For discussion
FCR(97-98)33
on 19 September 1997

ITEM FOR FINANCE COMMITTEE

HEAD 106 - MISCELLANEOUS SERVICES
New Non-recurrent Account Subhead "Contribution to the Sixth Replenishment of the Asian Development Fund"

Members are invited -

1. to approve the creation of a new Non-recurrent Account subhead with a commitment of HK$120.5 million for a contribution to the sixth replenishment of the Asian Development Fund; and

2. to approve supplementary provision of HK$30.13 million in 1997-98 to cover the first instalment due in the current financial year.

PROBLEM

The Asian Development Bank (ADB) has requested Hong Kong to contribute a total of US$15.39 million to the sixth replenishment of the Asian Development Fund (ADF) or ADF VII.

PROPOSAL

2. We propose that Hong Kong should make a contribution of US$15.39 million (about HK$120.5 million) to ADF VII over four years.

JUSTIFICATION

3. Members approved contributions to the last three ADF replenishments on 13 October 1982, 11 March 1987 and 12 June 1992 respectively. The amounts approved were US$1 million each to ADF IV (the third replenishment) and ADF V (the fourth replenishment), and US$3 million to ADF VI (the fifth replenishment). Hong Kong did not participate in the negotiations for ADF IV, V or VI because by tradition the main participants were the developed country members. Hong Kong ' s previous contributions were therefore made as additional contributions to supplement the ADF resources. The amounts contributed by Hong Kong were not determined with reference to the relative size of our economy, as would have been the case for the traditional donors participating in the ADF negotiations.

4. During the course of negotiations for ADF VII, it was clear that because of budgetary constraints, some traditional donors have to cut back their contributions. As a result, the ADB management lobbied the newly industrialised economies (NIEs) in Asia heavily, particularly Hong Kong, Malaysia and Thailand which participated for the first time in the ADF negotiations. The traditional donors repeatedly urged the Asian participants to shoulder a fairer share of the ADF VII funding requirements, commensurate with the state of their economic development.

5. In January 1997 the ADB concluded negotiations for ADF VII, which covers the four-year period from 1997 to 2000. The agreed replenishment total is US$6.3 billion, of which US$2.7 billion would need to come from donor resources. The ADB will meet the remaining sum largely by the surplus of its ordinary capital resources and possibly additional or supplementary contributions from other donors. The ADB has asked all NIEs for a significant increase in their donation. Hong Kong ' s full share, in accordance with the principle of burden sharing, amounts to US$15.39 million.

6. We consider that Hong Kong should contribute its full share for the following reasons -

(a) Hong Kong ' s commitment to the ADB

1. the ADB is one of the very few international organisations in which Hong Kong has full membership. Hong Kong should be seen to be playing its full part in ADB ' s activities.

2. The concessionary loan facilities under ADF is a very important arm of the operation of the ADB. As an NIE, it is Hong Kong ' s obligation, along with other economies within and outside the region, to support the ADB activities as fully as possible. ADB is a multilateral institution and it depends on the support of its members for the necessary resources to carry out its mandate.

3. Hong Kong has benefited from its participation in the ADB. While Hong Kong is not eligible for borrowing under the ADF, between 1972 and 1980 Hong Kong raised five loans totalling US$97 million from ADB ' s ordinary capital resources for financing construction projects in Sha Tin, including the Sha Tin Hospital -Polyclinic Project (the present Prince of Wales Hospital). Hong Kong repaid all such loans during 1981 to 1987. Now that Hong Kong has made remarkable economic progress over the last decade, Hong Kong is widely expected to play its part in turn to finance the operation of the ADF.

4. The ADB, being one of the biggest debt issuers in the region, has on our request tapped the Hong Kong market from time to time. Its supply of Triple-A rated bonds has contributed to the development of the Hong Kong debt market by stimulating investors ' interest and providing a benchmark for the market.

5. We are also developing technical cooperation with the ADB to contribute to its work. In recent months, the Hong Kong Monetary Authority has been involved in discussions with the ADB over the Bank ' s technical assistance project in the Mainland to upgrade the payment system. Such assistance would facilitate the linkage of the settlement and payment systems of Hong Kong and the Mainland, reducing settlement risks and enhancing Hong Kong ' s role as an international financial centre.

6. In all, Hong Kong's contribution to the ADF is a solid demonstration of our support of the ADB in its efforts to help the most needy members to achieve sustainable growth and development.

(b) Hong Kong ' s commitment to the region

- With increasing intra-regional trade and economic inter-dependence, Hong Kong ' s prosperity is closely linked to the development and prosperity of the region and the openness of their markets. ADB ' s activities will certainly help them in their policy and market reforms. Hong Kong ' s contribution to the ADF is consistent with our overall stance to support development efforts in the region.

(c) Peer Stance

1. Emerging economies such as Korea, Taipei,China, Malaysia and Thailand, have agreed to contribute an amount at or close to that sought by the ADB based on the burden sharing principle. Korea contributes its full burden share of US$54.3 million, up from US$15 million for ADF VI. Taipei,China would contribute US$14.6 million, the full burden share computed by the ADB - slightly lower than US$15 million for ADF VI. Malaysia, as a first time contributor, agreed to contribute US$10 million. Even Indonesia, which has not been asked by the ADB, has pledged US$10 million for ADF VII. Senior ADB officials have lobbied Hong Kong intensively to play an active and generous role befitting that of an advanced member of the Bank.

2. While our proposed contribution to ADF VII, at US$15.39 million, is much higher than our US$3 million contribution to ADF VI, it is relevant to note, as explained in paragraphs 3 to 5 above, that the ADF VI contribution represents an arbitrary figure whereas the ADF VII figure of US$15.39 million reflects Hong Kong ' s burden share of the replenishment target. We have considered the alternative of contributing less than the full burden share. However, this could well cast doubt on Hong Kong ' s credibility and its commitment towards the ADB, particularly in light of the contributions from other regional economies.

FINANCIAL IMPLICATIONS

7. Adopting the exchange rate of US$1 = HK$7.748 and allowing 1% fluctuation, we require a commitment of HK$120.5 million. We will make payments over four years evenly, i.e. a contribution of HK$30.13 million each year. As suggested by the ADB, we will pay in four instalments by issuing promissory notes to be encashed by the ADB in accordance with disbursement needs and encashment procedures. The first instalment is to be paid by 1 November 1997 and the last instalment by 31 December 2000. We will therefore require a supplementary provision of HK$30.13 million for the current financial year. Subject to Members ' approval, we will offset this amount by deleting an equivalent amount under Head 106 Miscellaneous Services Subhead 789 Additional commitments.

BACKGROUND INFORMATION

8. The ADF was established in June 1974 by the ADB to provide concessionary lending to the most needy member countries. Contribution to the ADF is voluntary and the traditional donors have been the industrialised countries such as Japan, the United States, Canada, the United Kingdom and Germany. Resources are replenished in phases to cover lending for three to four year periods. Hong Kong contributed to three previous replenishments as mentioned in paragraph 3.

9. The calculation of burden share is based on a member ' s subscribed capital, adjusted for per capita Gross National Product (GNP)/Gross Domestic Product (GDP), as illustrated in Enclosure 1. Details of the donors ' contributions to ADF VI and the pledges for ADF VII are at Enclosure 2.

10. At the ADF VII negotiations, member economies agreed that the ADB management will prepare at the end of 1998 a comprehensive mid-term progress report on the implementation of the ADF VII policy objectives and operational priorities. The policy review will cover strategic issues like poverty reduction, human development (including population planning), women in development, environmental protection, and other areas like improvement of project quality, transparency, accountability, governance, etc.

11. On 2 September 1997, the Chief Executive in Council decided that Hong Kong should contribute its full share of US$15.39 million to ADF VII, subject to the voting of the necessary funds by the Finance Committee of the Provisional Legislative Council.

12. The Sino-British Joint Liaison Group (JLG) agreed in 1985 Hong Kong ' s continued participation as a member in the ADB. The JLG also agreed that the Central People ' s Government would assume, as from 1 July 1997, responsibility for the obligations which had been or might be incurred by Hong Kong by reason of its membership in the ADB. Such obligations are mainly contingent liabilities arising from Hong Kong ' s callable capital subscription to the ADB and the unencashed promissory notes issued by Hong Kong as our contribution to ADF replenishment.

Financial Services Bureau
September 1997

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Enclosure 1 to FCR(97-98)33

Illustration Showing the Computation of Burden Sharing

The amount of donors ' contribution is say US$3,000 million and the newly industrialised economies have to contribute say 5% of the total. Following is the computation.

* Country B is designated as a "reference donor" and its per capita GNP is assigned a value of 1.0. Column II reflects the proportion in Column I. The outcome of the computation at Columns V or VI is independent of the choice of the "reference donor".

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Enclosure 2 to FCR(97-98)33

Donors' Contributions to
ADF VI and ADF VII

* On ADF VII, the amount of Hong Kong 's contribution will be notified after voting of funds by the Finance Committee.

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