The ADB is facing something of an existential crisis. Its traditional sources of funding – shareholder contributions and donations from higher-income governments – are drying up at the same time as the region’s needs are changing radically.
The bank’s future lies in its ability to mobilise additional resources, both from established public sector partners and – increasingly – with new sources of commercial and concessional finance.
“The world is changing. Our traditional co-lenders and grant donors … many of these people have their own priorities now,” said Jacob Sorensen, director of the office of cofinancing operations. “Thinking we can eternally continue to leverage this traditional money would be overly naive.”
The fraught negotiations around the World Bank’s 2018 capital increase have yet to be repeated in Asia – the ADB has no plans to ask for money in the near future – but it is clear that some of the bank’s biggest shareholders are focusing more on their domestic markets. Aside from the US administration’s blanket opposition to multilateral institutions, there are questions over the UK in the event of a disorderly Brexit.
The arrival of new multilateral development banks in the form of the Asian Infrastructure Investment Bank and the New Development Bank has also stepped up competition for development funding.
“It is becoming increasingly difficult to mobilise money for developing nations in Asia,” said Sorensen.
Expanding private sector cofinancing is part of the answer, but there are limits to risk appetite. Commercial banks and the institutional capital markets can play a role for countries like Indonesia or Thailand, but credit committees are less inclined to consider Cambodia or Kazakhstan.
As a result, the ADB is also looking for more innovative ways to work with new and existing partners.
It is exploring the use of donor funding to subsidise climate bonds, effectively adding a yield boost for investors that would allow a lower-rated borrower to access the market at attractive terms. The interest around ocean plastics could also open opportunities to combine concessional and commercial funds.
Export-credit agencies could also be more important financing partners, given their ability to offer quasi-commercial terms for deals that suit their national objectives – if discussions can be structured to comply with the ADB’s country-agnostic procurement policies.
The ultimate ambition, however, goes much further.
“The holy grail for us – and all the other MDBs – is using our concessional money to de-risk a transaction that could then access commercial funding,” said Sorensen.
That is no small challenge. Grant funding, which could help make projects ‘bankable’ by reducing blended funding costs, is in short supply. The ADB’s own grant operation – the Asian Development Fund – is reserved for only the poorest countries, leaving single or multi-donor trust funds as the main vehicles.
The US$800m-plus Afghanistan Infrastructure Trust Fund is the biggest example, but smaller sums can be extremely effective.
Sorensen notes that a France-sponsored grant fund for project preparation has delivered over US$300m of projects, leveraging the government’s contribution of less than US$5m by more than 60 times.
The US$10bn-plus Green Climate Fund, launched under the UN’s climate agenda in 2014, is an important partner, both through grant and concessional lending. Recent examples include a US$29m grant for a desalination project in Kiribati and US$29.9m for renewable energy in Tonga – both alongside commitments from the ADB. Progress in the world’s biggest climate fund, however, has been slow, and transaction costs are high.
Sorensen also notes that the fund’s resources come from the same shareholders that have backed the ADB and other multilateral lenders directly in the past.
Ultimately, he argues, the ADB – and Asia in general – will need to rely more on the private sector to fund development.
“At the end of the day concessional money comes from taxpayers. It’s not a zero sum game, as people’s priorities change … but the base is pretty fixed.”