowers who are paying 
for the costs of the institution. As we looked at each of the 
institutions, we sought to make sure that the fees that are 
charged to the borrowers covered the administrative costs at 
the institutions. And so that is the internal mechanism that 
provides this calibration, that provides this cost control that 
you were mentioning.
    Senator Lugar. Let me ask you, Executive Director Solomon, 
one additional question. A few years ago, I joined then-Senator 
Biden, Senator Leahy, Senator Bayh, and others in asking the 
Government Accountability Office to conduct a review of the 
World Bank regarding its ability to fight corruption and to 
conduct environmental assessments. But, at that time, the GAO 
did not receive clearance from the World Bank to commence its 
work. What is delaying that review and what could be done to 
ensure that the GAO has the ability to carry out its work in 
this endeavor?
    Mr. Solomon. Thank you.
    The GAO, I think, provides an invaluable service to the 
Congress and the U.S. taxpayer. I am a strong believer in the 
work that the GAO does holding us all accountable for these 
taxpayer resources. I think the GAO has been quite involved in 
a number of studies and audits and evaluations of bank work 
through the years. However, the particular studies you refer to 
were before my time on the board.
    In discussions with staff, it is my understanding there was 
a fair amount of discussion between the GAO, the World Bank, 
and the multilateral audit advisory groups which helped to 
define the scope of audits by supreme audit agencies like the 
GAO in this country. And you know, reams of documents went back 
and forth, lots of discussions. In the final analysis, at least 
for the environmental assessments one, the GAO decided it was 
going to allocate its resources elsewhere. But I will continue 
to look at this issue because I think the GAO provides an 
important function.
    Senator Lugar. I would appreciate that.
    This is a general question that any one of the three of you 
might want to comment on. One of the effects of our hearings on 
these issues, which began 7 years ago, is that many times the 
press in various nations that were being discussed in the 
hearings learned about loans for the first time. So this 
commenced a discussion within the political systems of various 
countries. In some cases, members of their respective 
Parliaments raised questions about the loans, complaining they 
had not achieved their stated effects. So this led to a certain 
degree of commotion initially in the world community.
    I think this has calmed down over the years. It is hard for 
such trends to sustain themselves, but at the same time, the 
regional development banks, the World Bank, and others have 
been more transparent.
    Do you have any general thoughts about this? It goes well 
beyond promoting viable, responsible international financial 
institutions as a component of our broader diplomacy. Sometimes 
controversies of this variety lead to disruptions at higher 
levels, as leaders of various countries who either feel 
embarrassed or put upon by these situations are going to 
respond to our Secretary of State or others.
    Ms. Lago. Thank you for pointing out the importance, the 
beneficial aspects of transparency. Because the reform agendas 
at the MDBs were so broad, we chose to focus on a couple of key 
areas. Transparency is one of them. It so underpins our 
American way of doing business, and this is one of the values 
that we are able to export, and I believe beneficially, through 
the MDBs.
    One need only look at the difference in the Web site of the 
African Development Bank. It has undertaken a sea change, and 
as people increasingly are using the Web as the source of 
information, having a robust Web site has made a significant 
difference.
    In particular, we know that civil society and 
nongovernmental organizations within the countries look for 
information about the activities of the banks, as do the 
governments, as you have noted. We are comfortable with the 
fact that every decision in the MDBs is posted. That is 
absolutely essential, and through ongoing reviews that are 
taking place in a number of the institutions, we are looking 
always to drive more transparency. We believe that putting 
information out about the projects is useful to avoid 
surprises, but also to spread the development impact.
    Senator Lugar. Yes, sir.
    Mr. Solomon. Thank you. If I could make a few additions to 
the comments made.
    One, I think that Secretary Lago talked about the important 
role that CSOs can play in helping to improve accountability 
for what the institutions do. And I think we work closely with 
the CSO community, the civil society organizations, NGOs around 
the world, who can provide an important link to some of the 
rural areas and other areas.
    And I think in terms of the Bank's efforts on transparency, 
there are a lot of efforts. And your team has been looking at 
the role of technology in these institutions. There are a lot 
of initiatives underway now to try to find out how do we use 
new technologies to get information both out to the communities 
better but also feedback from those communities into the 
development process, so for example, piloting things like using 
cell phone text messages to get feedback from farmers about 
agricultural assistance and things like that.
    Senator Lugar. Do you have a thought?
    Mr. Chin. Yes. I know you are not looking for praise, but I 
think our engagement with the MDBs is stronger because of these 
hearings. I am only in the United States every 6 months or so, 
but I know with strong Treasury support, I have regularly 
updated and engaged with this committee through its staff 
members. And the ideas that we have pushed in terms of 
strengthening risk management or anticorruption in some ways 
have been stronger because I can say it is not just Treasury 
and the United States ED that have raised these things, but it 
is based on consultations with all branches or at least another 
branch of Government.
    I would also echo Assistant Secretary Lago and Executive 
Director Solomon with regard to the importance of civil society 
and also to media. I know under my watch and with strong 
Treasury support, I have engaged regularly with nongovernmental 
organizations, with civil society. Some of them are even in 
this room behind me like the Bank Information Center. They 
really do provide a third party check, and I think that is 
critical. I think that makes these institutions stronger.
    Assistant Secretary Lago referenced some of the reviews 
taking place. At the Asian Development Bank, two critical 
reviews address this issue, the public communications policy 
review and the accountability mechanisms review. And I think 
the Bank will be stronger thanks to strong Treasury pushes but 
also the input of civil society.
    And to bring it all back to why we are here today, I think 
this Bank will certainly be much stronger with full U.S. 
support for a general capital increase because all the more 
reason they need to listen to our constant pushing for them to 
be stronger and to be better.
    Thank you.
    Senator Lugar. Well, we thank you for not reserving your 
compliments to our committee. I would just say that the 
compliments really are deserved by the staff of our committee 
on both sides of the aisle, especially with respect to the 
continuity of interest they have displayed on these issues over 
several years of time.
    I would add just one thought which really is beyond the 
scope of our hearing, but I appreciate your interest as 
generalists. As a part of a very important element of our 
diplomacy with the Government of Pakistan, the Congress 
initiated the so-called Kerry-Lugar-Berman strategy for 
Pakistan, which provides for as much as $1.5 billion of 
expenditure over a 5-year period of time. Now, this was 
initially wildly heralded in Pakistan largely because it 
constituted a 5-year commitment, but it was sometimes 
criticized in Pakistan because of the suspicion that there 
might be some accountability for the spending of this money.
    Now, the difficulties of all of this I think are now well 
known, and we have hearings on this issue from time to time. It 
is not easy to spend money in Pakistan or in any country even 
if you have the best intentions, while wishing to maintain some 
accountability to American taxpayers for the expenditures that 
are occurring. And the question is how well do the institutions 
function, and not just the banking and financial institutions 
in this case, but if money were to go to strengthening 
educational institutions, infrastructural improvements, the 
building of a legal system, or a good number of other 
objectives that would benefit the citizens of Pakistan, are the 
central and regional governments of that country capable of 
envisioning the programs, administering them, and accounting 
for the money?
    Now, the returns are fairly sketchy at this point as to 
what has been allocated, although we know because of the 
devastating floods that tens of millions of dollars may very 
well be allocated immediately, even if that was not one of the 
original intents. However, because these floods have caused a 
serious humanitarian emergency in Pakistan, the use of Kerry-
Lugar-Berman funds for relief purposes is certainly valid.
    But I just ask from your experience, as we get into the 
allocation of funds, what advice and counsel do you have, and 
is there any intersection regarding the international banks and 
this money?
    Secretary Lago.
    Ms. Lago. Thank you. You raise one of the most challenging 
questions that any of us involved in development face. We know 
that in many of the countries where the need is greatest, the 
challenge is also greatest, with corruption being an ever-
present challenge. And I think that we have to go in with our 
eyes open and with the recognition of what we can do, which is 
making sure that the institutions themselves have controls over 
how they spend money, but then also being very wise on a 
project-by-project basis on how we invest in the institutions 
within the country. Capacity-building is a key facet. How we, 
the United States, how we, the MDBs, in which we exercise a 
large role, operate within country, the expectations that we 
set, and also the investments that we are willing to make in 
government ministries to build the capacity are the seeds that 
are there. But it is not easy and we do have to confront or be 
realistic about the starting point and measure the progress and 
be realistic about the rate of progress.
    Senator Lugar. I thank you.
    Do either of you have comments?
    Executive Director Solomon.
    Mr. Solomon. I will just add one point to the incredibly 
important capacity-building point that has been made. I think 
many donors like to use the World Bank for its strong fiduciary 
standards and they create trust funds at the Bank because the 
Bank has demonstrated a comparative advantage in actually 
managing donor resources. It is sometimes criticized for being 
slow in that regard because it does try to have very stringent 
procurement rules and very stringent accountability in setting 
up separate accounts and doing things in a way that increase 
donor oversight and donor confidence in the institution.
    On top of that, the Bank also has a strong integrity unit 
within itself that seeks to root out fraud and corruption in 
Bank projects, and if there is a firm that has defrauded the 
institution or has had illegal practices, they will find 
sanctions against that vendor and then in some cases bar that 
vendor from working with the Bank. I think that creates again a 
deterrent from fraudulent activities but also strengthens the 
confidence donors have in the Bank as a fiduciary agent.
    Senator Lugar. Director Chin.
    Mr. Chin. Yes, Ranking Member. I would just echo my 
colleagues here. One reason that I think the borrowing 
countries want to work with the Asian Development Bank--these 
are apolitical institutions, and sometimes it is easier for 
them to hear the criticisms from an apolitical institution 
because they themselves know they need to move forward.
    With specific reference to Pakistan, I think the 
reprogramming of some $2 billion in assistance to Pakistan 
actually provides an opportunity to push this issue even 
further forward, of how we are particularly watchful of the 
money that is going to a country that has really been 
devastated by these floods. And so as in 5 years ago when the 
terrible tsunami hit Acce in Indonesia, the donor community in 
their response helped push some things forward in Acce 
including strengthening governance, it is my hope that with 
strong United States support for these institutions, we will 
also see that in Pakistan, that this flood will also generate 
some changes that in the long run will help all assistance be 
better and more effective.
    Senator Lugar. Well, I thank you on behalf of our chairman 
and the committee for your testimony, for your carefully 
prepared statements, as well as the statements you have 
delivered here and your responses to our questions.
    As the chairman indicated, we will leave the record open 
for other members as they survey the dialogue we have had. We 
would appreciate your responses.
    But thank you again for coming, and the hearing is 
adjourned.
    [Whereupon, at 11:40 a.m., the hearing was adjourned.]
                              ----------                              


              Additional Material Submitted for the Record


          Attachment Submitted With the Prepared Statement of
                    Assistant Secretary Marisa Lago

               appendix 1. details regarding asdb reforms
    The Treasury Department and the Office of the United States 
Executive Director will carefully monitor the status of implementation 
of the following reform commitments, which the AsDB is undertaking in 
connection with the 2009 capital increase agreement.

   Professionalize Human Resources. The AsDB committed to 
        develop a time-bound human resources action plan with input 
        from an external consultant in order to professionalize human 
        resources management. This plan is currently being implemented.
   Create a Human Resources Committee of the Board. The AsDB 
        has established this Board Committee, which is helping to 
        increase transparency of human resources decision making, and 
        improve oversight.
   Updated Safeguards Policy. The AsDB Board of Directors 
        approved an updated safeguard policy statement in July 2009, 
        with U.S. support. The update included a number of important 
        improvements, including greater clarity with respect to 
        borrower/client responsibilities, clearly identified 
        principles, strengthened safeguard implementation oversight, 
        improvements in consultation and participation, greater clarity 
        in the safeguards requirements for different lending modalities 
        such as framework approaches and financial intermediaries and, 
        for the first time, a specific provision on greenhouse gases.
   Risk Management. The AsDB upgraded the risk management 
        office and incorporated its functions into more AsDB 
        operations. In addition, the AsDB has significantly upgraded 
        its technical capacity through the provision of additional 
        resources and hiring more qualified personnel. In 2010, the 
        AsDB is strengthening staffing for private sector operations, 
        public-private partnerships, and credit risk management, all of 
        which have been major priorities in our engagement with the 
        Bank.
   Separate the Integrity Division from the Auditor General's 
        Office. This separation has been completed, and is helping to 
        enhance the visibility and functioning of both the internal 
        audit and the integrity (investigations) offices, and align the 
        Bank with best practices. Of the new professional staff in 
        2010, two positions will strengthen the Anti-Corruption and 
        Integrity Office and one will strengthen the Office of the 
        Auditor General's internal audit function.
   Further dissemination of the AsDB sanctions list. Currently, 
        all Board members have access to the AsDB's complete list of 
        sanctioned firms and individuals. Although the list is not 
        posted on the AsDB Web site, it is available to all AsDB staff, 
        other MDBs, and bilateral agencies. We will continue to press 
        the AsDB to make its list publicly available. The AsDB joined 
        other MDBs in signing a cross-debarment agreement in April 
        2010.
   Formalize principles for selecting the external auditor. 
        This is ongoing. We will continue to work with other Board 
        members on the audit committee and the Board of Directors to 
        ensure the highest standards are adopted. We expect to complete 
        this before the next selection of the external auditor in 2012.
   Establish a revised Whistleblower policy. The AsDB revised 
        its policy in December 2009, which now generally reflects the 
        best practices of other MDBs, the U.N. and other international 
        organizations. The revision consolidates and extends AsDB's 
        existing protections, which were previously located in several 
        documents. It also improves the protections available to staff 
        (as well as the limited protections available to external 
        parties who report information about integrity violations and 
        misconduct).
   Increasing Resources for the Poorest. The AsDB committed to 
        increase net income transfers to the Asian Development Fund 
        (AsDF) from $40 million to $120 million. This occurred in 2009 
        and again in 2010. This commitment makes the AsDB the second 
        largest contributor to the AsDF10 replenishment, behind Japan.
   Broaden the use of fee based services. The AsDB is 
        developing pilot programs for fee-based services to its more 
        advanced developing member countries. The AsDB has had little 
        interest to date from its developing member countries. We 
        expect that this is partly attributable to the financial crisis 
        and its pressure on the fiscal balances of countries in the 
        region, as well as a need for the Bank to refine its approach.
   Reshape Lending to China. The AsDB expects that China will 
        eventually decrease its borrowing and become primarily a 
        recipient of ``development innovations, knowledge, managerial 
        expertise, and international standard and practices and 
        technology." In the medium term, lending to China will almost 
        entirely be directed towards the poorer inland provinces with a 
        specific focus on energy efficiency and environmental 
        sustainability. For example, in 2007 to 2009, 90 percent of 
        AsDB lending to China was directed towards the inland 
        provinces, and 50 percent of lending supported agriculture, 
        water, and energy projects.

    While we recognize that the AsDB has made significant progress in 
recent years, especially on agreed GCI related reforms, we are 
continuing to work on the following priority issues.
    1. One relates to accountability in the institution, particularly 
of managers. We are addressing this through improvements in human 
resources management, and in managing for development results.
    2. A second area requiring improvement is gender, as there are few 
women in senior management. We also want gender equity throughout the 
institution to be improved, in addition to better mainstreaming of 
gender in AsDB projects.
    3. The AsDB can more fully publicize the names of firms and 
individuals that have been debarred from future AsDB procurement work. 
Although we have been successful in improving the dissemination of the 
AsDB's list, continued U.S. engagement is necessary to ensure progress 
in improved transparency.
    4. The AsDB should update consistent with best practices its 
Accountability Mechanism and its Public Communications Policy. The Bank 
is conducting public consultations on each this year, ahead of a 
decision in early 2011.
    5. The separation of the Integrity Division from the Auditor 
General's Office is welcome. However, the AsDB should further 
strengthen both offices through the provision of additional staffing.
    6. Finally, we are closely monitoring actions that the AsDB is 
taking following a recent fraud case in the Bank's information 
technology department; an external review of governance, with a 
specific focus on information technology, is expected to be completed 
by end-September of this year.
   appendix 2. improvements in the mdb's anti-corruption efforts and 
                              transparency
    Strengthening accountability and improving effectiveness of the 
MDBs is a top Treasury priority. We have championed efforts to fight 
corruption and increase transparency on three levels--within each 
institution, through MDB-funded projects and country programs, and in 
the MDB system as a whole.

   At the institutional level, Treasury advocates for strong 
        internal governance mechanisms, such as ensuring functional 
        independence of internal auditors and effective Board oversight 
        of the external audit function, establishing and strengthening 
        integrity and investigative mechanisms, designing effective 
        whistle-blower protection mechanisms, and setting new standards 
        for information disclosure policies.
   At the country level, Treasury has encouraged the MDBs to 
        provide extensive support for governance reforms in borrowing 
        member countries through loans and grants for capacity building 
        in key areas such as public financial management, judicial 
        reform, and efforts to fight corruption.
   In the system as a whole, we have supported the 
        establishment of IFI working groups or task forces in a number 
        of areas (such as procurement, public financial management and 
        internal audit) to improve coordination, harmonize standards, 
        and measure performance all intended to increase aid 
        effectiveness.

    Treasury shares the concerns and commitment of Congress to improve 
the accountability and transparency of the multilateral development 
banks. Notable progress has been made since 2003, and achievements on 
the three levels (institutional, country, and system-wide) include:
1. Institutional Level
    All of the MDBs have established anti-corruption/integrity 
investigative units, publish annual reports of the results of the 
investigations, and make the reports publicly available on their Web 
sites. All MDBs have whistle-blower protection policies in place.

   Treasury supported external reviews led by former U.S. 
        Federal Reserve Chairman Paul Volcker for the World Bank in 
        September 2007 and former Attorney General Dick Thornburgh for 
        the IDB in 2008. These reviews have had far reaching 
        consequences.
   The World Bank has implemented all 18 recommendations of the 
        Volcker Report to strengthen its Department of Institutional 
        Integrity (INT), which investigates fraud and corruption in 
        Bank programs. The key recommendations were raising the status 
        of the Integrity Unit to the Vice President level, providing 
        sufficient budget and staff to get the work done more 
        efficiently, and improving disclosure of INT reports making 
        results of investigations publicly available. Treasury has 
        consistently pushed the Bank to provide adequate resources for 
        offices responsible for upholding high fiduciary standards in 
        Bank lending and addressing potential corruption in Bank-
        financed projects, including Procurement Policy and Services, 
        Institutional Integrity, and Internal Audit. The Bank has also 
        worked to complete investigations in the 12-18 month timeframe 
        recommended by the Volcker Panel. As a result, 82 of the 138 
        cases opened in WBFY 2009 were also closed within the same 
        fiscal year. In WBFY 2010, INT closed 238 cases, which is a 56 
        percent increase over the previous fiscal year.
   The IDB is implementing the recommendations of the 2008 
        Thornburgh Report to improve its overall anti-corruption 
        framework. Key changes include increasing the status of the 
        Office of Institutional Integrity by making it an independent 
        unit within the Bank's basic structure, establishing an Anti-
        Corruption Policy Committee, creating a new Sanctions Committee 
        (four of whose seven members will be from outside the IDB), and 
        increasing protection for whistleblowers.
   At the AfDB, the Integrity Function began working in 2006. 
        Initially created to be housed under the Auditor General, the 
        office now reports directly to the President. It is both 
        reactive to and proactive in preventing corruption and fraud. 
        The AfDB also has a Whistle Blower Policy and a corruption/
        fraud hotline.
   At the AsDB, the separation the Integrity Division from the 
        Auditor General's Office was a key deliverable for the United 
        States in the GCI-V negotiations. This separation has been 
        completed. The purpose of this reform was to enhance the 
        function of both offices, and align the institution with best 
        practices. Of the new professional staff in 2010, two positions 
        will strengthen the Anti-Corruption and Integrity Office and 
        one will strengthen the Office of the Auditor General's 
        internal audit function. Our view is that the AsDB can further 
        strengthen both offices through additional staffing and we will 
        continue to press them to do so. Furthermore, we will press the 
        AsDB to improve accountability in the institution.
   The EBRD's Chief Compliance Office (CCO) has been in place 
        since 1999. As of January 2008, the EBRD requires automatic 
        referral of any potential investments that involve Politically 
        Exposed Persons and High Risk Sectors (property, natural 
        resources) to the Chief Compliance Officer. The CCO reports 
        functionally and administratively to the President, and has 
        full and free access to the Chair of the Audit Committee. The 
        EBRD's Integrity Risk Policy and the Compliance Office's Terms 
        of Reference were updated in April 2009.

    All MDBs have functionally independent internal audit departments. 
The internal audit departments in all of the Banks conduct regular 
audits of internal management controls and procedures.

   Most recently in 2010, the IDB revised the terms of 
        reference for the Audit Committee to conform to 
        internationally-recognized principles. These changes enhanced 
        the functional independence of the internal audit department, 
        by having this department report both to the President and to 
        the Audit Committee of the Board. The IDB also updated and 
        improved the charter of the Auditor General.
   At EBRD, the Internal Audit Department (IAD) terms of 
        reference were updated in April 2008. The Terms of Reference 
        include specific provisions designed to protect the 
        independence of all IAD staff reporting to the Head of Internal 
        Audit, who reports functionally and administratively to the 
        President and has full and free access to the Chair of the 
        Audit Committee.
   At the AfDB, the Auditor General reports to the President 
        and to the Audit Committee and implements a robust, risk-based 
        annual work plan of audits.

    Treasury has also pressed for strong Board oversight of the 
external audit function. We have urged the MDBs to put in place 
requirements regarding the appointment and governance of external 
auditors that will conform with international good practices.

   In 2003, the World Bank Group adopted best-practice 
        ``Principles'' for the appointment of the external auditor. The 
        Principles include: a tenure of 5 plus 5 years with the ability 
        of the incumbent to re-bid after the first 5 years; mandatory 
        rotation of the audit firm after 10 years; senior partner 
        rotation every 5 years; evaluation of the external auditors' 
        performance after 2.5 years; exclusion from pure consulting 
        services; and only very limited 'audit-related' consulting 
        services to be approved on a case-by-case basis by the 
        Executive Board upon the recommendation of the Board's Audit 
        Committee.
   Since 2003, the IDB and AfDB have adopted, either formally 
        or in practice, similar requirements for the hiring of their 
        external auditors.

    One of the core elements in the U.S. strategy to increase MDB 
accountability is to improve disclosure of information on MDB 
operations and activities.

   A signature achievement in 2009 was the revision of the 
        World Bank's information disclosure policy, which called for a 
        major shift in approach under which disclosure is the norm, not 
        the exception. In addition, the Bank has created a formal, 
        independent appeals process, through which members of the 
        public can seek disclosure if they believe it was wrongfully 
        denied, and will release significant policy documents and 
        certain project documents to the public at the same time that 
        they are released to the Board. The process leading up to 
        adoption of the new information policy was extensive, involving 
        consultations in 33 countries and through the Bank's external 
        Web site. This allowed the Bank to consider the views of the 
        public, including civil society organizations, 
        parliamentarians, the private sector and other international 
        organizations.
   In 2010, the IDB agreed to a fundamental change in its 
        access to information policy. The new disclosure policy is 
        consistent with the highest standards applied by the revised 
        World Bank policy, including the replacement of a ``positive 
        list'' of documents that could be disclosed with a narrow 
        ``negative list'' of reasons why a document could be withheld, 
        a presumption of disclosure, release of Board/Committee 
        minutes, an independent appeals mechanism, voluntary disclosure 
        of Executive Directors' statements, and disclosure of project-
        level results.
   The AsDB's Public Communications Policy is currently under 
        review and is open for public comment on the Bank's Web site. 
        Furthermore, the AsDB just completed an outreach tour, which 
        included Washington, DC.
   The AfDB is reviewing its 2005 Information Disclosure policy 
        this year. In keeping with best practice, the new policy will 
        have an explicit presumption of disclosure, and will include 
        the disclosure of Board and Committee minutes. The Bank 
        continues to modernize and improve its Web site, where most of 
        its documents can now be found.
   The IFC is also reviewing its Information Disclosure Policy 
        this year.
   For its own account, the Treasury Department posts U.S. 
        votes on all MDB projects on our Web site. Treasury posts U.S. 
        positions on significant operational policies and on projects 
        that have a significant impact on the environment, as well as 
        reports to Congress, on topics such as extractive industries.

    All of the MDBs now have put in place project and institutional-
level results frameworks. The United States has used negotiations for 
replenishments and capital increases to urge that the results 
frameworks are more extensive in scope, robust in measurement, and 
transparent in releasing results.

   The AsDB management developed a robust AsDF results 
        framework to guide the implementation of the AsDF-10 
        replenishment. Further, the Bank subsequently expanded the 
        framework to an AsDB-wide results framework to be updated 
        annually, called the Development Effectiveness Review (DER). 
        The results framework covers key benchmarks and indicators on 
        the country, regional, and project levels, as well as on the 
        institution's operational effectiveness. The DER feeds directly 
        into the development of the AsDB work plan and budget. This is 
        a major accomplishment for the AsDB.
   One of the most significant outcomes of the IDB GCI process 
        is the requirement that the IDB now publicly disclose, ex-ante, 
        project-level evaluability analyses, compliance with 
        institutional priorities, and economic rate-of-return 
        calculations for projects approved that year. The IDB must also 
        publicly disclose, ex-post, impact evaluations for any projects 
        evaluated in that year, including private sector projects.
   In the negotiations for the AfDB GCI, Bank Management agreed 
        to expand its Results Framework into a Bank-wide effort, with 
        core sector indicators, and results reporting for middle income 
        and private sector lending (concessional financing for low-
        income has already been covered). In addition, Management will 
        implement cross-disciplinary ``readiness reviews'' for country 
        strategy papers. (``Readiness reviews'' are already being 
        implemented to improve the quality of project design.) A major 
        upgrade of the Bank's project supervision is aimed at making 
        supervision more risk-based and results-oriented.
   The World Bank's IDA16 Results Measurement Framework will 
        expand the use of common ``core sector indicators,'' which can 
        be measured across countries. The United States is also 
        pressing for IDA to more effectively incorporate project impact 
        evaluation to improve accountability and inform the deployment 
        of limited development resources.
   The EBRD has a robust results framework. All projects 
        considered by the EBRD are assigned an ex ante ``transition 
        impact potential'' rating and a ``risk to transition impact'' 
        rating by the Office of the Chief Economist. In its Annual 
        Report, the EBRD reports on the share of new projects approved 
        that year that were given a ``good'' or ``excellent'' 
        transition impact rating. For 2009, the level was 89 percent. 
        In addition, the EBRD maintains a Transition Impact Monitoring 
        System that tracks the progress of projects through their life 
        cycle, assessing whether transition impact benchmarks have been 
        met and adjusting project ratings accordingly.

    All of the MDBs have functionally independent evaluation units that 
are essential to make sure that there is credible, impartial assessment 
and reporting on their work.
2. Country Level
    All of the MDBs recognize the risk that corruption poses to the 
fulfillment of their mandates to promote economic growth and poverty 
reduction. They each have developed strategies to combat corruption 
both in their institutions and on the projects and programs that they 
finance.

   In 2009, the IDB approved a new action plan for Bank support 
        to its member countries in their efforts to fight corruption 
        and foster transparency. The plan calls for the Bank to support 
        countries' implementation of international conventions against 
        corruption, and encourages the involvement of the private 
        sector and civil society in institutional strengthening.
   The AfDB's Governance Strategic Directions and Action Plan 
        guides AfDB work at the country, sector, and regional levels. 
        The Bank is helping strengthen Africa's economic and financial 
        governance structures so that public resources are managed 
        transparently and accountably. The AfDB is focusing heavily on 
        the fragile states that are coming out of conflict where 
        institutions are weak or non-existent. Given that the Bank is 
        heavily engaged in infrastructure, the Bank has focused on the 
        importance of addressing corruption and fraud in procurement 
        practices. The Bank has recently released guidelines for 
        identifying fraud in infrastructure projects. The Bank also 
        recently released its guidelines for developing projects in 
        resource-rich countries. It is working on a natural resources 
        strategy as well, another area prone to corruption and abuse.
   The World Bank's Governance and Anticorruption Strategy 
        (GAC) was endorsed by the Board in 2007. Since that time, the 
        Bank has identified 27 countries for heightened attention to 
        governance and anti-corruption, and has begun to develop 
        actionable governance indicators to better target Bank 
        assistance and monitor progress. All country assistance 
        strategies now incorporate governance and anticorruption 
        measures in their design. Since the adoption of the GAC 
        strategy, Treasury has advocated for mainstreaming 
        implementation of this strategy throughout the Bank's work. In 
        regular and frequent engagement with Board members, senior 
        management and Bank staff, Treasury has emphasized the need to 
        include GAC elements in country strategies, projects, loans and 
        the Bank's operating procedures. For example, after pressure 
        from the United States, the Bank committed to disclose to the 
        Board any ongoing investigations on previous projects that 
        might be relevant to discussion of present projects.
   Treasury has encouraged the MDBs to support the principles 
        of the Extractive Industries Transparency Initiative (EITI) in 
        their policy, operational and diagnostic work. All of the MDBs 
        have now endorsed EITI and are increasingly integrating EITI 
        principles into their operations. This has helped 27 candidate 
        countries--17 of which are in sub-Saharan Africa--comply with 
        the EITI principles. Treasury consistently stresses the 
        importance of resource revenue transparency in Executive Board 
        discussions and our loan review analysts scrutinize MDB 
        investment projects, country and sector strategy papers, and 
        technical assistance for compliance with legislation on the 
        extraction of natural resources. Transparent and accountable 
        management of extractive resources is a critical issue, 
        particularly in Africa, and Treasury will continue to press for 
        effective MDB engagement.

        The AfDB has supported the efforts of borrowing member 
            countries, such as Liberia, to adhere to the disclosure 
            standards of EITI through technical assistance, policy 
            advice, and regional training.
        Following strong U.S. leadership during negotiation of 
            IDA14 (covering the period 2005 through 2008), the World 
            Bank agreed to require recipient governments to have in 
            place, or to be in the process of establishing, functioning 
            systems for accounting for revenues and their use.

   In 2007, the World Bank, in coordination with the United 
        Nations Office on Drugs and Crime, established the Stolen Asset 
        Recovery Program to work with developing countries and 
        financial centers to fight money laundering, and help countries 
        identify and recover stolen assets. The Bank is working with 
        seven countries that have requested assistance, and other 
        countries have expressed interest in receiving support.
   The EBRD and IFC advise companies and banks on ways to 
        strengthen their corporate governance practices, including by 
        improving Board arrangements, strengthening shareholder rights, 
        and putting in place better internal controls and reporting 
        practices.
3. System-wide
    The MDBs have established an Investigators and Integrity Forum to 
work toward a harmonized approach to combat corruption in the 
activities and operations of the member institutions.

   At the 2006 World Bank Annual Meeting, the heads of the MDBs 
        agreed to common definitions of fraudulent and corrupt 
        practices. They also agreed to a set of principles and 
        guidelines for investigations conducted by their respective 
        integrity units.
   In April 2010, heads of the MDBs signed an historic 
        agreement on cross-debarment that adds a strong MDB 
        accountability tool to deter fraud and corruption. Firms or 
        individuals that have been sanctioned for fraud and corruption 
        by one MDB will now be debarred by all MDBs. World Bank 
        President Bob Zoellick summed it up by saying ``With today's 
        cross-debarment agreement among development banks, a clear 
        message on anticorruption is being delivered: Steal and cheat 
        from one, get punished by all.''
   The EBRD has followed up in May 2010 with an update of its 
        policies to implement cross-debarment.
   The IFI Heads of Procurement Working Group has made 
        important contributions to harmonizing procurement rules. The 
        Group is promoting more accountable procurement processes 
        through increasing harmonization of procurement rules, 
        including the development of standard bidding documents that 
        are widely recognized as an international best practice.
   The IFIs have also established an Evaluation Cooperation 
        Group and an MDB Common Performance Assessment System (COMPAS) 
        group.
                   appendix 3: u.s. ownership in mdbs

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         U.S. Share of
                                                                     Current capital      Proposed      U.S. Share of     new paid-in     U.S. Ownership
                            Institution                                  base ($        increase  ($     increase  ($     capital  ($       Share (%)
                                                                         billion)         billion)        billions)        millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
IBRD (GCI).........................................................             190               58              9.8              587             16.8
IBRD (SCI).........................................................             190               28              4.7              279             16.8
AfDB...............................................................              33               66              4.4              234              6.6
AsDB...............................................................              55              110             15.7              107             15.6
EBRD...............................................................              30               15              1.3                0             10.0
IDB................................................................             101               70             21.0              515             30.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S. ownership share will remain unchanged by the capital increase process, provided payment requests are fully funded. Should U.S. payments lag those
  of other shareholders, our ownership share would decline. If U.S. ownership fell below 15% of IBRD votes, the United States would lose its ability to
  veto modifications to the Articles of Agreement. Failure to fully fund a U.S. contribution to the IDB will limit the ability of other shareholders to
  contribute, and limit the impact of the GCI, as the United States cannot fall below 30% of total voting power under the IDB's Articles of Agreement.

                                 ______
                                 

Prepared Statement of Walter Jones, United States Executive Director of 
                      the African Development Bank

    Chairman Kerry, Ranking Member Lugar, and members of the committee, 
thank you for this opportunity to submit a statement on the record 
regarding the United States engagement in and support of the African 
Development Bank Group (``AfDB'' or ``the Bank'').
    The African Development Bank is widely recognized as one of the 
world's leading institutions supporting economic growth and development 
in Africa. Through its operations, the AfDB provides loans, grants, 
budget support as well as a wealth of economic and market research 
data. Today, particularly as a result of the ongoing global financial 
crisis, the Bank has emerged as a key player in stabilizing and 
shielding African economies from global volatility. By providing record 
amounts of credit, budget support, trade finance and capacity-building 
assistance, particularly during the height of the global crisis, the 
Bank cemented its role as an indispensable tool to promote growth and 
expansion in Africa.
               supporting economic growth and the poorest
    In response to the G20's call on the multilateral development banks 
to assist developing countries in countering the effects of the 
financial crisis, the AfDB increased lending in 2009 to almost $9 
billion from the AfDB and nearly $4 billion from the concessional 
African Development Fund. This compares to precrisis annual lending of 
$1.5-$2.5 billion, placing considerable strain on the AfDB's balance 
sheet. If not for provision of temporary callable capital by Canada and 
Korea, the Bank would have breached its statutory debt limit in 2010. 
The increase in lending to the private sector, especially in low-income 
countries, as well as renewed demand for public sector lending from 
middle-income countries would have exhausted the Bank's available risk 
capital by 2013.
    Thus, a significant general capital increase (GCI) of 200 percent, 
with 6 percent paid in, is necessary to support the Bank's continued 
role in promoting African growth and poverty reduction. The GCI was 
approved by the Bank's Board of Governors at the May 2010 Annual 
Meeting in Abjidjan, Cote d'Ivoire. Once implemented, the 200 percent 
GCI will provide for a sustainable lending level of over $5 billion a 
year, while without a GCI, sustainable lending would drop below 
precrisis levels to less than $2 billion. Similarly, the African 
Development Fund will have fully utilized the record level of resources 
from its 11th replenishment by end-2010. Strong support for the 
ambitious United States AfDF-12 replenishment pledge will also be 
required to meet the needs of Africa's poorest countries.
    Recent improvements in the Bank's operations have led to a greater 
capacity to deliver meaningful support to its constituent countries and 
ensure effective use of shareholders' capital and donor contributions. 
Such improvements would not have been possible without steadfast U.S. 
support and without a senior management team led by President Donald 
Kaberuka, who himself sought to bring about positive changes and 
operational efficiencies. Under current leadership, the Bank has 
implemented far-reaching reforms and has begun to institute a culture 
of results and accountability. Continued Bank leadership and success is 
not only important for Africa, but it is likewise of critical 
importance for the United States and for our economy.
    A few statistics are useful to underscore this conclusion. For 
example, in a May 2010 report, the U.S. Department of Agriculture noted 
that over the past 10 years, U.S. agricultural exports to sub-Saharan 
Africa had grown ``at a faster pace than exports to the top five U.S. 
export markets combined.'' The Department of Agriculture report goes on 
to state that growth in commercial shipments alone--excluding food aid 
and focusing solely on agriculture exports generated exclusively 
through actual commercial sales--increased by an astounding 326 
percent. The report also states that those commercial agriculture 
shipments to Africa exceeded U.S. shipments to all of South Asia, whose 
population is more than twice that of sub-Saharan Africa. These figures 
illustrate the tremendous growth in commercial ties between the United 
States and Africa, particularly in agriculture, which of course, lead 
to job creation right here at home. Furthermore, these figures 
highlight the importance of a strong, vibrant Africa for the U.S. 
economy.
    The rise in exports and in overall economic ties between the United 
States and Africa is largely a result of Africa's impressive economic 
growth over the past few years. While many world economies contracted 
in 2009, growth in sub-Saharan Africa's low-income countries averaged 
more than 4 percent. This growth has led to an unprecedented expansion 
of an African consumer class that has fueled domestic consumption, 
which, in turn, has generated an increase in imports. As African 
economies expand, as their populations gain more access to credit and 
as the African middle class grows, so too will demand for U.S. exports, 
demand for U.S. direct investment, and the need for stronger overall 
economic ties between the two. Clearly, there is a link between 
Africa's growth, development of an African consumer class, and in the 
associated economic benefits for the United States. Given this 
unassailably symbiotic relationship, the African Development Bank's 
role in promoting African growth and expansion is, therefore, of 
paramount interest to our country.
    By virtue of its presence on the continent, the makeup of its 
membership and the institutional expertise and knowledge base that it 
possesses, the African Development Bank is an institution whose success 
is vital to our own commercial, economic, and national security 
interests on the continent. Through its capacity-building programs, the 
Bank is helping to strengthen African governments and institutions so 
they become more accountable to their citizens and more effective in 
meeting the growing needs of their population. African Development Bank 
loans also support infrastructure projects throughout the continent 
that help bring power to areas where there was none, and water that has 
turned arid land into fertile landscapes. The Bank has become the 
leading financier in promoting regional integration in Africa.
    Roads financed by the Bank create new markets for agricultural 
products, which leads to greater income distribution, wealth 
generation, and food security, particularly in rural areas. Loans to 
local African banks have helped to expand the availability of credit to 
burgeoning private sector firms. Private equity funds, including 
several managed by U.S. fund managers, have benefited from African 
Development Bank investment, which has enabled them to provide equity 
critical to indigenous private sector growth.
       addressing national security and transnational challenges
    An area where the security of the United States is affected is in 
the Bank's programs and support for fragile states. In many cases, 
these countries have the potential to become security risks and 
unstable areas where forces contrary to United States interests can 
take hold and potentially operate with impunity. Support for fragile 
states, by strengthening governance and building government capacity 
and restoring infrastructure, is a major operational focus for the Bank 
and one where it has committed considerable human and financial 
resources. Through Bank assistance, it is hoped that rebuilding and 
strengthening those countries will allow them to become integral 
members of the world community rather than potential soft targets for 
civil unrest and instability.
    In response to transnational challenges, the Bank has increased its 
projects' emphasis on enhancing food security and mitigating and 
adapting to climate change.
                     implementing our reform agenda
    The recent increase of Bank operations has, indeed, tested the 
strength of the institution. Senior management has undertaken several 
internal assessments to determine how best to meet these new challenges 
while instituting meaningful, effective reform. Our own government has 
been a strong and vocal advocate of such reform. We leveraged the GCI 
discussions to obtain agreement from Bank management on a robust reform 
agenda, reflected in a reform matrix that Governors adopted at the 
annual meetings in May. These reforms were informed by consultations 
with Congress, and specifically from the members and staff of this 
committee. For example, the United States has pressed Bank management 
to reform its income model to assure, inter alia, that additional funds 
out of Bank net income be made available and transferred to the Bank's 
soft (concessional) loan and grant window that targets the poorest 
countries. A repricing exercise was also undertaken to assure that Bank 
lending rates at least cover operational expenses. The Bank is 
reviewing and strengthening its approach to risk management to meet the 
challenges of increased private sector lending, and the Integrity and 
Anti-Corruption unit has been given more prominence.
    The United States has likewise been insistent on deepening a 
culture of transparency and accountability at the AfDB. A review of 
disclosure policy and practice is underway, with the intention of 
moving to a policy based on best practices and a presumption of 
automatic disclosure. By publicly posting the matrix, the Bank can be 
held accountable when it fails to reach a reform milestone. Similarly, 
the United States has also insisted that the Bank publicly post on its 
Web site the names of individuals and companies debarred by other MDBs. 
This so-called ``cross debarment'' was memorialized in the Luxembourg 
Agreement, which the Bank recently signed. Although there is more 
progress to be made in this area and the United States continues to 
press Bank management to be more expeditious in identifying and posting 
such names, we are confident that the Bank will take its responsibility 
seriously.
    The United States has also been persistent in calling for the Bank 
to embrace a new culture of self-assessment and results. To this end, 
the Bank has adopted an impressive results measurement framework that 
implements a comprehensive system to assess Bank performance at key 
intervals. The new approach requires a change in mindset. Instead of a 
formerly, somewhat robotic ``programming culture'' that analyzed 
results and outputs post-facto, the new guidelines call for focusing on 
desired outcomes and ways to produce or achieve those outcomes. 
Readiness reviews are now performed on all projects to assure quality-
at-entry, and the Bank is moving to a continuous supervision process 
complemented by an automated results reporting system. This has led to 
fostering a ``culture of results'' that will allow more critical self-
assessment and enhanced delivery of products and services.
    The Bank has made noteworthy strides in other areas as well, such 
as in promoting gender equality in its projects.
    Although there is certainly much to praise, the Bank admittedly 
must continue to improve in many areas of its operations. A major 
decentralization effort is now underway. Great care needs to be taken 
so that problems within the Bank are not repeated or propagated as it 
expands its footprint across the continent. Furthermore, in undertaking 
new initiatives, the Bank must be careful to make an objective 
assessment of its own internal capabilities and available budget 
resources before announcing unrealistic timetables or goals. The 
performance-based employee evaluation system needs to be fully 
implemented, and the Bank should strive to improve its ability to 
attract, retain, and reward outstanding staff. The Bank must likewise 
improve its internal operations to assure that its employees receive 
adequate IT, telecommunications, logistical support, and training.
               a strong africa begets a stronger america
    While there remain areas where we continue to advocate for further 
progress, the strides and accomplishments achieved by the African 
Development Bank to date are far more noteworthy. Continued, active 
United States participation in the African Development Bank is an 
investment in our own country's economic growth. A strong Africa begets 
a stronger America. African markets present U.S. companies with 
attractive growth opportunities. An active United States presence in 
the Bank helps to assure that our values of transparency, good 
governance and sound environmental stewardship continue to resonate 
throughout. Through our efforts, the United States has been able to 
play a leading role in bringing about many of the key reforms noted 
herein. Continued strong U.S. support and leadership within the Bank 
help to assure that those reforms remain grafted onto the very fabric 
of the institution, and provide the impetus for even greater 
effectiveness and more meaningful contributions to Africa's 
development.
                                 ______
                                 

Prepared Statement of James L. Hudson, United States Executive Director 
        of the European Bank for Reconstruction and Development

    The European Bank for Reconstruction and Development (EBRD) invests 
in projects that foster entrepreneurship from Central Europe to Central 
Asia. By strengthening local economies, developing the private sector, 
and establishing foundations for long-term economic growth, the EBRD 
remains an important institution to help the United States stabilize 
the global economy and foster sustainable development. Additionally, 
our support of the EBRD furthers our own objectives in the region. The 
EBRD supports political stability and promotes democracy in volatile 
areas such as Ukraine, Kosovo, Georgia and the Caucasus, the Kyrgyz 
Republic and the Central Asian states that border Afghanistan. And EBRD 
support helps firewall the more fragile economies in the region from 
economic challenges, such as those recently experienced by the Eurozone 
economies.
                   critical financial crisis support
    The global financial crisis severely impacted the economies of 
Eastern Europe and the former Soviet Union. Among emerging markets, 
Eastern Europe experienced the largest reversal in economic output, 
large declines in foreign capital flows, and is recovering more slowly. 
The EBRD was critical to reducing the impact on these economies from 
the crisis as it responded with speed and vital support, increasing its 
2009 business volume by 55 percent over the previous year and assuming 
considerable risk in the process. In 2009, the EBRD outlined a bold 
operational response in Ukraine, where currency devaluation, output and 
commodity price collapses, and political turmoil threatened systemic 
collapse.
    In early 2010, as I assumed my duties at the EBRD, the institution 
was undertaking a capital resources review. Following their analysis, 
EBRD shareholders agreed on a 50-percent capital enhancement in May 
2010 based on the institution's use of resources during the crisis. The 
capital enhancement has a unique structure that was the result of 
aggressive negotiating by the United States to achieve our primary 
objectives of securing a temporary capital increase while preserving 
EBRD's core mission as a transition bank.
    The structure consists of a transfer of =1 billion ($1.5 billion 
using a conservative exchange rate) from EBRD's reserves to its 
permanent capital base and a new contribution of =9 billion ($13.5 
billion) in temporary callable capital by all shareholders on a pro 
rata basis. The U.S. is the largest single shareholder, with 10 percent 
of EBRD capital, making our contribution =900 million ($1.35 billion) 
of temporary callable capital. This contribution requires congressional 
authorization.
    Temporary callable capital is an innovative instrument. It is 
structured so that excess callable capital will be cancelled in the 
future, as long as the EBRD meets its prudential ratios. The advantages 
of this instrument are that: (a) no new paid-in capital is needed; and 
(b) the EBRD will have sufficient callable capital to increase 
investments to help crisis-affected countries in its region recover, 
while the shareholders of the Bank can manage future growth by 
cancelling excess capital.
    As a multilateral development bank whose lending is 75 percent 
oriented to the private sector and 25 percent to the state sector, EBRD 
is guided by three criteria: (1) sound banking; (2) additionality; and 
(3) transition impact. These criteria are intended to ensure that the 
EBRD makes commercially viable investments that do not compete with 
private capital markets and that develop markets by increasing private 
ownership, enhancing competition, reforming corporate governance, and 
improving regulation. By having a mechanism to cancel excess capital, 
the shareholders can keep EBRD focused on its core transition mandate 
and avoid mission creep.
    Initially, this structure was strongly opposed by some shareholders 
who preferred a traditional paid-in permanent increase. Ultimately, our 
approach prevailed because we were able to build a consensus that this 
mechanism gave EBRD sufficient resources for crisis response in the 
medium term and that it was sufficiently flexible to allow the Bank to 
respond to future changes. Critically, the U.S. was able to retain 
consensus that graduation from EBRD lending is expected for the first 
group of EU accession countries. The capital increase was underpinned 
by critical policy reforms, summarized below:
                              ebrd reforms
Sound Finances
   In March 2009, EBRD reinterpreted its gearing ratio to use 
        its existing capital base more efficiently.
   In December 2009, EBRD adopted a new Economic Capital Policy 
        to provide it with additional lending flexibility while 
        protecting its AAA status, despite its high risk, predominantly 
        private sector portfolio.
Transparency and Accountability
   Between 2008 and 2010, the EBRD revised its Enforcement 
        Policy and Procedures to be in line with Uniform Framework for 
        Preventing and Combating Fraud and Corruption and allow for 
        mutual enforcement of debarment decisions of other 
        international financial institutions.
   In March 2010, EBRD launched a new accountability mechanism, 
        the Project Complaint Mechanism, to independently assess and 
        review complaints about EBRD financed projects. The Project 
        Complaint Mechanism replaces an older accountability mechanism 
        and is designed to be more accessible to the public.
    furthering the transition mission and supporting u.s. priorities
Food Security
   The Agribusiness Strategy approved in July 2010 scales up 
        investment in primary agriculture in order to help the EBRD 
        region exploit agricultural potential and contribute to global 
        food security. Twenty percent of EBRD transactions in 2009 were 
        in the agribusiness sector.
Local Capital Market Development
   EBRD, working closely with national institutions and other 
        international financial institutions, is expanding its efforts 
        to develop local capital markets and local currency finance in 
        its region to prevent reliance on risky foreign currency 
        finance. Underdeveloped capital markets and a lack of local 
        currency lending left the EBRD region vulnerable to exchange 
        rate shocks. Addressing this weakness is a key lesson of the 
        recent crisis.
Climate Change Mitigation
   In 2009, EBRD launched the second phase of its Sustainable 
        Energy Initiative, which makes investments in energy efficiency 
        climate change mitigation and adaptation in the region--which 
        is one of the most energy intensive in the world. The 
        investments focus on the industrial, power, buildings, 
        transport and municipal sectors; renewable and biomass energy; 
        and working with local banks to promote energy efficiency in 
        the small business sector. EBRD has set a target of investments 
        resulting in 25-35 million tons of carbon dioxide reductions 
        annually.

    In conclusion, the EBRD supports key U.S. international economic 
and foreign policy objectives. The EBRD is the largest single financial 
investor in its region. Through our shareholding, the United States 
shapes the development of market economies in Eastern Europe and the 
former Soviet Union. EBRD's nimble crisis response in 2009 demonstrates 
its value to the United States in helping respond to challenges.
                                 ______
                                 

Prepared Statement Gustavo Arnavat, United States Executive Director of 
                  the Inter-American Development Bank

    Chairman Kerry, Ranking Member Lugar, and members of the committee, 
thank you for the opportunity to submit this statement regarding the 
Inter-American Development Bank (IDB or Bank), and the case for the 
proposed general capital increase (GCI).
    The IDB is the largest source of development finance in the Western 
Hemisphere, providing 26 borrowing member countries close to 50 percent 
of their multilateral financing. Between 1994 and 2009, the Bank 
financed over 1,400 projects for a total of $125 billion, averaging 
approximately $7 billion per year. Since 2007, lending to the region 
increased sharply, reaching $15.5 billion in 2009, as the Bank 
mobilized its resources in the wake of the global financial crisis. 
This lending has helped, directly or indirectly, the roughly 580 
million people of the Latin American and Caribbean members of the Bank 
to improve their lives through enhanced economic opportunity and 
stronger support to defeat poverty in their communities.
    The proposed capital increase is designed to allow the Bank to lend 
an average of $12 billion per year; without it, the IDB would be forced 
to reduce lending to approximately $7 billion per year, well below our 
estimates of the borrowing needs of the member countries. This would 
mean curtailing critical programs aimed at reducing poverty, 
stabilizing economies, promoting private sector growth, and improving 
the health and education of vulnerable populations, among others.
    As the largest shareholder at the IDB, the United States leadership 
was vital to the negotiations regarding the proposed GCI during the 
Annual Meeting of IDB Governors in March 2010. The U.S. reform agenda, 
which was developed based upon congressional input and specific 
comments from members and staff of this committee, was successfully 
incorporated and linked to the discussion of resources. Based on this 
engagement, and the subsequent discussions I had with executive 
directors and the Bank's senior management on how to implement the 
mandates and guidance provided by Governors, I believe we have achieved 
a GCI agreement that merits strong U.S. support.
    Among the signature achievements is the agreement that at least 
$200 million per year from 2010-2020 will be transferred from the 
Bank's ordinary capital to the Grant Facility established for Haiti's 
reconstruction and development. In addition, we achieved an agreement 
to eliminate all of Haiti's remaining debt held by the Bank, which was 
equal to $661 million in nominal terms. These commitments will mean 
real opportunity for the poorest in Haiti, and are a testament to the 
necessity and importance of continued U.S. support for and engagement 
in the IDB. The agreement also ensures the financial viability of the 
IDB's concessional window, the Fund for Special Operations (FSO), over 
the next decade. The FSO supports the region's poorest countries 
through highly concessional lending.
    The United States used the GCI negotiations not only to 
recapitalize the institution, but also to improve the strategic 
direction of the Bank, as well as consolidate key institutional reforms 
with the aim of promoting management for development effectiveness and 
enhanced safeguards, transparency, accountability, disclosure and 
financial and risk management policies and practices. Supporting this 
capital increase will reinforce the United States commitment to the 
region, and its leading and historic role in promoting the sustainable 
economic growth of its neighbors, a commitment rooted in the 
proposition that an economically strong and politically stable region 
ultimately benefits the economic and security interests of the United 
States.
                              idb reforms
    Not only does the GCI agreement include a Results Framework to 
monitor the institution's performance, but for the first time as part 
of a capital increase at the Bank there will be an independent mid-term 
review of progress achieved in implementing the Governors' directives. 
Specifically, the Bank's implementation of the agreed reforms will be 
subject to a full review by the IDB's Independent Evaluation Office by 
March 2013, culminating in a report to Governors assessing the extent 
to which the Bank has fulfilled these mandates. The following are among 
the key reforms agreed by Governors:
    Strategic Focus on Core Missions. Based on discussions with the 
United States and other shareholders during the GCI negotiations, the 
IDB agreed to focus more intensely on the following core priorities: 
reducing poverty and inequality, ensuring sustainable development, 
addressing energy and climate change challenges, focusing on the 
special needs of the poorest countries, promoting regional integration, 
and fostering development through the private sector. In addition, Bank 
management will adopt sector strategies and notional lending targets 
for the following urgent regional needs by the first quarter of 2011: 
regional integration infrastructure and technical assistance; better 
education performance; broader private sector access to finance, 
particularly for SMEs; renewable energy; and, climate change adaptation 
and mitigation.
    Management for Development Effectiveness. The IDB will implement a 
new development effectiveness matrix to improve the quality of the 
Bank's loan portfolio. The Operations Policy Committee, headed by the 
Executive Vice President of the Bank, will ensure that only projects 
that meet a quantitative minimum development effectiveness threshold 
will be forwarded to the Board of Executive Directors for 
consideration.
    Safeguards. The IDB will adopt updated environmental and social 
safeguards that are fully consistent with the recommendations of the 
independent advisory group on sustainability in its final report (due 
before the end of 2010) and in line with international best practices. 
Moreover, the Bank will implement new and rigorous safeguards against 
lending into unsustainable macroeconomic situations.
    Transparency, Accountability and Disclosure. One of the most 
significant outcomes of the reform discussion during the GCI 
negotiations is that the IDB has agreed to publicly disclose ex-ante 
project-level evaluability analysis, compliance with institutional 
priorities, and economic rate-of-return or cost effectiveness 
calculations for projects, as well as ex-post impact evaluations for 
all projects, including private sector projects. The Bank has also put 
in place a new Independent Consultation and Inspection Mechanism with 
high standards of independence and transparency. In addition, the Bank 
has adopted a new access to information policy consistent with the 
highest standards applied by other international financial institutions 
that includes the replacement of a ``positive list'' of disclosed 
policies with a limited ``negative list,'' a presumption of disclosure, 
release of board and committee minutes, an independent appeals 
mechanism, and voluntary disclosure of statements by Executive 
Directors.
    Sound Financial Management. The IDB has agreed to important new 
approaches to the stewardship of its resources. The Bank will implement 
a newly approved capital adequacy policy this calendar year and 
management will develop and adopt a corporate strategy for results-
based budgeting for its 2011 budget. In addition, the Bank has adopted 
a comprehensive income management model that allocates income and 
adjusts loan pricing to cover the Bank's complete lending and grant 
programs, minimum annual transfers of $200 million to the above-
mentioned Grant Facility for Haiti, a capital accumulation rule that 
preserves the financial soundness of the Bank, administrative expenses, 
and requirements of the Bank's capital adequacy policy. Any changes in 
expenses must generate an automatic offsetting adjustment in loan 
charges or other expenses.
    In conclusion, for more than 50 years, the role of the United 
States at the Bank has been to ensure that the investments made by the 
American people through the IDB are sound financially and lead to the 
economic and social development of our neighbors in Latin America and 
the Caribbean. While the primary beneficiaries of the Bank's projects 
(loans as well as technical assistance and, in some cases, grants) are 
the 26 borrowing countries, the Bank's overall objective of fomenting 
economic growth and reducing poverty in the region benefits the United 
States and its citizens and businesses from the resulting increase in 
demand for American goods and services. The United States also benefits 
because economic growth in the region, coupled with sound social 
policies, should lead to increased prosperity among its citizens and 
greater social stability, which also tends to promote greater democracy 
and security. In short, we believe strongly that the GCI for the IDB 
will benefit both the region and the United States.
                                 ______
                                 

 Responses of Assistant Secretary Marisa Lago to Questions Submitted by
                         Senator Richard Lugar

    Question. In your written testimony and during the question and 
answer session, you explained that as the administration weighed the 
capital requests of the various development banks, it considered the 
capacity of each MDB, demand for MDB resources, and focus on the core 
mandates of each MDB. Would you please explain in detail how the 
administration arrived at the general capital increase request levels 
for each MDB? Please explain the variances in the requests.

    Answer. Each bank confronted a different set of challenges. 
Accordingly, the factors we considered differed widely, and the 
outcomes were similarly variable. For example, the Asian Development 
Bank (AsDB) management sought shareholder support for a 200-percent 
increase to avoid a steep decline in lending (from $8 billion annually 
to $4 billion annually). This forecast, coupled with management's 
willingness to adopt a robust reform agenda, was key to securing the 
administration's support for the Bank's request.
    Similarly, the African Development Bank (AfDB), which started with 
a relatively low sustainable lending level of $1.8 billion per year, 
faced increasing demand for sovereign and private sector lending well 
before the crisis. By 2008, lending had increased to over $2.5 billion, 
and management had indicated that the Bank would need to seek new 
capital in 2012 to avoid a sharp decline in lending below the annual 
$1.8 billion level. The Bank's acceleration in crisis lending after 
2008 further accelerated the timeline for considering a capital 
increase. Management also made a compelling argument that regional 
demand--especially for infrastructure projects and private sector 
lending--had the potential to increase significantly. Here, too, 
management proved receptive to making significant reform commitments. 
As a result, we chose to support management's request for a 200-percent 
increase.
    The Inter-American Development Bank (IDB) initially sought a 200-
percent General Capital Increase (GCI) as well, premised on a sustained 
downturn in the region. However, Latin America proved more resilient 
than projected, which led shareholders to consider a more modest 
request. Ultimately, we agreed to support a smaller capital increase of 
70 percent because it enabled the Bank to provide significant new funds 
to the poorest countries, especially Haiti, and helped leverage reforms 
that we had been seeking, including a new capital adequacy policy, an 
improved inspection panel and a more robust disclosure policy.
    We also found the European Bank for Reconstruction and Development 
(EBRD) GCI request compelling, chiefly because its borrowing countries 
were among the hardest hit by the crisis. However, because we continue 
to expect EU accession countries to begin graduating, we advocated for 
a temporary increase in callable capital, which did not require any 
paid-in amount. We felt that this option, which other shareholders 
ultimately agreed to, would enable the EBRD to sustain its support for 
the region's recovery, but still be able to scale back when 
appropriate. The EBRD also addressed our concerns about excessive focus 
on the advanced transition economies by approving new business targets 
designed to increase the geographic diversification of projects and 
recommitting to work with EU accession countries on a graduation path.
    Finally, we supported management's request at the World Bank 
because of its projections that its crisis-lending would cause the 
Bank's equity to loan ratio, the traditional measure of the Bank's 
capital adequacy, to fall below its prudential ratio of 23 percent 
starting in July 2013, or result in a drop in lending authority from an 
average of $15 billion a year (before the crisis) to below $8 billion a 
year starting in 2011. In addition, we believed that additional 
resources were necessary to strengthen the Bank's capacity to 
complement U.S. bilateral programs and support major U.S. policy 
priorities, such as food security and climate change.
    To help ensure the long-term financial sustainability and 
responsible oversight of the Bank's finances, management also agreed to 
a new financial framework that unifies decisions on budget, pricing, 
and net income transfers. And, to further improve a focus on results, 
the Bank agreed to implement a corporate ``scorecard'' to assess the 
Bank's performance and to more closely link performance evaluation to 
results.

    Question. Were larger general capital increases offered to MDBs 
that agreed to more significant reform packages? If so, why? Are we 
rewarding reformers or rewarding the MDBs that were in the worst 
condition to begin with? Would it be fair to assume that the MDBs 
should want to improve on their own?

    Answer. Although we took the opportunity to seek new reforms in the 
GCI negotiations, we made no explicit links between the size of the 
GCIs and the reform commitments. Rather, we arrived at GCI levels that 
we believed best reflected the needs of the institutions, factoring in 
demand in their regions of operation and capacity to deliver. On a 
parallel track, we developed a reform and policy agenda for each 
institution and made clear that our support for a GCI would require 
satisfactory commitments on the reforms from management and by the 
other shareholders.

    Question. Will the capital increases benefit middle-income 
countries more than poor countries? How will the capital increases 
raise grant support for the poorest countries?

    Answer. The capital increases were supported by all borrowing 
country shareholders at the MDBs, and will benefit both poor and middle 
income countries. A key reason for this is that a major outcome of the 
GCI negotiations at each MDB was to prioritize the transfer of income 
earned from lending to middle-income countries to the MDBs' 
concessional lending windows.\1\ In fact, as part of its GCI, the IDB 
has committed to transferring over $2 billion of its income over the 
next 10 years to support Haiti's reconstruction and development. Also, 
in the AfDB, AsDB and IDB, the GCIs will support increased lending to 
the private sector in low-income countries directly through the hard 
loan windows. Finally, the regional development banks have agreed to 
focus more on increasing regional linkages, strengthening connections 
between neighboring middle- and low-income countries, boosting growth 
for each.
---------------------------------------------------------------------------
    \1\ Except the EBRD, which has no concessional window.

    Question. By MDB, please note the formula for transferring funds 
from the regular lending windows to the subsidized lending and grant 
windows. Are some MDBs providing significantly more assistance to poor 
countries than others? Please list the amount of grants and subsidized 
---------------------------------------------------------------------------
loans offered to poor countries by each MDB.

    Answer. During GCI negotiations, the United States placed high 
priority on securing commitments to increase the transfer of MDB net 
income to support concessional assistance through MDB soft loan 
windows.

   AsDB management committed to triple net income transfers for 
        AsDF to $120 million per year from $40 million per year.
   AfDB management committed to increase net income transfers 
        for AfDF to SDR $35 million ($53 million) per year from SDR $20 
        million ($30 million) per year. The AfDB also committed to 
        provide at least 75 percent of its total net income to low-
        income country support (primarily contributions to AfDF, but it 
        could also include contributions to arrears clearance, debt 
        relief, and technical assistance grants to low-income 
        countries). The latter measure will ensure that the AfDF will 
        also benefit in years where AfDB net income is exceptionally 
        high.
   IDB management agreed to transfer $200 million per year in 
        net income to the IDB grant facility, which currently benefits 
        only Haiti. (Four additional low-income countries have access 
        to concessional loans from the Fund for Special Operations; the 
        FSO does not receive net income transfers from the hard loan 
        window of the IDB.)
   World Bank management agreed to maintain IBRD transfers to 
        IDA flat in real terms (presently about $635 million per year) 
        until the IBRD's equity/loan ratio recovers to 23 percent, at 
        which time there will be modest increase in transfers to IDA. 
        In addition, the equity/loan ratio reaches 27 percent, it will 
        trigger Board consideration of much stronger measures to 
        redirect GCI resources, including through higher transfers to 
        IDA.
   IFC net income transfers to IDA: IFC net income transfers to 
        IDA (about $400 million per year in recent years) and other 
        initiatives, including technical assistance activities, are 
        determined by a sliding scale formula that takes into account 
        the IFC's annual financial performance and agreed principles 
        that the Board uses in determining specific allocations. The 
        sliding scale formula includes a minimum income threshold of 
        $150 million that has to be met before a portion of the income 
        can be transferred to IDA or other initiatives. For an income 
        amount above the $150 million threshold, the incremental rate 
        of designations increases in steps, from 20 percent up to a 
        maximum rate of 35 percent. The sliding scale determines the 
        maximum amount of net income transfers and the Board then 
        decides on the actual amount of allocations including to IDA, 
        technical assistance grants, or other initiatives that support 
        the IFC's work in low-income countries. The principles that 
        guide Board decisions on the levels and purposes of 
        designations of IFC's retained earnings include: preservation 
        of IFC's AAA rating and maintaining capacity to support IFC's 
        endorsed growth path.
   The EBRD does not have a separate soft loan window, though 
        it does provide investment grants for projects in poorer 
        countries and regions with limited finances, notably heavily 
        indebted countries subject to borrowing constraints under an 
        IMF Debt Sustainability Analysis (DSA). (The IMF prepares DSAs 
        which indicate minimum concessionality requirements needed to 
        avoid debt distress.)
   IDA provides by far the largest volume of concessional loans 
        to low-income countries, while the AsDF and AfDF also provide 
        substantial amounts. IDA is also the leader in grant assistance 
        to low-income countries, followed by AfDF and AsDF. The IDB 
        provides relatively smaller amounts of concessional loans and 
        grants. These results are not surprising given the global scale 
        of IDA and the fact that only five members of the IDB qualify 
        for concessional loans and grants.

                             [$ in billions)
------------------------------------------------------------------------
                                       2009 Approvals for Low-Income
                                                 Countries
                                 ---------------------------------------
                                        Grants        Concessional Loans
------------------------------------------------------------------------
AsDF............................             $0.9                $2.2
AfDF............................               1.4                 2.0
IDA.............................               2.6               11.4
IDB Grant Facility/FSO..........               0.16                0.23
------------------------------------------------------------------------


    Question. What are the administration's plans to ensure that a 
recapitalization does not mean a tradeoff in a limited budgetary 
environment away from grant support and debt relief for low-income 
countries?

    Answer. We are currently in discussions with OMB on our budget 
request for FY12. In negotiating the GCI commitments, we were very 
mindful of the budgetary costs associated with them. We will continue 
to work to ensure that we meet our debt relief obligations.

    Question. Building on our discussion during the hearing, what 
internal fiscal measures have the development banks taken to save 
money, thereby mitigating the need for additional donor contributions? 
Will the administration or the international community conduct a review 
of potential cost savings at each development bank?

    Answer. Several MDBs agreed to pricing reforms that will directly 
link loan pricing to their internal expenditures. For example, the 
World Bank agreed to overhaul its budget process to ensure that 
decisions on pricing, compensation, and administrative costs are 
closely integrated and aligned with the Bank's strategic priorities. 
The AfDB agreed to a comprehensive financial model that has parameters 
on loan pricing, locks in a minimum level of transfers to low-income 
countries, covers administrative expenses, and supports capital 
adequacy. In the FY 2011 budget (not yet finalized), AfDB identified $8 
million in annual savings from expenditure control efforts (e.g., 
telecom and Blackberry contracts, travel costs) and streamlined 
business processes (e.g., use of video conferences, e-recruitment). 
This amounts to 2 percent of AfDB's 2010 budget.
    The IDB agreed to adopt a new income allocation model that sets 
loan prices consistent with the IDB's financial constraints and 
priorities, and it is already apparent from the FY11 budget discussions 
that this is motivating shareholders to seek cost cuts.
    It has been a longstanding policy at the Asian Development Bank for 
loan income to cover the cost of administrative expenses. In addition, 
the AsDB's results management framework, which was adopted just prior 
to the GCI, emphasizes cost effectiveness at all levels of the 
organization.
    We expect these new policies to enhance MDB operating efficiency 
and, together with new capital accumulation objectives, mitigate the 
need for future shareholder contributions. The Treasury Department will 
closely supervise implementation of these new policies. In addition, 
the MDBs' annual budget processes will provide key opportunities for 
oversight.

    Question. To promote the principle of transparency, democratic 
governance, and country-ownership of development strategies and to 
avoid the irresponsible borrowing practices of the past in some 
countries, the United States should use its influence to ensure that 
new loans are at least reviewed by the Parliaments of borrowing 
countries. Is this part of the reform agenda being discussed in 
reference to the capital increase request?

    Answer. As a general principle, we advocate for an open and 
thorough consultation process in all borrowing countries to help 
promote buy-in of country development strategies. Similarly, we believe 
it is important that all relevant parties have a consultative role in 
the project development process, which could include legislative 
bodies, NGOs, and indigenous groups. We advance these principles in all 
relevant discussions of MDB policy, ranging from Country Assistance 
Strategies to safeguards and disclosure.

    Question. How are the MDBs preparing their respective institutions 
in terms of responding to the climate, fuel, and food crises facing 
most vulnerable countries in the coming decade?

    Answer. At the direction of the G20, the World Bank is taking the 
lead on issues related to climate change and energy efficiency, as well 
as food security. As discussed further below, each MDB has established 
a tailored approach, according to its mandate and clients, to engaging 
developing member countries on energy efficient, low carbon and climate 
resilient development options.
    With regard to food security, the share of agriculture in official 
development assistance (ODA) declined sharply from a high of 18 percent 
in 1979 to 5 percent in 2006-08, which equates to an almost 50 percent 
decline in the real value of support. To reverse this decline, the 
MDBs, along with other development partners, are gradually scaling up 
their assistance and aligning their support with country-owned 
agricultural development strategies. In addition, new mechanisms like 
the Global Agriculture and Food Security Program (GAFSP) are playing an 
important role in leveraging resources, scaling up assistance, and 
maintaining the international community's focus on agriculture.
    Called for by G20 leaders at their summit in Pittsburgh in 2009, 
GAFSP is a multidonor trust fund designed to provide financing for 
country-owned agricultural development strategies in low-income 
countries. The trust fund, supported by contributions from the United 
States, Australia, Canada, Spain, Korea, and the Gates Foundation, has 
already committed and started disbursing $321 million to eight 
countries (Bangladesh, Haiti, Rwanda, Sierra Leone, Togo, Mongolia, 
Ethiopia, and Niger), and has received requests for financing from an 
additional 20 countries.

    Question. What are the tools, skills required that they need to 
acquire to ensure they remain relevant?

    Answer. We believe that the MDBs have the tools to remain relevant, 
as illustrated by the fact that they were able to substantially 
increase borrowing levels during the financial crisis. In addition, we 
have found that MDBs are nimble enough to develop new tools quickly to 
help support borrowing countries as needed. For example, in response to 
the drying up of trade credits, the IFC, AsDB, and AfDB all created new 
trade financing facilities. Another example is the IDB's creation of a 
$6 billion liquidity fund, designed to support the banking sectors in 
borrowing countries. Also, the EBRD led the Vienna Initiative, a $30+ 
billion effort to stabilize the financial sector in Central and Eastern 
Europe. As the crisis has abated, the MDBs are phasing out these 
crisis-response tools, starting with the IDB's facility.
    Within IDA, we are now working with other donors and management on 
a crisis response window, which will be designed to provide a rapid 
response to the poorest countries in the event of an external shock. We 
expect this new instrument to become operational in IDA 16.
    Adding to the MDBs' skill levels will be important as well. The 
World Bank has recently hired internationally renowned experts in 
climate change and renewable energy to boost its efforts to help 
countries mitigate and adapt to climate change. The AsDB has agreed to 
strengthen the personnel resources of the Bank's internal audit and 
integrity functions; similarly, the AfDB has agreed to strengthen its 
risk management function.

    Question. Developing member countries are beginning to have greater 
voice and representation at the governing bodies of the MDBs. How will 
this affect progress made on improving anticorruption, social and 
environmental standards? How will the United States be engaging these 
developing member countries on these standards and additional reforms?

    Answer. The Treasury Department is committed to assuring that MDBs 
apply strong fiduciary, social, and environmental standards. We work 
closely with an array of stakeholders, including developing country 
shareholders, to deliver continuous improvement in MDB policies and 
practices in these areas.
    The GCI discussions enabled us to garner international support for 
key reforms. For example, the AsDB agreed to enhance that Bank's 
financial control practices, and upgrade its social and environmental 
policy. At the IDB, shareholders have agreed to implement the findings 
of a comprehensive review of the Bank's environmental practices. The 
AfDB pledged to increase its internal anticorruption resources. 
Finally, in the World Bank, a landmark access to information policy is 
promoting greater public accountability.

    Question. Ten years ago, world leaders made history when they 
agreed to provide debt relief for impoverished countries struggling 
with unsustainable debt burdens. The United States has fallen behind in 
our commitments for the Multilateral Debt Relief Initiative and the 
President's request includes a contribution toward those arrears. Will 
that contribution clear our arrears for our commitment to debt relief? 
If not, how much more is needed to eliminate these arrears?

    Answer. The United States has made several commitments with respect 
to multilateral debt relief. In 2005, the United States agreed to help 
cover the costs to IDA of providing MDRI debt relief. With full funding 
of our $1.285 billion request for IDA, the United States will be on 
track to meet its MDRI commitment for IDA15. Separately, full funding 
of our $50.0 million request for HIPC debt relief would leave us with 
an obligation of roughly $65 million to the HIPC Trust Fund. Unlike our 
MDRI commitment, however, our pledge to the HIPC Trust Fund for HIPC 
debt relief is not time bound, so we are not at risk of accumulating 
arrears.

    Question. Is the administration supportive of negotiating an 
expansion of HIPC and/or MDRI to all IDA-only countries? Would the 
administration promote a framework to provide debt relief to countries 
facing extreme exogenous shocks?

    Answer. The Congressional Budget Office estimated that the cost of 
expanding HIPC and MDRI to all IDA-only countries would be about $11 
billion. In today's fiscal environment, securing this level of funding 
would represent a significant challenge, particularly when we have 
other unfulfilled financial commitments, notably $1 billion in arrears 
to the multilateral development banks.
    The administration was a strong advocate for debt relief for Haiti 
following the devastating January earthquake. We are prepared to 
consider providing debt relief to other countries that suffer from 
extreme exogenous shocks on a case-by-case basis. Further, the Paris 
Club creditors have procedures in place to treat sovereign debt when 
non-Paris Club countries face financial constraints that make it 
extremely difficult to service their debt.

    Question. Critics of the World Bank and IMF's Debt Sustainability 
Framework (DSF) for low-income countries argue that reforms to make the 
DSF more ``flexible'' introduced in the height of the crisis seem more 
geared to hide rising debt levels than to address longstanding concerns 
about the actual performance of the DSF as a tool to maintain debt at 
sustainable levels. Is this correct? If so, is the administration 
considering calling for reforms in the mechanism for determining debt 
sustainability, its links to debt relief needs, and its appropriateness 
to support developing country efforts to achieve their development 
goals?

    Answer. We attach a high priority to continued debt sustainability 
in low-income countries and believe that the Debt Sustainability 
Framework has generally served the international community well. The 
modifications introduced last year were modest. The most significant 
change was allowing the exclusion of certain state owned enterprises 
(SOEs) from the calculations of debt sustainability if these SOEs met 
certain conditions related to independence and financial 
sustainability. We indicated that when an exception is granted for a 
particular SOE, full discussion and justification should also be 
included in the debt sustainability assessment. The most significant 
challenge to the Debt Sustainability Framework continues to be the lack 
of its adoption by all countries and institutions in the world.

    Question. How is each development bank engaging recipient and 
developing member countries to consider energy efficient, low carbon 
and climate resilient development options?

    Answer. In recent years, all of the MDBs have taken steps to 
incorporate low carbon development, climate resiliency, and energy 
efficiency across their respective portfolios. Generally, the MDBs 
approach these issues through their individual country assistance 
strategies, relevant sector strategies, and operational policies. The 
instruments they use to address climate issues include project loans, 
technical assistance, development policy loans, and financial 
intermediary operations. MDBs frequently combine these instruments with 
external sources of dedicated concessional support, such as through the 
GEF and CIFs.
    At the same time, each MDB has established its own approach, 
according to its mandate and clients, on engaging developing member 
countries on energy efficient, low carbon and climate resilient 
development options. For example:

   The World Bank Group has a Board-approved Strategic 
        Framework on Development and Climate Change that is 
        operationalized through relevant sectoral strategies and 
        operational policies, including support for a set of country-
        led pilot low carbon development strategies.
   The IDB is implementing the second phase of the Sustainable 
        Energy and Climate Change Initiative, which focuses on a set of 
        lending and assistance priorities for renewable energy and 
        energy efficiency.
   The EBRD is implementing the second phase of the Sustainable 
        Energy Initiative that focuses on energy efficiency and 
        renewable energy.
   The AfDB recently presented its Board with a Climate Change 
        Action Plan that lays out its priorities for support for 
        mitigation and adaptation activities.
   The AsDB has established a set of sector-specific 
        initiatives, including sustainable transport and solar energy.

    Question. With the increase in budget support and sectorwide 
financing, is the proportion of development bank financing subject to 
social and environmental safeguards decreasing? Does this vary by 
development bank? If so, how?

    Answer. During the crisis, there was an increase in the proportion 
of World Bank-financed budget support loans and sectorwide financing, 
which are subject to different requirements on poverty and social 
impacts than project loans. For budget support, the Bank determines 
whether specific country policies supported by the loans are likely to 
have significant poverty and social consequences, especially on poor 
people and vulnerable groups, or are likely to cause significant 
effects on the country's environment, forests and other natural 
resources. For country policies with likely significant effects in 
either area, the Bank provides an assessment of the impact and the 
borrower's capacity to reduce adverse effects. If there are significant 
gaps in the analysis or shortcomings in the borrower's systems, the 
Bank describes in the Program Document how such gaps or shortcomings 
would be addressed before or during program implementation, as 
appropriate.
    With respect to the regional development banks, we did not observe 
a similar shift in loan portfolios. There was a temporary increase in 
budget support lending by the AfDF in response to crisis needs during 
the 2008-10 period, but it stayed under 25 percent of total lending cap 
for budget support, and budget support lending is now expected to 
return to lower levels. Similarly, the AsDB undertook some fairly 
limited budget support and liquidity-based lending in 2008 and 2009 in 
order to help countries dealing with a drop off in capital flows. The 
EBRD does not do public finance except for infrastructure. At the IDB, 
the share of project investment loans compared with policy-based sector 
lending has been increasing recent years.

    Question. Is the administration incorporating the reforms promoted 
at the development banks into its bilateral aid programs including 
through USAID and the Millennium Challenge Corporation? Is there a 
process to convey best practices between the multilateral and bilateral 
aid agencies?

    Answer. Many reforms that the United States promotes at the 
development banks are specific to those institutions. But, the basic 
themes that motivate USG bilateral and multilateral assistance are the 
same, such as measuring results and improving transparency. The 
President's Policy Directive on Global Development (PPD) exemplifies 
this, establishing a governmentwide commitment to sustainable 
development. Currently, mechanisms for conveying best practice between 
the multilateral and bilateral aid agencies include: (1) in-country 
dialogue among donors; (2) dialogue between USG agencies and the 
development banks' headquarters offices; and (3) participation by 
bilateral and multilateral donors--along with partner countries--in the 
Working Party on Aid Effectiveness and in its efforts to develop and 
distribute best practice in areas of common interests.
    The establishment of a new U.S. Interagency Policy Committee on 
Global Development, as envisaged by the PPD, will facilitate the 
coordination of development policy across the executive branch, and 
will facilitate discussion within the USG of best practices that are 
relevant to the MDBs and the USG's bilateral aid agencies.

    Question. How are the core missions of the development banks 
different?

    Answer. Each of the MDBs shares the same core mission to reduce 
poverty and accelerate sustained economic growth. How that mission is 
expressed in each Bank's programming and internal culture varies, which 
is appropriate given the differing regional needs. But, this shared 
basic objective remains the cornerstone of the MDBs' successful 
collaboration. During the GCI negotiations, we urged the MDBs to 
highlight their areas of comparative advantage and focus. In response:

   The World Bank affirmed that it will act increasingly on 
        global objectives, such as food security, climate change, and 
        other transboundary issues, while working to alleviate poverty 
        through the Bank's five strategic priorities to target the poor 
        and vulnerable by creating opportunities for growth, providing 
        cooperative models, strengthening governance, managing risk, 
        and preparing for crisis.
   The AfDB identified as specific core priorities 
        infrastructure, economic governance, regional integration and 
        private sector development.
   The AsDB pointed to its ``Strategy 2020,'' which identifies 
        the AsDB's strategic objective as ``An Asia and Pacific Region 
        Free of Poverty'' and lays out three complementary agendas to 
        advance that goal: inclusive economic growth, environmentally 
        sustainable growth, and regional integration.
   The IDB's Governors affirmed as institutional priorities: 
        reducing poverty and inequality, ensuring sustainable 
        development, addressing sustainable energy and climate change, 
        addressing the special needs of the poorest countries, 
        promoting regional integration, and fostering development 
        through the private sector.
   Shareholders reaffirmed that the purpose of the EBRD is to 
        foster the transition towards open market-oriented economies, 
        and to promote private and entrepreneurial initiative in the 
        Central and Eastern European countries committed to and 
        applying the principles of multiparty democracy, pluralism and 
        market economics.

    Question. How can information and communication technology (ICT) 
improve the efficiency and effectiveness of multilateral assistance 
programs?

    Answer. Each of the MDBs has identified ICT as a key lever to 
improve the effectiveness of multilateral development assistance. The 
banks have focused on ICT a means of:

   Developing human capital and encouraging lifelong learning;
   Improving the transparency of local and regional 
        governments;
   Improving the efficiency of businesses and markets by 
        improving communications infrastructure;
   Encouraging citizen participation in democratic processes 
        and increasing the effectiveness of economic and political 
        reforms;
   Fostering entrepreneurship and creating new employment 
        opportunities.

    Question. To what extent do the multilateral development banks 
incorporate ICT in their programs? Is there a cohesive strategy on ICT 
as a development tool? If so, please describe.

    Answer. Each of the MDBs has worked to incorporate ICT in a cross-
cutting manner in its investment and development programs, although 
there are natural variations in each bank's approach to the ICT sector. 
For example, the AfDB has paid particular attention to the physical 
development of modern telecommunications infrastructure, and has sought 
to leverage advances in communication in order to help improve the 
delivery of public services. By contrast, the EBRD has focused its ICT 
investments on private IT enterprises, in an effort to take advantage 
of the high literacy rates, and large pool of scientific talent within 
its target region.

    Question. What could the multilateral development banks do better 
with regard to ICT? Is there a need for better donor coordination on 
best practices? What challenges or impediments prevent greater 
integration of ICT in development projects?

    Answer. The returns on ICT investments could be further improved 
through greater efforts to encourage reforms that improve local 
educational systems, protect intellectual property rights, promote 
greater clarity in regulatory regimes, and encourage the development of 
local capital markets that can finance the growth of small and medium 
enterprises in local ICT sectors.

    Question. The administration has been promoting improvements to the 
way the development banks evaluate projects. Will it be possible to 
compare, across development banks, the level of success of similar 
projects? Will observers be able to identify what caused the 
differences in the levels of success?

    Answer. Each of the MDBs' independent evaluators prepares an annual 
review that reports on their findings, including project evaluations. 
This allows the Boards in each of the institutions to compare 
performance across and within sectors and regions, and to see trends 
over time. For example, infrastructure projects typically have higher 
ratings than health sector projects. While some differences can be 
attributed to sector-specific issues, common themes emerge. Strong 
analytical work and careful targeting are often factors in project 
success, whereas projects that are overly complex or pay inadequate 
attention to cost recovery generally perform poorly and have lower 
sustainability. That said, comparing projects of different types within 
an institution, or similar project types across different MDBs, is 
complicated by the fact that the MDBs lack common metrics. To remedy 
this, we have been urging the use of cost-benefit analyses, which allow 
for the calculation of an economic rate of return, facilitating 
comparisons across project types and institutions.
                                 ______
                                 

 Responses of Executive Director Ian Solomon to Questions Submitted by 
                         Senator Richard Lugar

    Question. As we discussed briefly during the hearing, a few years 
ago, the Government Accountability Office was tasked by myself, 
Senators Biden, Leahy, and Bayh to conduct review of the World Bank 
regarding its ability to fight corruption and conduct environmental 
assessments. The GAO has not commenced its work on either study. What 
is the status of each review? What is delaying the reviews and what can 
be done to ensure that the GAO has the ability to carry out its work?

    Answer. I believe GAO would be best placed to explain the status of 
its reviews. However, to my knowledge, they have only undertaken the 
environmental assessment, as my office is not aware of any request for 
engagement regarding the World Bank's ability to fight corruption. I 
would also note that for GAO engagements requiring Board approval, 
which the environmental study does, the development of a clear roadmap 
of all of the steps in the process from GAO's first engagement to Board 
approval would help to ensure that that GAO can carry out its work.

    Question. The IFC Lighting Africa initiative helps organize the 
off-grid lighting sector in Africa. Has this initiative been 
successful? If yes, how is the World Bank building upon these efforts 
and support the market linkages and infrastructure needed to produce, 
distribute, and service decentralized power in rural areas around the 
world?

    Answer. The joint IFC/World Bank Lighting Africa initiative has 
been broadly successful. Recent accomplishments include:

   Development of new products: From fewer than eight products 
        developed for the base of the pyramid lighting market in 2008, 
        today over 70 products manufactured by 50 companies are 
        available for purchase in Africa--a growing number of them now 
        priced under $25. Nearly 40 percent of the companies in this 
        market state that they have explicitly used Lighting Africa 
        services for their product and business model design.
   Providing improved energy services to 500,000 people: In 
        2009, Lighting Africa directly supported six client companies, 
        which reached more than 500,000 Africans with quality assured 
        products. This market is not at an inflection point and in 2010 
        it is expected that clients will reach more than 1,000,000 with 
        improved lighting.
   Established a B2B platform for the industry: The Lighting 
        Africa conference has been established as the premier business 
        conference on off-grid lighting worldwide, with more than 600 
        paying visitors in 2010. The dedicated Web site is receiving 
        more 40,000 hits per month.

    As the World Bank Group continues to expand its experience in 
Africa, lessons learned can be used to build upon these efforts in 
other parts of the world.

    Question. U.S. businesses and consultants routinely pursue World 
Bank projects. For the last 5 years, what are the top five recipient 
countries of procurement contracts and how much did they receive? If 
the United States is not in the top five, what was the size of 
contracts won by U.S. firms in the past 5 years? For every one dollar 
that the United States has contributed to the World Bank since the 
institution was founded, how much have U.S. companies have won in 
procurement contracts?

    Answer. Specific answers are provided below, but I think it is 
important to emphasize up front that the United States has played a 
major role in ensuring the use of transparent and equitable procurement 
processes that result in a level playing field for American companies. 
In this context, we are also working very hard to ensure that the use 
of country systems is implemented in a manner that would not 
disadvantage U.S. firms.
    In addition, it is important to note that at the World Bank, 
procurement figures very likely underrepresent U.S. procurement by a 
significant amount because the World Bank lists contract winners by the 
country of registration. This means that an American firm bidding from 
its China office will appear to be a Chinese firm in the contract 
awards list. For example, if IBM (China) wins a contract, it will count 
as a Chinese win. In addition, some U.S. companies act as 
subcontractors or equipment suppliers to local firms, so their national 
identity is not visible in the contract awards list.
    Finally, I want to bring your attention to the fact that the U.S. 
Commercial Service's Advocacy Center is charged with ensuring that U.S. 
companies enjoy the best possible access to World Bank procurement 
opportunities. Specifically, its mission is to train U.S. companies on 
the World Bank procurement process, assist with dispute resolution, and 
educate the private sector about business opportunities created by 
World Bank activities.
    The Commercial Service officer has been instrumental in persuading 
the World Bank to agree that all procurement opportunities should be 
published on its Web site at no cost. Once approved by the Board, these 
opportunities will become freely available to thousands of small- and 
medium-size U.S. companies for the first time. For the 12 month period 
ended October 31, 2010, our liaison officer organized or participated 
in 17 outreach events reaching about 450 U.S. companies and counseled 
or worked directly with about 230 individual U.S. firms.
    Further information on MDB opportunities for U.S businesses can be 
obtained from the Commercial Service's Liaison Office to the World 
Bank. The contact information for the Liaison office is: 
world.bank@mail.doc.gov, and the Director is David Fulton.

    Question. For the last 5 years, what are the top five recipient 
countries of procurement contracts and how much did they receive?

    Answer.

Top 5 Suppliers Aggregate Totals (FY 2005-09)*

                             [$ in billions]

        Supplier Country                                          Amount
China............................................................. $10.2
India.............................................................   5.4
Argentina.........................................................   2  
Brazil............................................................   1.9
Russia............................................................   1.6

    Question. If the United States is not in the top five, what was the 
size of contracts won by U.S. firms in the past 5 years?

    Answer.

U.S. Awards (FY 2005-10)*

                             [$ in millions]

        Fiscal year                                               Amount
2005..............................................................  $122
2006..............................................................   159
2007..............................................................   131
2008..............................................................   157
2009..............................................................    88
2010..............................................................  * 93
                                                                  ______
    Total.........................................................  $751

* Refers to ``Prior review'' contract awards which are World Bank-funded 
contract awards that were conducted under World Bank procurement 
guidelines and were reviewed by World Bank staff to ensure that the 
procurement process was carried out in accordance with the guidelines as 
required in the Loan Agreement and further elaborated in the Procurement 
Plan. Prior review is applied only to the larger contracts in a project. 
A project's thresholds for prior review vary from loan to loan and from 
country to country; they are specified in the procurement schedule of 
the project's Loan Agreement. Contracts below the prior review 
threshold, and other fast-disbursing contracts subject to the Bank's ex-
post review, are not entered in the Bank's procurement systems. Most of 
the contract awards captured in the World Bank's database were awarded 
under International Competitive Bids (ICB). Contracts awarded under 
National Competitive Bidding (NCB) are not captured or reported by the 
World Bank.

    Question. For every one dollar that the United States has 
contributed to the World Bank since the institution was founded, how 
---------------------------------------------------------------------------
much have U.S. companies have won in procurement contracts?

    Answer. Contract award data for the World Bank does not go back to 
its founding in 1947 making it difficult to compute an accurate picture 
of the benefits to U.S. companies. Tracking of contracts began in 1995 
and the data for these awards is found below.

    Prior Review Contracts Under Bank-Financed Projects.* Contract 
Awards to U.S. Suppliers (FY 1995-2010). Data as of: 9/22/2010. Data 
prior to FY 1995 is not available.

    Question. To what extent does the World Bank incorporate 
information and communication technology (ICT) in their programs? Is 
there a cohesive strategy on ICT as a development tool? If so, please 
describe. What could the World Bank do better with regard to ICT?

    Answer. ICT has demonstrated tremendous promise as a change agent 
within the World Bank and in client nations, requiring fruitful 
collaborative work across sectors and countries. The Bank has a team 
dedicated to ICT that works globally across the six regions and in 
collaboration with the World Bank Institute and the Information 
Solutions Group to advance this agenda. The application of ICT across 
all sectors has been growing steadily in Bank projects, and there are a 
number of portfolio projects dedicated to ICT, supporting development 
of telecommunication policies and infrastructure networks and the use 
of ICT to help transform service delivery across sectors.
    The Bank's strategy has three pillars: connectivity, innovation, 
and transformation. The World Bank Group's current ICT sector strategy 
has a strong focus on the connectivity agenda through support of sector 
reform and liberalization to attract private sector investment. In 
addition, it supports the roll-out of innovative ICT applications that 
improve service delivery across sectors.
    A new transformational sector strategy is under preparation with an 
emphasis on increasing support to use ICTs strategically to transform 
the delivery of public and private services across sectors--leveraging 
the existing 3 billion mobile phones in developing countries and 
technology innovations (such as social media, mobile applications, 
etc.) to improve accountability of governance and to increase the 
efficiency and outreach of service delivery. The Bank has recently 
launched a technology-enabled Mapping for Results platform to geo-code 
and visually to locate Bank projects on a map, and overlay this with 
development indicators, as well as feedback from beneficiaries using 
ICT.
    The Bank's internal assessments have identified four areas for 
improvement: greater partnering with innovative IT industry players and 
governments; increasing staff awareness to scale up projects and 
integrate into the Bank's core business and processes; focusing more on 
cross-cutting foundations to break down sector-specific walls within 
projects; and improving IT procurement procedures and capacity in order 
to better accommodate the rapid changes taking place in technology. 
These approaches, however, will also require sufficient resource 
allocation and a firm commitment from Bank leadership to break down 
silos and inertia within the Bank. Further efficiencies and innovations 
could be generated if the Bank's own internal ICT equipment, policies, 
and practice were integrated more closely with client activities.
                                 ______
                                 

 Responses of Executive Director Curtis Chin to Questions Submitted by 
                         Senator Richard Lugar

    Question. In your testimony, you indicated that the United States 
and Japan are the largest shareholders at the Asian Development Bank 
and China is ranked third. However, since China has already provided 
its general capital increase contribution to the Asian Development 
Bank, isn't China actually ranked higher? If so, how does that affect 
their influence in the institution in the short run while the other 
shareholders are putting together their contribution packages?
    The United States and Japan were the largest shareholders at the 
Asian Development Bank before other member countries began making their 
capital subscriptions to the General Capital Increase V, and will 
regain that shareholding once capital subscriptions have been 
completed. In the interim, because China voluntarily made its entire 
capital subscription early, it is technically true that China a larger 
shareholder than the United States until we complete our capital 
subscription.
    The current breakdown of ownership is shown in the chart below:

                                AsDB SHAREHOLDING AND VOTER POWER--SEPTEMBER 2010
----------------------------------------------------------------------------------------------------------------
                                                  Shareholding  Voting power
                     Member                         (percent)     (percent)         Status of Subscription
----------------------------------------------------------------------------------------------------------------
Japan...........................................        22.4          18.2    Fully subscribed.
China...........................................          9.3           7.7   Fully subscribed.
India...........................................          9.1           7.6   Fully subscribed.
Indonesia.......................................          7.8           6.5   Fully subscribed.
United States...................................          7.5           6.3   Pending subscription.
----------------------------------------------------------------------------------------------------------------
 Source: AsDB Treasury.

    As in any institution, an increased shareholding is commensurate 
with increased influence. In this case, having a borrowing member 
country as the largest shareholder could complicate efforts to increase 
loan pricing, flow of funds to other borrowing member countries, and 
reform of the institution, particularly in the area of development 
results. In addition, it effectively eliminates the co-veto on 
membership and capital structure issues that we share with Japan.
    China's temporary status as a larger shareholder than the United 
States has not yet been a significant obstacle to our goals. 
Nevertheless, we expect that future efforts in the area of loan pricing 
or transfers to the concessional window would be especially difficult 
because China in combination with other large developing member 
countries, such as India and Indonesia, could effectively block such 
actions at the Board. When fully subscribed, the United States and 
Japan will again be the largest coshareholders.

    Question. What type of lending is the Asian Development Bank 
providing China? How has that changed during the past few years? What 
type of loans has the United States supported for China at the ADB? Do 
you think that loans through the Asian Development Bank to China could 
be improving China's competitive position vis-a-vis the United States 
and thereby contributing to economic concerns in our country? Why 
should the U.S. taxpayer contribute to the Asian Development Bank when 
it is providing funds to a country that is a net creditor of the United 
States?

    Answer. In recent years, the Asian Development Bank has worked with 
China to change the composition of its borrowings from the Bank to 
focus far more on environmentally sustainable growth and rural 
development. AsDB's investments are in areas that do not erode the U.S. 
competitiveness vis-a-vis China, but instead focus on areas that guide 
sustainable development.
    The Asian Development Bank has shifted its support to provinces 
inland where China's poorest are concentrated. The AsDB's strategy for 
China focuses on providing support to the 500 million people in China 
who still live on less than $2/day and who live in rural areas, where 
environmentally sustainable growth and improved access to basic 
services are integral to lifting people out of poverty. Furthermore, 
the AsDB's support of China's rural development and environmental 
sustainability has increased, representing a shift away from the Bank's 
previous focus on transportation and industry. Finally, AsDB assistance 
has helped rehabilitate zones devastated by the historic Sichuan 
earthquake by reconstructing roads, bridges, and schools.
    China values AsDB lending because of its high-quality 
implementation through tough anticorruption controls and environmental 
safeguards. Although AsDB typically finances only a fraction of total 
projects costs, its safeguards apply to the total loan amount. The 
United States has an interest in continued AsDB financing in China 
because Bank financing explicitly includes social safeguards, 
anticorruption provisions, and policy reforms.

    Question. Is China's exchange rate discussed or addressed at the 
Asian Development Bank? If so, how?

    Answer. The choice of monetary policy falls outside the mandate of 
the AsDB and other MDBs. We have consistently encouraged the MDBs to 
focus on their core capabilities. As such, China's exchange rate is not 
discussed or addressed at the Asian Development Bank.
    Instead, the AsDB focuses on a regional integration strategy to 
support policy dialogue and capacity-building through regional 
initiatives and bilateral technical assistance. Much of this work 
focuses economic surveillance, capital markets developments, financial 
sector reforms and restructuring. The overarching goal is to increase 
financial openness and integration, and improve the strength of the 
banking sector.
    By way of example, AsDB has a Regional Policy and Advisory 
Technical Assistance Program for deposit insurance establishments in 
China and Mongolia. The technical assistance provides support to the 
central banks of Mongolia and the PRC to develop and help establish 
national deposit insurance institutions that (i) conform to the 
specific conditions of each country's financial market; (ii) suit the 
current unique global financial market circumstances; (iii) minimize 
moral hazard; and (iv) provide extensive public information campaigns 
as to the purpose and functions of deposit insurance, particularly for 
households that are poor, income-insecure, or have low financial 
sophistication.
    Finally, the AsDB's overall work in China ultimately supports U.S. 
objectives by helping to create domestic sources of demand there, 
reorienting growth away from the export sector.

    Question. To what extent does the Asian Development Bank 
incorporate information and communication technology (ICT) in their 
programs? Is there a cohesive strategy on ICT as a development tool? If 
so, please describe. What could the Asian Development Bank do better 
with regard to ICT?

    Answer. As early as the 1970s, the AsDB recognized the need to 
support information and communication technology (ICT) in development. 
The AsDB recommitted in 2001 to support ICT with a new, cohesive 
strategy for its developing member countries because it recognized the 
widening inequalities in information, skills, technology, 
infrastructure and institutions between developing member countries and 
the industrialized world. AsDB assistance is focused on promoting ICT 
policies, applications, human development and strategic alliances; it 
encourages regional cooperation and networking to enhance local efforts 
and promote private sector participation.
    Despite all this good work, ICT does not figure prominently in the 
AsDB's development assistance, and has only averaged $123 million per 
year, in contrast to the World Bank where ICT applications have been 
estimated at approximately $1 billion per year. Improvements could be 
made to tailor ICT products to developing member country needs and to 
further integrate ICT as a component part of the AsDB's core 
capabilities in large-scale infrastructure.
                                 ______
                                 

 Responses of Inter-American Development Bank U.S. Executive Director, 
    Gustavo Arnavat, to Questions Submitted by Senator Richard Lugar

    Question. In 2008, the Inter-American Development Bank suffered 
$1.9 billion in losses. Since then, the IDB's portfolio has experienced 
some recovery. What is the current size of the IDB's losses? Is there 
any link between the losses and the need for a general capital 
increase? Please explain.

    Answer. According to the Bank's Finance Department, over the 18-
month period ending December 31, 2008, the IDB booked losses in its 
trading investment portfolio of approximately $1.9 billion, mostly 
unrealized accounting losses on asset and mortgage backed securities--
all of which were rated triple-A at the time of purchase--that were 
marked-to-market in accordance with U.S. GAAP.
    Beginning in the second quarter of 2009, the IDB began booking 
gains on these same securities as market conditions improved and as it 
received principal repayments at par. As of September 30, 2010, more 
than $2.8 billion had repaid at par (out of almost $7 billion 
originally held asset and mortgage backed securities) and cumulative 
valuation losses had been reduced to about $1.0 billion, reflecting 
these par repayments as well as higher market prices. Of the $1.0 
billion, about $132 million represents net realized losses, incurred 
when the positions were restructured or sold below par. The Bank 
believes that the valuation losses as of September 30, 2010, will be 
further reduced over time for those securities held and continuing to 
repay at par, although it anticipates additional net realized losses as 
it monitors market conditions and decides to further reduce its 
exposure to asset and mortgage backed securities.
    In light of the 2007-09 global financial crisis, the IDB 
implemented various reforms aimed at strengthening its investment 
management framework. These include: (a) a change in the IDB's overall 
investment policy to allow for more diverse investment strategies, 
hence reducing overall risk; (b) revisions to the IDB's investment 
guidelines, including concentration constraints to improve 
diversification across asset classes, and shorter maturities to lessen 
the overall investment portfolio's vulnerability to market price 
volatility; and, (c) further enhancements to the Bank's investment and 
risk management systems, including a capital project to provide 
capabilities for advanced portfolio analytics and risk measures.
    The unrealized mark-to-market losses in the trading investment 
portfolio were not a significant contributing factor to the request for 
a general capital increase. Rather, the request stemmed from the Bank's 
decision, with the support of its shareholders, to significantly 
increase lending volumes to help developing countries withstand the 
effects of the global financial crisis. As was the case at other MDBs, 
the front-loaded use of the IDB's capital to support increased lending 
in 2008 and 2009 depleted its ability to sustain increased volumes of 
lending after 2010, prompting a need for a capital increase. In 
addition, the commitment by the Governors of the Bank to significantly 
increase grants to fund--from the Bank's Ordinary Capital--Haiti's 
reconstruction program further increased the need and urgency felt by 
the Governors to approve the capital increase for the Bank.

    Question. Regarding allegations of irregularities with the Camisea 
project, what type of investigation was conducted by the Office of 
Institutional Integrity (OII)? Did the team sent from OII in Washington 
to Lima in 2007 review all relevant documents, interview key witnesses 
and visit leak sites? Specifically, how many people were on the OII 
team reporting directly to the IDB? Did the OII team visit the pipeline 
site? Did the expert certifying the welds in the locations where leaks 
were reported visually inspect those welds him or herself? Did the OII 
investigators have sufficient time in Lima and Washington to complete 
their investigation? Did team members agree about the conclusions to be 
drawn from the investigation? Have there been any followup 
investigations regarding the Camisea project?

    Answer. I have consulted extensively with the OII and the General 
Counsel's office, and they have informed me that confidentiality 
requirements preclude them from disclosing the conclusions of or 
information pertaining to the investigation. However, based on these 
consultations I can confirm that OII processed an investigation into 
allegations of fraudulent practices regarding the Camisea project and 
communicated its conclusions to the original complainants, in writing, 
in May 2007.

    Question. U.S. businesses and consultants routinely pursue Inter-
American Development Bank projects. For the last five years, what are 
the top five recipient countries of procurement contracts and how much 
did they receive? If the United States is not in the top five, what was 
the size of contracts won by U.S. firms in the past five years? For 
every one dollar that the United States has contributed to the Inter-
American Development Bank since the institution was founded, how much 
have U.S. companies have won in procurement contracts?

    Answer. For the period 2005-09, the top five recipient countries of 
procurement contracts stemming from investment loans were:

Top 5 Suppliers Aggregate Totals (FY 2005-09)

                             [$ in billions]

        Supplier Country                                          Amount
Brazil............................................................  $7.0
Argentina.........................................................   4.9
Mexico............................................................   3.4
Colombia..........................................................   1.6
United States.....................................................   1.0

    Since the Bank's inception, U.S. companies have won $8.4 billion in 
procurement contracts stemming from investment loans or $1.36 for every 
dollar the United States has contributed to the Bank's Ordinary Capital 
and the Fund for Special Operations. These figures do not reflect the 
full benefits derived by U.S.-based firms in connection with awarding 
of procurement contracts because they exclude contracts awarded to non-
U.S. affiliates of U.S. firms.
    Additionally, because the IDB's headquarters are located in 
Washington, DC, U.S. companies are uniquely positioned to pursue 
corporate procurement opportunities. For the period 2005-09, the IDB 
issued approximately $231 million in purchase orders and contracts to 
U.S. firms or 95 percent of total corporate procurement for the period.
    Finally, it is important to note that I count on the services of 
several U.S Commercial Service representatives (CSOs). They are charged 
with ensuring that U.S. companies enjoy the best possible access to IDB 
procurement opportunities by training U.S. companies on the IDB 
procurement process, assisting with dispute resolution, and educating 
the private sector about business opportunities created by IDB 
activities.
    For the 10-month period ended October 31, 2010, IDB-dedicated CSOs 
conducted over 100 counseling sessions with U.S. firms, most of them 
new to the IDB. Also during this timeframe, those CSOs conducted 12 
formal, large audience presentations reaching over 700 attendees, most 
of whom were new to the procurement process.

    Question. To what extent does the Inter-American Development Bank 
incorporate information and communication technology (ICT) in their 
programs? Is there a cohesive strategy on ICT as a development tool? If 
so, please describe. What could the Inter-American Development Bank do 
better with regard to ICT?
    In 1999, the IDB Board of Executive Directors approved a 
multisectoral policy for Information Age Technologies and Development 
(OP-711). Per OP-711, the Bank's focus in ICT is to increase the 
efficiency and effectiveness of social and economic development 
programs.
    The IDB offers its borrowing countries financing, as well as 
capacity-building and technical assistance, conducive to their 
integration into the global knowledge economy. It also offers a network 
of expertise and a platform for knowledge generation, exchange, and 
dissemination of best practices in the areas of science, technology, 
innovation and ICT. ICT programming is covered in the Science and 
Technology Division, which was created in 2007.
    While the Science and Technology Division has a cross-sector 
mandate for introducing ICT in the Bank's development agenda, there are 
other sectoral divisions whose operations are intensive in the use of 
ICT and that have specialized staff who work on such operations. These 
divisions are the Institutional Capacity of the State (e-Government) 
division, the Education (ICT for Education) division, and the 
Multilateral Investment Fund.
    Examples of the Bank's ICT programs include: supporting an e-
procurement platform in Chile, which helps SMEs provide goods and 
services to the Government; monitoring teacher attendance in Haitian 
schools; and providing remote child and maternal health care in Peru.
    One area where the Bank could do better is to mainstream ICT more 
in its programming. The Science and Technology Division is housed 
within the Social Sector Department. Therefore, organizationally it is 
not integrated as efficiently with other divisions that focus on 
programming that can benefit from investments in ICT, such as Fiscal 
and Municipal Management, Transport, Rural Development and Natural 
Disasters, and Opportunities for the Majority.
                                 ______
                                 

 Responses of African Development Bank U.S. Executive Director, Walter 
         Jones, to Questions Submitted by Senator Richard Lugar

    Question. U.S. businesses and consultants routinely pursue African 
Development Bank projects. For the last 5 years, what are the top five 
recipient countries of procurement contracts and how much did they 
receive? If the United States is not in the top five, what was the size 
of contracts won by U.S. firms in the past 5 years? For every one 
dollar that the United States has contributed to the African 
Development Bank since the institution was founded, how much have U.S. 
companies won in procurement contracts?

    Answer. The top five recipient countries of procurement contracts 
for the years 2005-009 are:

Top 5 Suppliers Aggregate Totals (FY 2005-09)

                             [$ in millions]

        Supplier Country                                  Amount (USD *)
China.............................................................$1,454
Japan.............................................................   511
France............................................................   433
Tunisia...........................................................   477
Morocco...........................................................   467

* At current USD/SDR exchange rate.

    Over that period, the U.S. received $164.4 million in procurement 
contracts, placing 11th, with a 2.3 percent share. While this ranking 
is lower than desired, it potentially understates actual U.S. 
procurement wins, as U.S. companies may be subcontractors in some 
instances, which would not be counted. Also, procurement information is 
recorded by country of registration, so an American firm based outside 
the United States will not be counted as an American win. Moreover, 
until very recently, Africa has not been seen as a desirable investment 
destination for many American firms and there is limited knowledge of, 
and interest in, the AfDB among many American firms. Finally, many of 
the contracts that the AfDB finances simply are not large enough to 
attract attention from American providers. For example, only recently 
has the AfDB begun dedicating significant resources to large 
infrastructure projects, which could create attractive procurement 
opportunities for companies. Prior to this strategic reorientation, 
many AfDB projects relied heavily on small-scale, local procurement 
which was not necessarily attractive for U.S. exporters.
    For every one dollar the United States has contributed to the 
African Bank Group, U.S. companies have won about 19 cents in 
procurement contracts. U.S. firms have received about $600 million in 
contracts for African Bank Group operations since 1983, relative to 
U.S. cumulative contributions of about $3 billion to the African 
Development Fund and $175 million to the African Development Bank. The 
more aggressive reorientation towards infrastructure, particularly 
renewable energy and technology-intensive projects, should be conducive 
to a rise in the level of U.S. procurement. Last, with concerted 
efforts underway to make more companies familiar with the AfDB, and as 
Africa itself becomes a more attractive investment opportunity, 
prospects for U.S. procurement at the AfDB should likewise increase.
    Support for U.S. companies seeking procurement opportunities at the 
Bank or funding from the private sector arm of the AfDB is provided by 
a Senior Commercial Service Officer (CSO) from the Department of 
Commerce. The CSO is responsible for with ensuring that U.S. companies 
enjoy the best possible access to AfDB procurement opportunities by 
training U.S. companies on the procurement process, assisting with 
dispute resolution, and educating the private sector about business 
opportunities created by AsDB activities. The office has been 
instrumental in providing transparency and contract resolution for the 
AfDB procurement process through factsheets, dialogue with the 
procurement staff and webinars on ``doing Business with AfDB.''

    Question. To what extent does the African Development Bank 
incorporate information and communication technology (ICT) in their 
programs? Is there a cohesive strategy on ICT as a development tool? If 
so, please describe. What could the African Development Bank do better 
with regard to ICT?

    Answer. The African Development Bank recognizes the critical role 
that information and communication technology can play in stimulating 
growth, alleviating poverty, attracting private sector investment, and 
promoting good governance and accountability through efficient public 
service delivery in Africa. In recent years, the Bank has moved from an 
unfocused approach to the ICT sector to one of greater prominence, 
including the creation of a dedicated ICT for Development Division 
within the Infrastructure Department as part of an organizational 
restructuring approved in April 2010. The AfDB Board approved the 
Operational Strategy for Information and Communication Technology in 
October 2008, and the strategy is currently under review for a possible 
update. The strategy has two pillars: (1) provision of regional and 
national ICT infrastructure backbones and (2) supporting creation of 
enabling policy and regulatory environments.
    Under the first pillar, the Bank is currently funding preinvestment 
studies on regional broadband backbones for the Southern, Eastern, 
Western, Central, and North African regions and will move forward with 
the projects once the studies are complete and funding is available. 
The AfDB's Private Sector Department is funding the Main One cable 
project along Africa's western coast, the EASSy cable for Eastern and 
Southern Africa, two satellite projects, and a shared telecom tower 
infrastructure project, among others. Where possible, the Bank also 
seeks to incorporate fiber optic cable components in its road, 
electricity transmission line, and railroad projects. Work on the 
policy and regulatory framework is largely done through technical 
assistance and analytical components of the preinvestment studies on 
the infrastructure backbone. Efforts are underway to fund the 
establishment of regional ICT centers of excellence in Rwanda, Tunisia, 
and Mali.
    There are three areas where we see scope for improvement in the 
AfDB's engagement in the ICT sector:
    1. More effort could be made to incorporate ICT components in other 
infrastructure projects. In particular, we would like to see the Bank 
work more closely with governments to identify opportunities for 
public-private partnerships to provide this supporting ICT 
infrastructure.
    2. We would like to see stronger implementation of the second 
strategy pillar through more attention to ICT policy and regulation in 
the design of AfDB governance programs focusing on business climate 
reform. Many of these governance programs seek to enhance the 
efficiency of public service delivery and boost transparency in public 
finances, but existing programs have not taken full advantage of the 
role ICT can play in promoting these goals. While the AfDB has become a 
leader in financing the construction of regional infrastructure, 
incorporating ICT policy reforms into regional integration projects 
remains a challenge requiring more attention.
    3. The Bank needs to upgrade and modernize its internal ICT 
systems. This is a necessary component of the AfDB's efforts to 
decentralize and put itself closer to its clients. Strengthening 
internal ICT will improve business process efficiency, contributing to 
better project performance, easier supervision, and enhanced results 
tracking, while further reducing opportunities for fraud and 
corruption.
                                 ______
                                 

  Responses of European Bank for Reconstruction and Development U.S. 
  Executive Director, James Hudson, to Questions Submitted by Senator 
                             Richard Lugar

    Question. U.S. businesses and consultants routinely pursue European 
Bank for Reconstruction and Development projects. For the last 5 years, 
what are the top five recipient countries of procurement contracts and 
how much did they receive?

    Answer. Over the last 5 years (2005-09), EBRD projects resulted in 
$7.5 billion (=5.8 billion) \2\ in public sector procurement contracts. 
According to EBRD figures, the top five recipient countries are as 
follows:
---------------------------------------------------------------------------
    \2\ EBRD assumes an exchange rate of =1 = $1.30 for planning/
budgeting purposes
---------------------------------------------------------------------------

Top 5 Suppliers Aggregate Totals (FY 2005-09)

                             [$ in millions]

        Supplier Country                                   Amount (USD*)
Russia............................................................$2,323
Croatia...........................................................   747
Austria...........................................................   627
Italy.............................................................   509
Turkey............................................................   486

* Assumes an exchange rate of =1 = $1.30.

    During 2005-09, the EBRD's cumulative business volume was =28 
billion or $36 billion. The relatively low proportion of public sector 
procurement contracts reflects the fact that EBRD's operations are 
heavily oriented to toward private firms.
    Support for U.S. businesses interested in EBRD procurement 
opportunities is provided by the Commercial Service's Liaison Office to 
the EBRD (CS/EBRD). The CSO is responsible for with ensuring that U.S. 
companies enjoy the best possible access to EBRD procurement 
opportunities by training U.S. companies on the procurement process, 
assisting with dispute resolution, and educating the private sector 
about business opportunities created by EBRD activities.

    Question. If the United States is not in the top five, what was the 
size of contracts won by U.S. firms in the past 5 years?

    Answer. U.S. firms have won $15,448,280 (=11,883,292) in contracts 
over the last 5 years (2005 09). U.S. firms bid on 24 contracts over 
the 5 years and won 6 of them for a 25-percent success rate. It is 
important to note, however, that this figure may be understated as it 
does not include activities of the overseas subsidiaries of U.S. firms. 
The value of those tenders would be reflected in the figures for 
countries where the firm is registered.

    Question. For every one dollar that the United States has 
contributed to the European Bank for Reconstruction and Development 
since the institution was founded, how much have U.S. companies have 
won in procurement contracts?

    Answer. According to EBRD procurement data, U.S. registered firms 
have won approximately =166 million, ($216 million) in public sector 
procurement contracts since the EBRD's founding in 1991, which 
represents approximately 32 percent of the paid-in capital that the 
U.S. has contributed to the EBRD and 8.3 percent of the total paid-in 
and callable capital.\3\ As noted above, however, that this figure may 
be understated as it does not include activities of the overseas 
subsidiaries of U.S. firms. The value of those tenders would be 
reflected in the figures for countries where the firm is registered. It 
should be noted that the proportion of EBRD public sector finance is 
low relative to other MDBs. Approximately 80 percent of EBRD's 
investments are made in private firms where it is not possible to 
ascertain the level of U.S. procurement because the EBRD has no formal 
oversight of procurement by private clients.
---------------------------------------------------------------------------
    \3\ EBRD assumes an exchange rate of =1 = $1.30 for planning/
budgeting purposes.

    Question. To what extent does the European Bank for Reconstruction 
and Development incorporate information and communication technology 
(ICT) in their programs? Is there a cohesive strategy on ICT as a 
---------------------------------------------------------------------------
development tool? If so, please describe.

    Answer. The EBRD continues to support both public and private 
sector initiatives in the telecommunication industry's transformation 
by tackling one of its key challenges: physical infrastructure. Whether 
the underlying infrastructure is cable, fiber, or some wireless form 
such as WiMAX (Worldwide Interoperability for Microwave Access), the 
goal remains the same: quality, high-speed broadband access by the mass 
market.
    While increased communication access is critical, it is not 
sufficient to support the development of knowledge-based economies--
economies where knowledge resources, know-how, skills, and innovative 
capacity diversify the economy and promote productivity, sustainable 
growth, higher valued jobs and social cohesion. Therefore, the EBRD has 
been directing more of its investments into innovative private 
enterprises in the ICT area to support IT infrastructure such as data 
centers, software development and services, media and content creation 
and distribution, and business services where employment opportunities 
for the highly skilled human capital residing in the region can be the 
greatest.
    To foster the emergence and growth of such businesses, the EBRD is 
also increasing its support to entrepreneurs by investing in the 
creation of innovation or technology-led venture capital and private 
equity funds. Through these funds, the EBRD is hoping to develop a new 
class of entrepreneurial investor as well as support that section of 
the economy where the most innovation is driven--the small and medium 
enterprise sector.

    Question. What could the European Bank for Reconstruction and 
Development do better with regard to ICT?

    Answer. We are working with the EBRD to better leverage its 
investments in the ICT sector to push for greater reforms, in areas 
such as the protection of intellectual property rights and promotion of 
more transparent regulatory regimes, in order to lay the groundwork for 
greater private sector investment.
                                 ______
                                 

 Response of U.S. Executive Director Curtis Chin to Question Submitted 
                       by Senator Robert Menendez

    Question. The World Bank and Asian Development Bank are already 
supposed to internalize the full costs and benefits of all projects for 
which they lend. In the energy sector this includes unpriced costs and 
benefits such as those associated with the risks of disruption of 
energy supplies; fuel price instability, the costs and risks of oil 
spills, toxic contamination, acid rain, and climate change. How has the 
World Bank incorporated the range of costs associated with fossil 
fuels?

    Answer. The Asian Development Bank's work in fossil fuels is 
limited, and instead its work in the energy sector focuses on clean 
energy investments through energy efficiency improvements and renewable 
energy projects. The AsDB's energy policy recognizes that fossil fuels 
such as coal and oil are internationally traded commodities with 
established commercial interests, and as such the AsDB does not finance 
coal mine development, except for captive use by thermal powerplants, 
or oil field development, except for marginal and already proven oil 
fields.

Responses of U.S. Executive Director Ian Solomon to Questions Submitted 
                       by Senator Robert Menendez

    Question. The World Bank and Asian Development Bank are already 
supposed to internalize the full costs and benefits of all projects for 
which they lend. In the energy sector this includes unpriced costs and 
benefits such as those associated with the risks of disruption of 
energy supplies; fuel price instability, the costs and risks of oil 
spills, toxic contamination, acid rain, and climate change. How has the 
World Bank incorporated the range of costs associated with fossil 
fuels?

    Answer. At the World Bank, the project appraisal process includes 
an analysis of risk factors that could affect the financial viability 
of the proposed project. Where relevant, these factors include fuel 
price volatility, energy supply disruption, and domestic environmental 
regulation. In addition, the environmental assessment and management 
process incorporates measures to avoid and mitigate environmental 
impacts and risks such as oil spills and toxic contamination. The costs 
of these measures are incorporated into project capital and operating 
costs. For projects with major carbon emissions, the World Bank 
conducts a ``switching analysis'' in which it determines the shadow 
price of carbon that is associated with the incremental cost of lower 
carbon alternatives to the proposed project.

    Question. From fiscal year 2006-10, World Bank lending for fossil 
fuels increased from $1.5 billion to $6.2 billion. Fiscal year 2010 
represented a record year for fossil fuel lending at the Bank with $4.4 
billion for coal projects alone. This compares to only $3.3 billion in 
financing for all new renewable energy and energy efficiency projects. 
How does the Bank justify this dramatic increase in coal and fossil 
fuel lending? Given a general capital increase would these figures rise 
further? How will the Bank ensure that lending for fossil fuels is 
rapidly phased out when it continues to increase lending for fossil 
fuels?

    Answer. From 2006 to 2010, World Bank lending for the energy sector 
increased overall. Of the total, the share for fossil fuel lending 
fluctuates from year to year in part from the ``lumpy'' nature of 
fossil fuel projects, which tend to be capital intensive. In addition, 
this period of time was associated with a contraction in global capital 
markets, which resulted in some countries facing challenges in 
financing all infrastructure projects.
    There is no direct relationship between the size of the World 
Bank's capital base and the amount of money it lends for fossil fuel 
projects, since the latter is largely driven by developing country 
demand and World Bank sectoral strategies. In this regard, the World 
Bank's lending for coal projects is driven by its Strategic Framework 
for Development and Climate Change (SFDCC), which imposes substantive 
constraints on financing such projects.

    Question. Companies are attempting to position supercritical coal 
technology as a low carbon alternative to more CO2 intensive 
subcritical plants. Regardless of the technology, however, coal is 
still the most CO2 intensive form of energy. How does the Bank define 
low carbon technology? Would the Bank identify supercritical or 
ultrasupercritical coal technologies as low carbon technologies?

    Answer. The World Bank defines ``low carbon'' as renewable energy 
projects, energy efficiency, powerplant rehabilitation, district 
heating, biomass waste-fueled energy, and gas-flaring reduction.

    Question. The Bank states that both powerplant rehabilitation and 
fuel switching are considered low carbon projects. However, both can 
still involve carbon intensive fossil fuels.

   How much of the Bank's low carbon lending is for new 
        renewable energy projects rather than merely reducing the 
        carbon intensity of fossil fuel use?

    Answer.
     the world bank group: trends in energy financing (march 2010)
   In 2009, the World Bank Group set a ``green'' record: 40 
        percent of our energy financing was dedicated to renewable 
        energy or energy efficiency projects in developing countries, a 
        total of $3.3 billion. This is a 24-percent increase from 2008, 
        which itself was an 87-percent increase over the previous year. 
        We are committed to growing our low carbon energy project 
        financing to at least 50 percent of all Bank Group energy 
        financing by 2011.
   Our total commitments in 2009 on renewable energy, energy 
        efficiency, transmission and distribution, sector reform etc., 
        accounted for more than 75 percent of our total energy 
        lending--a record high proportion.
   In 2004, we committed at the Bonn International Renewable 
        Energies Conference to increase support for new renewable 
        energy and energy efficiency by nearly $1.9 billion over the 
        period 2005-09. In fact, our financing surpassed $7.0 billion, 
        more than 3\1/2\ times the target.
   During the past 5 years, we approved 364 renewable energy 
        and energy efficiency projects in 85 countries, including 99 
        projects in 46 countries last year alone.
   Our fossil fuel financing in 2009 was less than 24 percent 
        of our total energy portfolio, the lowest ever. Two-thirds of 
        our fossil fuel projects were in clean natural gas. Of the 
        remaining projects, half were in coal; of that, half were to 
        rehabilitate existing coal plants to make them more efficient 
        and emit fewer GHGs. We finance very few new coal generating 
        plants: about one every 2 years. In terms of megawatts 
        generated by new coal plants over the next 3 years, our 
        financing is approximately 2.4 percent of what has been 
        committed for such plants in OECD countries.
   Bank Group financing for thermal generation has steadily 
        declined as our clean energy portfolio grows. Today, renewables 
        and energy efficiency make up 40 percent of our financing; a 
        decade ago, it was about 10 percent. The Climate Investment 
        Funds have $6.3 billion pledged, with $3.2 billion in 
        investment plans already endorsed to support more than $30.6 
        billion in clean technology projects.
        

        
   In some countries (e.g., Botswana, South Africa), under some 
        circumstances, there is no viable alternative to fossil fuel 
        development. In the near term, some countries have few or no 
        prospects for ``clean'' fuel energy sources. Hydro and wind 
        power potential is nonexistent; solar power remains too 
        expensive to produce and store, and insufficient for heavy 
        base-load use. Where electricity from a fossil fuel is a 
        commercially viable option in the near term and other sources 
        are not, extending access to electricity may well mean relying 
        on fossil fuel power generation.
   If thermal power generation is unavoidable in the near term, 
        our policy is to support countries on a case-by-case basis to 
        develop the least-cost, lowest carbon-based energy sources--
        under strict criteria as the lender of the last resort. Given 
        the impact of the financial crisis and the urgent need to 
        generate energy to promote growth and reduce poverty, we 
        believe we must continue to support a limited number of coal 
        projects in a handful of countries. These are unusual times and 
        we are responding to specific needs.

        We will support such projects provided that a panel of 
            external experts reviews any such project to determine that 
            it meets strict preconditions outlined in the Strategic 
            Framework on Development and Climate Change (see below).
        Our fossil fuel projects will respond to near-term, 
            critical energy necessities while helping countries move to 
            a medium-term low-carbon growth path. These projects will 
            include components that strengthen a country's efforts in 
            renewable energy, energy efficiency, energy sector capacity 
            building, and/or research and development.
        Over the medium to long term, developing countries should 
            be in a position to take advantage of low carbon 
            technologies, particularly as technical progress and 
            financing opportunities make them more deployable and 
            affordable.

   Our Strategic Framework on Development and Climate Change, 
        endorsed by our shareholder governments in 2008, outlines six 
        conditions under which we could support client countries to 
        develop coal power projects:
          (1) There is a demonstrated developmental impact (e.g., 
        improving overall energy security, reducing power shortage, or 
        access for the poor);
          (2) There is assistance to identify and prepare low carbon 
        projects;
          (3) There has been optimization of energy sources by 
        considering the possibility of meeting the country's needs 
        through energy efficiency and conservation;
          (4) There has been full consideration of viable alternatives 
        to the least-cost options (including environmental 
        externalities), and when additional financing from donors for 
        their incremental cost is not available;
          (5) The project uses the best appropriate available 
        technology, to allow for high efficiency and, therefore, lower 
        GHG emissions intensity; and
          (6) there is an approach to incorporate environmental 
        externalities in project analysis.

    Question. How is the Bank engaging recipient and developing member 
countries to consider low or zero carbon energy planning? Does the Bank 
plan on phasing out fossil fuel lending? If so, by when and what steps 
is the Bank taking now to achieve that result?

    Answer. The World Bank's Country Assistance Strategies are the 
primary vehicles for addressing energy planning in individual 
countries. Two-thirds of all new Country Assistance Strategies address 
climate issues, particularly adaptation; this number will only 
increase. According to the April, 2010, Interim Progress Report on the 
Strategic Framework on Development and Climate Change (SFDCC), the 
demand for World Bank Group engagement in coal power generation will be 
limited while the demand for financing low carbon options will grow. 
There will be continued demand for rehabilitation of coal-fired 
powerplants, which will reduce GHG emissions, and projects that lead to 
improvements in local environmental quality. A review of the lending 
pipeline shows no greenfield coal generation projects in middle income 
countries for the next few years and very few in IDA countries.

    Question. The World Bank recently appointed Nobel Prize recipient 
Daniel Kammen as Chief Technical Specialist for Renewable Energy and 
Energy Efficiency. What steps does the World Bank anticipate Mr. Kammen 
will take to strengthen the financing capacity for renewable energy and 
energy efficiency projects? Will Mr. Kammen's strategies for renewable 
energy and energy efficiency financing lead to a decrease in financing 
for fossil fuel projects?

    Answer. This is a new position created to provide strategic 
leadership on the policy, technical, and operational fronts. The aim is 
to enhance the operational impact of the Bank's renewable energy and 
energy efficiency activities, while expanding the institution's role as 
an enabler of global dialogue on moving energy development to a cleaner 
and more sustainable pathway. Mr. Kammen's appointment takes effect in 
October. Treasury intends to meet with him shortly thereafter to 
discuss his approach to strengthening the World Bank's capacity to 
finance renewable energy and energy efficiency projects.