|Illustration: Lon Chan|
Nobody turns 50 without a few aches and pains. You can comfort yourself with the accumulation of wisdom and experience along the way, but the big day tends to come with a bloated creakiness and a sense of doubt about your relevance to an ever-modernizing age. Happy birthday, Asian Development Bank!
When the great and the good of Asia-Pacific policy and development gather in Yokohama for the ADB annual meeting in May, they will be doing so for the 50th time. They will meet in a Japan and an Asia quite different to those in which a 1963 UN conference set out the vision for a new multilateral to alleviate poverty and help with rural development in, what was then, a largely agricultural continent.
So, how has the ADB done so far? If poverty alleviation is the measure, then there is evident progress. If it is infrastructure development then the funding gap, by the ADB’s own research, is getting worse, not better. The ADB might score well for reach and environmental commitment, poorly for speed and efficiency. You might call it steady, but you would not call it nimble.
The appearance of the Asian International Infrastructure Bank in China offers a leaner, more focused alternative to the Japan-led ADB. A younger and sprightlier version with a sharper mandate; the new multilateral also hints at structural questions about the voting composition of the ADB in a modern continent led by China and India.
“This is a good moment,” says ADB president Takehiko Nakao, “to think about what the ADB is.”
Nakao became president of the ADB and chair of its board of directors in 2013. He then won re-election for a further five years in November 2016. Euromoney meets him in the ADB’s squat marble-clad head office in Mandaluyong City, as incongruous today among the jeepney-throttled streets of Manila as it was when it opened in the 1990s.
|ADB president Takehiko Nakao outside the ADB HQ in Manila|
Leafing through the proofs of a new book being produced for the anniversary annual meeting, he recalls how initially the plan was to set up a trade finance institution in Hong Kong or Singapore, sort of an OECD for Asia, before the decision was made to make it a development bank. Asked if its purpose and mandate has changed over the years, he says that at its core it is still about being an intermediary through which capital might be allocated in to Asia. There has been a shift to the private sector along the way.
“Promoting transactions for PPP [public-private partnership] has become a larger part of our role,” he says. “But financing development is an unchanged part of us.”
Asia itself is unrecognizable from 50 years ago. Its population has more than doubled, from 1.91 billion in 1966 to 4.43 billion in 2016, roughly 60% of the human race. Asia was then largely agricultural, with only two or three of its cities among the world’s most populous; today, nine of the 10 most heavily populated urban areas in the world are in Asia. With this growth has come an overwhelming need for infrastructure.
In February, the ADB put out a new flagship report on Asia’s infrastructure needs, accompanied by the sort of eye-watering numbers that have become commonplace when discussing the continent’s insatiable thirst for power stations and highways. Including climate change mitigation and adaptation costs, Asia’s needs have risen to over $26 trillion, or $1.7 trillion a year, between now and 2030. That is more than double the $750 billion annual estimate the ADB came out with in a previous landmark study in 2009.
The gap between spend and requirement is as acute as it has ever been. The region already invests $881 billion a year in infrastructure, about half the required amount, and the gap between needs and commitments is equivalent to 2.4% of projected GDP for the region over the next five years – 5% of GDP if China, which has a policy of heavy commitment to infrastructure, is excluded.
Does that reflect, Euromoney asks, the increasing needs of a growing Asia, or the failure of institutions like the ADB to get capital to go where it needs to go?
“In a sense, we are not filling the larger deficit of infrastructure. Which means, compared to the needs, our building of infrastructure in Asia is weaker,” says Nakao. “In that regard, you can say that we should have mobilized more capital resources.”
There is some success, he says, chiefly in the fact that governments are no longer having to do it all alone with state money, with the increasing involvement of the private sector and through access to the international capital markets – much of it through multilaterals like the ADB. “Asia’s development has been supported by investment infrastructure, so I wouldn’t say that it was a failure for Asia to mobilize resources. But of course, it’s not enough.”
Nakao says the reason the ADB’s estimates have increased so dramatically is the need to invest in climate change mitigation, something that was not quite so obvious or quantifiable eight years ago. Also, there is the dramatic growth in per capita wealth and the creation of a vast and growing middle class. “So we need more energy, we need more water: people take a bath every day.”
He speaks of the mobilization of more tax resources from countries into infrastructure and use of the capital markets, but it has long been accepted that the magic bullet for infrastructure development is the movement of private capital into this area. On paper, it looks simple: rapidly growing savings pools from emerging pension industries across the region on one side, an almost limitless amount of long-term infrastructure projects that need to be funded on the other.
But it is not that simple. Nakao cites changing regulation, foreign exchange risk on long-term concessions and difficulties in accurate projections. “So it’s easy to talk about matching long-term investment needs with long-term financing including pensions and life,” he says. “But I would say it’s not so easy to do.”
To try to ease the way, a mainstay of ADB policy in recent years has been to assist countries in establishing PPP frameworks. March, for example, brought news of a partnership with Myanmar’s Yangon Region Government to promote PPPs. And Nakao has recently visited the expansion of Mactan Cebu airport in the Philippines, a PPP combining domestic private-sector lenders and an Indian private-sector operator.
The ADB also helps governments to access the capital markets. “PPP is nothing new,” he says, illustrating his point with 19th century British railways and the transportation that took silk inland from Japanese ports around the same time. His point is that the engagement of the private sector in infrastructure development has hundreds of years of history and must be the driver today.
It is a sufficiently vexing challenge that Nakao asks Euromoney for views on how to handle it. Yet he remains positive that infrastructure gaps can be filled. “I’m not so pessimistic about infrastructure building if the governments can mobilize different kinds of instruments.”
|Shanghai through the haze|
The ADB does not just want infrastructure, but infrastructure that fits in with its views on social and environmental considerations with the correct governance structures. And here there is an impasse. The ADB is widely criticized as being slow and inefficient, but at least part of this is a reflection of the standards it insists upon for involvement and the tiresome process of accountability. In the ADB’s view, it has to be this way.
“I think governments now really understand the importance of paying attention to social and environmental considerations,” Nakao says, adding that they are similarly aware of the need for transparency on procurement. “These are known components of our loan support. Countries appreciate it because we can show examples of models of how to do things right,” whether it is in the environmental impact of a dam or the social impact of resettlement of indigenous people in a big project.
There is, of course, a great deal of discussion about whether or not the ADB has made the right calls environmentally. Controversial projects over the years have ranged from the Samut Prakan waste-water management project in Thailand, to a railway rehabilitation project in Cambodia and the Melamchi water supply project in Nepal. However, governments and lenders tend to moan not about the environmental decisions, but the time they take.
“They’re so slow, that’s the problem,” says one senior Philippines bank executive. “They’re very slow in moving forward with projects. They need to be faster.”
“The problem is that our procedures sometimes take more time than they [governments] want to see,” counters Nakao. “It takes time to start implementation and building, because of these considerations.” The ADB’s response is to try to streamline analysis and decisionmaking, by delegating more power to its 28 overseas missions rather than documentation having to be handled at headquarters. “But we must be concerted, and the procedure takes time.”
Nakao argues that it is often not the ADB’s fault that a project moves slowly. “At the same time, procedures are often delayed by [governments], among ministries, sometimes involving parliament, sometimes cabinet officers and so on. So we should make efforts to rationalize or streamline the procedures.”
Moving forward, and doing so on time, is the biggest practical challenge facing the ADB today. At the last annual meeting in Frankfurt, the bank presented its annual performance report, in which it measures itself against 17 performance indicators. While 13 of the 17 targets were met or exceeded, the biggest issue by far was implementation delays, which averaged almost two years and affected 90% of sovereign projects.
A large part of the Strategy 2020 mid-term review action plan, implemented in 2014, is about speeding up procurement (as well as approvals for small non-sovereign transactions), but it is hard to escape the conclusion that projects are not getting done as quickly as they should.
Euromoney puts these numbers to him and asks if this is the way it has to be if you want to do things with environmental safeguards? “I think so,” he says. He talks again about streamlining procedures, delegating powers and about the use of IT. “Of course disbursement takes time naturally for things like building bridges and so on, but I think we are making progress.”
The ADB is at least putting more money to work. Its operations reached a record $31.5 billion in 2016, up 17% year on year, with approvals of loans and grants of $17.5 billion – another record and well on track to meet the target of $20 billion of approvals in 2020. Partly, this reflects an example of the streamlining Nakao is talking about, with the merger of the bank’s two main financial instruments – the Asian Development Fund and Ordinary Capital Resources facilities – kicking in on January 1 this year. “Approval is OK,” Nakao says. “In disbursement, there are more issues.”
Aside from the operational challenges, the ADB must face other issues. One surrounds the fact that Japan leads the bank in most respects: it is the largest shareholder, has the largest voting stock and has provided every president since the bank’s foundation in 1966. Nakao himself is a finance ministry man by background.
There is a question of whether or not it is appropriate for Japan to continue to provide the leader of the Asian Development Bank. In answering, Nakao turns to history and money: “Japan has been the largest shareholder” and has provided 38.2% of the concessional and grant funding through the Asian Development Fund, he says.
“My answer is, I think Asian countries and member countries understand the very important contributions made by Japan. Japan has played a central role to create this bank and develop ideas.” He talks about Japan’s support during the Asian financial crisis and about “using reparation for wartime problems.
“So I don’t know whether it [Japanese leadership] causes issues or problems to countries or not. But my election and re-election were supported unanimously, and I think Japan has played a relatively benign role, as a stable, pacifist, development-supporting country.”
Should we expect Japan to continue to lead the organization in the medium term? “It’s very difficult to foresee the future, but at this moment, I think there is a certain trust in Japan’s role in the region.”
The latest available numbers show the ADB’s biggest shareholders as Japan and the US (15.6% each), China 6.4%, India 6.3% and Australia 5.8%. The five most-powerful in terms of voting power are Japan and the US (12.8% each), China (5.5%), India (5.4%) and Australia (4.9%).
Given that China now boasts the second-largest economy in the world, far bigger than Japan’s, and India the seventh in the world, it is not surprising that both nations have sought greater representation. There is a feeling in both these countries that the voting and shareholding mix of the ADB is a throwback; an image of an Asia whose economic composition has long since shifted. There is a story in diplomatic circles that China reduced its representation at the ADB’s last meeting out of annoyance that the bank would not allow the country to increase its stake or countenance the dilution of either Japan or the US’s position in order to permit it.
Nakao seems genuinely dumbfounded by this. “What do you mean? There has always been minister representation [at the annual meeting]. I don’t know why you got such an idea. China has always regarded the ADB as very important and the level of representation by China has never been reduced.”
I can understand the feeling of India and China. They should be given more say. But they are gaining more say, in G20, at the World Bank and IMF, and AIIB is proposed by China. I don’t say whether it’s enough or not – it’s up to their perceptions. But the fact is they are gaining more voice
- Takehiko Nakao, ADB
Nakao then recalls his frequent meetings with the highest level of China’s government – he was there in January and before that December, in fact has met the Chinese finance minister eight or nine times as president. He says he met new finance minister Xiao Jie in January in a meeting scheduled for 30 minutes that instead ran for two-and-a-half hours. “What I want to say is that they regard ADB as very important partners, regardless of their plan to establish their own AIIB.”
Have they sought a greater voting stake?
“I think India and China want to have greater voting powers, or shares, but unless we increase capital, there is no opportunity to do that,” he says, which is not entirely true, Japan and the US could offer to dilute. “Their share of capital is next to Japan and the US. But their contribution to concessional lending is still limited. They are trying to increase it at the ADB and the World Bank and they are gaining more power,” with one of the six vice-presidents having been Chinese for the last 15 years, he says (currently Wencai Zhang, who previously served in China’s ministry of finance).
Is the voting level appropriate given their contributions at the moment?
“This kind of adjustment takes time because it is based on the previous accumulative capital,” he says. “Japan had a similar experience. Japan’s voting power in the IMF is 6.5%, but it took a long time to gain representation. Japan spent a lot of money, made a serious contribution to IDA [the International Development Association, the part of the World Bank focused on the poorest countries]; it was the number one ODA [official development assistance] donor for almost 10 years or so up to the 1990s.
“So I can understand the feeling of India and China. They should be given more say. But they are gaining more say, in G20, at the World Bank and IMF, and AIIB is proposed by China. I don’t say whether it’s enough or not – it’s up to their perceptions. But the fact is they are gaining more voice.”
All of this has been brought into sharp relief by the launch of the AIIB, whose president Jin Liqun is a former vice-president of the ADB. It was originally seen as something of a raised middle digit to multilaterals like the World Bank and the ADB: China taking its rightful place at the top table of global affairs when other multilaterals would not give it appropriate heft, launching its own infrastructure-led vehicle in which China held the biggest stake and sufficient voting power to retain a veto, as does the US in the World Bank.
Events since the AIIB’s launch have been illuminating. The Chinese bank has made a point of being more open than any of its contemporaries; its latest round of expansion will take it past the ADB’s 67 members, potentially to as many as 90, and will dilute China below the level at which it will have an effective veto on decisions (although it can of course still lean on its neighbours and trading partners to vote with it, should the occasion require).
Additionally, having looked to the ADB for senior staff, AIIB has also been happy to co-invest with it and other multilaterals. In Asia, for example, it is lending alongside the ADB on the Trans-Anatolian natural gas pipeline in Azerbaijan, the Myingyan power plant in Myanmar and the National Motorway M-4 in Pakistan. Partly, it can be argued, this is a matter of necessity on AIIB’s part, since it simply does not have the institutional capacity to do proper due diligence on projects like this, nor yet the money to go it alone. But it appears to be a long-term plan too.
“There is a need for cooperation among MDBs [multilateral development banks] to promote infrastructure,” says Jin, speaking to Euromoney at the AIIB’s headquarters in Beijing. “That is the reality. Early in the first stage, when we have limited manpower, this is particularly important for us. In looking forward I would say there is still vast space for us to have this kind of cooperation. This could be pretty common practice.”
For its part, the ADB has observed the new Chinese upstart with interest and some introspection, and apparently settled upon a view that they might as well work together, provided the AIIB can live up to the ADB’s required standards on governance, social and environmental matters. “Asia has a huge financing need for infrastructure. So it’s nice to have more financing resources so we can partner to finance these projects,” says Nakao.
He knows Jin well. Over the last two years the two men met formally nine times. “It is really enjoyable to talk with him. Because the challenges and issues we are facing – how to strengthen our human resources, how to recruit good people, how to build capacity, what sector specific or country-specific approaches we are taking – there are so many common issues.
“The advent of AIIB gives us a chance for partnership but also gives a stimulus to me, or to this bank, on how we can work with them.”
|Takehiko Nakao, with Chinese premier Li Keqiang|
Both sides appreciate that the other is very different. AIIB has a full-time staff of around 90, the ADB had 3,118 in December 2016. ADB has a bigger and more cumbersome board structure, is on the ground in 28 countries and has an entirely different mandate. Where AIIB is, as its name suggests, all about infrastructure, ADB seeks to take on poverty, education, health; it gives programme loans and concessional lending. “But this is a good moment to think what the ADB is and what the complementary elements are between these banks,” Nakao says. “It’s complementary, not adversarial.”
Nakao does not subscribe to the view that AIIB, when it gets bigger – it lent just $1.73 billion last year compared with total ADB operations of $31.5 billion – will push ADB towards irrelevance. “We have the experiences of 50 years and the staff resources of 3,100. There are differences, but we can complement each other.”
The voting and ownership composition is relevant for another reason too. In March, the US government came up with a budget blueprint, including a proposal to reduce funding for multilateral development banks by $650 million over the next three years. The headlines were caught by the likely reduction in funding of the World Bank, but the US also holds 15.6% of the ADB. Moody’s says: “The sums are small and unlikely to materially affect the credit metrics of the affected MDBs,” but adds that it “is a credit-negative signal from the top shareholder of several multilateral development banks.”
That is the point: the US is not represented at all in AIIB and appears to be of a mind to step back from multilateral participation generally in favour of a more US-focused policy under president Donald Trump. If it were ever to countenance dilution, China and India would be ready to take up the shortfall.
As times have changed, so have priorities. Nobody would pretend the work of alleviating poverty is ever done, but the incidence of people living on $1.90 a day or less (adjusted to 2011 purchasing power parity) has dropped from 36.4% of the region’s population in 1999 to 9% in 2013.
“Poverty is still there,” stresses Nakao. Even that 9% figure represents 330 million people, and alleviation programmes will remain a mainstay, from getting Philippine kids to regular clinic visits to pushing gender equality in central Asia.
Asked how much credit the ADB should be given for declines in proportional poverty, Nakao sees this loaded question coming (if ADB claims credit for poverty alleviation, it is fair to hold it accountable for failing to meet infrastructure needs). He bats the question back: “It’s very difficult to tell. The ADB cannot claim too much because our finance is limited, but in the idea of addressing these issues, our influence is very substantive.”
He is firmly of the view that the alleviation of poverty is linked to the opening of markets to trade and investment. “It is my very strong belief that many countries in Asia started development and poverty reduction more seriously after they started opening up their economies,” he says.
Over the years, two other themes – beyond the PPP/infrastructure drive – have gained greater importance: local capital markets development and climate change mitigation. It feels like increased capital market integration in the region has been talked about for at least as long as the infrastructure gap, certainly since the Asian financial crisis, and Nakao is an advocate.
“We need to use regional resources directly for investment in the region,” he says. He thinks progress has been made in the depth and liquidity of local currency markets, in their use by private issuers and in their availability to governments, aided by better-capitalized banks with more strident supervision than used to be the case.
All of this is clearly true, but regional integration remains elusive. “It’s not so easy,” he says. “But we are making progress, and cross-border investment between countries in Asia is increasing.” He’s talking mainly of foreign direct investment, but says that bilateral purchases of bonds – Singapore investors buying bonds in Thailand – is for the moment more realistic than “totally integrated capital markets.”
The ADB has long been influential as an issuer in capital markets and this brings us to climate finance, where it has been a pioneer in green bonds. “In the capital markets and through our operations, we can make a difference.” Climate-related lending accounted for about $3.7 billion of last year’s $17.5 billion of approvals. “But we are targeting $6 billion.” It is naturally a priority. The so-called V20, envisaged as a group of the 20 most vulnerable nations to climate change and since expanded to 43 members, has 18 of its constituent members in Asia and the Pacific.
These are the themes that will engage and irk the ADB in the decades ahead: climate finance, infrastructure bottlenecks, reluctant private capital, peeved donors and shareholders, capital markets that will not integrate and the poor that stay poor. The bank will try to streamline and modernize, to slim down and be decisive. But most likely it will enter the second half of its century doing what it always has: moving slowly but steadily on its own terms.