Q&A: ADB president calls for effectiveness over growth

WASHINGTON — On Sept. 17, Asian Development Bank President Takehiko Nakao announced that he would resign halfway through his second term in office.

“I feel this is a good time to ask someone with fresh ideas and strong commitment to development to succeed me,” he said in a statement.

During his tenure, which began in 2013, Nakao oversaw the 2018 launch of the bank’s Strategy 2030, which saw the bank reaffirm its commitment to social sectors and scale up its financing for climate change. Nakao also led the merger of ADB’s two financing arms, the Asian Development Fund and Ordinary Capital Resources, in order to expand the institution’s lending capacity. Other reforms were more controversial, including cuts to staff benefits and pensions in 2015.

Devex spoke to Nakao on the sidelines of the World Bank and International Monetary Fund Annual Meetings in Washington, D.C., where he reflected on changing dynamics in the Asia-Pacific region, ADB’s relationship with emerging Chinese lenders, and the challenge posed by climate change.

This conversation has been edited for clarity and length.

How would you describe ADB’s relationship with China when it comes to investing in developing countries?

In the case of [the Asian Infrastructure Investment Bank] — although the U.S. and Japan are not members — AIIB has membership from different countries, including Australia, Canada, and European countries. So it is a more international institution, and I think they are more prudent about lending.

Their lending over the last year was $3 billion, versus $22 billion from us. So it's still small ... and I believe that they are observing international standards of procurement, fair competition, and also the environmental and social impact standards. So with the AIIB we have very good cooperation, and we have already co-financed eight projects.

[With the] Belt and Road Initiative, there is not so much opportunity for us and for any international lenders to work with BRI, because BRI is a more unilateral initiative by China. Development Bank of China, Export-Import Bank of China, and other state-owned enterprises have a large [portion] of lending.

The Chinese authorities themselves don't clearly get the data about this lending, so it's more difficult to coordinate. And that kind of very large lending by the Chinese entities under the coverage of the Belt and Road Initiative — even if it is to promote connectivity and supporting infrastructure building — often those are done in a more rushing manner, and it is reported to create a lot of problems, including debt sustainability, or over-borrowing, and sometimes environmental issues and resettlement issues from big dams, and so on.

This is often portrayed as a competition between two different lending models — China’s model, and the model promoted by other traditional development finance institutions. Is that how you see it?

The international community should try to engage China to guide these investments in the [right] direction. One of the encouraging signs is that China was one of the signers of the G-20 principles for quality infrastructure, which was adopted in Osaka, and includes the elements of debt sustainability, and environmental and social protection, fair procurement systems, and also life cycle cost — the good quality of infrastructure.

One of the basic issues is that China regards itself as a developing country still, and it's not a member of [the Organisation for Economic Cooperation and Development]. They regard this cooperation with other countries — developing countries — as south-south cooperation.

If China is like the China of the 1980s or 90s, it is okay to regard it as just south-south cooperation, as peripheral kind of activities. But today, China's lending to countries is massive, but still China is not a member of OECD. That lending to other countries is not regulated by OECD guidelines for export credit, or OECD guidelines for [official development assistance] … China does those things on their own. I don't think it is really from intentional, malicious will. It can be from goodwill. But still, it causes a lot of trouble if we do those things inadvertently.

There are discussions going on right now about what it means for the multilateral development banks to be aligned with the Paris climate agreement. What do you think Paris alignment means for ADB?

So first, we are aligned with the Paris climate agreement, both for mitigation and adaptation. There is an [agreement] that the developed countries should support developing countries by [contributing] $100 billion annually to support the developing countries' adaptations and mitigation efforts. So in that regard, climate finance by MDBs is a very important part. MDBs' climate finance in total was $43 billion dollars in 2018, and it is based on very strict measurement.

ADB last year was a little bit low — $4 billion — because of delays of some important projects. But the year before last was $5 billion … Climate finance, whether it is mitigation or adaptation, is very important. But also we are supporting countries to develop nationally determined contributions. So for some countries, we provide technical assistance to set the goals of their nationally determined contributions … I think it is aligned and we are having regular discussions among MDBs together with the U.N. system.

Coal remains a major component of your region's energy production. What role is ADB playing in helping to transition countries off of coal, and what else do you think needs to happen?

The biggest challenge in development is energy access … Still, more than 300 million people are without energy. So the imminent task is to generate more power, and in the past, coal was the most available resource. But today, renewable is becoming cheaper because of innovation, because of technological progress. So as far as ADB lending is concerned, we don't lend to coal projects at this moment.

We are not saying that we don't do it at all, but in reality, the last project we did coal finance was [the Jamshoro Power Generation Project in Pakistan] in 2013. So we are staying away from coal. We cannot stop countries from having a very sophisticated coal project, like a supercritical [coal plant], if they use their own money. But as far as our money is concerned, we are focusing on renewable — solar or wind, and geothermal.

Given that you're not financing coal now, why not put out a policy prohibiting it?

We will discuss energy policy next year, so this is an opportunity. But at the same time, in many countries — Germany is famous for renewable energy, but at this moment, at least, the [portion] of coal in their electricity generation is about 30%. Same in the U.S. — I wonder whether it is really fair to, in a sense, say that developing countries [must] totally give up the idea of coal. They must carefully do it, and they must use better technologies with less emissions and less pollution ... But for those countries, the imminent issue is to provide access to electricity. So we'll consider these issues next year.

So the option is on the table for ADB to consider some sort of new policy on coal?

Yeah, that's right. But once again, if there is only limited option[s] except coal, and if those are poor countries. [The World Bank’s International Development Association] is the same, I think. They don't totally deny the possibility of coal, although they are staying away from it.

During your tenure, you spearheaded the creation of Strategy 2030, which aims to position ADB to better support a changing region. You also merged the institution’s two financing windows to support more lending. What are the remaining questions you think ADB will have to answer about its operations in the future?

We must continue to think about how we can best use our capital resources and also staff resources. On capital, the question is whether we'll continue to expand our operation as much as possible, or have a more moderate growth and try to avoid asking for capital increases too often — because developed countries, our shareholders, also generally have more fiscal difficulties. So is it better to keep the scale of our lending moderately growing while paying more attention to the impact and quality of our work — or better to grow further? Those are the two options.

My [opinion] is that [it is better to pursue] moderate growth, while paying more attention to knowledge and expertise, and impact and quality, so that we can use existing staff resources more efficiently and promote innovative ideas. It's easy to say this, but it's not so easy [to do].

I hope that staff feel that we are working for development, and we are working [on behalf of the] poorest countries. So the staff shouldn't take very privileged conditions for granted. We are supported by taxpayers. Of course, we should have good benefits and compensation so that we can get good people, but at the same time, we should always be reminded that we are established by the taxpayers’ money for the purpose of supporting poorer people.

And do you have any thoughts on how your successor should be appointed, or where they should come from, or whether it's time for a woman to be in the role?

It's up to the shareholders. It's not my decision. Anyone can be a candidate.