PARLIAMENTARY DEBATES

HOUSE OF COMMONS

OFFICIAL REPORT

Second Standing Committee on Statutory Instruments, &c.

DRAFT ASIAN DEVELOPMENT BANK (FOURTH REPLENISHMENT OF THE ASIAN DEVELOPMENT FUND) ORDER 1987

Tuesday 9 December 1986

LONDON

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1

The Committee consisted of the following Members:

Chairman: Mr. Albert McQuarrie

Alexander, Mr. Richard (Newark)

Barnett, Mr. Guy (Greenwich)

Beith, Mr. A. J. (Berwick-upon-Tweed)

Bottomley, Mrs. Virginia (Surrey, South-West)

Bowden, Mr. Gerald (Dulwich)

Conway, Mr. Derek (Shrewsbury and Atcham)

Fallon, Mr. Michael (Darlington)

Faulds, Mr. Andrew (Warley, East)

Fields, Mr. Terry (Liverpool, Broadgreen)

Freeson, Mr. Reg (Brent, East)

Grist, Mr. Ian (Cardiff, Central)

Hargreaves, Mr. Ken (Hyndburn)

Hayes, Mr. Jerry (Harlow)

Holland, Mr. Stuart (Vauxhall)

MacKay, Mr. Andrew (Berkshire, East)

Patten, Mr. Christopher (Minister for Overseas Development)

Pike, Mr. Peter (Burnley)

Sainsbury, Mr. Tim (Hove)

Mr. S. A. L. Panton, Committee Clerk.

2
3 Second Standing Committee on Statutory Instruments, &c. Tuesday 9 December 1986

[MR. ALBERT MCQUARRIE in the Chair]

DRAFT ASIAN DEVELOPMENT BANK (FOURTH REPLENISHMENT OF THE ASIAN DEVELOPMENT FUND) ORDER 1987

10.30 am

The Minister for Overseas Development (Mr. Chris Patten): I beg to move, "That the Committee has considered the draft Asian Development Bank (Fourth Replenishment of the Asian Development Fund) Order 1987." I am pleased to be able to move the order, which seeks parliamentary approval for our continued support for one of the best of the international development banks. The Asian Development Bank was founded in 1966, to promote the development of poor countries in Asia and the Pacific. The Asian Development Fund, the subject of the present order, was set up in 1973 as the soft lending arm of the bank. It was established to consolidate several existing financial funds that had provided concessional loans on different terms, and to standardise the lending by the bank to its smaller and poorer member countries. The United Kingdom was a founder member of both the bank and the fund. The fund is an important part of the international development system. It has the same objectives as our own aid programme: the promotion of sustainable social and economic development and the relief of poverty. Nearly all of its resources have gone to the poorest of the bank's member countries since 1976. Our support for the fund reflects our historical interests in Asia, and not least our close relations with the Commonwealth countries in the region—10 of which have received ADF loans. Through being part of a multilaterally negotiated arrangement our contributions help to promote a greater flow of money to the poorer countries, and to the poorest people within those countries. Although the Government's policy is to put more weight where possible on our bilateral aid programmes, that multiplier effect is one main argument for continuing our support to multilateral institutions. From 1967 to 30 September this year, the fund approved 358 loans to a total value of nearly 5,500 million dollars. Nearly all of the fund's resources have gone to the bank's poorest developing countries—the main 4 recipients having been Bangladesh, Pakistan, Burma and Sri Lanka. The fund will continue to concentrate on lending to its poorest members. Agriculture and agro-industry have received by far the largest share of resources—nearly 53 per cent. since 1967. Proposals recently approved include a forestry development project in Nepal to establish plantations and nurseries covering some 10,000 hectares; a smallholder development project in Papua New Guinea to provide improved agricultural support services, transport infrastructure and social services; and a project to expand crop production among small-scale farmers in Pakistan. Another main sector for support has been energy; I was pleased to be able to announce recently further support for our bilateral programme for an energy project in Pakistan, which is supported by both the World Bank and the ADF. Other main sectors have been urban development, education, health and population, transport and development banks. Lending is interest free, except for a service charge of 1 per cent., with repayment over 40 years. The fund is beginning to play an important part in helping the development of its newest and smallest Pacific members. Unlike earlier replenishments, this one includes a special element for technical assistance grants. Previously, such grants have been largely funded by donors' voluntary contributions to the bank's technical assistance special fund. The new arrangement puts this form of assistance, which we value particularly highly, on a firmer footing. At our suggestion, it was agreed to allocate 72 million dollars from the replenishment to the technical assistance special fund, almost doubling total contributions to date. The initial funding and the first three replenishments had provided a total of some 6,700 million dollars for commitment between 1973 and this year. Of that, the UK's contributions totalled £161 million. Nearly £60 million of this has been spent. British business has also done well out of those commitments. From 1982 to 1985, for instance, British firms won orders worth 30 per cent. more than we spent in contributions to the fund. The fourth replenishment is to cover commitments from 1987 to 1990. Negotiations started in June 1985 and were successfully concluded in April of this year. The contributing countries include all the major western donors, together with two developing country members, Indonesia and South Korea. The contributors have agreed to provide a total of some 3·6 billion dollars. That is the largest replenishment ever, 12 per cent. more than the last one. It is a reasonable outcome considering the constraints on everyone's ability to help in the present economic circumstances. Subject to Parliament's approval, our own share will be £95,082,840. That is 3·8 per cent. of the total replenishment agreed between the developed member countries. This relates closely to our relative voting power in this bank, which in turn reflects our holding of capital stock. We contributed £72 million to the last replenishment. 5 The proposed replenishment and its terms and conditions were approved by the bank's board of governors on 1 October this year. The bank hopes that contributing countries' parliamentary procedures will be completed in time for the replenishment to become effective by 31 May 1987. Our subscription must be paid in four annual instalments, the first by not later than 1 November 1987. Our payments will be in the form of the deposit of non-interest bearing notes encashable on demand. We expect them to be encashed over several years beginning in in the early 1990s. It is only at that encashment stage that there will be call for funds from the aid Vote. The draft order authorises the Secretary of State to pay that subscription. The arrangements include provision for any donor country to modify its contributions pro rata if one or more of the others fails to meet its obligations in full. I commend the draft order to the Committee. I believe that the Asian Development Fund will continue to help the poorest countries of the region solve their serious problems by promoting economic and social progress, and that Britain should continue to play a significant part in this important task.

10.37 am

Mr. Stuart Holland (Vauxhall): We note the Minister's comment that United Kingdom firms gained orders worth 30 per cent. more from projects financed by the bank and the fund than the United Kingdom itself contributed. That message should be publicised beyond this Committee Room, because many people still consider that aid programmes put a strain on public funds, whereas they tend to generate resources. Interests are therefore mutual between the north and south of the world's economy as the work of multilateral agencies, such as the Asian Development Bank illustrates. Recently changes have been made in the bank's lending structure. The Minister said that most of the funding went to agriculture, but according to the bank's own report, lending to agriculture and agro-industry, on which covers irrigation and rural development, fell from 758 million dollars in 1984 to 559 million dollars in 1985. In other words, it is down by about one third. Lending to industry is also weaker and is declining. Although that is to be welcomed for the overall spending on social infrastructure projects, it reflects the relative recession in the world economy. The miracle economic growth of the south-east Asian newly-industraliased countries has been slowing down, thereby weakening investment prospects in other parts of south-east Asia and the Pacific economy. The Minister may wish to pay attention to those issues as he looks deeper into his portfolio, because there is a relation between the funding of projects, either on a bilateral basis or through multilateral agencies such as the ADB and ADF, and the overall rate of growth, demand or development in the world economy. 6 The Opposition believe that that issue should have been discussed at the recent London summit of the Common Market countries. No serious attempt was made to address the important need for European economic recovery and generate trade with the rest of the world bearing in mind the possible cut in the claimed Budget deficit in the United States and a deeper recession in the world economy. The viability of any investmet project depends on sustained growth and development in the world economy. One aspect of the bank's sectoral structure that we particularly support is social infrastructure, which covers urban development projects, housing subsectors, low-cost housing, water supply, sanitation, education and health facilities as well as projects relating to population growth. Latest figures show that although this sector previously had a small share of bank and fund lending, as I stressed in a debate on an earlier order, it now has the second largest share. Appropriate funding of multilateral agencies should not be concerned only with economic infrastructure or industrial development projects. To take development seriously and make our co-operation with it effective, priority should be given to housing, health, education and social services in developing countries rather than denying to them the benefits of the kinds of mixed economies that exist in virtually all the developed countries. It is too early to read a long-term trend into the increased share of social infrastructure spending, but it reflects the difficulties that the bank and the fund have in finding adequate industrial or other development projects because of the weakness in the world's economic growth. That weakness is apparent in the more successful of the newly-industrialised countries, such as Singapore. I am not suggesting that Singapore is a beneficiary of funds; I cite it to illustrate that the rate of growth of its economy has virtually ground to a halt and is in danger of becoming negative. A bias clearly exists towards bigger countries and bigger projects in the bank's funding. I raised the problem in an earlier debate on 22 January 1986 when I contrasted South Korea, a categoryy C country in bank lending, which was then receiving loans of 50 dollars per head in 1984, with Bangladesh, which was receiving only 17 dollars per head. That is an outstanding contrast. I should be interested to know whether that trend had changed and whether the Minister wished to see such a change.

10.44 a.m.

Mr. A. J. Beith (Berwick-upon-Tweed): I welcome the Government's continued support for the Asian Development Bank and the Asian Development Fund. As the hon. Member for Vauxhall (Mr. Holland) pointed out, it is less than a year since we discussed the affairs of the bank under the framework of an earlier order. Much has happened in the bank since then. The calm atmosphere that prevailed in our previous debate and that was characterised in the Minister's remarks today seems a long 7 way from the enormous internal battles that have gone on in the bank. The American representative to the bank has argued that the United States no longer believes in development economics and has strongly opposed the policies pursued by the bank and by the fund. Such a stream of adverse press reports emanated from the bank's offices, obviously inspired by internal discontent about some of the projects, that I began to wonder whether some of the bank's staff were next on the case list of the New South Wales court in an attempt to stop them leaking documents and going public on the reasons for their discontent. There has been major criticism, and it would be wrong to gloss over it. However, the bank is operating in some of the world's poorest countries, many of which are on the United Nations list of least developed countries with problems such as high infant mortality and low per capita incomes. The Asian Development Bank's declared policy is to focus on agriculture and the agro-industry sector to increase food production and to generate higher incomes and jobs for the rural poor. We endorse that emphasis and hope that it will become stronger. Projects to increase basic food production and to deal with rural poverty are the most arduous to mount. It is much easier to fund a straightforward power station project, for example, and more such projects can be included in the programme more quickly. One of the criticisms that have been made within the bank is that emphasis has been put on achievement of lending targets rather than on project quality. Criticism has tended to feed that section of United States opinion that is rather hostile to the work of the bank and the fund. I understand that Congress intends to reduce United States funding for the bank and for the soft loan operations. Perhaps the Minister has further information about that. Conditionality is now an issue here, as it is in the IMF. Clearly, the United States intends to attach stringent conditions to loans made by the bank. Some of these conditions may not be damaging. There is a strong case for greater recognition in some recipient countries, such as Pakistan, of the need for private enterprise development and for a loosening of the bureaucratic state hold on large parts of industry. However, the danger of conditionality is that the most important work in the poorest countries will be hindered. I hope that the Minister is aware of the controversy and the criticisms of work even in the countries that he cited. He quoted Nepal where, I believe, one of the main recipients of the bank's funding faces 22 charges of financial malpractice. He also quoted Korea, where a recent fisheries project was strongly criticised. Mr. Fujioka, the current Japanese head of the bank, has been criticised for achieving lending targets at the expense of better project quality. It is clearly in the interests of the policies which I hope the British Government want to advance that projects should be of the right kind. I detected a slight note of complacency in the Minister's opening remarks about the bank's operations. In voicing criticisms, I merely remind him 8 that all is not as rosy as it might appear. But that does not diminish the strength of my feeling that we should support the bank, make it as effective an institution as we can, and use the Asian Development Fund to direct help to the poorest people in some of the poorest countries in the world.

10.49 am

Mr. Chris Patten: This has been a short though interesting debate. I am sure that we shall have even longer and more substantial exchanges of views, possibly later today. I welcomed the remarks of the hon. Member for Vauxhall (Mr. Holland) about the mutuality of aid and commerce. That message needs to be appreciated by as substantial an audience as possible, both in the House and outside. The hon. Gentleman referred to the support for agricultural and agro-industrial projects. According to the 1985 annual report, agriculture and ago-industry obtained 17 per cent. from the bank's ordinary capital resources but 53·9 per cent. from the Asian Development Fund resources, which is what the order deals with. The success of the green revolution will probably mean that over the next few years there will be more investment in human resource development and in correcting the imbalance between rural and urban investment programmes. Human resource development should be given priority—that is all part of adjustment with a human face—with due regard to the environmental consequences of development. I place particular importance as will our bilateral programmes, on the development of literacy programmes and primary health care. There is a close relationship between the development of literacy and population programmes. I should like to see more assistance to the creation of a viable private sector, not only through the operations of the international financial institutions but through our bilateral programmes. However, there are difficulties to surmount before we can do that satisfactorily. The hon. Member for Berwick-upon-Tweed (Mr. Beith) referred to the balance between quality and targets. We know that there are problems in achieving that balance in IFIs. I welcome greater emphasis on quality not only through IFIs but in our aid programme. We shall guard against the tendency in the executive board of this bank and of other IFIs. The hon. Gentleman referred, perhaps a shade more disparagingly than he intended, to conditionality. Conditionality means ensuring that development is likely to be sustainable, which means not pouring good money after bad. There are countless examples of past development projects which would have done better had they been linked to sensible pricing policies. The United Kingdom is the fourteenth largest shareholder in the bank but the seventh largest donor of concessional funds. That shows the importance that we attach to the region, the work of the bank as a funder in the region. I cannot answer for others, but I should report that the United States Congress voted appropriations 9 for this year which provided the full amount requested for the capital funds of the Asian Development Bank. However, there was a reduction in the amount for the Asian Development Fund. The hon. Member for Vauxhall spoke of the balance between rich and poor countries in the fund programme. The fund to which this order refers—the previous order referred to the bank—concentrates on poor countries. Only one loan has been made to Korea, which was for 3·7 million dollars in 1972. Bangladesh has had about 30 projects supported by loans amounting to nearly 2 billion dollars.

Mr Stuart Holland: We are having a repeat of the exchange that we had with the Minister's predecessor earlier in the year. I do not contest what the development fund does, but if the bias in the bank's lending is towards bigger countries and bigger projects, there will be hard guys and soft guys—the good and bad guys, in phraseology that President Reagan will understand. A lot of pressure has been put on the bank to lend to big projects—I made the same point to the hon. Member for Berwick-upon-Tweed (Mr. Beith) when we debated the matter in January—without considering the absorption capacity. As a result, the fund becomes not simply the soft lending arm of the bank but relatively cosmetic to the bank's lending. That occurs in other agencies such as the World Bank and IDA, and we must look at the overall contribution made by such agencies on a regional basis. If not, we shall miss the whole picture. 10 Both Opposition parties have supported the social infrastructure and other projects. None the less, it is important to debate the fund issues in relation to what the bank does.

Mr. Patten: We shall have further opportunities to develop our thoughts on that issue. Although there has been a change of Minister, those who furnish us with such admirable arguments remain in post, as the hon. Gentleman will know. We should note that a number of countries in the region will choose to borrow from institutions other than the bank, as the terms are likely to be the same. That is a point that the hon. Member for Vauxhall made in an earlier Committee about borrowing in Europe by Asian countries. We shall be able to return to that matter at a later time. As we have found so much on which we agree, I should not like to end on a point of difference. I am grateful to the two hon Gentlemen who have contributed to our discussions. Once again, I commend the order to the Committee and I am sure that I speak for all members of the Committee when I welcome the work of the bank and the fund in a part of the world that still has far too many poor and disadvantaged people.

Question put and agreed to.

Resolved, That the Committee has considered the draft Asian Development Bank (Fourth Replenishment of the Asian Development Fund) Order 1987.

Committee rose at two minutes to Eleven o'clock.

THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:

McQuarrie, Mr. Albert (Chairman)

Alexander, Mr.

Beith, Mr.

Bowden, Mr. Gerald

Conway, Mr.

Grist, Mr.

Holland, Mr. Stuart

Patten, Mr. Chris

Pike, Mr.

Sainsbury, Mr.