Intheblack magazine, July 2010

In late May, Juan Miranda was in the Afghan town of Mazar-e-Sharif, attending the inauguration of Afghanistan’s first railway. As Director General of the Central and West Asia Department of the Asian Development Bank, Miranda had been involved in the funding and development of this railway, a vital 75-kilometre link to the border with Uzbekistan and the international railway networks beyond. But as he stepped back to take a photo of the train moving slowly backwards and forwards on the tracks, he noticed a huge transmission line in the back of a shot, and a road behind it. He realised he had been involved in the development of all three.

When you are a multilateral banker in this part of the world, the work can be tough, but when it works out there’s the joy of seeing a tangible difference being made. And Miranda’s patch of Asia is all about high challenge and high reward. His department operates in 10 countries most of which few people could successfully locate on a map (and, if they could, it would be for all the wrong reasons): Afghanistan, Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Pakistan, Tajikistan, Turkmenistan and Uzbekistan. It is a patchwork of mostly landlocked countries with sometimes random borders, stubborn bureaucracy, limited commercial laws, dominated by mountains and deserts, into which Miranda must coax international private capital to invest.

The challenge is not just about getting foreigners to come in, but to get these disparate nations to work together too. One might expect the former Soviet states to be kindred spirits, but that’s often far from the truth. “After independence from the Soviet Union, these countries embraced sovereignty like you and I would a long lost brother,” Miranda says. “But as a result of that they created economic structures that were directed towards self-sufficiency and putting up borders.” The ADB is one of six multilaterals that backs the Central Asia Regional Economic Cooperation (CAREC) programme, which seeks to improve efficiencies between Central Asian nations, focusing on connectivity, energy security and trade facilitation. “The nearest port to some of these countries is 2,000 kilometres away,” he says. “Unless people can move from point A to point B efficiently, you’re not going to be very competitive.”

Miranda, CAREC and the ADB have focused their energies on transportation, and have devised six transport corridors, some north-south through Afghanistan and into Pakistan, others traversing Kazakhstan from east to west to link Europe and China. And this speaks to an advantage Central Asia does have: being in the way, separating Europe and China. Becoming an efficient conduit for goods between these states will be to Central Asia’s benefit, and will cement a shift away from reliance on Russia and towards greater integration with China. Other less visible things are no less important: trade facilitation, such as removing tariffs and speeding up the flow of goods across borders, is crucial to the ADB realising its ambition of doubling per capita income within the region within a decade, pulling poverty down from 40% to 25% in the process.

The good news is that when something works, it really has an impact. That transmission line in the back of Miranda’s photo in Afghanistan runs from Uzbekistan to Kabul, and supplies it with constant electricity for the first time. “Delivering electricity 24 hours a day instead of two hours a day is a transformation,” he says. “It’s not a solution in itself, but it’s a means to an end.” By this he means that helping with infrastructure makes it a little easier for Afghanistan to find its footing as a country. “Optimism is something that can come and go, but we have to let it be with us,” he says. “You’ve got to wake up in the morning thinking that you’re doing good. The task is not for the faint-hearted and the security aspects are not getting any easier but I am optimistic this resilient country, these resilient people, can put things together.”

“The political differences between groups across the country are clear, but one thing that binds them together is to reconstruct the nation, and to do that you need development,” he says. “We are part of that agenda, to do projects that will make a little difference to the country.”

Elsewhere in Central Asia, the ADB has been making gradual headway. Talking to IntheBlack at the ADB’s annual meeting in Tashkent, Uzbekistan in May – the first time the bank had held its meeting in Central Asia – Miranda bemoaned the lack of a landmark public-private deal that would get the region truly noticed. “We haven’t had in Central Asia the unique transaction that says: the future looks like this,” he says. “If one happens, we’ve created a message. We convey an opportunity to the international investment community that this place is open for business.”

A month later, over the phone in the ADB’s Manila headquarters, he is able to suggest that such a deal is finally close to the finish line. The $3.2 billion Surgil project in Uzbekistan will involve the construction of a petrochemical plant with a production capacity of more than 500,000 tons of polypropylene and polyethylene, made by converting gas deposits. It will be structured as a PPP (a public-private partnership) and will combine a number of foreign investors – who have not yet gone public in their involvement – with the Uzbek state oil and gas company, with the management and the exports run by international shareholders. “In turning gas into chemicals it moves a commodity into a value-added product with an international market ready-made,” Miranda says. “If it works well, instead of just exporting their gas they can get foreign investment into the country and generate jobs.”

Getting foreigners in requires more than just a visible opportunity. What’s also lacking is the legal infrastructure to protect and encourage an investor. “In Central Asia we have the big ticket projects waiting for the private sector to invest, but unlike other parts of Asia the upstream work lags behind,” he says. There are places where concession laws do exist – Kazakhstan has gone so far as to build a dedicated PPP unit within its government and has an approved list of projects for it to pursue – but few foreigners have so far been willing to jump in. “There is a comfort zone that is not that huge here, and we need to expand that comfort zone.”

Uzbek landmarks apart, he thinks it’s important to be reasonable in expectations. “Would you be able to have an all-singing, all-dancing concession and BOT [build-operate-transfer, the classic public-private model in more developed markets]? Maybe not right now. Maybe you go in more realistically and expect a management contract to start with. If you go from zero to something that’s no longer zero, that still represents success.”

Miranda himself, who is Spanish-born and English educated with a degree in agricultural economics from Reading University, first visited Central Asia in 1992 after the Soviet Union was dismantled. Back then he was working at the European Bank for Reconstruction and Development. When he took over his current department for the ADB in 2006, he felt that he had “a longer memory of the region” thanks to his earlier role, and he remembered its potential. “They have the things that everybody should want: a growing market, investment opportunities for regional and international players, and an area strategically as important as most. It is an area with rich traditions but is landlocked and needs to be integrated into the world economic system.”

Miranda’s career has involved plenty of private sector work between the multilaterals: at once stage he set up and managed his own project finance boutique investment bank that he later sold to Morgan Stanley, becoming a senior executive at the US powerhouse as well as a stint in a Spanish investment bank. People who have sold their own banks to Morgan Stanley don’t generally need more money, and one suspects he is drawn to this ADB role, with its dismal flights and endless visa queues, out of a sense of duty. “Central Asia has the importance and that thrill where things are yet to be done,” he says. “As a development bank we like to be involved with change.”

And, once in a while, there’s a visible reward. That Afghan railway, the first in the country’s history, built across unforgiving topography in a nation at war? It was finished ahead of schedule.

BOX: Out of Hours

What are your interests?

Lots of them – music, sports; I play golf well enough to beat most of my colleagues. I like classical and jazz music and I like to watch football – I’m a long-standing fan of a team called Deportivo La Coruna. I’m happy to report to you that we beat Manchester United twice.

What words do you live by?

Accountability and responsibility.

What keeps you awake at night?

The happiness and health of my healthy and happy children.

What are you reading?

Henry Kamen’s Spanish Empire. It argues that the empire could well have been the first big example of globalization and outsourcing!

The Asian Development Bank is to continue with its carbon fund initiatives despite growing uncertainty about the future of carbon markets.

The development of carbon markets based on the clean development mechanism – in which polluters in wealthy countries offset their own pollution by buying credits generated by clean energy projects in the developing world – have suffered a series of setbacks in the last six months. The Copenhagen agreement failed to deliver clarity on the structure for carbon credits after the Kyoto accord expires in 2012, and several countries who had pledged to develop carbon trading initiatives have delayed or abandoned them.

Most recently Australia announced its cap and trade system will not now be launched until there is a clear post-2012 structure, and even then it will clearly face a challenge to be passed into law.

“Basically in the last 12 months some of the events were less than ideal,” said WooChong Um, the ADB director who has spearheaded carbon trading initiatives at the bank. “But I’m still optimistic that there will be some kind of global agreement.”

The ADB has launched two carbon funds. The Asia Pacific Carbon Fund was launched in 2007 and raised $151.8 million from European nations. This fund invests in clean energy projects and buys the carbon credits that come from them, and has allocated most of its money in projects such as hydropower, landfill and biomass to energy in countries including Vietnam, India and China.

A second, innovative Future Carbon Fund was launched in 2008 to invest in projects that will generate carbon credits after 2012. This was designed to make sure clean energy projects were not delayed because of uncertainty about the future structure of carbon markets – uncertainty that has worsened since Copenhagen.  This raised $100 million, including a $20 million contribution from Korea.

Both funds are distinctive because they commit money up front, whereas others do not contribute until the project is built and generating credits, which can undermine the projects’ viability.

“Our direction is the same,” said Um. “Our energy and climate change priorities remain the same. All of them have to be undertaken, it’s just that it’s probably not as easy now.”

The effectiveness of carbon markets divides opinion. “The carbon market is an effective tool primarily for meeting the commitments of developed countries to mitigate [their pollution] at lower cost,” said Prodipto Ghosh, a member of the Indian Prime Minister’s Council on Climate Change, and former Indian environment minister. “But it is not a tool for financing developing countries’ own actions for mitigation.”

Philippe Delhaise, CEO of Carbon Management Consulting, disagreed. “It [carbon markets] helps, because it makes the difference between a project that would not be undertaken and a project that is. There’s a huge transfer of technology and funds going to 2000 projects all over the world. The volumes are small, but we have a war here, we have to do something and every bit helps.”

Mr Delhaise said that despite uncertainty, it was inconceivable that the carbon market would not have a future post 2012. “Nobody really knows but the one thing that is certain is you cannot, on December 31 2012, tell your Guatemala pig farmer reducing methane emissions: ‘sorry, you expected 21 years of carbon credits, but now nobody will buy them from you.’ That is nonsense. It’s not going to happen.

“Whatever the new system, there will be a way to price those carbon credits and get the reward to the investor.”

For many years now, the Asian Development Bank has being trying to coax the private sector to take a leading role in its projects and initiatives. The logic is straightforward: the ADB’s own assets as a lender are finite and inadequate for the social and infrastructure challenges the region faces, but if the bank can be a catalyst for private sector investment, then impossible funding targets become potentially achievable.

Last year the ADB put out a book, Infrastructure for a Seamless Asia, which argued that between 2010 and 2020 Asia needs to invest approximately US$8 trillion in national infrastructure, as well as $290 billion on specific regional infrastructure projects in transport and energy. On the flip side, it argued that if this happened, “developing Asia’s real income during that period and beyond could reach $13 trillion.” This contention – that if you spend money, you will make money – is the message the ADB must get across to the private sector.

How’s it done so far? “As a bank I think we’ve made tremendous progress both from the perspective of real investment, and catalysing additional investment in the region,” says Philip Erquiaga, director general of the Private Sector Operations Department of the ADB. Firstly, the bank has “ramped up our operations rather dramatically” in pure dollars and cents commitments, Erquiaga says. “Back in 2001 we were doing less than $100 million a year [private sector operations] in terms of approvals; last year we were close to $1.7 billion, with $1.8 billion anticipated this year.” By 2020, the bank hopes that engagements in private sector development will account for 50% of approvals.

Alongside that, the ADB has put heavy resources into what Erquiaga calls “upstream work” – creating the right environment for private investment, from company law and land registration to adjudication. Another challenge has been capacity. “If there is one lesson we have learned in dealing with the private sector in our operations, it’s that they don’t want the rules of the game to be changing on them midway through their investment. To ensure that does not occur you need to establish the right environment and to ensure that a PPP is staffed with the right people with the right competence.”

Since the ADB can only ever take a 25% role in the financing of a project, it has necessarily moved from being a banker to a broker. “It’s in our nature to act as a broker to make sure the deal gets done,” Erquiaga says. This, though, has changed as a consequence of the financial crisis: these days the ADB finds itself putting a lot of deals together with other international agencies, rather than with commercial co-financing. When the New Bong Escape hydro plant in Pakistan, the country’s first run-of-river hydro development, was financed last year, the ADB was alongside the Islamic Development Bank, IFC and Proparco, the French development finance institution. “Otherwise the financing would not have been available,” Erquiaga says.

Hopefully, though, that retreat of the private sector is temporary, and in the meantime the ADB continues to try to provide the facilities to keep them interested, such as political risk cover, partial credit cover – a guarantee can cover as much as 99% of credit on an individual transaction – and simply the ADB’s own participation. “A lot of people look to us for the halo effect,” says Erquiaga. “The fact that the ADB is involved in a transaction, with our close relationships with governments and so forth, means there are fewer instances of the rules of the game changing midway through.”

For many years the ADB has used a funds model to try to attract investment. The bank has been active in private equity since 1983, and today has 40 current funds, covering about 400 individual portfolio companies, with around $720 million of total current commitments.

Again, the ADB is held to a 25% limit on fund participation, but funds are one area where the catalytic effect of the ADB is easily measured. “If we look across the entire portfolio since 1983, we see that for every one dollar we have put into a fund, approximately eight is raised elsewhere,” explains Robert van Zwieten, director of the private sector capital markets division at the ADB. “That’s a huge effect and amplifies the impact we could have with our own resources.

“It’s far beyond what we ourselves could muster. The multiplier effect continues as funds then take minority equity stakes in portfolio companies.”

For much of the decade the focus was exposure to the SME and infrastructure sectors. “Those are widely seen to be a huge source of employment, and jobs are a conduit for poverty reduction,” says van Zwieten. From 2007 the department’s view broadened, with more activity in areas such as microfinance, clean energy and water, and socially responsible investing, as well as an increasing focus on frontier markets “where private equity is nascent or non-existent.”

The change of focus brought a shift in approach too: in clean energy the bank struggled to find suitable investable funds in late 2007, so stepped up to incubate some itself. That process entailed an RFP process that attracted 19 bids, five of which were accepted, and today they are “only just coming to the starting line, due to the harsh fundraising climate for such novel funds in 2008 and 2009.”

Hopefully these funds will, in time, be free-standing. One fund manager the ADB has long backed approached van Zwieten recently saying they hoped to start a fourth fund, and raise $700 million through it. “These follow on funds are getting a lot of mainstream institutional investors coming to the fore, which is exactly how it should be – but if they can do that, there’s no role for us,” van Zwieten says. The ADB’s own capital is better deployed in those that have yet to develop such traction.

Project finance in Asia, while hit by the credit crunch, has a number of reasons for optimism. Funding sources appear to be returning, and the demand for power and infrastructure in Asia is every bit as big as it always has been.

“Project finance is a very long term game with a considerable gestation period for any of these deals,” says David Gardner, managing director and global head of project finance, resources and energy group at HSBC. “We don’t see a lot of volatility day in day out: you might have to delay a project but for the most part deals need to stand up on their own and if so will remain on the books. There’s a real supply-demand gap so transactions will still get done.” He says over the last year or so around US$10 to 15 billion of project financing has been done in Asia, and that next year he would expect $20 to $30 billion.

Project finance has held its head above water in Asia chiefly because of the liquidity of local banks, which have been relatively unaffected by the financial crisis and have the further advantage of higher savings rates in Asia. Take a look at the biggest announced project finance loans in the last 12 months and local names dominate both in the syndicate and at the mandated lead arranger level: China Development Bank on the Kazakh-Chinese Gas Pipeline; SBI Capital Markets on the ONGC Petro Additions petrochemical complex and the Aircel and Vodafone Essar financings in India; BDO Capital Investment and Bank of China alongside HSBC on the National Grid Corp financing in the Philippines; Bank of China on the China Super Bridge; and IDBI Bank on the Coastal Andhra Power plant in India.

Offshore banks have been hit to varying degrees. “We started to see the whole liquidity premium come into play in the middle of last year,” Gardner says. “Banks had real costs involved in providing long tenor to these transactions so the appetite for them has diminished.” Consequently tenors have shortened and the underwriting market has stepped away. “Most deals done last year were on a club basis with a few banks sitting around a table on a take and hold basis,” says Gardner. “The market is easing back now and we may soon start to see some underwriting, albeit on a smaller scale initially.” He says in terms of tenor “the sweet spot is now probably in the seven to 10 year range”. Bankers say they would like to see a greater contribution from local currency debt markets, where Malaysia and India have shown some success for project bonds.

While activity has slowed, progress on some bigger deals does suggest a brighter future, and this is nowhere more true than with the Victorian Desalination Plant in Victoria, Australia, a A$3.5 billion public-private partnership financing. The winning bidder for this project was Aquasure, a consortium comprising Degremont, Suez Environment, Macquarie Capital Group and Thiess. Funding is in place for this with 15 lenders backing the bid, and syndication under way as this edition went to press.

The deal’s sheer scale is significant in itself, particularly coming out of the credit crunch. “We’re hoping that a deal like this will reopen the underwriting and syndication market for next year,” says someone close to the deal. It’s also interesting in being a fully carbon offset project serving a key community need – Victoria has been in drought for a decade now – and it is understand that these issues, combined with the strong support of the Victorian government, helped to attract banks to it.

Progress with this deal is likely to be felt in other Australian PP projects, covering roads, hospitals, schools and prisons, among other things. The A$750 million Peninsula Link project linking two roads in Victoria is at the shortlisted bidder stage, while there are prison PPPs in Victoria and Darwin and another, worth A$2 billion, for the Royal Adelaide Hospital in South Australia. Another project financing underway in Australia is a A$750 million deal for Epic Energy to build a pipeline in Queensland. Several windfarm projects are also in progress, and at some point the PNG LNG project in Papua New Guinea – a deal that has the potential to transform that country’s economy – will move forward.

Elsewhere, project financiers expect China to be a major driver across the board from power to oil and gas, petrochemicals and mining, driven by ample demand and the Chinese government’s willingness to push growth, as well as vast domestic liquidity in the local banking system. India too has liquid banks and huge infrastructure demand, and is going to be another driver of project finance in Asia:  in the power sector alone, it has announced 14 so-called “ultra mega power projects”, each with a capacity of at least 4000 megawatts, as part of a plan to create an additional 100,000 MW of capacity by 2012. As always with India, getting to the finish line can be a challenge, but the intent is immense.

The global financial crisis required decisive thinking from regulators, governments and institutions worldwide, but none more so than the World Bank, IMF and the World Bank’s finance arm, the International Finance Corporation (IFC). A decade ago, these groups were instrumental in trying to turn around Asian economies during the financial crisis there, and they were widely criticised for some of the measures they took. This time around, how did they do?

The headlines fell to the IMF by dint of the enormous sums involved, and the public nature of their announcement. In April, when the G20 group of leaders spoke of committing $1.1 trillion to combat the financial crisis, the bulk of it – $750 billion – was pledged to be delivered through the IMF, representing a trebling of its lendable resources. The institution’s emphasis appeared to be on building its power to act: as Andrew Tweedie, the director of the IMF’s finance department, put it in the IMF’s own in-house magazine, the IMF built bilateral borrowing arrangements “to strengthen its lending war chest to combat the ongoing global economic crisis”.

The IMF approach had some interesting elements, particularly the $250 billion allocation of a reserve asset called Special Drawing Rights. In July the IMF’s executive board approved a framework for the issuance of IMF notes to member countries and their central banks, as a method of raising funds and – the IMF says – providing members with a secure investment. Additionally it has expanded credit agreements, increased concessional lending to very poor countries, brought forward a review of the fund’s country quotas, and is considering revising its own investment mandate with a limited sale of gold holdings to create an endowment to generate income.

But one could argue most of the interesting things about the IMF, chiefly reform, are still to come and not yet really up for review. Instead, when it comes to individual, technical programmes, many of the most interesting policy initiatives relevant to financial markets came out of the IFC, part of the World Bank group. All told, its programmes designed to help private enterprises cope with the crisis are expected to involve more than US$30 billion of financing over the next three years – not all of it from the IFC, but in combination with funds mobilized from governments and other financial institutions. That is in some sense the point of the IFC: not to put a vast balance sheet on the line in isolation, but to use it to draw in other sources of funds.

From that perspective, the most obvious cause for alarm at the outset of the financial crisis was trade. Trade is, as the IFC has frequently said over the last year, “the lifeblood of the global economy”, and it was immediately under threat. As capital moved towards lower-risk assets, it left emerging markets, with trade finance lines being cut in some of the areas that needed it most.

The IFC already had a Global Trade Finance Program, basically a one-off guarantee facility which did not deploy funds for trade but did provide support in the form of guarantees in order to make sure emerging market trade transactions would still go through. So its first step was natural: it doubled the size of this programme, from US$1.5 billion to US$3 billion, in December 2008. But something strange happened.

“We thought when we doubled the programme there would be immediate uptake across the markets,” recalls Scott Stevenson, manager of the Global Trade Finance Program at the IFC. “But when we made that increase the immediate uptake was much less than was anticipated.” Banks had pulled back all their own capital, and in Europe they were further constrained by the arrival of Basel 2 with its heavy risk weighting towards emerging market exposure. “It was a convergence of negative effects, but it meant that global liquidity collapsed – not only the interbank market, but liquidity available for trade finance.”

What was needed was not the guarantees, but the pool of funding in the first place. “When we saw the market dry up like that we started fishing around for what we could do,” says Stevenson. “It was not just a drying up of liquidity but the entire secondary market, because the investors who would traditionally be buying up the securitized trade portfolios had put their tails between their legs.” So the IFC’s next step was to build what it calls the Global Trade Liquidity Pool, which among other things was a sort of synthetic secondary market. At that point, the World Bank was estimating that the gap in the liquidity in the system, between what was there and what was needed, was between $200 and $400 billion, clearly beyond the remit of the IFC balance sheet or anyone else’s in isolation. The idea was instead to partner with governments and development institutions to pool resources, and then to get the banks themselves involved: “established international players with footprints in emerging markets, who had liquidity but not the secondary market to churn their portfolio,” Stevenson explains. The banks would create portfolios, the pooled IFC fund would purchase 40% of them, and the banks retain 60%. IFC’s own contribution to the fund was $1 billion, additional donors $3 billion, and the involvement of the international banks is intended to put a further $6 billion to work, making a $10 billion programme.

It took time, but by April the World Bank was able to announce that the UK, Canadian and Dutch governments were all involved, and that the first two lines, of $500 million and $400 million, would go to Standard Chartered Bank and Standard Bank respectively (in Standard Bank’s case as a full loan rather than the 60/40 arrangement, since Standard’s extensive networks in Africa were deemed vital). Since then Citigroup and Rabobank have agreed terms, while Commerzbank and JP Morgan will be next.

The theory of the scheme was widely supported, with criticism instead focusing on the length of time involved to get it running. The IFC funds were put to work at the end of June and the commitment for donor funds is in place, but at the time of IFR’s interviews, in early September, disbursement of the pooled funding had still not taken place, although it may well have done so by the time this article is published. “I think the lesson learned is that in dealing with public sector counterparts, a lot more time is necessary in terms of response,” says Stevenson. While private sector institutions were, he says, the ones who pushed the programme, “from the donor side you do get into the machinations of governments, and that’s the slower part.”

Although the global markets have clearly improved dramatically in the meantime, Stevenson has little doubt the funds will still be necessary. “Because of the advent of the increased capital rules that Basel 2 is demanding, a lot of the major banks are still constrained in terms of what they can do in higher risk countries of the world,” he says. “That really is the focus at IFC as well as other donors. First tier banks are fine and seeing liquidity come back into the market. But second and third tier banks in those countries, for them, liquidity has not returned.” In fact, he has no doubt that additional funding is going to be necessary. “If you look at the overall ability to respond to the shortage in the market, this is – I don’t like to use the term – a drop in the bucket.”

While it would obviously have been preferable to see funds deployed faster, a benefit that may have come from the process is an unprecedented level of cooperation among world bodies. “This was a crisis that was well beyond what anybody would have imagined,” says Jyrki Koskelo, vice president for Europe, Central Asia, Latin America and the Caribbean, and global financial markets and funds, at the IFC. “It forced everybody to work together. Some of these initiatives helped us and the international community to align our interests, and when we worked on that basis the damage was contained a bit more than if the IFC had done anything alone. A lot of it is signaling to the market: this is what happens in a crisis, and this is what had to be done.”

While trade and liquidity were among the most visible problem areas, there was plenty else to worry about too. Another example was microfinance, which in a relatively short time has become absolutely vital. According to Martin Holtmann, who heads microfinance for the IFC, there are believed to be about 140 million households in the world that have access to microfinance credit, and a much larger number who have access to micro savings. Many of these institutions, and the people who borrow from them, faced a double hit within the space of the year, first with the vast food price rises in 2007, and then the financial crisis. Deposit-taking microfinance institutions, excepting some problems in Eastern Europe and particularly Ukraine, came through the crisis largely unscathed and in some cases enhanced by the run on commercial bank deposits. But those that exist chiefly to provide credit faced a serious liquidity crunch. “Take a country like Bosnia,” says Holtmann. “There would normally be commercial banks providing funding to the MFIs [microfinance institutions] but that supply has totally disappeared, creating a liquidity issue. You wouldn’t call it a crunch, because MFIs like any other prudent institutions had secured medium term financing, but eventually you hit the rollover risk, and certainly that’s happening in certain parts of the world.”

So IFC set up a $500 million facility, the Microfinance Enhancement Facility, with the German development bank KfW to support microfinance institutions facing refinancing difficulties. It aims to support more than 100 institutions in up to 40 countries. “The top 150 microfinance institutions in the world account for roughly 70 to 80% of the total supply out there. That’s essentially the group this facility is targeted at,” says Holtmann. At the time of our interview about $140 million of funding had already been approved, mostly in the area covering Eastern Europe and the Balkans, and Latin America. (Perhaps surprisingly, African institutions suffered less in the crisis, partly because they have tended to have more access to deposits, and also because the crisis had less of an impact on African than it did in, for example, Eastern Europe).

As elsewhere, things have already improved, but Holtmann says it is “too early to cry victory.” He sees quasi-commercial investors coming back into the market, but “a creeping up of portfolio at risk – a slow deterioration of loan portfolio quality.” Even so, this is not so bad compared to many retail banks since the default rate on microfinance portfolios is often strikingly low, although he says institutions in Bosnia, Morocco and Ukraine are on the watch list. In some cases, there is a need for capitalization, and part of the IFC’s role is to provide the right instruments for that, whether equity infusions or subordinated debt.  “When the crisis hits you first and foremost need liquidity, you don’t worry so much about solvency,” he says. “In the long run of course you do have to worry about solvency, but the moment you’re illiquid, you’re dead.”

One interesting element of the microfinance response is that the facility is managed externally, by BlueOrchard Finance, responsibility Social Investments and Cyrano Management, all specialist fund managers. This, Holtmann says, increased the capability. “Last  year we did 33 transactions in microfinance. With these fund managers we can triple, quadruple the number of transactions.”

Another vital area requiring a response was infrastructure. “In several countries in the world today which are developing infrastructure projects are funded only partially with a long term debt structure with quite a bit of it based on rollover maturities,” says Koskelo. “When that [the ability to roll over debt] stops, the good infrastructure projects get stopped as well.”

Usha Rao-Monari, senior manager in the infrastructure department at the IFC, recalls: “A number of projects had come to the market for financing and were not getting it, and in a number of other projects preparation was stopping because of fears that they wouldn’t get long term debt.” She recalls from the Asian financial crisis how banks can back away from this capital-intensive, long-term sector; “it ended up becoming what is known as the lost decade for infrastructure in Asia. We did not want to repeat that.”

The response here was the Infrastructure Crisis Facility, which has debt and equity components. The debt side had raised US$2.4 billion when announced in April and Rao-Monari hopes by the annual meeting in Istanbul in October another $700-800 million may be in place. Then on the equity side, $1 billion is targeted; IFC has approval to put in $300 million of its own balance sheet on the equity side and up to $2 billion in loan co-financing. But – once again – as yet, none of it is deployed yet. “We already have a pipeline of projects waiting for it to be set up and we will start putting money up almost instantly,” Rao-Monari says. Her hope is that, when funds finally do get put to work, “it will send such a huge signal to the market we are going to be deluged by projects. There is stable financing available, Mr government representative and Mr private sponsor, so don’t worry about building projects.”

Then there’s agribusiness. During the 2009 financial year IFC invested $2 billion – a record – across agribusiness, through the supply chain from farm to retail, to boost production, increase liquidity and improve logistics, as well as increases access to credit for small farmers.

Elsewhere, the IFC Capitalization Fund was launched with $1 billion of the IFC’s money and $2 billion of Japan’s, through the Japan Bank for International Cooperation, in order to provide additional capital for banks in developing countries, in subordinated loans or equity investments. Here, too, little has been dispersed, although the first investment took place in Paraguay’s Banco Continental, with a US$20 million contribution.

And IFC is also planning a private sector programme to take on and resolve distressed assets.”If you look at the NPL rates in Eastern Europe, there are horrible projections about where they might end,” says Koskelo. “We’ve tried to prepare ourselves for that. We haven’t signed individual NPL platforms yet but we do expect to sign some of the first vehicles for NPL funding soon.”

The capitalization fund in particular is an area that looks like shutting the stable door after the horse has bolted, with the financial environment now much improved, but Koskelo says there is every need for such a facility. “Unfortunately the capitalization needs are pretty much in line with what we expected,” says Koskelo. “There’s a significant uptick of demand today. There was a limited need about six months ago, because the crisis had not yet hit the banking sector properly through NPLs. Today, the pipeline of banks requiring capitalization is unfortunately increasing.”

Apart from criticism of the time taken to get things moving, NGOs have focused concern on the increased power of the IMF without a change in its policies. Speaking of the IMF funds, Peter Chowla of the Bretton Woods Project noted in August: “This substantial amount of resources may never be provided, and, if it is, may not have the intended positive effect on developing countries. Experience so far demonstrates that the IMF is still imposing damaging pro-cyclical conditions on some borrowers, and that the finance provided to low-income countries will be too small.” Chowla noted that by early July only $100 billion of the $500 billion of new lending that was supposed to come through the IMF had actually been signed off.

At Third World Network, another NGO, Bhumika Mucchala has argued: “At a time when devastating financial and economic crisis is calling into question the governance and policies of all the major institutions that constitute the existing international financial order, the IMF appears to have escaped any such major reevaluation…. The IMF, now financially reinvigorated with a fresh infusion of funds, is still pursuing some of its discrete policies.” Like Chowla, Mucchala wanted to see reforms in lending instruments, conditionality and policies “toward more even-handed and broad-based implementation which better meets the needs of its developing-country members.” Mucchala sees a contrast between loan conditions – for example, advising a reduction in Pakistan’s deficit through lowering public expenditure and removing energy subsidies; or, in Hungary, freezing public sector wages and placing a cap on pension payments – and the rhetoric of officials calling for fiscal stimulus programmes to boost demand and consumption. To this point Mucchala quotes the IMF’s wording in a $532 million loan to Serbia: “Anything less than a tight fiscal stance could… jeopardize the credibility of the programme in the eyes of foreign investors and the Serbian public.”

The charge that the IMF has opportunistically bolstered its own standing through the crisis is occasionally leveled at IFC too. Bretton Woods Project in July noted that the crisis had given the IFC an expanded role “but its methods may leave a bitter taste with civil society.” The NGO argues that the liquidity deals with Standard Chartered and others “likely subsidises their activities in the sector”. Bretton Woods is also uncomfortable with the formation of the IFC Asset Management Company, which will buy shares in emerging markets companies and will initially manage the capitalization fund, as well as a $1 billion private equity fund, with the intention of attracting third party funds such as national pension funds and sovereigns. Bretton Woods is not alone in this: Aldo Caliari from Center of Concern, another NGO, has said: “Access to credit [for developing countries] has traditionally rigged the playing field against developing country companies. Now, instead of fixing those asymmetries, this device will allow foreign investors to help themselves to any company they might have in their sights, bearing little or no risk, courtesy of IFC-provided public money.”

It’s widely accepted that corruption is a problem in the developing world, and that the worst of the consequent economic hit is to the poor. Development projects such as those supported by the Asian Development Bank are especially vulnerable: they take place in some of the poorest parts of the world, with the lowest ability to supervise, and the greatest incentive to steal. But what to do about it?

Kathleen Moktan is the director for public management in the governance and participation division at the ADB, and is practice leader on public management and governance. She has been a part of the bank’s farthest-reaching initiatives in this area, including the Second Governance and Anticorruption Action Plan (known as GACAP II), approved in 2006, which aims to improve the implementation of governance and anticorruption policies in sectors where the ADB is active; and a joint initiative with OECD which aims to harmonise approaches and share good governance practices.

In Moktan’s reading, corruption is not necessarily any worse in Asia than elsewhere, it just has a greater effect. “Corruption will occur, fraud will occur, crooks are everywhere in the world,” she says.

“The difference is the way institutions deal with it. Institutions in the developing world are weaker so vulnerability is higher. In the developing world the returns from corruption are high and the risk of prosecution is low, so the risk/return tradeoff is different.” The other difference is the impact: the poor and disenfranchised are the worst hit by corruption, and in countries where a greater proportion of the population is below the poverty line, the effect is naturally greater.

Changing the risk/reward tradeoff is at the heart of the ADB’s attempts to tackle the problem in Asia. By strengthening institutions – the independence of the judiciary, the experience of auditors, the accountability and monitoring of public financial management systems – the ability to catch perpetrators is improved.

It’s a slight shift in approach, enshrined in the GACAP II documents launched in 2006. “Past institutional and governance efforts have tended to be too short term and spread across too many sectors,” that document says. “To few resources have been allocated toward preventing corruption and building systems and capacity in public financial management and procurement.”

But it’s not all at the top level, or at least not anymore. “In one country we looked at we noticed that corruption was not occurring at the bidding or tender process, but instead there was collusion at the build phase,” she explains. “The ADB would pay for 100% of a bridge but find they actually only got 80%. Instead of three inches of asphalt, there was one inch, or 10% less reinforced cement.” In this instance the monitoring needed to be taking place at implementation, not the bid.

At the top level, Moktan believes implementing agencies around the region are getting a lot better at spotting what she calls “red flags, where something may be amiss. We’ve trained them to look for things that don’t seem right.” That might mean noticing that the phone number in the letterhead is the same on three separate shortlisted bids. “Executing agencies now are picking these things up more often than not.”

So is it working? It’s a difficult thing to assess: do high numbers mean improving supervision or rising corruption? The Office of the Auditor General, Integrity Division (OAGI) reports that in 2008 the ADB imposed sanctions on 41 firms and 38 individuals in 2008; that brings the tally to 552 firms and individuals banned from working for the ADB since it began investigating corruption allegations in 1998. OAGI, whose headcount dropped from 15 to 12 in 2008, opened fewer new investigations in 2008 than any year since 2002, but at the same time the complexity of investigations is increasing and the number of open investigations in 2008, an average of 105, is higher than previous years.

“I think the biggest measure of success is the extent to which corruption is openly discussed in most countries in Asia and the Pacific,” says Moktan. “10 years ago, nada. It was all viewed as too highly sensitive. Now I can have a meeting with 50 people in the region discussing the nature of political corruption and how it impacts their ability to deliver as government officials.” There has been a certain amount of diplomacy in this process: Moktan says it is best to depersonalise the conversation. “It’s rare you meet public officials now who will not discuss vulnerability to corruption – but if we start with ‘sir, we think you’re a crook’, they won’t,” she says. “If we start with ‘what do you want to achieve and let’s look at where your own goals are at risk’, most are willing. If you don’t put on a western value label, you can have a meaningful discussion.”

Investment products and practices that seek to benefit from rising food prices are under increasing scrutiny as a partial source of those rises, putting food affordability out of reach of the poor.

More and more mutual funds and structured products are being launched based on agricultural themes, either buying the stocks of food-related companies or taking bets on soft commodities such as grain and corn. Some funds have gone further and set out to purchase farms, cattle stations or even just vacant land.

For example, in Australia alone yesterday two new agricultural investment products were launched. JP Morgan launched a vehicle called Trio, which among other things exposes investors to the JP Morgan Commodity Curve Index, an agricultural benchmark; and Macquarie added a well-established agribusiness mutual fund, the DWS Global Equity Agribusiness Fund, to its Fusion Funds range.

Opinion is divided on the impact. “I think it is certainly making it worse,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors. Alongside the impact of weather, crop failures, food for fuel and rising income levels, he believes speculation and investment approaches are significant impacts. “Speculative activity in food markets has become particularly evident in the last six to 12 months fuelled by strong fundamentals for food prices and uncertain equity, credit and property markets,” he says.

“Basically traders and speculators flocked to commodities including food this year as it was one of few investments still providing solid returns.” He said the emergence of food as an asset class “will provide a strong structural underpinning for food prices – which is not good for people living in emerging countries.”

The allure from an investment perspective is clear. “The demand for soft commodities is really just beginning to increase and we believe the opportunities here are quite considerable,” said Chris Larsen, managing director of DWS Investments. “Including agricultural investments within a portfolio can provide several benefits including increasing its growth potential and lowering risk through diversity.”

The DWS fund invests in listed securities such as Archer Daniels Midland, Syngenta and Monsanto, an approach less likely to push up food prices than food stocks. But other funds make direct investments in farms. In June Macquarie Bank launched the Macquarie Pastoral Fund, which owns and operates beef cattle and sheep production properties in Australia. Tim Hornibrook at Macquarie said the fund would exploit increasing disposable incomes in Asia that are likely to translate into more consumption of red meat and therefore higher prices for beef exports. Hedge funds including UK-based Odey Asset Management, US commodity fund Ospraie Management have bought farms, while a Agriculture Fund launched by Blackrock has purchased a large area of land in Norfolk, UK, all of it likely to contribute to an upward momentum in food or agricultural land prices..

ADB President Haruhiko Kuroda told Emerging Markets: “You cannot explain by simple demand-supply conditions the huge, phenomenal increase in rice prices in the last four to five months.” But he added: “It’s not hoarding by a big company or hedge fund, it’s people trying to purchase rice sooner rather than later because of potential price rises.”

NGO groups are calling for changes to the ADB’s Safeguard Policy Update to bring it more closely into line with the Equator Principles – the environmental and policy guidelines devised by the International Finance Corporation and signed to by many of the world’s leading banks.

The SPU aims to improve the effectiveness of the ADB’s safeguard policies, and by April 22 had gone through 13 rounds of consultation workshops worldwide since the consultation draft was first published in October.  But some feel they fall short of the Equator Principle standards – and feel that at a time the ADB is greatly boosting the importance of private sector participation, they ought to move closer to them.

“In the October draft the ADB say that they want to harmonise with the Equator Principles,” said Mishka Zaman, manager of the Asia program at Bank Information Center, a Washington DC-based NGO. “As an objective they aspire to that, but the draft does not match up to it. The actual language will not help them get there.”

Joanna Levitt, Co-Director of the International Accountability Project based in San Francisco, identifies a number of key differences between the two models. “The Equator Principles begin with a clear statement: no play, no pay,” she says, referring to the EP statement that signatory financial institutions will not provide loans to projects where the borrower does not comply with social and environmental policies and procedures. The SPU draft, she says, “has no such clear statement.”

She adds: “EPs, across the board, have clearer, more explicit language, benchmarks and requirements, including on consultation, disclosure, grievance mechanisms, and reporting requirements.” She believes the SPU draft is vague by comparison.

Other examples are that SPU does not require categorization for involuntary resettlement projects based on the level of risks and adverse impacts of projects, and “uses language that leaves a dangerous amount to the discretion of the borrower.” She says that SPU does not require independent monitoring; does not make clear that borrowers have any heightened assessment responsibilities for higher impact projects; and has subtle but important differences of definition regarding negotiated settlements and the avoidance of involuntary settlement.

That said, these comments refer to a draft that will be revised to reflect “the feedback and advice received through the extensive consultations,” according to the ADB; a revised document will be posted on the bank’s website for further comment. It will be clear then whether NGO concerns have been addressed.

Even then, the principles will not please everybody. “We feel that as a starting point, the ADB should use the equator principles for its private sector operations,” says Zaman. “But even with them, I am sure there are things that can be improved. We would like them to offer the Equator Principles as a base for discussion and we can move upwards from there.”

A former ADB consultant is in Madrid with a list of grievances against the bank including fraud and a failure to protect whistleblowers, both of which the bank denies.

David Elliot worked for the ADB in Afghanistan and claims that while there he was asked by an ADB official to falsify reports for donors, and that when he refused to do so, his contract was terminated. He further claims that funds from the UK’s Department for International Development intended for projects with the Aga Khan Foundation were never dispersed, including a mobile health clinic in the country’s north with one of the highest mortality rates in the world.

Arguably of broader import is the implications about the ADB’s treatment of whistleblowers. Mr Elliot claims that, after reporting impropriety in Afghanistan, he was blacklisted on a database of consultants, stopping him from receiving further work from the ADB and other agencies. He was named as the whistleblower in an audit on the Afghanistan projects for the ADB by PricewaterhouseCoopers and AF Ferguson & Co, a move he believes potentially endangered him; he also claims he was defamed by that first audit which, without seeking evidence from him, discredited most of his allegations, only for the audit to be redrafted in March of this year accepting that most of the allegations were actually correct at the time they were made.

Mr Elliot also claims to have damaging email correspondence between Clare Wee, director of the OAGI’s Integrity Division, and Ali Azimi, the man who terminated Mr Elliot’s contract in Afghanistan, in which she told him “I would not worry about the investigation” before it had taken place.

“The talk of integrity is just that: talk,” Mr Elliot said. “ADB policy says that when a whistleblower comes forward the ADB is supposed to encourage and protect them. They have done the opposite. For two years they have tried to get me to shut up, and public tried to embarrass me. That is not integrity.”

The ADB accepts that many of Mr Elliot’s claims about operational problems are correct (although it points out he was in charge of two of the technical assistance mandates in question), although they have since been redressed. “The supervisor did not do his job properly,” says Juan Miranda, the Director General of the ADB’s central and west Asia department. He adds that “we didn’t supervise the supervisor properly,” and notes that the supervisor has since resigned and the whole composition of the ADB office in Kabul, including the country head, has changed.

But he insists the audit found no evidence of fraud; he says Mr Elliot was “categorically not” blacklisted, and even worked for the ADB again after the first consultancy (he now works for USAID);and he disputes any breach of confidentiality because Mr Elliot had previously gone public with his criticisms before the audit took place. Mr Miranda suggests the language Ms Wee used in her email was designed to be calming. “We don’t want files to be burned… we wanted to calm people down, do the independent audit and publish.”

At the heart of the dispute is the mobile clinic. Mr Miranda says the ADB never committed funds to it, or at least not within his areas of responsibility. “We’re not there. It’s not part of these TAs. We don’t know what he’s talking about.” In fact, the annual report of the Poverty Reduction Cooperation Fund directly refers to a mobile clinic in Wakhan developed with the Aga Khan Foundation.

Mr Elliot sees the failure of this clinic to receive funds in blunt terms. “The simple story is the ADB stole money from donors, lied about what they did with it and people are dead as a result. “

In one corner: Asia’s vast savings pools. In the other: Asia’s equally vast infrastructure spending needs. Getting these two to meet in the middle is of vital importance to Asia’s future, and has become a keystone of Asian Development Bank policy.

Rajat Nag, managing director of the ADB, estimates the demand for infrastructure in Asia is around US$300 billion a year, and growing – and that doesn’t include investment in agricultural infrastructure. “Official assistance can provide just a tiny fraction of that,” says Nag. The ADB lent just over US$10 billion last year, roughly half of it for infrastructure; governments can provide a similarly small chunk. “So most of that $300 billion has to come from the private sector, and from public-private partnerships.”

There’s no shortage of money. Around 34% of GDP is saved in the Asian region. But mobilising that capital, and getting the private sector involved, has been impeded by two things in particular. One concerns dispute resolution mechanisms. “Even if you have the right legal framework, we find the private sector is very keen to know what is the dispute resolution mechanism, what will be the procedures for arbitration, where will the courts be where these things are settled.” This relates to a broader query about the governance structure for infrastructure investments – “who will be our counterparty? Will we be working the ministry of public works or will there be a project authority set up for this particular project?”

The second impediment is perhaps more surprising: lack of projects. It’s not that there’s a shortage of infrastructure that needs to be built. But there’s a big difference between identifying that, say, Bangladesh needs more power, and coming up with a carefully considered project in which to invite private sector involvement.

“I must confess we had not thought this was much of an issue, but it is increasingly becoming one,” says Nag. “Many times private sector sponsors will come in and say: we are willing to work with the ADB and the government, but where are the bankable projects? That means you’ve got to have projects that are prepared technically, socially and environmentally, so that you are not talking just in abstract terms about ‘coming in to infrastructure’.”

How to move that forward? “We now recognise that somebody has to invest money up front,” Nag says. “We would be willing to do that with the governments, and we are starting to do it, by creating what we call the project preparation facility. We go into countries and say: let’s look at this particular water project, and let’s spend $25 million up front – at our risk – so when the private sector comes in we can say: here are the details.”

The ADB’s long term strategic vision aims to put 50% of bank lending into private sector development (both in terms of creating an environment for the private sector and putting money into private sector projects directly) by 2020.

Getting there is going to have to involve greater development of domestic debt capital markets in Asia. “One reason we have not been able to get investment in infrastructure to the extent that we should is the lack of a suitable financial architecture in Asia,” Nag says. “We’ve got huge savings but we don’t have the mechanisms to mobilise those savings, excepting the banks,” which by necessity are short term funding options. “One of our priorities is to get a regional financial capital market.” The ADB backs this as an issuer in its own right; “I think that is of equal importance to having the right legal framework and dispute resolution.”

But how does it work in practice? Take the technical assistance recently offered to the Indian state of Bihar, granted approval on April 4. The words ‘private sector’ don’t appear once in the 14-page technical assistance report, which can be found on the ADB site, but everything else about it – long term demand forecasts, the development of capacity expansion scenarios, assessments of generation and transmission investments, a loss reduction program, software, a capital works program – implicitly increases the appeal of investment in the state to the private sector. “Ultimately that’s the objective but you’ve got to do quite a few things before you get there,” Nag says. “The private sector is not looking for goodies and handouts: don’t give them a tax incentive for five years, give them a level playing field, the right dispute resolution mechanisms, the right institutional support. That’s what the private sector wants, not financial incentives.”

India’s an interesting market, because one couldn’t really claim that there is a shortage of legislation or judicial establishments – its legal code goes back more than a century and a common complaint of local lawyers is that there is too much law and regulation, not too little. Nag points to the development of the public private partnership scheme in India, which the ADB has backed, as a way of getting past this. “Often it is not that the people at the top are not willing to move ahead – they are,” he says. “And the right legislative framework is in place. But the details, the implementation, that’s an issue and a constraint. We are working with the government both at the central and the state level to strengthen public-private partnerships, where you have a team of lawyers, engineers, economists and financial analysts in place to look at these projects.” Nag also believes the long-moaned battles between federal and state governments in India, long seen as a headache for infrastructure development which commonly involves both, are in the past and “there’s more of a common purpose. The central government certainly recognises that many of these projects have to be done at a state level. There’s a greater convergence of interests.”

It will take time, he says, “but I think we recognise that the issue is no longer whether there is a political will. That took some time, but I think we are over that. It is now a question of how we get the private sector in.”

Sticking with South Asia, a look at recent private sector-type lending from the ADB shows a lot of activity. On April 17 the ADB board approved a US$113 million private sector loan to help Gujarat Paguthan Energy Corporation set up wind energy facilities in Gujarat and Karnataka with an installed capacity of 183.2 MW. The objectives and scope include “demonstration of the successful implementation of large-scale wind power projects by the private sector.” The same day, a US$450 million private sector loan was approved for the Mundra Ultra Mega Power Project, to build and maintain a 4000MW coal-fired power plant in Gujarat. Among its aims is to “promote private sector participation in the Indian power sector.” In May a private sector credit committee meeting will discuss the Phulbari coal project in Bangladesh, involving a US$100 million private sector loan and $200 million political risk guarantee, with project sponsor Asia Energy. And in July the board is scheduled to consider approving two projects in Sri Lanka involving modest private sector loans, one for a biomass power project, the other a hydro plant.

The theory of putting the bank’s money where its mouth is – giving comfort to the private sector not just through guarantees but through active participation – will be tested in the years ahead. For example, the bank has gone quite heavily into significant power projects in markets like Vietnam, “and the precondition for doing that is to give comfort to private sector investors that there is a legal framework.” But Nag himself point out: “The test will really be if the dispute resolution mechanism works. We’ve got it in there, which has been enough for the private sector partners in these countries to come in, but the test will be, when you have a dispute, how it is resolved – how equitably and quickly.”

Today, Nag reckons private sector funding covers 20 to 25% of what’s needed: perhaps $60 billion a year. The hope is that as the private sector becomes more familiar with participation in these projects, the figure will grow quickly. “For example, as some of the infrastructure projects India is doing through public private partnership come to fruition, there will be a demonstration effect and others will come through,” he says. “There is a huge unfunded gap but we are quite hopeful the rate of uptake will increase.”

And even if the commitment of capital is slow, it is clear that the debate has moved on from a few years ago, when the broader question was whether the private sector should be involved at all.

“It is no longer an ideological debate about whether the private sector is good or not,” says Nag. “I think everyone recognises that without them we won’t go anywhere near $300 billion. It’s a question of how we implement it.”