MANILA Asian economies have been rattled by China's slowdown, but they are still growing faster than many others. Maintaining that momentum, however, will require governments to get serious about improving the region's shaky infrastructure. The Nikkei Asian Review asked Takehiko Nakao, president of the Asian Development Bank, about how his organization and governments are coping with this challenge.
How are Asian governments keeping their economies moving forward? Some are growing because of their market-oriented reforms. Others are becoming more competitive against China because of their lower wages. Many companies are shifting production to those countries. Furthermore, investment and consumption demand is growing in those nations. So while we of course cannot be complacent, and the impact of China's slowdown is indeed large, I'm not especially negative about the overall picture.
Are infrastructure improvements necessary for Asia's economy to continue growing? Yes, infrastructure is the basis for everything. To have industry, agriculture and any development requires infrastructure. Agriculture requires irrigation and logistics to transport products. Factories need power, roads, railways and ports. Without infrastructure, the economy and industry cannot develop. At the same time, it is an important source of poverty reduction. Infrastructure is the basis of economic and social development. Unlike advanced economies, many Asian countries are behind in infrastructure development, and that is why their growth is more constrained. The reason China developed so fast is partly because it invested a lot in roads, ports and power. No question about it.
Asian infrastructure demand is massive, but the number of projects that get completed is relatively small. So-called public-private partnerships are often mentioned as a key to boosting that number, but that approach does not seem to be working so well. PPPs are a kind of risk sharing between the government and the private sector. The government should ensure a certain flow of income from road, railway, power and other projects. We also need reasonable cost-sharing, risk-sharing and dispute-resolution mechanisms. For PPPs to work, we need a good framework to share the costs, to share the risk and to resolve disputes. If the cost sharing favors the private sector too much, it means the public has to shoulder a large cost burden. If it goes the other way, companies lose money.
We are trying to help governments build up the capacity for such undertakings. For example, we are supporting the enactment of PPP laws in Vietnam, the Philippines and elsewhere. We finance the private sector portion of PPP work through our Private Sector Operations Department. We also support the public side of PPPs. We can finance those things. By engaging in such PPP activities, governments help reassure the private sector that they are willing to bear more responsibility into the future.
We don't see a lot of well-planned projects in Asia. Do you see the number of bankable projects significantly increasing anytime soon? I hope so. The ADB's support is one part of the PPP framework. The World Bank has a global investment fund facility [to support such projects]. We are having serious discussions about how we can increase the number of bankable projects, and Group of 20 talks have focused on this, too.
Are Asian leaders interested in PPPs? At a recent meeting with Indonesian President [Joko] Widodo, we touched on the issue of PPPs and also how to use the country's state-owned enterprises more efficiently to support infrastructure bids. In India, Prime Minister [Narendra] Modi and I have discussed how to use private sector money, including through PPPs. In China, I spoke with Finance Minister Lou Jiwei and other officials about PPPs and related issues. There is very strong interest; they think that is where the money is. Many face budget and other constraints and are keen to mobilize resources through those systems.
This year will likely see the first infrastructure project funded by the China-led Asian Infrastructure Investment Bank. Will the AIIB change Asia's infrastructure landscape? The bottom line is that the need for infrastructure finance is growing. Countries need more money. Most of that should come from domestic resources, so they have to enhance their capacity to collect revenue. But it is good that we are seeing more money from international financial institutions and also the private sector. This is one of the areas in which we can strengthen our support for infrastructure building in developing countries.
The need for funds is huge, and there is a lot of talk about how the World Bank and the ADB aren't enough in that regard. That is why the AIIB has so much support. My view is that we can work together. Governments might ask both the ADB and the AIIB to help with a certain project, or sometimes the AIIB might handle a project on its own.
Are the two banks already cooperating? Yes. The ADB helped the AIIB's secretariat prepare safeguard policies on social and environmental protection. We also helped with some of the legal framework. We will seek projects that we can co-finance.
AIIB President Jin Liqun agrees that safeguard policies for social and environmental protection are important. We gave the bank the policy framework on those matters. It wants to use this kind of framework. Unless it meets those conditions, the ADB cannot co-finance projects. But we have started identifying projects. The first batch of projects by the AIIB will include a co-financing deal between us that will take place in the second half of the year. As I see it, we have no option but to cooperate. Developed countries that are shareholders in the AIIB want the ADB to be an important part of the new institution.
What incentive is there for the ADB to cooperate with the AIIB? We can target bigger projects. We can mobilize the AIIB's resources, in addition to government resources. We can complement our financing with AIIB money, and we might even receive project-management fees.
Interviewed by Nikkei Asian Review managing editor Hiroshi Toyofuku