The Swedish International Development Cooperation Agency and the Asian Development Bank on Tuesday approved a project that, if successful, could sharply increase multilateral development banks’ lending capacity.
SIDA has agreed to guarantee about $170m in energy loans made by ADB across India in return for undisclosed fees, said Indu Bhushan, director general of strategy and policy at ADB.
ADB had cumulatively made 164 loans, grants and technical assistance approvals totalling $12bn as of December 2015, so the guarantee is only a fraction of the bank’s overall portfolio.
But it is an experiment that could end up an important tool in MDBs’ efforts to optimise their balance sheets and increase lending capacity — an effort mandated by the G-20 last year as part of an effort to fund an increasingly large global infrastructure financing gap.
India’s previous government estimated that it needed to raise $1tr to fund the infrastructure needed by the end of its 12th five year plan, which ends in 2017. Many estimates have Asia’s overall needs at $8tr between 2010 and 2020.
MDB officials and economists broadly agree that without a huge increase in the use of private funds for global infrastructure projects, increased national government spending and more efficiently run MDBs, there is little chance of bridging that gap.
ADB is also said to have privately placed securitizations of projects for which it partnered with private investors as part of its experimentations with balance sheet optimisation.
EXPOSURE EXCHANGE
The deal between ADB and SIDA is a first for both parties, if not a first of its kind in the development financing world. The World Bank last year announced a similar type of transaction, known as an exposure exchange, in which it synthetically swapped loan exposures with the Inter-American Development Bank and African Development Bank, helping the latter two to diversify their exposures and gain consequent capital relief.
ADB’s Bhushan would not disclose the fees paid to SIDA, but said that the deal was, in part, small in order to gauge whether those fees would be proportionately small to the capital relief gained to practically increase ADB’s lending capacity over time.
“It’s useful only if we can use that excess capacity for new loans,” he said, adding that guarantee fees over time would have to prove capital efficient, especially given that they feel these loans are high quality and unlikely to default.
The two MDBs have collaborated in the past, for example co-guaranteeing wind power loans in Pakistan.