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ASIAN DEVELOPMENT BANK
R301-00
4 December 2000
TECHNICAL ASSISTANCE TO THE PEOPLE’S REPUBLIC OF CHINA
FOR INSTITUTIONAL STRENGTHENING OF CHINA DEVELOPMENT BANK
(FINANCED FROM THE JAPAN SPECIAL FUND)
The attached Report is circulated for the information of the Board. The
President approved the technical assistance on 20 October 2000.
For Inquiries: Ms. H. Feig, Infrastructure, Energy and Financial Sectors
Department (East) (Ext. 6351)
Mr. V. You, Office of the General Counsel
(Ext. 4835)
TAR: PRC 32462
ASIAN DEVELOPMENT BANK
TECHNICAL ASSISTANCE
(Financed from the Japan Special Fund)
TO THE
PEOPLE'S REPUBLIC OF CHINA
FOR THE
INSTITUTIONAL STRENGTHENING
OF
CHINA DEVELOPMENT BANK
October 2000
CURRENCY EQUIVALENTS
(as of 06 October 2000)
Currency Unit – Yuan (Y)
Y1.00 = $0.1208
$1.00 = Y8.2790
On 1 January 1994, the People’s Republic of China dual exchange rate system was unified. The
exchange rate of the yuan is now determined under a managed floating exchange rate system.
ABBREVIATIONS
ADB – Asian Development Bank
CDB – China Development Bank
MIS – management information system
PBC – People’s Bank of China
PRC – People's Republic of China
SME – small and medium enterprise
TA – technical assistance
NOTES
(i) The fiscal year (FY) of the Government of the People's Republic of China ends
on 31 December.
(ii) In this report, "$" refers to US dollars.
I. INTRODUCTION
1. As requested by the Government of the People’s Republic of China (PRC), the World
Bank and Asian Development Bank (ADB) jointly assessed in 1999 the China Development
Bank’s (CDB’s) capacity to act as an onlending institution for World Bank and ADB
infrastructure projects and bear the credit risk for such projects. In their report, submitted to the
Government on 31 January 2000, the World Bank and ADB confirmed CDB’s suitability for this
role and identified its strengths and weaknesses. To enable CDB to effectively intermediate
infrastructure financing and fully exploit its banking potential, the report, among other things,
recommended (i) strengthening CDB’s role in and capacity for project selection, design,
appraisal, and management; (ii) enhancing CDB’s capacity for risk management through
comprehensive staff training and upgrading of internal processes and methodologies over the
medium term; (iii) strengthening CDB’s internal controls, and financial and management
information systems (MIS); and (iv) strengthening CDB’s training function in line with job
requirements. Based on the findings of the report, the World Bank and ADB programmed
technical assistance (TA) to address institutional development requirements of CDB.1 A joint
ADB-World Bank Fact Finding Mission visited CDB from 10 to 21 April 2000 and designed a
comprehensive TA program to be financed by both WB and ADB. The TA program aims at
strengthening CDB’s project appraisal/selection, credit and risk management, and financial
reporting. Agreement was reached with CDB on the objective, scope, financing, and
implementation arrangements for the TA program, including the ADB-financed component. A TA
framework is provided in Appendix 1.2
II. BACKGROUND AND RATIONALE
2. CDB was established by Special Decree No. 22 of the State Council on 17 March 1994
through the merger of six trust and investment companies. Set up as a financial institution
under the direct supervision of the State Council, CDB’s mission is to foster the PRC’s
economic development by providing long-term financing in domestic and foreign currency for
projects in accordance with Government priorities. CDB has promoted the development of
infrastructure sectors, and urban utilities, and provided finance for industry, agriculture and
forestry, environmental protection, and private small and medium enterprises (SMEs). Beside
providing domestic and foreign currency financing for Government projects and programs, CDB
also relends funds mobilized from foreign governments and international financial institutions.
CDB further provides guarantees and advisory services related to project loans, and mobilizes
domestic and foreign funds for priority projects through issuance of debt.
3. CDB is the fifth largest bank in the PRC in terms of assets. During CDB’s more than five
years of operations, its assets have grown rapidly to Y686 billion ($83 billion), accounting for
almost 5 percent of total banking sector assets. It has a capital base of Y51 billion ($6 billion).
About 95 percent of CDB’s assets consist of long-term loans. To avoid maturity mismatching,
CDB’s financial resources largely consist of long-term bonds, of which 96 percent are domestic
currency bonds that are placed with the largest five commercial banks through allocation by the
People’s Bank of China (PBC). Given its focus on infrastructure lending, CDB’s exposures to
clients and sectors normally exceed the benchmarks for commercial banks. At the end of 1998,
CDB’s aggregate commitments to its 8 largest borrowers for 10 projects were equivalent to 3
times its equity. CDB’s loan portfolio is highly concentrated in the power and transport sectors
1
TA funds in the amount of $600,000 were included in ADB’s 2000 country assistance plan for the People’s
Republic of China for this purpose.
2
The TA first appeared in ADB Business Opportunities (Internet version) in April 2000.
2
with 35 percent and 22 percent, respectively, of total outstanding loans at the end of 1998.
About 67 percent of CDB’s total outstanding loans at that time were to the country’s less
developed central and western regions, where CDB has become the largest lender. Because of
the nature of its establishment and its policy lending function, CDB inherited and accumulated a
significant amount of nonperforming loans. CDB is currently transferring the bulk of such loans
to asset management companies, mainly the China Asset Management Company, at book
value against bonds issued by such companies.
4. CDB provides both “hard” and “soft” loans. In 1998, 99.3 percent of CDB’s loan
disbursements were on hard terms, i.e., lending rates that followed PBC interest rate limits for
commercial banks. Soft loans carry lower interest rates and are provided mainly for social and
environmental development. As a result of the Government’s efforts to stimulate demand and
reflate the economy, all lending rates including long-term rates have been substantially lowered
since mid-1997, which has adversely affected interest margins. For 1999, CDB reported an
average return on assets of 0.11 percent, down from 0.15 percent in 1998. CDB’s net interest
margin currently leaves very limited room to fully absorb the short-run provisions for doubtful
and bad loans according to international practice. To determine the true quality of its assets, its
profitability, and the efficiency of its operations, and prepare itself for an environment of
deregulated interest rates, CDB intends to upgrade its MIS and accounting policies and
procedures for internal management to international standards. 3
5. Consistent with the Government’s recent financial sector reforms, CDB intends to
transform itself into a development bank that is managed according to international banking
standards. Within the overall development priorities of the Government, CDB is moving toward
market and risk-based approaches for project selection instead of relying on the
recommendations of Government agencies. Although CDB is a policy bank and does not seek
to maximize profits, it is expected to operate without need for Government subsidies. CDB now
faces a more competitive operating environment than before, especially for infrastructure
finance. It expects increased competition from domestic commercial banks and foreign banks
once the PRC gains membership in the World Trade Organization. CDB anticipates limited
business growth in the power sector, due to increasing use of private financing for this sector.
By contrast, the transport, urban utilities, and environmental protection sectors have significant
business growth potential. Also, in line with new Government policy initiatives, CDB plans to
respond to the financing needs of high-tech industries and SMEs through innovative wholesale
refinancing facilities and products. CDB has announced that it will further expand its operations
in the underdeveloped western region of the PRC. It also intends to help develop the
underdeveloped bond market in the country through innovative bond issues, and assistance in
the issuance and underwriting of bonds for State corporations and Government projects. In the
medium term CDB is expected to reduce its policy-based lending role.
6. To meet the requirements of the changing business and policy environment, CDB
recognizes the need to develop its credit and risk management systems, and its organizational
structure, staff, and management systems in line with its strategic objectives. Assisted by an
international management consulting firm, CDB developed a reengineering strategy for its major
business processes including (i) planning, (ii) credit risk management, (iii) asset liability
management, and (iv) credit management. The strategy is sound and has led to significant
organizational changes in late 1999. Measures implemented so far include the establishment of
three new credit appraisal review departments, and the decentralization of the credit
management function to 27 provincial branches, acquired through CDB’s assumption of the
3
While respecting the legal requirements for external reporting and taxation.
3
provincial branches and staff of the now defunct China Investment Bank. CDB is also reviewing
its agent bank relationships to enhance portfolio and service quality and ensure an adequate
sharing of risk.
7. During the next two years CDB intends to fully implement its reengineering strategy by
introducing new operational processes and tools in credit and financial risk management, and
strengthening accounting and MIS in line with international practices and standards. This will
require substantial advisory inputs by consultants who would have to work together with CDB
“change leaders” on the design and implementation of detailed restructuring plans. Substantial
staff retraining is needed at all levels. Proper understanding and support for CDB’s reform
strategy by senior staff is a prerequisite for successful change. A training and familiarization
program, therefore, should precede other consulting inputs to facilitate a broad-based
consensus within the organization for the restructuring process and ensure the effectiveness of
the TA.
8. The TA will be ADB’s second in support of CDB. The first TA comprised initial advisory
assistance and short-term training seminars in project appraisal, credit management, asset and
liability management, MIS, and postevaluation.4 The TA was rated only partly successful, mainly
due to different views within CDB regarding the objectives of the TA and the relevance of
international banking principles for a PRC policy bank. The TA nevertheless paved the way for
several reform initiatives that are now expected to be taken during second TA. The present TA
is in line with ADB’s country operational strategy for the PRC, which supports the establishment
of efficient financial markets. The TA is also consistent with ADB’s poverty reduction strategy. It
promotes sustainable pro-poor growth by strengthening the PRC’s main lender for essential
infrastructure, particularly in disadvantaged and less developed regions of the country. By
enhancing CDB’s capacity for project selection and appraisal, the TA helps avoid potential loan
losses, thereby freeing for direct pro-poor interventions fiscal resources that would otherwise
have to be spent on financially supporting CDB.
III. THE TECHNICAL ASSISTANCE
A. Objective
9. The TA forms part of a comprehensive capacity building program supported by ADB and
the World Bank aimed at helping CDB transform itself into a development bank that is managed
according to commercial principles and has the capacity for onlending project loans funded by
ADB and the World Bank. The ADB TA will help develop CDB’s training function and strengthen
its project and borrower selection and appraisal process, while the World Bank-financed
assistance will focus on the reengineering of other business processes, in particular the credit
management, corporate planning, asset/liability management, accounting, and MIS/information
technology functions. Assistance to enhance CDB’s capacity for project selection and appraisal
is expected to lead to a more efficient allocation of resources for the development of the PRC’s
infrastructure and SME sectors and the country’s underdeveloped western region.
B. Scope
10. The TA will comprise assistance in two areas: (i) project selection and credit evaluation,
and (ii) human resource development and training. The TA will build CDB’s capacity for project
4
TA 2664-PRC: Institutional Strengthening of the State Development Bank of China, for $500,000, approved on 16
October 1996.
4
screening, project and borrower analysis, and the financial structuring of projects to facilitate
earlier involvement of CDB in the design of projects, and ensure that projects with the best
credit risks are processed on a priority basis and projects with little potential for economic or
financial viability are rejected early on. The TA will assist CDB in the implementation of its
restructuring initiatives in these areas through advisory assistance in the adoption and
implementation of appropriate policies, procedures, systems, tools and staff training. The TA
will, among other things, help (i) determine loan portfolio risk management strategies; (ii) review
CDB’s methodology and process for financial, market, and borrower analysis (including the
evaluation of financial institutions); (iii) strengthen CDB’s capacity for project finance including
financial engineering, to arrive at suitable financing structures for projects it participates in; (iv)
develop a comprehensive credit evaluation model; and (v) prepare and implement
comprehensive policy and procedure manuals for the project selection and credit approval
process. The TA will also provide initial advice on the development of a financially sustainable
CDB support program for the SME sector. The TA consultants will be expected to advance key
staff’s understanding of proposed restructuring measures and assist CDB management in
building consensus within the organization for the restructuring strategy. Once consensus is
built on changes in operational policies and procedures, the consultants will assist the
concerned staff in CDB departments and branches in the development and implementation of
action plans to fully implement the restructuring measures. This will involve the pilot testing of
proposed approaches at the sector or branch level.
11. The TA will familiarize CDB with international approaches to human resource
development and staff training. The TA will analyze job requirements, current skill levels, and
training needs for staff of CDB’s operational departments, and will develop a training strategy to
address the identified needs. A comprehensive medium-term staff training program, including
inhouse workshops, and on-the-job and external training, will be developed and implemented
under the TA. The consultants will develop suitable training modules for different operational
areas. To ensure the transfer of skills to a large number of CDB staff on a sustainable basis, the
TA will train suitably skilled staff members to serve as trainers for inhouse workshops and on-
the-job assistance. The TA will also finance some external training events identified under the
training program. Outline terms of reference are attached as Appendix 2.
C. Cost Estimates and Financing Plan
12. The cost of the TA capacity building program is estimated at $2.75 million equivalent,
which will be jointly financed by ADB and the World Bank.5 The total cost of the ADB TA is
estimated at $750,000 equivalent. ADB will finance $600,000 equivalent on a grant basis from
the Japan Special Fund, funded by the Government of Japan. This will cover foreign exchange
cost of $520,000 equivalent, and local currency cost equivalent of $80,000. CDB will contribute
the equivalent of $150,000 in kind in the form of office space and support, training facilities,
counterpart services, interpretation services, and local transport. Detailed cost estimates and a
financing plan for ADB’s TA are shown in Appendix 3.
5
For the part to be financed by the World Bank, CDB has requested $2 million financing under Loan 4473/Credit
3212-CHA: Fourth Technical Cooperation Project (TCP IV), Part A, Reform Support and Institutional Development.
5
D. Implementation Arrangements
13. International consultants with expertise in project finance, financial analysis, credit
analysis, and bank training, as well as domestic consultants with experience in accounting and
financial services will be recruited through an international firm in accordance with ADB’s
Guidelines on the Use of Consultants and other arrangements satisfactory to ADB for the
engagement of domestic consultants. The TA will finance a total of about 14 person-months of
international and 20 person-moths of domestic consulting services over a period of about 12
months starting in January 2001. To ensure a coherent and consistent approach, the selection
and services of consultants under the World Bank and ADB-financed TAs will be closely
coordinated.
14. CDB will be the Executing Agency for the TA. The wholly state-owned bank has
adequate institutional capacity and financial resources to implement the TA. CDB will appoint an
adequate number of appropriate staff to coordinate and organize the proposed inhouse training,
work closely with the consultants, provide relevant data and information to them, and arrange
meetings within CDB and with outside parties, as reasonably requested by the consultants. All
counterpart staff and consultants will work in accordance with detailed work plans that specify
the responsibilities and assignments of each party under the TA. The work plans for the ADB
and World Bank-funded TA components will be coordinated and periodically reviewed by the
responsible consultants in consultation with ADB and the World Bank. A tripartite inception
meeting will be held in Beijing about four weeks after the beginning of the TA to discuss and
finalize the detailed work plans. To guide and coordinate the large number of departments and
all branches benefiting from the World Bank-ADB TA program, CDB will set up a senior
interdepartmental steering committee chaired by the governor or one of the vice governors. The
steering committee will be directly supported by a project management team led by a full-time
project director and composed of a suitable number of well-qualified, full-time staff. In addition,
each department will appoint a senior staff member to take responsibility for implementing
departmental training and capacity building initiatives. These change leaders will report to the
steering committee and act as the main counterpart to the consultants.
15. The consultants will prepare, in both English and Chinese, an inception report, monthly
progress reports, a final report, and reports on each TA component and phase. The consultants
will also prepare training materials at least two weeks prior to the start of each training seminar.
IV. THE PRESIDENT’S DECISION
16. The President, acting under the authority delegated by the Board, has approved the
provision of technical assistance, on a grant basis, to the Government of the People’s Republic
of China in an amount not exceeding the equivalent of $600,000 for the Institutional
Strengthening of China Development Bank, and hereby reports such action to the Board.
6 Appendix 1, page 1
TECHNICAL ASSISTANCE FRAMEWORK
Design Performance Monitoring Assumptions
Summary Indicators/Targets Mechanisms and Risks
Goal
China Development Bank (CDB) CDB operates CDB financial Continued financial
is able to allocate resources to profitably statements sector reforms including
develop infrastructure and small and reports liberalization of interest
and medium enterprises in an rates and elimination of
efficient and financially directed credit
sustainable manner.
Government acceptance
of CDB’s restructuring
objectives and efforts
World Bank-financed
technical assistance (TA)
implemented on time
Purpose
Strengthening CDB’s capacity for Improvements in TA reports Continued management
project and borrower selection and related processes and institutional support
appraisal, and staff training and skills enable TA review for CDB’s restructuring
CDB to fully missions
perform onlending
functions for ADB
projects
Outputs
Adequate policies, systems, Preparation and TA reports Competent consultants
methodologies, and procedures testing of
for project selection, financial comprehensive TA review CDB committed to work
structuring, and appraisal recommendations missions with consultants
for project
selection and
appraisal process
including policy and
operational
manuals and
guidelines
Adequate credit and project All CDB staff
finance skills involved in project
appraisal trained in
new policies and
methodologies
(Reference in text: page 1, para. 1)
7 Appendix 1, page 2
Design Performance Monitoring Assumptions
Summary Indicators/Targets Mechanisms and Risks
Training strategy and program in Relevant training
line with job requirements strategy and
program prepared
on time
Activities Inputs
Development of strengthened 14 person-months TA progress Suitable consultants can
project screening and credit of consulting reports be identified on time.
evaluation process, methodologies, services by
organization, and assistance in international TA review Suitable CDB
implementation consultants missions counterpart staff can be
20 person-months identified and made
Capacity building for project of services by available to work
appraisal, particularly financial and domestic together with the
market analysis consultants consultants on the
design and
Advice and training for implementation of
strengthening CDB’s evaluation of Full-time CDB restructuring measures.
borrowers including financial counterpart staff
institutions Project Steering
Committee is established
Advice and training for on time.
strengthening CDB’s financial
structuring of projects
Preliminary assistance in the
development of a financially
sustainable CDB support program
for small and medium enterprise
Identification of competency
requirements and formulation of
job descriptions
Design of a training strategy and
in-house training programs in line
with job requirements
Training of Trainers
External training Reports Suitable study tours and
prepared by training activities can be
participants identified.
8 Appendix 2, page 1
OUTLINE TERMS OF REFERENCE
A. Humans Resources Requirements and Training1
1. The consultants will
(i) advise staff of the China Development Bank (CDB) personnel department on
international approaches to change management, human resources
development and staff training;
(ii) assist CDB to prepare job descriptions for each staff position in the operations
departments;2
(iii) undertake a comprehensive analysis of staff skills and experience at both
headquarters and branch offices and identify any gaps between job requirements
and actual competency levels;
(iv) identify which skill gaps are most efficiently addressed through training and
identify those that can only be addressed through outside recruitment;
(v) with inputs from technical specialists, design a comprehensive training program
corresponding to the identified needs at all staff levels comprising inhouse, on-
the-job, and external training;
(vi) assist CDB in the identification of appropriate external domestic and overseas
training programs;
(vii) prepare detailed curricula for the inhouse training of operations staff with the
assistance of technical specialists;
(viii) advise CDB on appropriate training methods and approaches;
(ix) assist CDB in the identification and training of inhouse trainers; and
(x) advise CDB on the role of training in human resources development.
B. Project Selection and Credit Evaluation3
2. The consultants will do the following:
(i) Build the capacity of CDB staff for early involvement in energy and infrastructure
project design and financial structuring by helping to develop policies and
1
About 4 person-months of international and 5 person-months of domestic consulting services.
2
Operations departments comprise the comprehensive planning department, credit evaluation (project appraisal
departments), international finance department, market analysis department, financial analysis department,
appraisal management department, credit management department, branch offices, asset quality department,
treasury department, and investment banking department.
3
About 10 person-months of international and 15 person-months of domestic consulting services. One of the
international consultants will act as team leader. The training measures covered under this part will not be limited
to staff involved in project selection, but also benefit staff involved in the project/loan cycle management and
supervision.
(Reference in text page 4, para. 11)
9 Appendix 2, page 2
procedures, and conduct comprehensive staff training in sector-based project
finance techniques and methodologies.
(ii) Help CDB to develop and implement new guidelines and procedures for the
preliminary screening and selection of projects for appraisal to ensure that
projects with the best credit risk are processed on a priority basis and projects
without the potential for financial or economic viability are rejected early on. The
consultants will train staff of the planning and project appraisal management
departments in the use of the guidelines and procedures to build inhouse
capacity for project screening.
(iii) Help CDB to determine adequate loan portfolio management strategies including
CDB’s overall risk exposure, and appropriate exposure limits for single clients,
sectors, and regions.
(iv) Review CDB’s methodology and process for the financial and market analysis of
energy and infrastructure projects and recommend any changes required to
ensure an adequate assessment of the long-term financial viability and debt-
servicing capacity of projects financed by CDB.
(v) Identify specific training needs of staff involved in the market analysis of projects
(including staff of the financial analysis, project appraisal, credit management,
and asset quality departments, and the branch offices), and design and conduct
a comprehensive staff training program comprising classroom and on-the-job
training to meet the identified needs. Sector-based case-studies will be
developed for the training.
(vi) Identify specific training needs of staff involved in the financial analysis of
projects (including staff of the financial analysis, project appraisal, credit
management, and asset quality departments, and the branch offices), and
design and conduct a comprehensive staff training program comprising
classroom and on-the-job training to meet the identified needs. Particular
emphasis will be placed on the use of appropriate discount rates for cashflow
based financial analysis, the use of appropriate assumptions, an analysis of the
risks connected to the nonrealization of those assumptions, the identification of
the most sensitive project variables, and the design of optimal project financial
structures that maximize the project’s debt-service capacity. Sector-based case-
studies will be developed for the training.
(vii) Identify the financial engineering skills required for staff involved in project
appraisal, credit management, and treasury operations, and design and conduct
a training program to meet the identified needs.
(viii) Design and conduct classroom and on-the-job training on forward-looking
borrower analysis, in particular the evaluation of borrowers’ debt-service
capacity, including the assessment of the fiscal capacity of borrowers that are
governments and the determination of appropriate capital requirements,
collateral and guarantees. This will also cover the analysis of agent banks and
interbank borrowers.
10 Appendix 2, page 3
(ix) Assist CDB in the development and implementation of a comprehensive credit
evaluation model to facilitate CDB’s credit decision-making, and train staff to use
the model.
(x) Assist CDB in the preparation and implementation of a comprehensive policies
and procedures manual for the project/credit appraisal process. This will also
cover interbank lending.
(xi) Design management information system reports related to the project/credit
appraisal process.
(xii) Advise on appropriate performance indicators for the project/credit selection and
appraisal process.
(xiii) Review CDB’s institutional arrangements and processes for evaluating the
environmental, social, and poverty impact of projects, and identify any
improvements and training required to ensure that CDB has the capacity to
appraise projects in line with ADB standards and policies in these areas.
(xiv) Familiarize CDB with build-own-operate financing mechanisms/project structures
(including typical risk sharing arrangements and legal structures) and assess the
scope for CDB’s participation in such financing.
(xv) Help CDB to identify basic parameters for the development of a financially
sustainable small and medium enterprise support program.
(xvi) Advise on an effective coordination process between the international finance
and other CDB departments for the appraisal of projects that require foreign
exchange and domestic financing, and recommend related procedures.
11 Appendix 3
COST ESTIMATES AND FINANCING PLAN
($'000)
Foreign Local Total
Item Exchange Currency Cost
A. ADB Financing
1. Consultants
a. Remuneration and Per Diem
i. International Consultants 420.0 0.0 420.0
ii. Domestic Consultants 0.0 60.0 60.0
b. International and Local Travel 16.0 0.0 16.0
c. Reports and Communications 4.0 0.0 4.0
2. External Training 30.0 0.0 30.0
3. Miscellaneous Costs to Support 0.0 10.0 10.0
CDB’s Onlending Function for
ADB Projects, including
Translation of ADB manuals
4. Cost of Government Observers for 3.0 0.0 3.0
Contract Negotiations
5. Contingencies 47.0 10.0 57.0
Subtotal (A) 520.0 80.0 600.0
B. Government Financing
1. Office Accommodation 0.0 50.0 50.0
2. Remuneration 0.0 50.0 50.0
of Counterpart Staff
3. Training Facilities and Other 0.0 50.0 50.0
Subtotal (B) 0.0 150.0 150.0
Total 520.0 230.0 750.0
(Reference in text: page 4, para. 12)
