Seminar on Financing for Development
Opening Remarks by
Rajat M. Nag
Managing Director General
Asian Development Bank
At the 41st Annual Meeting
6 May 2008
Madrid, Spain
Thank you, Rick, for that great overview and kind introduction. Good afternoon distinguished guests, ladies and gentlemen and my esteemed panelists. Allow me first to congratulate the World Economic Forum for taking the initiative to come to ADB's 41st Annual Meeting and for organizing a session of great importance to us all.
ADB is delighted to be part of phase II of the Forum's Financing for Development Initiative and we think you and your organization, Rick, are playing a very useful intermediary role between the MDBs and the private sector. We look forward next month to hosting you at our headquarters in Manila and engaging in a more in-depth dialogue about how ADB can develop stronger partnerships with the private sector to more effectively leverage private capital flows in the region. Asia's future prosperity depends on it and we at ADB have bold plans to scale up our engagement and investments with the private sector as I will explain shortly.
Let me also say that this session comes at an opportune time when ADB has recently approved our new Long-Term Strategic Framework, Strategy 2020, which maps out our strategic direction to 2020. Our Board of Governors discussed this in some detail earlier in the week here in Madrid and I am pleased to say that we have a broad consensus from our shareholders that we are moving in the right direction.
One driver of change in our Strategy 2020 that pertains to today's session is how ADB plans to act as a catalyst for stimulating greater private-public sector investments in the region. The Strategy 2020 aims to scale up our support for private sector development to 50% of our annual operations by 2020.
There is no better proof or witness to illustrate the importance of the Financing for Development Initiative, than what the global economic and financial system is going through now. Recent months have shown the need for two things: first, a resilient financial architecture; and second, for all of us in the "financial community" to stand on our toes to ensure that the benefits of growth are sustained and built upon.
I will present four sets of modalities or instruments that ADB and other multilateral development banks pursue. Along with, I will also look a few key issues or challenges with each of these instruments. At the end, I will touch upon a couple of themes or issues we need to be cognizant of and focus on.
Our first instrument is resource mobilization and intermediation for development. ADB and other MDBs raise resources through the market as well as members' contributions (such as for our grant or concessional lending window and technical assistance). That has been the traditional modality. Official development assistance (ODA) channeled through such means has been important, but it has now become small in relation to the overall capital flows and development needs. In parallel, the Asia Pacific Region has built up large external reserves and savings, which the countries are vigorously investing. There is a paradox here, however. The developing countries in the region face massive needs for financing.
Let me take infrastructure financing needs as a case. Our recent assessment shows that ADB's developing member countries need at least $3.7 trillion over the coming 10 years. That is a massive $370 billion per year. At the same time, we have a paradox, with the region being home to over $2 trillion in foreign exchange reserves and domestic savings in the order of 30-35% of GDP in some of the large countries. ADB and other MDBs can help intermediate these regional resources for regional investment needs. We are working in that direction now, to mobilize and manage financial resources, through viable and bankable project opportunities for countries and institutions to cofinance with us.
Our second instrument is credit enhancement and risk mitigation to help address risks that are inherent in developing countries. Let me stick to infrastructure needs, and illustrate the challenges in translating the huge needs into viable demand (or projects). The large unfunded gap in infrastructure finance in the region is partly due to two sets of constraints:
- Lack of delivery capability: While many DMCs have progressed ahead, there is an acute lack of capacity. This starts from weaknesses in the policy and regulatory framework, then goes to lack of adequate resources to prepare transactions, and relatively low ability in construction and operation.
- Special risks: There are inherent risks in the region's infrastructure demand profile, such as: political risks; lack of sector maturity; operational/financial risks; uncertainty of safeguards, among others.
ADB and other MDBs can help in risk mitigation in a number of ways. First is supporting the preparation of good quality bankable projects. Second is ensuring adherence to social and environmental safeguards. Third is our focus on accelerating private sector participation. Particularly with regard to credit enhancement and guarantees, ADB is uniquely placed among the MDBs. Our sovereign, non-sovereign and private sector, and guarantee operations are all under one umbrella, within the same balance sheet. This enables us to combine different modes of support into a single project, if needed.
Our third instrument is closely related to risk mitigation, but of a different kind: leveraging and supporting policy and investment climate reforms. It is clear that governments alone cannot meet the massive development financing needs in the region. To attract greater private sector investments and they have to provide.
Our fourth instrument takes the form of supporting the development of domestic and regional financial markets. The need for a strong and resilient financial architecture can never be overstated, in developing or even in developed countries. This pertains to all areas - with policy, market, and regulatory aspects being the most important. I wish to highlight ADB's support for development of markets for long-dated financing in the region, through for instance the Asian Bond Market Initiative (ABMI) and other country level efforts. Local and foreign currency bonds help deepen the markets, channel the liquidity and establish long-term pricing benchmarks. ADB's $10 billion Asian Currency Note Program launched in 2006 is a noteworthy example. ADB has also been issuing regularly local currency bonds in many countries. I need to stress that ADB uses the local currency proceeds for project finance in the respective countries. In fact, our debt issuance is structured on a back-to-back basis to support the project financing needs.
Finally, ladies and gentlemen, allow me to highlight two themes in closing. As we focus on improving financial stability, we need to stress on two key needs:
- First is to ensure financial inclusion
- Second, is to promote broad-based inclusive growth
Both are vital to ensure that the benefits of growth reach out to the poor.
Thank you, Rick.
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