[Senate Hearing 111-743]
[From the U.S. Government Publishing Office]
S. Hrg. 111-743
BANKING ON REFORM: CAPITAL INCREASE PROPOSALS FROM THE MULTILATERAL
DEVELOPMENT BANKS
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 15, 2010
__________
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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
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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
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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:
[email protected], 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.
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\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
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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.