ADB President Takehiko Nakao explains how the bank can use its 50 years of experience to meet Asia’s needs in a changing landscape for multilateral lenders.
The Asian Development Bank’s 50th anniversary year comes at a busy time for Takehiko Nakao. Having overseen a revamp of the bank’s capital resources in 2015, the ADB president led a near 20% jump in operations in 2016 to a record US$31.5bn of loans and other commitments. He began a new five-year term in November, and is deeply involved in a strategic review that will guide the bank’s operations until 2030.
For Nakao, the half-century landmark is more than just an excuse for a celebration. He is a firm believer in the power of knowledge, and has taken it as an opportunity to study ADB’s achievements as a guide to its future focus.
A book project commemorating the ADB’s 50th anniversary has consumed, by Nakao’s own estimation, about 300 hours of his time. (Others at the bank reckon the real figure could be far more.)
The product of those efforts, a comprehensive history of the ADB since it opened its doors in December 1966, will be published at this year’s annual meeting in Yokohama, Japan. Nakao’s involvement is telling: this is no ordinary vanity project, but a serious effort to identify the institution’s key strengths at a defining moment in its evolution.
The bank’s first president, Takeshi Watanabe, wanted the ADB to be an institution that “learns before teaching”. It is a mantra that Nakao has taken to heart.
Since arriving at the bank in 2013 to replace Haruhiko Kuroda, Nakao has made it his duty to study the issues facing Asian development. He has become a passionate advocate of the bank’s gender equality and climate change programmes, even keeping his office deliberately warm to cut down on energy bills. He personally chairs 15 sector and thematic task forces, and his attention to detail can turn even a quick update meeting into a three-hour discussion. Department heads regularly have their meetings – and lunch hours – interrupted by questions from OPR, as the president’s office is known inside the Manila headquarters.
Building on strength
Nakao’s extensive history project has convinced him that the ADB’s strengths lie in its knowledge, policy advice and regional cooperation – alongside finance.
Since launching its first bond issue in Germany in 1969, the bank has leveraged public and private sector resources to support Asian development, transforming US$7bn of paid-in capital and US$30bn of donor funding into a total of US$267bn of loans and grants.
“In a sense the ADB was established to tap the global capital markets,” said Nakao. “Finance was very important in the beginning. It is still very important … but at the same time we can combine finance with knowledge and expertise.”
The ADB has used its knowledge and expertise to introduce new technologies and environmental standards to borrowing countries, such as the Nanpu and Yangpu bridges that connected Pudong to Shanghai or the Suzhou Creek rehabilitation project.
It has also used policy-based lending to support less-developed countries in times of crisis.
“Although many people regard the IMF as the centre for macroeconomic policy, I realised that the ADB has also been supporting good policies,” said Nakao. “We have been promoting the idea of open markets and open trade and investment regimes.”
Regional cooperation initiatives include the Greater Mekong Subregion and the Central Asian Regional Economic Cooperation group.
“The ADB itself is a child of regional cooperation,” said Nakao, contrasting the European multilateral sector with the ADB’s long monopoly position in Asia. “People wanted to have an institution to unite the friendship and cooperation in the region.”
These historic strengths are likely to form the bedrock of the ADB’s operations in the next 10 years, according to a draft framework of the Strategy 2030 review circulated earlier this year.
But the bank also aims to establish itself as a leader in new focus areas that are becoming increasingly important to its borrowing members as they reach a higher level of development, such as technology, social inclusion and healthcare.
“We are looking to support advanced technology. If we just look at the lowest cost option it doesn’t serve the country very well,” said Nakao.
The UN’s Sustainable Development Goals underpin the broadened agenda. Released in 2015 as an update to the Millennium Development Goals, the 17 SDGs call for an increased emphasis on tackling inequality, an issue that plagues many of Asia’s fast-growing economies.
“When the ADB was started, if we talked about poverty we talked about food and GDP per capita. Today poverty is many things,” said Nakao. “The ideas of inclusiveness – access to education and healthcare, and gender equality – are also important.”
Climate change is high on Nakao’s list of priorities after the global agreement on emissions in Paris in 2015, known as COP21. The ADB is on track to double its climate finance operations to US$6bn a year by 2020 after approvals jumped from US$2.7bn in 2015 to US$3.7bn last year.
The bank has supported renewable energy, energy efficiency and transportation projects across the region, and is also keen to help Asian borrowers improve their resilience to the effects of climate change – financing infrastructure upgrades, for instance, that otherwise may not be viable.
Social issues such as access to quality education, gender equality and healthcare are also gaining significance.
“The global trend is that people are paying more attention to social issues,” said Nakao. “Education used to be seen as a tool to promote growth and development … now it is seen as more of a basic right.”
New partners
Nakao’s comments show a desire to reaffirm the bank’s relevance as its member countries become richer and their needs evolve. He stresses the need to mobilise a wider range of resources to keep development moving forward, and has committed to working with all partners – both public and private sector – to meet those aims.
The combination of concessional and ordinary capital resources has given the ADB more firepower and the bank is well on its way to approving US$20bn of loans and grants a year by 2020.
Equally important, however, is the bank’s roster of cofinancings and partnerships, which allow it to leverage third-party funds and complete projects that would otherwise be beyond its reach.
“We are the only MDB with a cofinancing target of 1:1 by 2020,” said Saswata Gupta, director of the ADB’s office of cofinancing operations. “We are looking at how we can increase our partnerships.”
Grants from public donors can be blended with ordinary development loans to reduce interest costs on a project, or provide credit enhancement as a first-loss equity investment.
“Donors focus on the catalysing effect of their money, just like the ADB,” said Gupta.
Concessional funds are an important part of the ADB’s operations.
Most donor agreements are below US$50m – the Bill & Melinda Gates Foundation pledged US$15m in 2013 to support sanitation projects – but recent initiatives include a major trust fund from the Japan International Cooperation Agency, which has pledged US$1.5bn to support quality infrastructure projects in the region.
The ADB is also finalising its accreditation with the Global Climate Funds, based in Songdo, South Korea. Two ADB grants are already approved, and others are under discussion.
The Asian Infrastructure Investment Bank is the highest-profile of the ADB’s new partners. Although the two institutions are very different – the AIIB has no resident board and a far greater Chinese shareholding – Nakao is keen to emphasise that they are working towards a common goal. A third co-financing was signed in March, for the Batumi Bypass road project in Georgia.
“Asia needs more money for development and infrastructure, and it’s better to have more resources,” said Nakao, who has met AIIB president Jin Liqun nine times in the past two years.
The AIIB’s arrival has also encouraged Nakao to think about the ADB’s purpose and how the two can complement each other.
“It’s very nice to have a new institution to think about these things and cooperate.”
Reforms
The AIIB approved another 13 members in March, taking its membership to a total of 70 countries (three more than the ADB). Pressure to reform the ADB’s shareholder base, meanwhile, seems to be less urgent.
The arrival of the AIIB and the New Development Bank has given China and India an alternative means of raising their global influence, and there is little appetite among the ADB’s shareholders for a change to the status quo.
“Our shareholders are not aiming at expanding the number of countries but for close control over the management of the bank,” said Nakao. “It’s not for me to decide if there are any new ideas among the shareholders.”
Still, there are calls for reform to the way the bank operates. Australia’s Lowy Institute has called for a review of the bank’s graduation policy, which constrains its lending to countries that have reached a certain income per capita.
“The ADB faces a situation where many of its traditional major borrowing partners have already technically passed the income threshold to graduate out of ADB lending, and more will no doubt graduate in the years to come,” said Lowy analysts in a February 2017 report. “This creates issues both around the sustainability of the ADB’s expanded lending, but also the sustainability of the ADB itself.”
“A short supply of development finance in middle-income countries across Asia, combined with the need to still address poverty in these countries, means there are no development grounds that justify the ADB’s graduation policy.”
Nakao says the graduation policy is under review, but emphasises that the ADB has an important role to play in supporting middle-income countries.
“Finance combined with knowledge is a very effective tool to help these countries,” he said.
“As far as those countries want our support, we can continue to support them. It’s a very effective way of engaging middle-income countries in better directions – in line with COP21, the SDGs and so on.”
A further capital raising appears unlikely in the immediate future, following 2015’s restructuring and a replenishment of the concessional Asia Development Fund in 2016.
Nakao, however, is not ruling anything out.
“Of course it is better to have increased capital, but because of the merger (of the concessional and ordinary resources) at this moment we can increase our lending without further additional money,” he said.
This year’s 50th annual meeting in Yokohama is an opportunity to celebrate the ADB’s achievements over the last five decades. For Nakao, it is also a moment to reflect on how the bank can build on its strengths in the years to come.
When the ADB opened its doors in late 1966, its first president described it as a ‘family doctor’ for Asian countries. It’s a metaphor Nakao has used more than once in anniversary speeches, and one that fits well with the bank’s changing mission. It may have started out dealing with the young and sick, but the ADB will always need to upgrade its services as its patients grow up.
(This article has been updated to correct the year of the ADB’s first bond sale in paragraph 7.)
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