Like AIIB, the Asian Development Bank Struggles to Find Quality Borrowers
The Asian Development Bank is making a mighty effort to avoid being overshadowed by the upstart, China-initiated, Asian Infrastructure Investment Bank. But the problem for both institutions remains the implementation of approved projects as well as the identification of economically viable ones.
The ADB’s annual meeting in Manila last week was a reminder that all the talk about Asia’s vast needs for investment in physical and social infrastructure are meaningless if projects can ’t be identified or implemented for whatever combination of technical, budgetary, political or institutional reasons.
The ADB’s annual report for 2017 shows an impressive rise in loan and assistance commitments, to US$33 billion from US$25 billion in the previous year. The steep rise has been made possible in part by a radical change to its capital structure, to include the assets of its former soft-loan window, the Asian Development Fund, into the overall balance sheet.
This has greatly increased the equity capital base – from US$17 billion to US$50 billion and thus how much can be borrowed to finance loans, without resort to a general capital increase. This should enable a higher level of lending to continue for about five to six years, by which time the ADB hopes for Washington in particular to be less hostile to the bank’s needs.
But disbursements have continued to lag, falling to US$11.1 billion from US$12.2 billion. After big increases in 2014 and 2014, disbursements have since stagnated. Net flows to beneficiaries have actually fallen due to repayments of old loans, thus net transfer of resources was only US$3.5 billion compared with US$6.5 billion two years earlier. Repayments can be erratic but nonetheless it shows how in net transfers it may not be difficult for the new AIIB to match the 51-year-old ADB.
There has also been a shift in ADB commitments away from Southeast Asia towards South and Central Asia, with transport projects taking over from energy as the leading sector. Whether this is a response to China’s Belt and Road initiative or the AIIB is a matter for conjecture. But it is noteworthy that AIIB-supported projects have also mostly been in South and Central Asia, regions where implementation can be especially difficult. For instance, it recently approved a loan for rural road improvement in Madhya Pradesh, an admirable goal with potentially large benefits for one of India’s least-developed states. It has also made a commitment to Egypt and is looking at others in Africa – which suggest a Belt and Road goal as well as an Asian one.
Both lending institutions must aim for viable projects and ensure that governments aren’t saddled with loans that yield no return to the nation. With its limited staff and experience, the AIIB in particular faces the danger of trying to do too much too quickly, Meanwhile the ADB is under pressure from some of its governors for graduated lending terms for countries which no longer qualify for concessional loans but are still much poorer or otherwise less developed than others such as China – still the second largest borrower from the ADB in 2017.
The dilemma for the ADB is that it needs clients such as China to help its disbursements performance, and sustain the quality of its sovereign loans book now that countries such as South Korea, Malaysia and Thailand are no long significant borrowers.
It is far too early to tell whether the AIIB, despite a smaller bureaucracy and focus on infrastructure finance than broader development lending, will be any more successful than the ADB either in the speed of implementation or in assessing the success of projects. Necessarily too, the AIIB for now at least must focus on co-financing if it is to be disbursing significant amounts quickly and in countries where implementation is difficult.
Indeed, implementation remains a major problem in the relatively developed parts of Southeast Asia. In particular, road and rail projects in Thailand, the Philippines and Indonesia all face land acquisition and other hurdles, showing up what should have been clear for the past several years – that lack of money, whether public or private, has been less a problem for much of Asia than other issues. For the private sector, these include legal and regulatory uncertainties which make successful public/private sector projects so much more difficult to realise than is usually assumed.