Making ODA Working for National Development
Yingming Yang
Director, International Department
Ministry of Finance, People’s Republic of China
Official Development Assistance (ODA) utilization has been part of China’s opening and
reform policy. Since 1978 when the opening and reform policy was launched, there are
many multilateral and bilateral donors active in China:

Multilateral donors Multilateral Development Banks (MDB) such as the World
Bank, Asian Development Bank, GEF and EIB and UN agencies such as UNDP,
UNEP and IFAD.

Bilateral donors include about 20 countries, such as DFID.
China is not a large recipient of ODA in per capita terms. And the majority of ODA
available to China is in the form of loan rather than grant. Nonetheless, overall, ODA has
been playing a very useful role in promoting reform and development in China. Over the
last 20 years or so, China has been frequently classified as a success story of
international development results. Looking in retrospect, I personally feel that the
following factors explain, in large part, the success of China’s ODA utilization:
1. Aligning MDBs program with National development strategy
2. Setting Appropriate Institutional Arrangement
3. Linking expected results with domestic and external resources
4. Synergizing between knowledge and financial cooperation
5. Using Innovative and Coordinated Approach among donors and recipients
6. Strengthening the capacity on managing for better results
7. Establishing the Monitoring and Evaluation System
Aligning MDBs’ resources with National Development Strategy
National strategy provides directions and priorities for international development
cooperation. A good strategy is a strategy that gains commitment and ownership both by
the recipient and by the donor. For this purpose, the strategy must reflect the
convergence of priorities of both the recipient and the donor.
For example, the World Bank’s China Country Partnership Strategy for FY2005-2010
identifies five priorities: 1) Integrating China into the world economy; 2) Managing
environment and natural resources; 3) Reducing poverty, inequality and social exclusion;
4) Financing for rapid growth; 5) Improving public and market institutions.
The five priorities exactly reflect the priorities of China’s 11th Five-Year Program. This is
not surprising since the CPS (Country Partnership Strategy) was prepared based on,
among others, consultation with about 30 central agencies and more than 30 local
governments. Consultation was also made with other donors. Therefore, there are
already donors expressing interests in co-financing some of the projects listed in the
Strategy.
Setting Appropriate Institutional Arrangement
China’s ODA management system can be articulated as centralized programming with
decentralized implementation. China treats ODA funds as quasi-public finance, and
therefore believes that they should be used in accordance with national development
policies, in terms of either sector or regional priorities. For this purpose, the central
government, based on consultation with all the parties concerned, makes centralized
programs for the utilization of ODA. However, it is the beneficiaries at various levels who
actually implement individual projects financed by ODA funds.
The two most important central agencies for ODA management in China are Ministry of
Finance (MoF) and National Development and Reform Commission (NDRC, the former
State Planning Commission). In China, the ODA loans and credits are also called as
“foreign government debt”. The division of labor for ODA project management is:

MoF is the agency for the unified management of foreign government debts,
responsible for (1) making basic guiding principles and regulations governing
foreign government debt management; (2) negotiating loans with international
financial institutions and bilateral donors, and signing loan agreements; (3)
on-lending and repaying loans; (4) supervising the use of the foreign funds.

NDRC is responsible for (1) controlling the overall ceiling for borrowing and
optimizing the structure of the borrowing; (2) working together with MoF to make
borrowing programs and annual borrowing plan.

The other agencies that have generic importance to ODA utilization include State
Environment Protection Administration (SEPA) and Ministry of National Land and
Resources (MNLR). Both agencies have the veto power against a project to be
financed by ODA funds. SEPA is responsible for reviewing whether a project is
consistent with national environment regulations and MNLR with national
regulations governing land use.
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
Line ministries also play important roles. They provide technical support to MoF
and NDRC in the management of ODA funds in their respective sectors. Some of
them serve as PMUs for the implementation of projects covering several
provinces. Almost all of the ministries related to economic and social
management use ODA funds for their own capacity building.

The majority of MDBs’ financed projects are implemented by localities. Besides a
Project Management Unit (PMU), there is always a Leading Group for Utilization
of MDBs’ Loans to give the PMU policy guidance and coordination support. The
Leading Group is usually led by a deputy head of the government concerned,
consisting heads of the parent agency, local finance bureau and planning agency,
and representatives from other agencies concerned. All these organizational
arrangements demonstrate strong commitments of various stakeholders to good
implementation.
Linking expected results with ODA
Every year, MoF and NDRC discuss with the MDBs the lending program for the next
three years. This is important not only for ensuring project quality at entry, but also for
enhancing the synergies among projects to be financed by the World Bank loans.
In the recent past and future years, China has been stabilizing the annual borrowing from
ADB and the World Bank in about $1--1.5 billion respectively. The regional priority for the
borrowing is to support the central and western parts of the country, which are less
developed compared with the east/coastal area. Regarding the sectoral priorities, they
are infrastructure, rural development, and social sector.
So far, the ODA funds in China are not included in the government budgets. However, as
far as the repayment of ODA loans is concerned, they are included in the budgets of
various levels of governments depending on which level has the final obligation to repay.
Actually, in the past 26 years, China has basically been following a model of “who benefits
from the loans, who repay”. This model has both merits and shortfalls. Since it creates a
hard budget discipline, it contributes to the effectiveness of ODA design and utilization.
On the other hand, it creates a disincentive for the localities to use ODA loans to finance
projects that do not generate sufficient financial returns. The shortfall is becoming more
acute today when the government decides to encourage the utilization of more ODA
funds towards social sectors and underdeveloped regions where projects tend to have
low financial but high economic and social returns. In this context, MoF has been
exploring ways to blend central budgetary funds with ODA loans to support projects in
poor regions and in sectors such as education, health and poverty reduction.
Synergizing between knowledge and financial cooperation
ODA brings not only money, but also ideas. From a long-term perspective, ideas are
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actually more important than money, as has been demonstrated by China’s experiences.
Therefore how to dig out the benefits of ideas associated with ODA funds is also critical to
improve ODA effectiveness in a broader sense.
In China, besides the three-year rolling lending program, the Government and the MDB
also make three-year rolling ADB ADTA and WB AAA programs. As some of you may
know, AAA represents Analytical and Advisory Activities. These joint economic research
works per se have their own value. They can provide policy advice to the Government on
such important issues as macro-economic management and sector reform. They can
also lay solid analytical underpinnings for lending projects. Meanwhile, lending projects
are good vehicles to pilot some of the policy advices deriving from AAA activities.
Using Innovative and Coordinated Approach among donors and recipients
For various reasons, China cannot access to ADB’s ADF and the World Bank’s IDA credit
since 1997. This means that the MDBs no longer have effective instrument to finance
China’s projects of social development and poverty reduction, which need highly
concessional financing. Thanks to an innovative financing mechanism supported by UK’s
DFID, World Bank has resumed its lending to these sectors in early 2002. The general
principle for the innovation is that the on-lending interest rate of the World Bank loans are
fixed at 2%, with interest rate subsidy financed by DFID grants. So far three projects in
the sectors of health, basic education and poverty reduction have been co-financed by
the World Bank and DFID in this way. The forth one for rural water supply and sanitation
is being under preparation. This special type of co-financing is called “blending” by the
international development community. The Development Committee of the World Bank
and the IMF has been encouraging the scaling up of the blending model.
Strengthening the capacity for better results
A good strategy or organizational structure cannot guarantees the good development
results. Strengthening the capacity at different levels is the key to success:

The major way is to train stakeholders during the whole process of project
identification, preparation and appraisal, depending on the actual needs. The
merit of this type of training is that it is more cost-effective since it is more
targeted.

Thematic trainings are frequently conducted for new Project Management Units
nationwide. The themes are usually about procurement or disbursement. The
merit of this type of training is that it enables peer colleagues from all over the
country to have an exchange of views on the subject of their common interests.
In other words, this type of training provides opportunities for brainstorming.

Training on comprehensive project management is also occasionally conducted.
It will cover briefings on the latest progress of the MDB’s reform and the
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Government’s strategic thinking about cooperation in the next five years as well
as training on procurement, disbursement, safeguard policies and monitoring
and evaluation. This type of training usually enables the participants to better
appreciate the comprehensiveness and complexity of implementing MDB’s
projects.
Establishing the Monitoring and Evaluation System
M&E is a useful management tool to promote effectiveness. Without effective M&E, we
cannot distinguish the difference between success and failure. Without understanding
what contribute to success, we cannot disseminate good lessons of experience. So, it is
worthwhile to establish a good M&E and dissemination mechanism. Of course, keeping in
mind that these mechanisms cost money and is capacity-demanding as well, we should
focus on realistic and implementable mechanisms rather than on overambitious and
perfect ones.
There are different layers of monitoring and evaluation arrangements for ODA utilization.
Take the World Bank projects as an example:
1.
The most basic form of monitoring and evaluation is the performance
indicators and the associated M&E arrangement for each one of the projects.
The responsibilities of organizing these M&E activities lies in the PMU
concerned, under the supervision of the MDB. MoF has the legal responsibility
to ensure that the M&E activities specified in the legal documents for the loan
are conducted.
2.
The State Auditing Office (SAO) conduct annual audit for each on-going project.
These traditional audits focus on whether the rules of game for a given project
are being observed. Starting from this year, SAO starts performance audit on a
pilot basis. Performance audit, while continuously emphasizing the importance
of observing rules, tries to find out good lessons of experience related to
project implementation with a view to disseminate them in a large scale.
3.
MoF requires that the local finance bureaus to organize regular reviews of
project performance in their respective jurisdictions.
4.
MoF, jointly with the MDBs, conducts the Project Portfolio Performance Review
once for several years, on a national scale and covering all sectors.
5.
In 2004, MoF, through Tsinghua University, completed a performance review of
MDB’s contribution to China’s development over the past more than 20 years.
6.
MoF and the MDBs have been trying with some innovative arrangements of
monitoring and evaluation. Starting from this year, we are trying to develop a
series of thematic review such as the performance of the Technical Assistance
Component under loan projects.
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