Reforming ADB to Strengthen Operations on the Ground and Better Service the Region

Opening Address by ADB President Takehiko Nakao at the 47th Annual Meeting of the Board of Governors in Astana, Kazakhstan on 4 May 2014

(as drafted)

Introduction

Your Excellency, President Nursultan Nazarbayev, distinguished guests, ladies and gentlemen:

It is a great pleasure to join the Honorable Erbolat Dossaev, Chair of the Board of Governors, in welcoming you to the 47th Annual Meeting of the Asian Development Bank.

On behalf of all of us, I thank the Government and people of Kazakhstan for graciously inviting us to Astana. This thriving, modern city is a symbol of the country’s remarkable progress since its independence.

I am pleased to announce that this morning ADB and Kazakhstan will sign a new “Partnership Framework Arrangement”. Under this framework, Kazakhstan’s National Fund and ADB will work together to finance economic diversification, sustainable development, and inclusive growth in Kazakhstan.

The progress is not just about Kazakhstan. Indeed, the Asia and Pacific region has achieved a lot in growth and poverty reduction. But challenges remain. Today, I will focus on the region’s evolving challenges, and on how we can reform ADB to strengthen operations on the ground and serve ADB’s clients more effectively.

But first, let me start with the economic outlook for the region.

Economic Outlook for Asia and the Pacific

I would like to re-affirm that the Asian economy remains strong. Gross domestic product in developing Asia and the Pacific expanded by 6.1% in 2013, the same growth rate as in the previous year. Looking ahead, the region should benefit from continued strong domestic demand as well as better economic prospects in industrial countries. We project the region’s growth to edge up to 6.2% in 2014 and to 6.4% in 2015.

However, some risks remain. These can be related to changes in monetary policies of advanced economies and the possible slowdown of some regional economies. But I would like to note that overall downside risks are easing. In addition, developing Asia is in a much better position now to weather any potential shocks than before.

The region’s macroeconomic frameworks are more robust. Financial systems are well capitalized. Foreign reserves are higher.  Exchange rate regimes are more flexible. I am confident that by making a strong commitment to continue sound macroeconomic policies and address long term structural issues, the region will become even more resilient.

Emerging Challenges in Developing Asia and Pacific

Let me now turn to the main theme of today: Asia’s challenges and ADB’s role.

As I promised last year in Delhi, we have undertaken a comprehensive mid-term review of ADB’s long term strategy—Strategy 2020. This mid-term review reflects on our performance in the last five years. It identifies remaining and emerging challenges in the region. And it recommends how ADB can improve its service to clients.

As the mid-term review emphasizes, the biggest challenge in the region remains poverty reduction. More than 700 million people live below the extreme poverty line of $1.25 a day. This accounts for 20% of the total Asian population. This also accounts for as much as 60% of the world’s poor.

But Asia has done well in translating high growth into poverty reduction. Using the measure of $1.25 a day, we are likely to see an end to poverty in the region within the next decade.

But can we be complacent by just looking at the $1.25 threshold? This threshold is well over 10 years old, and not in line with the aspirations of people in the Asia and Pacific region today. It cannot support even a minimum standard of living in most Asian countries. Mobile phones, for example, were considered a luxury only a few years ago. Now, they are a necessity for accessing basic services and economic opportunities.

Actually, more than 1.6 billion people live on less than $2 a day. They are highly vulnerable to job loss, inflation and crop failure. Inequalities within and between countries in the region are also increasing.

The challenge for ADB is to help developing member countries eradicate remaining poverty, and support greater inclusiveness to address inequalities.

And there are other challenges: a huge infrastructure gap, environmental degradation and climate change. There is also the question of how to tap the full potential of regional cooperation and integration.

Another set of challenges relates to the middle income countries. In this region, an increasing number of countries have now reached middle income status.  These countries are tackling issues such as rapid urbanization, aging populations, sustaining inclusive growth, and avoiding the “middle income trap.”

Meeting the Challenges: Strengthening Operations on the Ground

The region is changing fast.  ADB too must change.  ADB must sharpen its operational focus to better help its clients overcome challenges. Let me share with you seven strategic priorities today.

First, inclusive growth. Given the unfinished poverty agenda and increasing inequalities, ADB will increase its emphasis on inclusiveness and the quality of growth. We will expand our operations in education, health, social protection and inclusive business.

Greater emphasis will be put on closing gender gaps through investment in girls’ education and income earning opportunities for women. ADB will help countries to improve governance and build capacities to ensure effective, timely and corruption-free delivery of social services. And we will devote increased resources for countries in fragile and conflict affected situations.

Second, climate change and disaster risk  management. ADB will continue to strongly support mitigation efforts, but we will also put much more emphasis on adaptation. The region is experiencing more frequent – and more severe – climate-related disasters.

The recent devastation by Typhoon Haiyan in our host country, the Philippines, is a stark reminder of the region’s exposure to natural disasters. More than eight thousand people lost their lives. The typhoon wiped out crops, schools and bridges, and left about 4 million people homeless. In the affected areas, ADB is implementing $900 million of support focusing on the reconstruction efforts driven by communities.

Going forward, ADB will integrate disaster risk prevention and management more strategically into its operations.

Third, regional cooperation and integration. In addition to supporting connectivity through hard infrastructure such as cross-border roads and electricity, ADB will increase support for trade facilitation through simplifying custom procedures and harmonizing national standards. ADB will also support regional financial integration to promote investment using the region’s own resources.

Last October, I attended the Ministerial Meeting of the Central Asia Regional Economic Cooperation (CAREC) in Astana. I was so impressed by the enthusiasm and spirit of cooperation shared by the Ministers. Thanks to CAREC, countries are better connected, cross border trade has expanded, and  investment opportunities have grown.

Fourth, infrastructure. A huge infrastructure deficit exists in the region. Infrastructure will remain a major focus in ADB operations. In order to leverage ADB resources more effectively, we will mobilize greater investment from the governments themselves, the private sector and other development partners. ADB will pay greater attention to operation and maintenance (O&M) to support better delivery of services from existing infrastructure assets.

I cannot emphasize enough the need for good infrastructure in promoting inclusive growth. When I visited Papua New Guinea last June, a minister mentioned to me that the most important work by ADB in his country is enhancing connectivity between communities by building roads and improving ports. Such infrastructure is essential for people to go to hospitals and schools. It also improves access to jobs and markets, thereby helping more people out of poverty.

Fifth, middle income countries. Development challenges do not end after achieving middle income status. Middle income countries need to improve productivity, mainstream innovations, catalyze private sector financing, adopt international best practices, and integrate more into the regional and global economy. ADB can play an important role in supporting these efforts by tailoring its assistance to country-specific conditions. At the same time, ADB can closely work with these countries in promoting South-South cooperation. It is my strong belief that ADB should remain a relevant and important partner to middle income countries.

Sixth, private sector development. A strong private sector is essential for development. It can fill large investment gaps, create jobs and reduce poverty. In addition to being a project financier, ADB should become a more active project developer. In this regard, we will expand our support for public-private partnerships. This will help mobilize more private sector investment and improve the delivery of public services.

Finally, ADB’s knowledge work. Client countries increasingly seek ADB’s knowledge and expertise. When I visit developing member countries, I am always struck by their strong desire to learn from best practices that ADB has developed through its operations in other countries. Our knowledge ranges from designing health systems and providing vocational training, to improving city planning and strengthening environmental protection. To strengthen our knowledge work, we should act as “one ADB”. I have asked all departments of ADB, including those responsible for treasury operations, risk management, legal services, and information technology, to be an integral part of our knowledge work. Our 28 resident missions will play a crucial role in coordinating with client countries.

An Innovative ADB: Serving the Region Better

Ladies and gentlemen:

In order to accomplish all of this, ADB must reform itself. Last year, I discussed how the “three I’s” – innovation, inclusiveness and integration – are critical to the region’s future. They are equally important to ADB.  In reforming ADB, I want to focus on innovation in three areas: (1) innovation in mobilizing finance, (2) innovation in our processes and products, and (3) promoting innovative thinking and skills in our staff.

First, innovation in mobilizing finance. Given the region’s huge financing needs, we should be more innovative in mobilizing larger investments from public and private partners. At the same time, ADB itself should pursue a more innovative approach to optimize its own resources in order to enhance its financial capacity and strengthen our support for poverty reduction.

For this reason, we are proposing to combine the lending operations of the Asian Development Fund (ADF) with the balance sheet of the Ordinary Capital Resources (OCR). Under this proposal, ADB will continue its concessional lending from its expanded OCR window, while the grant assistance will continue to be provided from the ADF.

When we established ADF 41 years ago to support the poorest members of ADB, we did not design it using leverage. But today, thanks to the sound track record of repayments by ADF borrowing countries, ADB can benefit from  combining OCR and ADF resources, thus expanding equity base and leveraging it.    

We have started discussing this innovative proposal with you and the ADF donors. If approved, it would allow us to increase our lending capacity, and enhance support for low-income countries while reducing the burden on ADF donors.  It would also better position ADB to respond to any future financing needs including for natural disasters and economic crises.

Of course, we will also explore other ways of increasing ADB’s lending capacity with the guidance of the shareholders.

Second, innovation in our processes and products. While ADB is recognized as a lean and efficient organization, ADB should further increase its institutional efficiency and effectiveness. Instead of taking a business as usual attitude, we should be more innovative by reforming our business processes and by revisiting the risk return profile of our private sector operations.

Regarding ADB’s business processes, for example, the workload and time needed for procurement can be rationalized by avoiding duplication of procedures and by delegating more to resident missions, without compromising due diligence. This would not only contribute to efficiency in ADB; it would also alleviate the burden on clients and potential contract bidders, making ADB a more attractive partner.

Third, innovation in our human resource management. In order to motivate staff to better achieve ADB’s goals, ADB will recognize and reward staff for managing project implementation effectively in addition to loan approvals, being innovative in solving problems, and demonstrating strong client orientation.

I will ensure that we have the staff skills needed to respond to the region’s needs today, and tomorrow. ADB will attract, motivate and retain highly skilled technical staff to provide better services in sectors.

I recognize that our resident missions have to play a greater role. Country operations have become more complex, and our clients expect a quick and effective response from us. I will empower resident missions by providing them greater capacity and mandate.

Concluding Remarks

Ladies and gentlemen:

To reiterate, Asia and the Pacific is transforming. The region has made great strides in reducing poverty. Incomes have risen and the majority of ADB’s developing member countries have achieved middle-income status.

But there are still many challenges to tackle – traditional ones and emerging ones. As the largest development institution based in Asia, ADB must also transform to meet these challenges with reforms and innovative solutions.

To be successful, ADB needs strong partnerships with all its members, civil societies and other development partners.

An old Kazakh proverb tells us “the more the friends, the wider the road.” Working together in partnership, with focus and firm resolve, we can achieve our shared goal of a better life for all people in Asia and the Pacific. 

Thank you.