Knowledge management

IFR Asia - Asian Development Bank 2016
10 min read
Steve Garton

The Asian Development Bank’s 49th year of operations is shaping up as a calmer period for its president, Takehiko Nakao. Having won support for a groundbreaking capital restructuring last year and weathered the arrival of new players on the multilateral scene, 2016 is a chance to focus on the future.

The Manila-based lender is laying the foundations for an expansion that will take its annual approvals from US$13bn to US$20bn by 2020. Green projects and Asia’s poorest countries are set to be the big beneficiaries, but Nakao is also honing the bank’s technical expertise to ensure it remains relevant as the region becomes richer.

“Unless we can introduce better technologies and better expertise, our relevance will be limited,” said Nakao at an interview in the bank’s Manila headquarters. “I have a very strong view on that. Our money is limited anyway, compared to the vast needs of financing for infrastructure. We should combine our knowledge and expertise with our financing.”

“Without China as a borrower, the ADB’s relevance in Asian development is much smaller, so it’s better to keep a strong partnership with China at this moment.”

The ADB is looking to reduce its use of external consultants and upgrade its technical knowledge, with a view to passing on that expertise as a service to member countries. The bank is seeking experts for renewable energy, smart grid, transport and water projects, among other positions.

Nakao’s comments point to a focus on securing the ADB’s long-term future in a region where growing wealth threatens to reduce the relevance of a multilateral development bank. Rather than simply providing capital, the bank aims to be seen as a partner, working with countries to introduce new technologies or financing solutions that can then be replicated on a bigger scale.

“We need to remain relevant through our expertise. As Asia develops, a lot of our member countries can finance themselves,” said Nakao.

The bank’s relationship with China is a case in point.

The ADB’s latest country partnership strategy, timed to match China’s own five-year plan, calls for a focus on environmental initiatives and rural development.

“I really feel there is very strong interest among European companies for business and investment in Asia. They are also looking to increase the investment from Asian companies into Europe, and some interesting technology cooperation.”

“People may say that China is already more developed and they can use internal resources to support their people,” said Nakao. “But we can help China by using our expertise, which we have developed by supporting other countries.”

Several of the ADB’s member governments have cut their use of the bank’s assistance entirely as their economies have developed, including South Korea, Taiwan and Hong Kong. Malaysia no longer borrows from the ADB, although it has not formally “graduated” to the same advanced economy status.

Nakao does not foresee China graduating in the near future, but acknowledges that the scale of the country’s economy means the ADB’s support must offer more than just capital.

The ADB approved loans totalling US$1.7bn to China last year – a drop in the ocean for a country with a GDP of US$8.8trn in 2015.

“It’s a very small number, so we must target projects that can be replicated. Our focus must be on the biggest development impact,” said Nakao.

Lending to a highly rated country such as China has other advantages for a development bank.

“By lending to China at a spread over our funding cost, we can finance our operations and some surplus can be used for supporting poorer countries. And by having China as a borrower our asset portfolio becomes more balanced and stronger, so it is easier to get a higher rating,” said Nakao.

“Without China as a borrower, the ADB’s relevance in Asian development is much smaller, so it’s better to keep a strong partnership with China at this moment.”

Capital combination

In the immediate future, Nakao is looking to wrap up the next replenishment of the Asian Development Fund, the concessionary pool of resources dedicated to supporting Asia’s poorest countries. Thirty-four of the ADB’s 67 shareholders are also donors to the fund.

The total size of the ADF injection is set to be confirmed during the Frankfurt meetings, but is expected to be around 40% smaller than the 11th replenishment round in 2012, raising around US$2.5bn-$3bn rather than US$4.8bn.

That, however, does not signal a reduction in activities, as the ADB is restructuring its capital base to give it more firepower. Previously, donations for concessional lending were kept separate and were not leveraged, reflecting the additional risks of lending to Asia’s poorest countries. At the 2015 annual meeting, however, the governors approved the combination of the bank’s ordinary resources and the ADF’s equity and lending operations, effectively adding almost US$35bn to the bank’s capital base without a capital increase. (See table.)

10 Bigger and better

Bigger and better

The move allows the bank to use leverage for its concessional lending for the first time, while the ADF will become a smaller fund dedicated to providing grants to eligible countries.

That means the 12th ADF replenishment will place less of a burden on the developed countries – a welcome move at a time when many governments are struggling with low domestic growth, and are facing more demands for their assistance from new multilateral players.

“It will be smaller because we just need the grant part. By combining the capital for concessional lending with the ordinary capital resources we can now use leverage and generate more profits that can then be used for more financing,” said Nakao. “It’s much more efficient.”

The bigger balance sheet will allow the ADB to lend more across Asia – especially targeting infrastructure projects and the region’s poorer nations.

“The support for less-developed countries will be the focus. The capital combination will allow us to lend up to 70% more to less-developed member countries, and 50% more for developed countries,” said Nakao.

The private sector department is also growing fast, with approvals up 37% in 2015 to US$2.6bn, including non-sovereign loans, guarantees and investments

“We are now strengthening our support for PPP and transaction advisory services, like the railway project in the Philippines. The private sector should be involved of course, but there is an element that needs public sector money. We can help both sides.”

ADB’s private sector exposures include medical equipment leasing, venture capital for climate-sensitive projects, loans to SME banks and a variety of equity stakes. It is playing an advisory role on the Philippines’ largest ever PPP, a US$3.8bn investment in the North-South Railway and commuter rail line.

Green finance will be more of a focus across the bank. Nakao has announced plans to double the bank’s climate financing exposure to US$6bn a year by 2020, issue more Green bonds and seek co-financing opportunities with public and private partners.

“Asia’s role in climate change is so important,” said Nakao. “Asia is still growing. Because it will account for more than 50% of the global population by 2050, Asia’s share of GDP can be more than half, and its share of emissions can be more than half.”

European relations

Germany is a big advocate of climate awareness, and is hosting a City of Sustainability exhibition alongside the ADB’s annual meetings. This year’s venue of Frankfurt also provides an opportunity to reinforce relationships between Asia and the European Union as the first time since Madrid in 2008 that the ADB governors have met in a European location.

“This is an important opportunity to encourage the development of the Asia-Europe relationship,” said Nakao.

“I really feel there is very strong interest among European companies for business and investment in Asia. They are also looking to increase the investment from Asian companies into Europe, and some interesting technology cooperation.”

Discussions on the sidelines are certain to focus on the eurozone’s own challenges, with migration, security and the threat of a British exit from the European Union high on the agenda.

While European stability has a bearing on Asia’s own economies, Nakao hopes the Frankfurt meetings will encourage some European participants to look beyond the continent’s troubles.

“Asia is slowing down but it’s still growing. I don’t buy the idea of a secular stagnation,” he said.

“There is much difficult news in Europe, but I hope this can be good news.”

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Bigger and better
Bigger and better
Combined balance sheet as of 1 Jan 2017 (US$bn)
ADFOCRCombined
Equity34.618.353
Outstanding loans30.86898.8
Equity-to-loan ratio112.50%26.90%53.60%
Annual assistance without combination310
Annual assistance with combination15-18
Source: ADB
Knowledge management
Bigger and better