For greater good

After securing a capital increase in 2009, the ADB has stepped up its efforts to streamline its business and cut down bureaucracy. The challenge, however, is to manage the bank’s expansion without increasing risks, says ADB managing director general Rajat Nag.

IFR Asia: It must be very different running a bank that now has three times the capital. What has changed at the ADB?

Nag: Last year, after our general capital increase, was about looking at the commitments we had made to our shareholders and making sure we started to deliver. So, we continued, first of all, with some fairly significant internal changes. Basically, we were going to have to hire about 500 people over a period of three years and you just had to make sure that the new skills and the new people you got all melded in with the institution - which really meant that we had to continue our focus on results. That again was something we really consolidated last year with the development effectiveness review - a scorecard that we produced for the last four years.

And the third focus was on quality at entry. We realised that, if we are going to have development outcomes, we really needed to start almost at the beginning of the process. You can’t have good projects coming out at the end of the pipeline if you don’t have good projects going in. So, we set up a small taskforce - a very high-powered taskforce - to look at quality at entry of all our projects, both sovereign and non-sovereign, including our country-partnership strategy. It completed its work this year, but the majority was done last year. It was reassuring to learn that quality at entry had improved; the project designs had improved both for sovereign and non-sovereign projects, although, on the non-sovereign side, we still have some way to go, as is the nature of the business.

Also, last year, we felt that the way we were doing business for a US$8bn bank would no longer be appropriate for a US$16bn bank. So, we streamlined our business processes quite significantly, shortened the time requirement for certain steps, cut off a few steps, but, obviously, we had to make sure we weren’t compromising quality. So, we began to front-load our processes, which fit in with the point I just made. We spend more time conceptualising a project to see if it fits with our strategy, and we delegated more authority to the heads of department. So, last year was more a question of making sure, internally, that we were geared up for the higher level of operations and more complex operations resulting from the capital increase.

IFR Asia: Have you changed your plans for the additional capital in light of Asia’s recovery?

Nag: Yes. In response to the crisis, we put together a US$3bn counter-cyclical support facility, which has now mainly run its course. We also put together, for our Asia Development Fund countries, a US$400m fund for immediate assistance and made some changes to our ADF allocations. We are now going back to a more normal level of operation. Last year, our operations came to about US$16.7bn - that is lower than the year before, but that is because of the counter-cyclical support facilities being withdrawn. However, we are going to be operating at a completely different quantum. This year, our lending will be well over US$15bn-$16bn, whereas, as recently as 2004-05, we were operating at US$5bn. There’s a huge difference.

Still, in spite of the global crisis, our Strategy 2020 has remained very robust. In fact, we believe the focus on infrastructure development, financial sector development, education, environment and regional co-operation are probably more valid than ever before. Last year, about 92% of our operations were in these five core areas. This means we are very well aligned with our Strategy 2020 and I think that will continue.

IFR Asia: What has changed in the way you approach your business?

Nag: We have got to do much more decentralisation, both in the sense of delegating more authority from senior management to the departments and the divisions, and also to our country officers and resident missions, and we’re continuing that process. We’re trying to think of a model in which, essentially, the headquarters becomes the back office. We’re supporting people on the front line, rather than the resident missions having to come to Manila for every approval. We’re trying out various models, but the first thing we have to do is make sure our decentralisation efforts continue.

The second thing is that our business processes have to be much more streamlined. They still have to go through a very strict due-diligence process. That is, after all, our strength and that has to continue. Projects have to follow a more streamlined business to make sure you cut down on the bureaucracy without cutting down on the quality.

And the third thing we’ve done is really looked at new products. For example, we have now mainstreamed what was the multi-tranche financing facility. Now, suppose there is a power project costing US$500m, but what the country really needs for the first year is, say, $25m to prepare the project. We will commit to US$500m, but the first tranche will be only US$25m. So, the country pays commitment fees only on that US$25m, but has the assurance the US$500m is there. We, in turn, tell our board the full amount, but seek approval only for the first tranche. Before the second tranche is taken out, we will seek approval from either the president or the board, depending on the scale.

This has been a major improvement, because, now, our projects are much more aligned with the country’s needs and the financing is much more aligned to the needs of the project. We’re making some fundamental changes in terms of the way we do business. It’s far from over, but the engagement is more intense and more aligned to our vision of poverty reduction.

IFR Asia: You’re cutting our bureaucracy and making your capital more efficient, which means you can do a lot more lending. How do you do that without increasing the risks for the ADB, particularly since its focus is shifting towards lower-income, riskier countries?

Nag: That’s an extremely important point. First, we had established a risk-management unit about seven years back. In October 2009, we upgraded that unit to a full-fledged office of risk management, reporting directly to the president, under my supervision. The office does not have a veto - that’s only with the president - but it has become a much more important management tool by which all projects - particularly our non-sovereign projects - have to go through a very rigorous risk-assessment process.

Our public sector work doesn’t go through that office, but we do look at the country exposure. As we lend to more emerging economies, the risk increases - that is a very valid point that certainly occupies our time. For all our non-sovereign operations, we have an investment committee, which the vice president concerned chairs. I am a permanent member. We scrutinise every project going through the non-sovereign window both at the concept stage and at the final stage. And, of course, our office of risk management and our treasury are extremely zealous in guarding our Triple A status. That is absolutely sacrosanct, so we make sure that whatever we do is done in a way that our credit rating is not damaged.

IFR Asia: Is co-financing easier now that the private sector has come back in force?

Nag: You’re right that there are much more private sector funds available. We have to make some major efforts internally to be able to leverage on that. We find our challenge is to bring these two sides together - countries have projects, but the private sector comes in and says: where are the projects?

We have to spend much more time as an institution developing projects. The private sector can deal with the risk; what it cannot do is deal with uncertainty. Once you can structure a project where we can say “Here is the technical, financial and economic viability, and here is the environmental viability, here is the risk profile” - I don’t think money is going to be a constraint. I get calls all the time from people wanting to invest, but the challenge in Asia is always the paucity of well-developed, bankable projects. So, our focus at the ADB now is to see how we can leverage more PPPs by structuring projects and seeing where we, as an institution, might come in. Maybe, we can take the front end of a project because the greatest risk sometimes is early in the construction phase. Once we take a greenfield project to a brownfield, we can either sell out or the private sector can come in for the post-construction phase. Or we can structure it so that we come in later on, as the uncertainty is greater the further out into the future you go. We are spending a lot of time and energy grappling with questions like these - how to leverage more PPPs because, frankly, our US$15bn-$16bn is still a drop in the ocean, compared to what is needed. We really need to find ways of leveraging more private sector resources, and that is our biggest challenge.

IFR Asia: Does that mean the ADB should be structuring projects rather than financing them?

Nag: I think the ADB’s role needs to be both, but we should certainly spend much more time on structuring and preparing projects. Our financing should be just the catalyst. Now, we might finance sometimes as much as 80% of a project. I’m looking forward to a time when we finance only 10% of a project, but get the remaining 90% from other sources and spread our capital to do more projects. Our capital is not going to increase significantly at least for the foreseeable future. So, the challenge will be how we mobilise a much larger multiple of what we do now.

Last year, we mobilised US$3.5bn in co-financing, which is a record, but is still a fraction of what we provide ourselves. Our challenge is to see if we can get multiples of what we finance, and become a much larger bank not by our own capital but by the capital we have been able to mobilise. That is the only way to go. We, of course, have some political risk and guarantee products, but, still, the structuring of the projects has to be much more imaginative.

IFR Asia: Do you see the ADB teaming up more with multilaterals?

Nag: We certainly work intellectually and on projects with the World Bank, which is our principal partner in Asia. However, the partnership with multilaterals has to be such that it doesn’t become a zero-sum game. The emphasis has to be on additionality. That has to come from the private sector, not from the multilaterals, as we’re all part of the same fraternity.

Increasingly, our emphasis has to be on greater leverage. Even with the tripling of our capital, it is still very inadequate for the needs of the region. Our most recent estimate is that about US$800bn a year is needed for infrastructure development and the ADB is only providing about US$10bn and other institutions probably a similar amount. So, the amount of unmet demand is huge.