Lending operations continued to expand in the third decade, reaching $43 billion, an almost threefold increase from the second decade, with 30% of lending financed from ADF. Public sector and government-guaranteed loans accounted for 96%, with the rest going to direct private sector loans or equity. Annual lending commitments grew at an average of 14% from 1987 to 1993 before dropping by 29% in 1994. The decline was due to a combination of factors. First, difficult negotiations for a new general capital increase (GCI IV) took over 8 years to complete. As a result and for the first time, ADB’s lending program hit the lending headroom in 1994. At the same time, in response to the recommendations of the Task Force on Improving Project Quality,¹⁹ ADB undertook a one-time spring cleaning of its portfolio to weed out inactive and slow-moving projects, and implemented a freeze on new lending activities. The Bank used this opportunity to conduct a deeper examination of the absorptive capacity of some of its borrowers. Normal lending resumed in 1995 and 1996, back to 1992–1993 levels and above the $5 billion annual mark (Figure 1).

Compared to the previous decade, the geographic distribution of ADB lending shifted, as the PRC and India became active borrowers (each accounting for 15% of total lending over the decade). Consequently, the share of lending going to South Asia and East Asia increased. Southeast Asia continued to receive the greatest share, though its share was reduced from 52% in the second decade to 41% in the third. Lending to Indonesia increased significantly, accounting for more than half of lending to Southeast Asia. ADB resumed lending to Cambodia and Viet Nam after a hiatus of almost 2 decades.²⁰ The share of lending to Central and West Asia declined modestly from 18% in the second decade (1977–1986) to 14% in the succeeding 10 years (1987–1996). ADB new members (Kazakhstan, the Kyrgyz Republic, and Uzbekistan) borrowed for the first time only in the latter part of the decade. Afghanistan stopped borrowing in 1979 and would not resume activities until 2001, due to political factors. The Pacific subregion continued to account for the smallest share of lending, with Papua New Guinea accounting for more than half of lending to the Pacific. The top five borrowers over the third decade were Indonesia (22%), the PRC (15%), India (15%), Pakistan (13%), and the Philippines (9%). Figure 2 shows lending operations by region.

ADB’s operations in the PRC started in 1986, at a time when the country was in the process of moving rapidly from a centrally planned economy to a market-oriented system. During the first 10 years of operation (1986–1996), ADB lending in the PRC reached $6.3 billion. All loans were financed from ordinary capital resources (OCR). Lending was heavily concentrated on physical infrastructure with transport and information and communication technology (ICT) accounting for 41% of lending, and the energy sector accounting for another 22%. The Bank’s lending operations were complemented by its TA operations, which amounted to about $100 million over the same period. The Bank’s TA assisted the PRC in preparing projects, instituting policy reforms, and supporting institution building. The PRC’s lack of access to ADF limited the Bank from playing a key role in addressing social development issues and issues that were at the core of the Bank’s new MTSF. However, there was a significant evolution in the composition and location of the Bank’s PRC portfolio over the decade.

The first half of the decade (1986–1991) was a formative stage in the relationship between the Bank and the PRC. During this period, the PRC borrowed mainly for its industries either directly or through financial intermediaries. ADB operations were largely in the eastern coastal seaboard, which was the country’s economic heartland, chosen by the PRC government to be developed as a growth corridor for the whole country. During this period, the Bank played a minor role in identifying projects to finance. It was, by and large, the central authorities who decided which projects were to be funded. The second phase (1992–1996) coincided with significant reforms and economic development following Deng Xiaoping’s southern tour. ADB operations grew rapidly. As a result of continuous dialogue with the government on the Bank’s desire to diversify its operational program to cover more energy and infrastructure projects, the government allowed provincial governments with adequate foreign exchange repayment capacity to borrow from ADB for selected infrastructure projects. This led to a major shift in the portfolio from industry and finance to infrastructure. Apart from infrastructure, there was substantial lending for the financial sector and environment-related projects mostly in the industry sector. There were also increased efforts toward making cofinancing arrangements with the private sector. By the end of the decade, ADB’s concern about poverty reduction was better understood, which led to a shift in regional focus into the poorer interior provinces.²¹

After opting to be a nonborrowing member for 2 decades, India decided to borrow from ADB starting in 1986, mainly to access an additional (although modest in the country context) source of external finance. The first two country operational strategy studies approved in 1986 and 1990 supported the Government of India’s strategic thrust of developing a modern, technologically progressive economy. From 1986 to 1996, ADB lending reached $6.6 billion and was primarily oriented to support the government program of industrialization through loans to state-owned financial intermediaries and public infrastructure development (power, roads, railways, ports). Projects in the energy and transport sectors accounted for almost three-fourths (73%) of total lending. The rest went to finance (16%), public sector management (4%), multisector (4%), industry and trade (2%), and water and other municipal infrastructure services (2%). All loans were financed from OCR. Unavailability of ADF support precluded ADB assistance to the agriculture and social sectors. Lending operations were supported by TA, which amounted to $35 million over the period.

Although ADB’s assistance clearly helped to alleviate infrastructure bottlenecks, links to reforms and policy dialogue were weak for a number of reasons: (i) ADB had just started operations in India and was still getting to know the borrower, the sectors, and their issues—which was reflected in the still relatively low number of projects; (ii) ADB wanted its emerging relationship with India to be supportive rather than confrontational; and (iii) the political environment at the time was not conducive to externally driven policy dialogue. Several sector studies examining policy issues were launched and ADB staff gradually engaged in policy dialogue at the sector level.

After India started to introduce policy reforms in 1991, there was greater scope to translate sector policy dialogue into lending programs. The government played a major role in designing the reform measures. ADB responded by broadening its operational focus to include institutional and policy support. ADB’s swift response to India’s balance of payment crisis in 1991 through the Financial Sector Program Loan supported the government’s wide-ranging sector reforms. Subsequent country strategy (approved in 1996) would emphasize support for financial sector restructuring and the development of policy, regulatory, and institutional frameworks in ADB’s assistance for infrastructure development. It would also shift the focus from central government entities to state governments (Box 3). ADB’s quick response to the crisis and its shift to state-level operations, particularly in the northeastern and other poorer states, strengthened relations between ADB and the Government of India. The government came to regard ADB as a valuable, responsive development partner, which enabled ADB to begin to address policy issues more proactively through program loans as well as project assistance.²²

Several DMCs were considered economies in transition at the time: Cambodia, the PRC, the Lao People’s Democratic Republic (Lao PDR), Mongolia, Myanmar, and Viet Nam; as well as three republics of the former Soviet Union (Kazakhstan, the Kyrgyz Republic, and Uzbekistan). ADB’s operational strategy in those countries centered on three types of assistance: (i) short-term assistance to help their economies survive the shock of restructuring; (ii) financing for development of infrastructure, capital equipment, and technology to raise efficiency and environmental standards; and (iii) policy advice to build market-supporting institutions. ADB provided this assistance with a mix of program and project loans, and TA grants. ADB worked in close collaboration with the World Bank and the International Monetary Fund, which were providing policy advice related to macroeconomic stabilization and structural adjustment programs. ADB also collaborated closely with the European Bank for Reconstruction and Development, the United Nations Development Programme, and a number of bilateral donors. ADB assistance was accompanied by policy advice and sector restructuring to ensure better governance and appropriate macroeconomic and sectoral policies.

Short-term assistance included agriculture sector program loans to Kazakhstan, the Kyrgyz Republic, Mongolia, and Viet Nam. Policy advice focused on institutional reform, promotion of competitive markets, improvement of agricultural infrastructure, facilitation of restructuring, privatization of state-owned enterprises, and social and environmental concerns. Loans to the industrial sector supported policy and institutional reforms, private sector development, and strengthening of the legal and regulatory framework. Loans for infrastructure improvement included construction of expressways in the PRC, rural infrastructure improvement in Cambodia, and integrated urban development in the Lao PDR. By alleviating constraints in key sectors and supporting key policy reforms, ADB sought to improve economic efficiency and growth while at the same time addressing environmental concerns. ADB also conducted research and TA activities to help countries understand the transition process and its associated problems. ADB financed projects for capacity building and institutional development (for l...