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p. 2 of 6 BACK | NEXT I. Introduction II. Regional Development and Strategic Context III. "Existing Instruments and Market Changes IV. Innovation and Pilot Concepts V. Implementation VI. Recommendation

Pilot Financing Instruments and Modalities

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II. Background

4. Despite progress made, the Asia and Pacific region continues to face major challenges in achieving prosperity and poverty reduction. Almost 700 million people still struggle on less than $1 a day. Many countries face considerable risks in trying to attain the non-income Millennium Development Goals (MDG)². For the region to achieve these MDGs and other development objectives, it must mobilize resources and knowledge quickly and effectively to improve efficiency, productivity, quality and access to productive activities and services.

5. A large financing gap persists across the region, jeopardizing sustained growth and poverty reduction. Infrastructure alone requires annual financing of several hundred billion dollars per year over the next 5–10 years. Despite ample domestic savings, public sector budgets are under pressure in many DMCs, as well as in countries that normally provide development assistance. Yet the world has huge amounts of private capital in search of worthwhile investments. Financing from official sources, including ADB, needs to become much more proactive and innovative to help DMCs mobilize private investment. Progress in this area has been far too limited. Much more can, and should be done.

6. Despite recent well-intentioned efforts, many development agencies, including ADB, have had difficulty keeping pace with the significant shifts in global and regional finance³. Development agencies have gone from being primary sources of capital to secondary sources, thus becoming less important as providers of fresh financing, in particular for infrastructure finance. As a result, development finance agencies urgently need to reposition themselves to focus on their comparative value relative to the private sector. In addition, they must shift their mandate, when appropriate, from being primary providers of funds to being a catalyst to help attract private investors (foreign and domestic) into productive investments and services. This is part of the challenge faced by ADB and others like it.

7. Changes in the nature of DMC governments, and their relationship with development partners, have compounded this challenge. With the decentralization of investment and management in many DMCs, development agencies are being asked to respond to the needs of subsovereign and other public sector entities such as provinces or states, municipalities, state owned enterprises (SOE) and utilities, in addition to their traditional sovereign clients. These entities play an important role in creating employment, and providing infrastructure and basic public services. Giving them access to affordable long-term debt, working capital and equity finance is critical to promoting economic growth and pro-poor employment and prosperity. However, many governments are not in a position to provide the required finance to make the decentralization process work. Increasingly, they are also unable or unwilling to provide sovereign guarantees to support their long-term financing needs. Regionally, countries are demanding cross-border initiatives to create new and integrated transport and communication networks and power facilities, critical to ensure successful national development strategies.

8. But to meet these emerging challenges, ADB and other development agencies must transform themselves. Institutions that traditionally have been lenders to sovereigns must emphasize their role as mediators and facilitators at the sovereign, subsovereign, and regional level, creating value by attracting private sector capital and harnessing business management or technical expertise for application to specific sectors and public services. Navigating the transition from direct lender of official funds to enabler of private investment will require a major change in the culture, products, processes, and rules. Increasingly, the market will measure the success of this transition by the extent to which private investors perceive their services and transaction costs as being relevant, practical, competitive and attractive.

9. ADB’s Long-Term Strategic Framework 2001–2015 and its associated first Medium Term Strategy 2001–2005⁴ explain the strategic context and functioning of ADB. These corporate-wide strategic frameworks call on ADB to respond better to the needs of its DMCs by improving organizational effectiveness through greater flexibility in its structure, skill base, processes, and financial instruments and modalities. Further, the original ADB Poverty Reduction Strategy (1999) and its recent review in 2004⁵ urge ADB to widen the range of available modalities and instruments, and to tailor assistance to the complex needs of poverty reduction and conditions in DMCs.

1. Within the context of the new global development architecture that emerged following the Millennium Declaration (footnote 2), ADB has renewed its commitment to improving development effectiveness. To contribute to the global commitment on aid effectiveness articulated in early 2005 the Paris Declaration,⁶ ADB defined for itself an ambitious reform agenda (the Reform Agenda) to enhance its organizational effectiveness and to make ADB a more effective, dynamic, and results-driven catalyst for poverty reduction and prosperity in the region.⁷ IEI is a core reform initiative under the Reform Agenda. Further background information on IEI and its results framework are in Appendix 1.

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