ADB steps into the Chinese century
It has been a pillar of Asian finance for half a century, but does the Asian Development Bank still have a role to play?
By Paolo Danese
It may seem sacrilegious to ask, but in this day and age, what kind of role is left for the Asian Development Bank to play?
Interest rates are relatively low, China is flush with cash, Beijing is marching ahead with its ambitious Belt and Road Initiative and new multilateral development banks, or MDBs, are already encroaching on the ADB’s turf. Will this institution be elbowed aside or even become redundant?
One has only to look at Asia’s infrastructure requirements to see that the demand for financing far exceeds the funds available from the ADB.
“It will never be enough,” says YeeFarn Phua, sovereign analyst at rating agency Standard & Poor’s.
“The infrastructure needs for Asia are massive. India and Indonesia alone could be $1 trillion. But the MDBs do not just fulfil a function of infrastructure investment and poverty alleviation. They have other functions, from technical know-how to project execution with best global practices.”
The ADB’s own oft-quoted figures point to an infrastructure financing requirement in the region of $1.7 trillion a year over the period 2016 to 2030 – that in itself could be seen as a judgement on the existing institutions’ inability, both in Asia and around the world, to make much of a dent on demand.
Last year, the ADB tripled its lending capacity by integrating the resources sitting in the Asian Development Fund (ADF) with the ADB’s ordinary capital resources (OCR) balance sheet.
“This merger is in part a response to the call made by the G20 and others to use balance sheets a bit more creatively,” says Stephen Groff, ADB vice-president with oversight on China, southeast Asia and the Pacific. “We are in a time where infrastructure needs across the region and globe are vast, when the world has agreed on the sustainable development goals. The existing institutions and the new ones really need to step up their game.”
The ADB remains incredibly relevant, and I don’t see that changing - Karby Leggett, Standard Chartered
In the year since integration, the ADB’s lending rose from $15 billion to around $20 billion.
“That pace of increased lending will continue over the course of several years to somewhere like $25 billion a year,” Groff says, “although that number is not a specific target as there are a lot of factors to consider.”
In theory, the ADB could increase its balance sheet still further, Groff adds, “but if we are not successful in using funds to bring knowledge and experience to the table, to deepen partnerships with the member countries, other partners and MDBs, we are not going to be successful.”
The ADB has a long list of issues to tackle, ranging from poverty and inequality to infrastructure deficits and the problems arising from urbanization.
“There are the main challenges for the region as a whole, but there are also different ones for each country,” Groff says. “That’s why we can’t go with a cookie-cutter approach in these countries.”
As for where the money will go, infrastructure will remain a target, but Groff notes the goals laid out by the SDGs and the Paris climate accord go beyond building roads and power plants, starting from the startling fact that some 360 million people in the region still live in extreme poverty.
“We will continue to focus on poverty reduction across countries and scale up support for climate change adaptation and mitigation,” says Groff. “We have already increased climate change-related commitment from $3 billion to $6 billion on an annual basis.”
Stephen Groff, ADB
Key to any conversation about the role of the ADB these days is its interaction with the three-year-old Asian Infrastructure Investment Bank (AIIB). The Beijing-led institution employs a good number of former ADB staffers, including Jin Liqun, the former ADB vice-president who now heads the AIIB.
Some critics warned that the ADB should watch out, as new players like AIIB and the Brics-led New Development Bank would eat its lunch.
“When AIIB was first mooted, many thought of it as a competitor of ADB,” says Phua. But in terms of sheer size, the ADB does not fare badly. Its subscribed capital was $143 billion at the end of 2016, putting it in the top three MDBs globally, behind the European Investment Bank with $275 billion and the World Bank with $250 billion. AIIB’s subscriptions totalled $93 billion as of September 2017.
“The ADB remains incredibly relevant, and I don’t see that changing,” says Karby Leggett, head of public-sector client coverage for Asia at Standard Chartered. “At the edges, there is a new competitive dynamic but, more fundamentally, these [MDBs] are all mutually complementary.”
Not that there is much evidence of warm, fuzzy feelings of friendship among the various institutions.
For 2017, the ADB’s official and commercial co-financing approvals amounted to $9.5 billion, down from $13.9 billion a year earlier.
Takehiko Nakao, ADB president, told reporters in January that the pipeline of co-financing, specifically with AIIB, was larger for 2018, although he did not give a number.
Taken together, the Asia-based MDBs have a combined firepower equivalent to 2.5% of the infrastructure financing needs estimated by the ADB.
As a relative newcomer, the AIIB may need something like a decade to build up the kind of institutional capabilities that the ADB has accumulated over the last 50 years, whether in terms of balance sheet deployment or navigating the local bureaucracies in the jurisdictions where it lends.
But it is the MDB’s own mission statements that may help prevent confrontation on the ground, says S&P’s Phua: “These multilaterals are not set up for profit maximization, they have to help enable projects that the private sector would not do.”
The commercial banks have their own angle on how to ensure the MDBs achieve their goals while simultaneously helping their own bottom line.
For Standard Chartered that comes in the shape of blended financing, whereby commercial banks step in with additional financing alongside the subsidized loans from MDBs and government entities on specific projects.
|Karby Leggett, Standard Chartered|
“The issue is that everybody understands the capital financing need, but on their own, it is challenging for the MDBs to solve the gap,” StanChart’s Leggett says.
The structure has clear benefits for banks, which can offer a variety of structures alongside the MDB loans, whether it be additional vanilla loans with shorter tenors than those typically offered by the multilaterals, or helping the borrowers issue a bond in the capital markets.
“The MDBs have preferred creditors status, which means that in the event of defaults they are repaid first,” he says.
“If you lend with them, there are structures where commercial banks can enjoy that status as well and get an additional set of protections. This is useful for lenders, for example, in a country with a lower credit rating, or with uncertain legal framework. If you enjoy that kind of protection, it’s the difference [that helps us decide] to actually lend in that project.”
The blended structure is popular in Africa, and Leggett says Asian institutions and governments are coming around to the idea. The ADB put forward a proposal last August to leverage blended finance to crowd-in private-sector financing towards environmentally sustainable infrastructure projects.
However, the model has struggled to take off. In a report published in January, the OECD wrote that over the period 2012 to 2015, just $81.1 billion was mobilized from the private sector by official development finance interventions in the form of guarantees, syndicated loans, shares in collective investment vehicles, credit lines and direct investment in companies.
More cooperation between public institutions and between public and private ones will definitely help, but there is at least one area where increased competition between MDBs is showing a positive side effect: the speed of approval for new loans, an area where the ADB has faced criticism.
“Because the mandate of AIIB and NDB is to execute more quickly given the requirements of infrastructure spending, they are moving at a faster pace than older organizations,” says Leggett. “This is creating a new motivation for everyone to run a bit faster.”
One avenue for team play will be the globe-spanning Belt and Road Initiative, China’s infrastructure development plan, which is seen as a massive economic opportunity as well as a sign of Beijing’s assertiveness as a geopolitical player.
Japan – which, like the US, has a 15.6% stake in the ADB, making these two countries the biggest shareholders – is willing to see the BRI in a positive light if it helps achieve growth for Asia, although not without a hint of concern around the standards under which BRI projects will be approved.
Last year, the ADB signed the obligatory and vaguely worded cooperation agreements with all relevant MDBs, but Groff says the organization has not stopped there.
“We have discussed with the ministry of finance in China how the existing [ADB] regional cooperation programmes can be leveraged through engagement with the BRI,” he says.
But in terms of political legitimacy, China will not win points by simply going it alone, hence its need for old and new multilateral avenues through which it wants to build consensus around the strategy.
Perhaps surprisingly given how much China’s domestic leverage levels have risen, the country has managed to establish itself as a top ADB borrower.
China has become the largest exposure for the ADB, and together with India and Indonesia, makes up more than half of the institution’s lending, says Anushka Shah, an analyst with Moody’s sovereign risk group.
“China remains important in ADB’s lending strategy,” Shah says.