Asia “needs a lot of money for infrastructure” according to Asian Development Bank (ADB) president Takehiko Nakao, who dismissed concerns that the region is becoming over-banked in terms of the number of development institutions it has. He also denied that there could be a competitive scramble for projects and funds.
He told GlobalMarkets during an interview in Washington that the bank is revising upward the estimate it produced several years ago that Asia would need $8tr of infrastructure investment in the current decade.
He acknowledged the run-up of sovereign and other debt and the danger that countries could become over-borrowed given the volume of financial liquidity combined with ultra-low interest rates. “We should continue to pay attention to debt service capabilities and to what extent countries can borrow,” he said.
Nakao revealed the strategic thinking that underlies what for many is seen to be a surprisingly high degree of cooperation between the Japan and US-dominated ADB, based in Manila, and the China-dominated Asian Infrastructure Investment Bank (AIIB), based in Beijing.
The ADB and AIIB have been joined recently by the Shanghai-based New Development Bank (NDB) or ‘Brics’ bank, in addition to the World Bank, as development institutions with a focus on Asia, But, says Nakao, it is a case of the more the merrier given the size of the need.
“We need more money for infrastructure development — power, roads, railways and communications.”
Even with four development banks operating in Asia, plus lenders such as the Japan Bank for International Cooperation, the money they can provide is only a drop in the ocean compared to the total needs.
The ADB’s new study, to be published “soon”, will review not only the size of Asia’s infrastructure spending but will also identify potential sources of funds, Nakao said.
“Most must come from domestic sources: tax and [government] bond issues.” But “a very large part [will be] from private companies such as power producers”. Even so, multilateral development banks should play an important role. “They must provide more advanced projects to set an example,” he said.
The reason why the AIIB was supported by so many shareholders — it has 57 so far with a reported 30 more waiting in the wings — is that Asia needed a lot of money, Nakao said. The ADB, a much longer established institution, has 67 member countries.
Japan and the US are the two major hold-outs from AIIB membership, a fact that has spurred fears of competition or even friction among the world’s three largest economies over development philosophies and standards. But Nakao insists that the actual situation is very different.
‘KIND OF COEXISTENCE’
The ADB signed a memorandum of understanding with the AIIB in July and has begun co-financing with the bank. “I don’t think there is competition for project and funding,” Nakao said.
“We find and prepare projects and supply technical assistance and they co-finance. There is a kind of coexistence.”
Asian shareholders “want the ADB to be a partner with the AIIB”. Borrowing countries also want to involve the ADB said Nakao, whose bank has much longer experience in development lending than the AIIB, and whose project standards are exacting.
Meanwhile, “the US and Japan want the ADB to partner the AIIB. That way they can cooperate [indirectly] with the China-controlled institution without actually being members,” the ADB head suggested.
“China also wants us to be involved to make thing go smoothly,” added Nakao in a comment casting light on how China is using the skills of other development institutions while it builds up its own development lending capabilities.
“At this moment, we don’t have any idea about the division of labour” as to who will do what in the Asian region as between the ADB and the AIIB, as well as with the New Development Bank. The ADB also has a memorandum of understanding with the NDB as well as with the World Bank.
Nakao dismissed the idea of funding competition among the various development banks with regard to market funding. “There is no shortage of money,” he insisted. The fact that new lenders such as the AIIB do not have triple-A ratings does not mean they have restricted access to capital markets, he said.