Boosting ADB’s Mobilization Capacity: The Role of Credit Enhancement Products
The financing needs of developing countries are far greater than the funds available from governments’ own resources and from development finance institutions. In addition—and further increasing the financing gap—developing countries will need to attract huge amounts of finance to combat climate change and achieve other United Nations Sustainable Development Goals. Mobilizing nondevelopmental sources of capital is therefore of great importance to developing countries and their strategic development partners.
This evaluation of the deployment of credit enhancement products (CEPs) by the Asian Development Bank (ADB), including its policy environment and the development of its business portfolio shows that ADB is primarily a lender of development loans, particularly to sovereign borrowers. At year-end 2015, its total guarantee exposure was $1.407 billion (less than 2% of the overall portfolio). This evaluation shows that utilization of guarantees, A/B loans, and risk transfer operations by ADB has been very modest over the past 30 years. Various market-related factors and internal institutional policy factors account for this. Many are not unique to ADB, but are shared by other multilateral development banks that are also mainly involved in lending operations.
Of all ADB’s credit enhancement products (CEPs), partial comprehensive credit guarantees are the most effective in mobilizing third-party financing. The demand for “classical” political risk cover for medium and long-term debt financing is quite low. Extended political risk cover, including breach of contract, is mainly used in project finance transactions, but preference is given to comprehensive guarantees, except in high-risk and fragile countries where there is potential demand for political risk coverage.
ADB has no clear targets for the utilization of guarantees, A/B loans, and risk transfer techniques CEPs are not well integrated into ADB’s country strategy and operations. A complicating factor is that ADB’s system of measuring mobilization leads to the reporting of unrealistically high mobilization figures. The current incentive system does not encourage the utilization of ADB products that would have optimal mobilization and developmental impact for ADB member countries.
The participation requirement for guarantees, despite a more flexible interpretation since 2006, and ADB’s inability to provide political risk guarantees for equity investments are important obstacles to the guarantee business. The limited number of staff involved in guarantees and syndication affects operations and administration. ADB lacks a comprehensive IT system to manage CEP operations. For ADB to play an effective role in the use of CEPs and to use them as an important tool for mobilizing much needed private capital in its member countries, it needs to address several issues identified in the report. These include organizational and incentive structure, capacity development, and strategy and policy, including the mobilization approach.