ADB to use leveraged finance as ‘catalyzer’ for development

The ADB must embrace leveraged finance to enable it to have a more meaningful impact on development, a senior official at the bank told Emerging Markets yesterday.

Rajat Nag, managing director of the ADB, said that leveraging - not just of finance but also knowledge and other resources - was going to be “the name of the game” for the ADB from now on. He said it was an “existential question” for the bank. “Otherwise we could become irrelevant,” he said.

The strategy contrasts with the position in Europe and elsewhere in the advanced world where commercial banks in are deleveraging in the face of the debt-fuelled crisis.

Nag said ADB research showed Asia will require spending on domestic and cross-border infrastructure of nearly $8 trillion over the next decade, while the ADB’s annual lending in currently around $20 billion annually.

The key to unlocking much greater resources to meet these needs is for the ADB to get involved in a much more meaningful way in public-private partnerships (PPPs), Nag told Emerging Markets.

ADB president Haruhiko Kuroda has approved a PPP operational plan which aims to bring about a revolution in the way the ADB approaches project finance - favouring private sector partnerships ahead of sovereign projects.

“What we think we will have to increasingly do is think of ourselves not as project financiers but as catalyzer of finance, some of which will be our own but a large part of it is going to have to be from other sources, particularly commercial sources,” said Nag.

The ADB, along with other multilateral development banks, has been promoting the idea of “co-financing” with private sources of finance for decades but Nag said he was confident the concept, using the PPP path primarily, has greater chance of success now.

“Public private partnerships which were not properly evolved a few years back. It was either private or public but over the past decade we have seen public/private partnerships really take off,” he said. “PPPs are not just a fad. Countries have adopted PPP as their guiding philosophy, the Philippines being one example.”

The financial environment is right, says Nag. “I frequently get calls from pension funds in North America and from bankers saying they want to invest in infrastructure in Asia, so where are the projects? And we have people in Asia with project that say where is the money.

“Our role has to be to bring these two together, maybe with some money of our own but basically leverage. We have recently adopted a PPP Operational Plan which basically will require a transformation within the institution. Our regional departments will become as involved in public private partnerships as they were in public sector lending.”

Nag said the ADB might need to use guarantees “much more ambitiously and aggressively” order to lure private investors.