Appetite for Action: ADB on the Record

In times of crisis – be it climate emergency or global pandemic – development finance institutions (DFIs) play a pivotal role in mitigating risks and mobilizing resources. 

DFIs tip the scales from lofty commitments to actual impact by injecting liquidity into the sectors most affected in troubled regions. Fast-track finance helps maintain critical services, while stabilizing economies and preventing societal collapse, as vividly seen for healthcare in 2020 and food security in 2022. 

Nonetheless, development is the bread and butter of DFIs, as they historically fund more longer-term projects. Across the Global South, DFI investments in renewable energy, sustainable infrastructure and climate resilience are building economies that are better equipped to withstand future shocks. These investments tackle immediate energy needs while also cutting carbon emissions – a win-win for people and planet. 

Risk appetite in private markets is where things get tricky and where DFIs can really bridge the gap. During or after crises, private investors often retreat in the face of uncertainty. With their higher risk tolerance and worthy mandates, DFIs step in to fill this void with concessional financing, guarantees and various instruments to lower the (perceived) risk for private investors. That tends to catalyze further private sector investment and therefore amplify overall impact. 

The corollary then becomes: How much should DFIs step in and address market gaps? DFIs are clearly needed to stabilize economies and shore up development, but they must not crowd out private investment. Instead, they should complement private sector efforts by focusing on areas where private capital is insufficient or unavailable. That means identifying projects that have high development impact but may be perceived as too risky by private investors. 

To understand how all this works in practice, we spoke with Marife Apilado, Director of the Portfolio Management Division in the Private Sector Operations Department at the Asian Development Bank (ADB). 

OPEC Fund Quarterly: How can DFIs help resolve global and regional crises? 

Marife Apilado: Given the standing that DFIs have and their knowledge and advisory capacity, I think they’re well-placed to influence policy frameworks toward sustainable and resilient solutions. For example, they can design the right incentives together with governments and create the right growth catalyzers, support and safety nets for vulnerable and priority sectors. 

OFQ: What exactly are these “vulnerable and priority sectors”? 

MA: That depends on what kind of crisis we’re trying to address and varies from context to context, according to different geographies and countries. So, for example, if the priority sectors are small and medium-sized enterprises (SMEs) in lagging regions of certain countries, we can help those governments design the right incentives to make sure capital flows into those priority sectors. 

Several MDBs, including ADB and the OPEC Fund, have public sector and private sector operations. We try to provide support on the public sector side to yield fruit on the private sector side by creating incentive mechanisms and proper regulatory frameworks. For example, by working with governments to influence the flow of capital into certain sectors like renewable energies or food security using upstream and midstream solutions to yield dividends on the downstream side. 

OFQ: Given the reduced risk appetite in markets, how much should DFIs step in and address market gaps? 

MA: Given their specific mandates, DFIs can act as “pathfinders” for markets. They can use their presence to open up and influence the flow of development capital to evolving but impactful segments of the economy where there is a funding supply-demand gap until such sectors become mainstream and sustainable contributors to the economies. 

This in itself presents a very strong case for financial additionality. But a DFI can only provide this if its risk appetite is aligned to the development mandate. So it’s key to have risk management offices embedded in institutional strategy discussions and contribute, align and even co-own the development agenda. 

That’s not to say that DFIs should finance loss-making ventures and burn capital, but rather to support important but potentially viable and impactful or emerging sectors with patient capital, based on a strong cogent view on the midterm viability and sustainability of these capital-starved ventures or sectors with high development impact. 

OFQ: How far should DFIs align in terms of philosophies, perspectives and (perhaps most importantly) planning? 

MA: I think it’s very much needed. More can be done to create more venues for conversations, discussions and planning among DFIs. There is already a good number of gatherings that occur regularly. I think we need to deepen those discussions to ensure that we’re not only responding to the most meaningful needs of developing member countries, but doing so in a manner that is efficient, responsive and cohesive. 

I think the philosophies are generally aligned, although risk appetite and execution can vary significantly sometimes. It’s not necessarily a bad thing and at times it cannot be avoided. But I think we should avoid situations where DFIs are competitively pitted against each other because that may not be efficient. We need to establish alignment and cooperation in such cases, because I think the needs of the market are so vast. There’s really no need to outbid each other for mandates. Rather, I think more can be done on how we can leverage on each other’s work, to make it a time and cost-efficient process, such as in the case for example of mutually cooperating in common due diligence, legal documentation and reviews and cost-sharing. 

I think this is true not only for deal processing or deal approvals, but also in the portfolio management space, where there could be more collaborative sharing of data rooms, safeguard systems (because we’re all concerned about the same environmental and social safeguards), legal costs etc. That is the space where we can do more together as a community. 

OFQ: When it comes to partnerships, is “complementarity” a better guiding concept than “alignment”? The latter assumes going lockstep in the same direction, which may not always be helpful. 

MA: I think going in the same direction may not be the most desirable outcome in terms of development strategy. It’s also good to be in various different but important spaces – and perhaps the impact could even be larger if we don’t all concentrate in one space. 

Complementarity is where planning comes in. When we collaborate with each other in our respective strategies, we need to be cognizant of what each other is doing and how we can help each other – rather than crowd each other out in the same space. 

OFQ: What is ADB doing to crowd in private sector funding for climate and development projects? 

MA: It’s a big space and even with all of our resources combined, we never have enough. We’re talking about trillions of dollars of capital needed for climate finance alone. ADB has taken a bold step forward to declare its ambition to be the climate bank for Asia-Pacific. That’s our big priority. Last year we led a reform of our capital adequacy framework, which enables the bank to commit more capital for climate finance. 

ADB President Masatsugu Asakawa has announced US$100 billion of additional capital until 2030 and most of that incremental capital is devoted to climate finance (on top of our baseline business targets). This significant capital commitment is using our own capital resources. In addition, we have committed to a 1.5x long-term co-financing ratio, which means mobilizing other people’s money to co-finance our development undertakings, including climate finance. So for every dollar that we bring in for each project, we have to bring in 1.5x third-party monies as part of our mobilization and co-financing. 

We have a very active team that manages mobilization with a vast array of tools including risk participation, B-loans, syndications and management of third party funds, which all have the effect of crowding financiers into a space that otherwise these financiers would not be able to access and develop on their own. That includes insurance companies, pension funds, concessionals, philanthropics and means bringing them into our projects. This approach enables us to support large ticket projects, which would not be feasible using just our own balance sheet. It is often seen in billion-dollar infrastructure projects involving renewable energies, particularly with unique and innovative features like smart batteries or new technologies. 

Risk distribution is very sensible not only from the point of view of mobilization, but also to structure risk and share it with other different capital providers that have different layers of risk appetites and then assigning risk share depending on their risk tolerance. We also use risk distribution very actively to blend various sources of funding to enhance the viability of highly innovative projects to help create markets. It’s also very important because it helps us to manage concentrations in the portfolio and optimize our balance sheet, because otherwise taking billion-dollar exposures in one project would result in a very bulky portfolio. 

OFQ: Is that 1.5x a standard target or is that really pushing the envelope en route to 2030?

MA: 1.5x is an existing and mainstreamed target at ADB, which in some years we’ve even surpassed. Last year for example we managed 1.8x on average for all projects – so achieved and exceeded! 

Marife Apilado 

Marife Apilado currently serves as Director, Portfolio Management Division of the Asian Development Bank (ADB) and is part of the Private Sector Operations Department Regional Management Team. The division is accountable for proactively managing all private sector projects and investments throughout a transaction’s lifecycle. She joined ADB in 2008 from Citibank N.A., where she had extensive experience in project and structured finance, corporate finance, financial institutions and global cash and trade transactions.