1. How are ADB’s current operations organized?
- The Asian Development Bank (ADB) provides loans, guarantees, equity investments, grants, and technical assistance to developing member countries in Asia and the Pacific. Loans are financed from ordinary capital resources (OCR) and the Asian Development Fund (ADF).
- OCR loans are provided to middle-income countries at a quasi-market rate.
- ADF is a donor fund replenished every four years that provides loans to poorer countries at concessional terms (long maturities, lower interest rates) as well as grants. Among highest ADF recipients in 2014 were Pakistan, Bangladesh, Viet Nam, Nepal, and Cambodia.
2. What is the innovation?
- To combine ADF’s equity and lending operations with the OCR balance sheet.
- Retain ADF as a grant-only donor fund to provide grant assistance to eligible countries.
- Concessional lending to poor countries to continue from the expanded OCR, on the same terms and conditions as current ADF loans.
3. Why are you pursuing this combination?
- To increase our lending capacity by more efficiently and effectively utilizing ADB’s existing resources.
- ADB needs to enhance its lending capacity to remain a relevant and effective development partner in the region, and pursue its vision of a region free of poverty.
- Meeting the financial requirements of ADF countries — both ADF-only countries and blend countries (receiving a mix of ADF and OCR loans) — is increasingly challenging for ADB and ADF donors.
- At status quo, ADF equity is not leveraged, and ADF lending is constrained by donor contributions (majority of ADF equity). ADB’s OCR lending capacity is constrained by the equity-to-loan ratio (the ratio of the OCR equity to the OCR outstanding loans and guarantees).
Note: As of end 2014, ADF equity (donor contributions, income transfers from OCR, and retained earnings from ADF lending and liquidity investment, etc.) is $31.5 billion while outstanding ADF loans are $27.5 billion. OCR equity of $16.9 billion is composed of the OCR paid-in capital of $6.1 billion, and reserves (accumulated retained earnings from OCR operations and liquidity investment, etc.) of $10.8 billion while outstanding OCR loans are $55.9 billion. For reference, as of end 2014, ADB’s subscribed capital (OCR capital) is $153.1 billion composed of the paid-in capital of $7.7 billion (including $1.6 billion committed but not paid yet) and the callable capital of $145.4 billion.
- This combination relieves financial constraints on both the ADF and OCR by transferring the ADF equity to the OCR equity (ordinary reserves portion), and using the expanded OCR balance sheet more efficiently and effectively.
- The combination will not only increase financial support to ADF countries, but also enhance ADB risk bearing capacity, further support private sector operations, and strengthen ADB preparedness for any future economic crises or natural disasters.
4. What will be the impact of the combination on ADB’s equity and lending capacity?
- As of 1 January 2017, OCR equity almost tripled from about $17.5 billion to about $49 billion by combining ADF equity (together with lending operations) to the OCR balance sheet.
- Raising annual financing commitments (loans, guarantees, equity investments and grants) by up to 40%, from the current level of $13 billion to $15 billion-$18 billion in the coming years, according to baseline scenarios.
- In particular, increasing annual financing commitments to poor countries (current ADF countries) by up to 70% from the current level of $6.5 billion to $7.5 billion-$11 billion, according to baseline scenarios (through concessional lending and grants for remaining concessional-assistance-eligible countries, and including through non-concessional lending for blend countries—those that have access to both concessional and non-concessional lending— and countries graduating from blend status).
- Out of these commitments to the poor countries, concessional lending and grants to the remaining concessional-assistance-eligible countries will increase—by up to 80%, according to baseline scenarios from the current level of $1.7 billion to $3.1 billion.
- The total annual commitments could increase up to $20 billion or by up to 50% over the current level, if there are needs.
- Together with cofinancing (targeted at a one-to-one ratio to ADB financing in the Midterm Review), annual assistance could reach $40 billion in the coming years from $23 billion in 2014.
Balance Sheet of Combined ADF and OCR Scenario (as of 1 January 2017)
| Item | ADF | OCR | Combined OCR-ADF |
|---|---|---|---|
| Equity ($ billion) | 34.6 | 18.3 | 53.0 |
| Outstanding Loansa ($ billion) | 30.8 | 68.0 | 98.8 |
| Equity-to-Loan Ratio (%) | 112.5 | 26.9 | 53.6 |
| Annual Assistance without Combination ($ billion) | 3b | 10c | |
| Annual Assistance with Combination ($ billion) | 15-18d |
a Including outstanding guarantees.
b Comprises concessional loans ($2.5 billion) and grants ($0.5 billion).
c Comprises loans, guarantees, and equity investments.
d Comprises non-concessional and concessional loans, guarantees, equity investments, and grants.
5. Why do you feel a need for these extra funds?
- Despite substantial progress, Asia and the Pacific still has large numbers of poor and vulnerable people and there are gaps in economic and social infrastructure.
- We have estimated that the region’s infrastructure investment needs alone in the decade to 2020 total $8 trillion.
- We need to continue to help poorer countries sustain economic growth to further reduce poverty, and current ADF countries will also need support to achieve new targets that will be set following the expiry of the Millennium Development Goals in 2015.
6. What will be the impact of the combination on donor contributions?
- Donor contributions to continued ADF grant operations would reduce by about 50% from $1.2 billion (average annual donors’ contribution in the current, ADF XI) to $0.6 billion.
7. Will the combination dilute the focus on poor countries?
- Absolutely not. In fact, the combination will increase ADB financial assistance to poor countries (current ADF countries).
- Under the combination , poor countries currently eligible for ADF loans will continue to receive concessional loans from expanded OCR on the same terms and conditions as current ADF loans.
- The ADF will be retained as a grant-only donor fund to assist eligible countries.
- The combination will also help deliver increased support for the transition of current ADF-only countries into the category of blend status, as well as their graduation from blend status to non-concessional-only status, through increased non-concessional operations from the expanded OCR.
8. How are the financial benefits derived?
- Enhanced ability to leverage the combined resources by significantly expanding the equity base of ADB.
- Increased income from expanded lending operations.
- Use of combined equity for funding concessional loan disbursements.
- More efficient and effective investment of liquidity.
- Diversifying the portfolio of OCR loans by combining the ADF loan portfolio with OCR.
- Strengthening ADB’s business profile (franchise value, etc.) and financial profile (equity-to-loan ratio, etc.), meaning that ADB’s overall creditworthiness as perceived by rating agencies and creditors improves.
9. Why does the combination not change the governing structure of ADB?
- The combination does not alter the voting shares of ADB members because the ADF equity will be transferred to the ordinary reserves of the OCR balance sheet, not to the shareholders’ paid-in capital (which is the basis of voting shares).
10. What will be the governance structure for using concessional resources?
- ADF donors will continue to play the same role as now in relation to key issues related to concessional operations.
- The frequency and scope of donor consultations are embedded in the mandatory processes of ADB including ADF replenishment for grant operation every four years and annual consultation with donors.
- Current principles on eligibility for concessional financing, terms of concessional financing, and graduation are unchanged by the combination.
11. Is the merger potentially risky as ADB will lend more without increasing paid-in capital, and OCR itself will lend to lower income countries?
- No, we don’t believe it is risky.
- The combination will almost triple OCR equity.
- We will increase the minimum equity-to-loan ratio from current 25% to 37% since current ADF borrowers that will borrow from the OCR after the merger have, on average, lower credit ratings than OCR borrowers, and these loans require more equity capital under ADB’s capital adequacy framework.
- Further diversification of OCR loan portfolio will also help mitigate risk.
12. Will the merger affect ADB’s AAA credit rating?
- We believe that the combination will not adversely affect ADB’s credit rating (credit rating of bonds issued to finance OCR operations) because its OCR equity base would almost triple and its loan portfolio would become more diversified.
- ADB engaged an international rating agency to review the credit fundamentals of the combination. The rating agency affirmed that there would likely be no changes to ADB’s current AAA rating. ADB also discussed the combination with two other rating agencies. They noted that ADB’s financial strength would immediately improve.
13. How innovative is this move?
- It is a groundbreaking innovation to leverage concessional lending in a manner unique among multilateral development banks.
- Combining the resources will significantly expand ADB’s equity base, and boost its operations significantly.
14. How has the 40-year track record of ADF influenced the combination?
- Low-income countries in the region have established an extensive 40-year financial track record of regular ADF loan service payments.
- This track record enables ADB to leverage the ADF equity and to more efficiently and effectively deploy those resources and enhance our concessional and non-concessional operations.
- The traditional trichotomy among OCR countries, ADF countries, and ADF donors is no longer as valid as it was 40 years ago when the ADF was established. The differences in social and economic indicators of these countries are not as stark as they used to be. Therefore, there is less justification for taxpayers in donor countries to finance development needs in low-income countries.
- The combination enables ADB to more efficiently and more effectively utilize the funds contributed by donor countries to ADF over 40 years toward the donors’ original purpose of providing concessional financing for the region’s poorest countries to alleviate poverty.
15. What should ADB do to fully realize the opportunities presented by the increased lending capacity and to fulfill its mission to reduce poverty in Asia and the Pacific?
- To prepare for an expansion of operations, ADB will start identifying additional projects and build project pipelines.
- ADB will also continue to improve efficiency and effectiveness by streamlining business processes and carrying out institutional reorganization and reform.
- For that purpose ADB will implement reforms agreed under its Mid-Term Review (MTR) Action Plan.
- Procurement reforms have been implemented
- Resident missions are being further empowered
- IT systems are being improved
- The Office of Public-Private Partnership has been established
- Sector and thematic groups are being reconstituted
- Reforms for private sector operations are being implemented
- A talent management initiative for ADB staff is being implemented
- ADB will put greater emphasis on cofinancing and trust funds by
- Striving to achieve a cofinancing ratio of 100% by 2020, up from 67% in 2014.
- Exploring the possibility of insuring a part of its portfolio by donors to release some headroom for additional lending
- Working with donors to establish large trust funds to supplement financing.
- • ADB will continue to emphasize its knowledge-based services, particularly in the context of capacity development.
16. Will ADB need a new strategy after the combination is finalized?
- The current strategy (Midterm Review of the Strategy 2020, finalized in 2014) will continue to guide ADB.
- Under the current strategy, ADB operations will need to be examined to fully realize the opportunities presented by the increased lending capacity resulting from the combination.
- ADB will consider a new strategy in due course reflecting the new financial capacity, evolving development challenges, and the post-2015 development agenda.
17. Will ADB need more administrative budget to utilize the increased financial capacity?
- ADB will continue to focus on maximizing efficiencies in all operations, using its existing resources. ADB continues to take efficiency measures and to further streamline its business processes.
- ADB will review its staff resources and budget after a work force planning exercise is completed, and necessary measures have been taken.
18. Has this combination been analyzed and vetted by independent reviewers?
- ADB engaged a number of international experts and firms to review the combination and its various assumptions.
- A team from the Center for Global Development (CGD) concluded it was highly credible, with the potential to deliver on its promises.
- Another team of three international experts reviewed the scope and reasonableness of the CGD assessment and upheld its judgment, noting that the combination is designed in such a way that it is very likely that ADB as a whole, and specifically ADF countries, will benefit from it.
19. What is the current status of the combination and what are the next steps?
- All 34 ADF donors gave formal and unanimous consent to the combination by end February 2015.
- The Board of Directors approved on 30 March 2015 to send the proposal to Board of Governors of ADB’s 67 member countries.
- The Board of Governors unanimously approved the combination by end April 2015.
- The combination will become effective in January 2017.
