The future of the ADB: An interview with ADB Vice-President Stephen Groff (Part I)

DevPolicy Visiting Fellow Robin Davies interviewed Stephen P. Groff during a visit to Canberra in early September 2012. Here is the transcription:

Robin: Most people who have a glancing acquaintance with the ADB think of it as an infrastructure bank. Last time I looked, somewhere between 60 and 70 percent of the bank’s investments were in infrastructure. Have you seen a shift away from the central focus on infrastructure in the way the bank thinks about itself and its mission?

Stephen: That sounds like a simple question but it’s a fairly complicated one. The problem with the conception of the ADB as just an infrastructure bank is that that is time-specific. Our resources are ever, ever more, in relative terms, insignificant in the region when compared against the needs and the kind of economic growth we’re seeing. So to think about ourselves as an infrastructure bank is, maybe, relevant up until today, or next year, or the year after. But very soon there are going to be a lot of other actors that are investing in infrastructure. Hopefully, if we see progress in Indonesia and on public-private partnerships (PPPs) there will be actors that are going to be much bigger players than the ADB is alone when it comes to infrastructure finance.

This is an evolution recognized by the management of the bank.  It is also recognized by the Board. There’s this term that has been developed in recent history called “Finance Plus Plus”. The first “plus” is leverage. The second “plus” is knowledge. And so the management and the Board of the institution recognize that we need to make this shift – Rajat Nag [Managing Director General of the ADB] refers to a vision of a $US100 billion bank, and that’s basically 90 percent leverage, not simply ADB funds alone.

But are we behaving that way on the ground?  Not yet. And have we figured out how to incentivize our staff and our procedures and our mechanisms in a way that’s going to actually result in that? To a certain degree, yes, that’s happening, but it’s not happening at the speed or on the scale that it needs to to really transform the institution quickly.

There are a couple of recent developments that are going to help accelerate this transformation. The first is that the President recently approved our “PPP Operational Plan”. This has various parts to it but a significant element of it is the fact that we need to put every single project that’s in the pipeline, not just when it comes to the Board for approval but long, long in advance – three or four years in advance – through a screen that asks why wouldn’t we be seeking to make this project a PPP. So that’s a significant change.

Another element that is in process and should be finalized within the course of the coming weeks is a knowledge management action plan. This is really looking at how do you take not just knowledge generation, which the bank’s Regional and Sustainable Development Department does through its published papers, but also the tacit knowledge within the institution – how do you take that and make that more available both across the institution but also to the Developing Member Countries? But also how does the ADB act as a knowledge broker for the region? Examples here include work we are doing with the People’s Republic of China on a relatively small scale. But how do you scale that up in a way that has more impact?

So I think that there are things that are underway that have the potential really to change not only the way the institution thinks, which I think has changed, but the way it acts, which is still evolving. But it’s a big ship and it takes a while to turn it.

Robin: So would you see it going as far as becoming heavily invested in social protection, for example, or is that, do you think, beyond the bank’s core business?

Stephen: I don’t think that the institution is quite at that point yet. The challenges revolve around the fact that that the region itself is looking, rightly or wrongly, at what happened in Europe.  And also that a lot of the countries in the region feel that they can’t yet afford social protection. These countries now look at the European experience and say, two years ago we said we couldn’t afford it, and now even Europe can‘t afford it – or at least at the level to which it has been provided.

Against this backdrop, we need to be collectively thinking about “good enough” types of social protection policies. That is just not an area in which the bank has a lot of experience and I don’t see it being one in which we ultimately develop a deep expertise but we can certainly contribute to the thinking.

Robin:  As part of the Asian Development Fund (ADF – the concessional financing arm of the ADB) replenishment process it was agreed there would consideration of the longer-term strategic vision for the ADF with, I believe, a 2024 horizon. Do you see the ADF facing pretty much the same set of challenges as the International Development Association (IDA – the concessional arm of the World Bank Group) in terms of its client base?

Stephen: I think our challenges are no less acute than IDA’s.  There’s one thing in particular that will mirror the IDA process, which is – against the backdrop of a growing number of graduating countries – how do you reconcile the performance-based allocation system with a narrowing set of countries that are not performing? I think that will be the fundamental challenge in the next replenishment. It’s also going to be the fundamental challenge in the next few IDA replenishments. As the universe becomes smaller and more focused on fragile states, it is something we’re all going to have to wrap our minds around.

Robin: Do you have a clear sense of what options the donors are looking for in this strategic vision exercise? Are they looking for the ADF to be recast with a focus on conflict and fragility, or are they looking at converting it into an issues-based fund that would provide top-ups?

Stephen: I don’t have an immediate sense for where we will end up. It wasn’t the focus of the recently-concluded negotiations but, looking forward, I would wager on fragility more than on issues-based funding.

One of the challenges the bank faces is that we know what we need to do when we engage with these countries – we know the kind of flexibility that we need to have in fragile states. There is an incredible amount of good work that’s been done on this. But the challenge is that, as hard as it is for bilateral donors to adapt to more flexible approaches, there’s a real tension in the multilaterals because of the fiduciary responsibilities that the shareholders rightly place on them while, at the same time, asking for greater flexibility in engagement in fragile situations.

So I think that the question that will feature fairly prominently in the next round is:  how do you reconcile those two things? How do you look at ADF money as truly risk capital in some of these fairly undependable environments?

Robin: You’ve worked for the ADB twice, with stints at the Millennium Challenge Corporation and the OECD’s Development Cooperation Directorate in between. What changes did you observe when you returned to the ADB?

Stephen: I think the ADB is actually quite different from when I left. First – and a lot of this comes out of the recent General Capital Increase (GCI) and the additional requirements that all shareholders put on the bank through that process – the bank is a much more transparent place than it was before. That doesn’t mean there isn’t room for improvement, but it’s much more transparent than it was. It’s also now a place that cares much more about its own human resources and recognizes these as being the core of the institution. And it has a much better reputation and relationship with its shareholders than it did in the past – a fact borne out in the ADB’s positive performance in the Australian Multilateral Assessment, in DFID’s Multilateral Aid Review and in assessments by the Multilateral Organization Performance Assessment Network.

The relationship with staff and the atmosphere inside the building itself is a lot better than it was. When I left in 2004 the ADB was either at or close to a nadir in terms of morale. That was a result of a couple of things. I think it was a result, first, of our human resource management practice. But also a result of the fact that the Bank was near its low point of lending, at least in modern history, and that led to a lot of existential questions about the purpose of the institution.

So through the GCI, the subsequent global economic crisis and increases in lending, changes in human resource management, more direction through Strategy 2020, and better leadership, the Bank has turned around quite a bit. That doesn’t mean that it’s perfect. There’s always room for improvement, but the Bank is a significantly different place than it was when I left eight years ago.

Robin: As you’re aware, Australia will host the G20 leaders’ summit in 2014. As part of that, Australia will be chairing the G20 Development Working Group in the lead-up to the summit and will join the troika of past, present and future chairs around the end of this year. I’m interested in what you would hope to see Australia driving for in this role.

Stephen: I think that what would be important first is cleaning up the agenda, because the multi-year action plan is a bit of a grab-bag at the moment. It reflects a lot of compromises and includes some things that are issues and others that are symptoms.  So I think first you could rationalize the agenda – and it may be that enough time has passed that somebody could come along and say, let’s narrow this down to a set of issues that we want to tackle and things that we can measure ourselves against.

But I also think that the other part of it is that there’s a tendency in this forum to focus on Africa, which I understand because the needs are great. But we still find the vast majority of poor people in the world live in Asia. Australia is ideally positioned to bring this fact to the attention of the G20 and seek some consensus on how to address continued deprivation in the region.

The Deputy Managing Director of the IMF, Min Zhu, offers one way of thinking about it is this: he is on record saying that what you’re seeing all around the Pacific rim is countries that 10 years ago one didn’t really associate with each other showing similar patterns of growth and building new trading relationships. Those countries include Brazil, Chile and Argentina. So it may be useful to think about the region from almost an APEC perspective, and to look at how you get that universe working a little bit better together.

Robin: Do you think there’s anything desirable about the G20’s weighing in on questions about the future of the concessional arms of the multilateral development banks? Essentially you’ve got very similar issues being discussed in a series of different rooms at present, around graduation, performance-based allocation, resource mobilization, and the provision of global public goods – and around the fundamental objectives of the concessional arms.

Stephen: It would be useful but only if all G20 members are ready to talk about it – because otherwise you’ll end up spinning your wheels without much impact or just producing rather anodyne communiqués.

So I think it would be important to get some signals fairly early on whether everybody would be ready seriously to talk about it – particularly the emerging economies because, of course, it has implications for them. They still come to the ADF and IDA negotiations as developing countries, not explicitly as donors, and discussion about these matters in the G20 would likely necessitate an evolution in this perspective.