Thinking big

Asian Development Bank Special Report 2019
8 min read
Steve Garton

Rugby-mad Fiji is flying the flag for the Pacific nations and raising awareness of the impact of climate change. Channelling investment to the remote region, however, remains a challenge.

The Asian Development Bank’s first annual meeting in the Pacific Islands is also its most remote. Fiji is more than 9,000 kilometres from Beijing – even London is closer to the Chinese capital.

In many ways, however, Fiji is leading the region – and not just in rugby, where its sevens team beat a global field in Hong Kong last month for the fifth year running.

The government chaired the UN Climate Change Conference in 2017, taking the lead in raising awareness of the impact of climate change in the Pacific Islands. It became Asia’s first sovereign issuer of Green bonds the same year. Fiji’s iTaukei Land Trust Board is even working on a blockchain-based system to digitise its land registry.

For the ADB, Fiji and the more remote Pacific island states encapsulate the challenge facing the multilateral community: how can the bank do more to assist smaller economies without spreading itself too thin or taking on unmanageable risks?

“Fiji is like an appetiser to the Pacific,” said Carmela Locsin, the ADB’s director general for the Pacific. “When you descend into Kiribati or Tuvalu or the Marshall Islands, and you see only this very limited stretch of land, you do feel isolated. You feel the vulnerability.”

Locsin cites resilient infrastructure, disaster mitigation and renewable energy as priority sectors for the future.

This approach mirrors changes to the bank’s focus under Strategy 2030, which calls for more cofinancing, a stronger response to climate change and increased decentralisation of the ADB’s own operations.

In the Pacific, the ADB is establishing a presence in each of its client countries, in additional to regional offices in Sydney and Suva, the Fijian capital. The bank has expanded its Pacific portfolio from US$500m in 2005 to about US$2.8bn in 2018, but still needs to work with other partners to expand its operations.

The Green Climate Fund, which began approving disbursements in 2015, has emerged as the ADB’s most important partner in the region. It has supported six projects in the Pacific, from battery storage and renewable energy to desalination plants. Locsin sees the GCF as “catalytic” for the region’s growth ambitions. The Canadian Climate Fund for the Private Sector in Asia and donor governments such as Australia are also important grant funders.

Mobilising the private sector is harder, given the cost of doing business in remote economies. Most of the bank’s operations in the Pacific region are in the form of grants, with the exception of Fiji, which borrows from the ADB’s ordinary resources.

The ADB, however, is working to lower the barriers to private sector participation by improving connectivity and institutional reforms.

“Our new country partnership strategy for Fiji has a very clear focus on finding ways for the private sector to play a bigger role, to help sustain inclusive and environmentally sustainable growth,” she said.

New ideas include using the ADB’s resources to credit enhance offtake agreements under a regional renewable energy programme, with the goal of attracting private sector participation by removing the risk of non-payment. The programme, which is not yet approved by the board, would be open for all Pacific nations.

“A number of transactions have been identified that could use this guarantee programme,” said Locsin.

The ADB’s private sector department is also working with Fijian sponsors on potential cross-border investments, helping local companies expand in the region.

Fiji has also been raising its own profile among private-sector investors. It can point to a longer capital markets track record than any of its Pacific peers, having issued US dollar bonds in 2011 and 2015 and local currency Green bonds in 2017 and 2018. (Papua New Guinea made its dollar debut in 2018.)

Fiji set up a F$100m (US$49m) Green bond programme in 2017 and listed the bonds on the London Stock Exchange in April the following year. The first offering in November 2017 drew orders of F$60.1m for F$20m of five-year bonds, priced at 4.0%, and F$27.61m for F$20m of 13-year bonds, priced at 6.3%.

Fijian banks put in orders of F$40m, but the Green bonds also attracted overseas investment – a first for a Fijian dollar bond – as well as demand from local insurance companies and the Fiji National Provident Fund.

Proceeds from the Green bond programme finance the sustainable management of natural resources, renewable energy, water and energy efficiency, as well as clean and resilient transport and waste-water management.

The US$200m five-year US dollar issue in September 2015 lowered the coupon from 9% on the 2011 deal to 6.625%.

Disaster mitigation

Disaster risk is also in focus. Tropical cyclone Winston caused losses totalling about 30% of Fiji’s GDP in 2016, underlining the need for governments to ensure they have the fiscal space to respond when a disaster hits.

The ADB, World Bank and others have already partnered on a regional insurance initiative, the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI), but there is interest in a separate ADB-led facility that would cover a broader range of events, such as storm surges.

Similar to a policy-based loan, the facility requires borrowers to set aside grant funding to cover emergencies.

“There is increased demand,” said Locsin. “It also requires governments to take on substantive action to manage and reduce disaster risk through policy changes.”

The 2019 meetings will also include seminars dedicated to ocean health – a hot topic globally that is especially important to economies reliant on fishing. Managing the impact of tourism, ocean plastics and more intensive land use is key to Fiji’s future, while its low-lying island peers are facing a more existential threat from climate change and rising sea levels.

“I am glad there is so much sensitivity to plastics, because it makes the world think about the ocean in a food-insecure world. How do we harness the energy of the oceans to feed our people and help our clients diversify their sources of revenue?” said Locsin.

“You can always think of them as small island states, but if you turn the world around … you can look at them as big ocean states.”

Fiji is also dealing with many issues that are immediately recognisable in other Asian emerging markets. Rural migration has led to a rise in urban poverty and strained resources in the capital, Suva. There has also been political conflict, with the current prime minister, Josaia Voreqe “Frank” Bainimarama, responsible for a coup in 2006.

The country does have one big advantage over its Pacific island peers: its population of now close to one million is still increasing, and it is not facing emigration. And there is always the rugby.

“I’m very excited about Fiji,” said Locsin. “There are lessons the Pacific has learned from its own experiences that others may want to pick up.”

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Thinking big