Tuesday, 18 June 2019

A new chapter

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The latest uncontested nomination for the presidency of the Asian Development Bank suggests that little is changing at the bank’s Manila headquarters. Behind the scenes, however, the institution is transforming in response to Asia’s development.

A Rohingya beggar reaches out his hand outside a mosque after Friday prayers in Sittwe.

Source: Reuters/Damir Sagolj

A Rohingya beggar reaches out his hand outside a mosque after Friday prayers in Sittwe.

On the surface, at least, it is easy to assume that little has changed at the Asian Development Bank. More than eight years after Haruhiko Kuroda, a bureaucrat with a long career in Japan’s finance ministry, was named ADB president, another experienced Japanese finance ministry official is poised to take the reins in an equally predictable process.

Despite early suggestions that China would seize the opportunity to nominate its own candidate in a bid to increase its international clout – and later rumours that Australia was considering a similar move – only Japan formally tabled a nominee, repeating the uncontested election of Kuroda in November 2004. Japan and the US remain the bank’s biggest shareholders, and each president in its 47-year history has come from Japan. The ADB’s power base has not changed.

Takehiko Nakao, Japan’s vice minister of finance for international affairs, will take over an institution charged with eliminating poverty in Asia – no less a challenge today than it ever has been. The task that awaits him, however, is very different from the one that greeted Kuroda in late 2004.

Kuroda resigned mid-way through his second five-year term for a high-profile challenge as governor of the Bank of Japan, and departed amid ringing endorsements from his former colleagues.

“Mr Kuroda has done an exemplary job of leading the Asian Development Bank for more than eight years,” said Palaniappan Chidambaram, India’s finance minister and chair of the ADB’s board of governors. “His extraordinary vision and leadership has enabled ADB to advance significantly its mission of poverty reduction and sustainable economic development in Asia and the Pacific.”

The ADB had certainly evolved a great deal during Kuroda’s tenure. Driven, in part, by the development of the region in which it operates, and, in part, by its own limitations, it has sharpened its focus, simplified its operations and strengthened internal controls and accountability.

Although it may sound counterintuitive for an institution that has almost tripled its lending in the past eight years, the ADB has also reduced its emphasis on finance – at least in the purest sense.

The challenge for Nakao will be ensuring that the ADB remains relevant in a region that no longer suffers from a shortage of capital.

“The ADB has undergone a fundamental transformation over the past eight years,” said Rajat Nag, managing director general of the ADB. “We didn’t lose sight of our core role as a provider of finance, but we recognised our role in a wider context as leveraging our resources and our knowledge. The work is far from done, but I feel we have become more relevant, responsive and results oriented.”

Kuroda, known internally as a diligent and organised operator with a quiet manner and a fondness for formality, oversaw a significant expansion of the ADB’s balance sheet.

Total operations, including co-financing, grew from US$7.4bn in 2005 to US$21.6bn in 2012. The Asian Development Fund – the bank’s main concessionary pool – was replenished twice and general capital increased once, by 200%, in 2009. A US$3bn counter-cyclical support facility, introduced in the wake of the 2008 credit crisis, and a trade financing facility that has grown to more than US$2bn, underline the new scale of the bank’s operations.

A new wing is under construction at the bank’s Manila headquarters, and staff numbers have grown by around 500.

“Volume isn’t everything, but volume is important and, in that sense, ADB became more relevant and more responsive to the needs of the region,” said Nag.

‘Existential question’

Such an increase in scale demands greater accountability, and the ADB under Kuroda installed a stronger results framework and evaluation department.

It also raised the risks of mission creep, that a larger bank would blur its focus in trying to spread itself too thinly across the region.

“We came up with Strategy 2020 in 2008, which, basically, defined for the next 12 year a broad blueprint of strategic priorities this institution would pursue. That was very important because there’s always a tendency for institutions, such as ours, to respond to every need, and lurch from one thing to another,” said Nag.

Strategy 2020 defined five core areas for the ADB: infrastructure, education, finance, environment and regional cooperation. Projects that fall under one or more of those initiatives will get priority, and the mantra has been instilled across the bank.

Shareholders want to see those reforms continue.

Cesar Purisima, the Philippines finance secretary, was quick to support Nakao’s nomination, but called on him to build on Kuroda’s efforts to improve transparency, rationalise bank processes to speed up the delivery of services, and provide greater representation in the appointment of senior bank officials.

Even with a bigger balance sheet and sharper focus, the ADB’s total operations are still a tiny fraction of Asia’s funding requirements. Nag points to infrastructure funding needs alone of US$800bn a year as an indication of the extent of that gap.

While US$20bn goes a lot further than US$7bn, the ADB is determined to make an impact in other ways.

“It’s not the money we bring to the table, important as it is, but the resources we catalyse or make happen,” he said.

Instead of placing that burden on the ADB’s funding department, or its public-private partnership specialists, Kuroda made the idea of leverage a priority across the bank. “Finance plus plus” is another mantra that officials attribute to the former president, a deliberately catchy slogan that sums up the ADB’s changing mandate.

The first “plus” is leverage, but the second – knowledge – is an increasingly key component of the bank’s operations, whether it be promoting best practice in a developing capital market or working with a government to prepare suitable projects well ahead of the financing stage.

“It’s recognition that our resource base will never be enough to meet the demands of the region. But we also have to recognise that this region is now in capital-surplus – it can and does attract a lot of capital from outside,” said Nag. “Our role has to be to act as facilitator or intermediary.”

That approach has seen the ADB strengthen its focus on improving Asia’s financial markets, sharing its knowledge rather than its capital through programmes, such as the Asian bond market initiative. Guarantee schemes, credit enhancement programmes, co-financings and public-private partnerships also fall into that category, allowing the bank to mobilise more financing than its own resources allow.

New challenges

“Almost all our countries are asking for additional resources, and we have to work within our available resources. This is why leverage is becoming an existential question for us,” said Nag. “Gone are the days when we could dip into our pocket for 80% of the cost of a project and say ‘let’s get on with it’. It’s more about coming up with 20% and helping to finance the remainder.”

Nakao has given little indication that he intends to pursue a radical reinvention, praising the ADB’s achievements and emphasising the importance of engaging with the private sector in his sole public statement. However, the demands facing the next ADB president are also changing as the region develops.

Asia is still growing fast. The ADB, in its most recent Asian Development Outlook report, predicts economic growth rates for the region of 6.6% in 2013 and 6.7% in 2014, an improvement on the 6.1% recorded in 2012. The region’s growth has helped it meet several of the United Nations’ millennium development goals, but much of that progress is fragile. Poverty, as measured by those living on less than US$1.25 a day, has halved from the 1990 levels, but 830m people in Asia still fall below that line and a severe natural disaster could easily reverse much of the improvement.

While access to safe drinking water has improved, and HIV and tuberculosis infections are down, 370m people still have no access to drinking water and 1.7bn live without improved sanitation.

Asia’s development is also creating new challenges. Urbanisation brings with it environmental dangers in a region already extremely vulnerable to climate change. Inequality is rising in almost every country across the region. The Gini coefficient, where 0 reflects perfect equality and 1 the opposite, has worsened from 0.39 to 0.46 over the last 10 years in the region as a whole.

“What the ADB will do is a reflection of what needs to be done in Asia. We, as an institution, have to continue with a laser focus on these challenges,” said Nag. “The priorities for the institution remain the same and will continue to be dictated by the needs of the region.”

The ADB finds itself facing a changing mix of demands from its member countries, with more governments placing an emphasis on clean energy and targeting inequality. Experience has shown the initiatives that have the highest impact on development: where once an ADB project would have involved the construction of a single road or power plant, the bank is now supporting multi-modal transport links and partnering with governments on initiatives capable of backing multiple projects at once.

The ADB played a leading role in designing the ASEAN Infrastructure Fund, and is investing alongside ASEAN member governments in a capital pool that will contribute to the equity portion of key infrastructure projects. The ADB will mandatorily co-finance each project the AIF invests in, providing finance, leverage and knowledge all in one.

Nag points to the ADB’s multi-tranche financing facility as another example of how the bank is looking beyond individual projects. In Bangladesh, the ADB is partnering with the government on a primary education programme, providing a fraction of the funding required for a sector-wide initiative to improve teaching standards and materials across the country.

“We’re not moving away from projects, particularly large infrastructure, but they won’t be mutually exclusive. We’ll work with the member governments and see if we can support a slice of their programmes in infrastructure or in other areas,” said Nag.

“If these programmes work well they have a higher development impact than individual projects. They are certainly more complex and demanding, but I believe it is the right approach.”

To see the digital version of this report, please click here.

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