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Role and Features of the new NEADB Cont

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Role and Features of the new NEADB Cont Powered By Docstoc
					                Design of Establishment
                                of
        Northeast Asian Development Bank
                         October 18, 2002


                                By Jai Woong Lee,
                                Senior Fellow,
                                Asia Pacific Institute & NEAEF
                                Visiting Professor, Sogang University


Energy Cooperation in Northeast Asia : Directions and Implementation
                 Korea Energy Economics Institute
                           Seoul, Korea
                                                                  1
                       Contents

   1. Introduction
   2. Need and Justification for the Proposed NEADB
   3. Role and Features of the new NEADB
   4. Rejoinder to Objections to Establishing the
              Northeast Asian Development Bank
   5. Conclusion
    6. Annex A : Summary of Costs and Benefits of ADB
                 membership for Japan, South Korea and China



                                                         2
1. Introduction

 Lagged economic development of Northeast Asia
  far behind the rest of Asia


 Obsolete and inadequate   infrastructure base for
  achieving region’s self-generating development
  objective




                                                 3
2. Need & Justification for the proposed NEADB

 Large and continuing investments in infrastructure
  projects required to bring region’s infrastructure level
  up to competitive international standards

 The required amount clearly exceeds the region’s
  capacity for generating and mobilizing savings and
  foreign exchange earnings

 Supplementary  transfers of external capital will
  therefore be needed to fill up the infrastructure
  financing gap
                                                        4
2. Need & Justification for the proposed NEADB
                                                       (Cont’d)

 Required net foreign capital inflows reach at $7.5 billion
  a year, for several decades in the future


 Estimated amount is beyond the region’s means, as has
  been the solution adopted by existing tools like,
     International Financial Institutions   (notably, the IBRD,
      ADB and EBRD)
     Private direct investments in commercially-viable
      infrastructure projects
     Bilateral, government-to-government assistance
                                                                   5
2. Need & Justification for the proposed NEADB
                                                     (Cont’d)


 By   optimistic assumptions, the region’s             financing
  shortfall would amount to $5.0 billion a year.


   Required net foreign inflows : $7.5 billion
   Possible supply through the existing tools : $2.5 billion
   Estimated Shortfall : $5.0 billion


                                                                6
3. Role and Features of the new NEADB
 Purpose of NEADB would…

 To make even a start in filling the region’s projected $5.0 billion
  infrastructure financing gap will require a new institutional
  arrangement created for the purpose of helping to meet more fully
  Northeast Asia’s future capital transfer and infrastructure investment
  requirements.


 A New, sub-regional development bank – the Northeast Asian
  Development Bank (NEADB) would be the most viable and effective
  institutional arrangement for helping to meet Northeast Asia’s
  projected infrastructure financing gap.


                                                                    7
3. Role and Features of the new NEADB (Cont’d)

 Operations of NEADB would….


     Access the private capital market in NY, London, Tokyo,
       Frankfurt, HK, and elsewhere and would borrow long-
       term funds by issuing its own bonds, secured by NEADB
       capital callable in FX and its statutory reserves
     Attract favorable interest rates and maturities which the
       bank would pass on to its borrowings
     Bank would represent a pro-active, new investment
       channel for securing and transferring multiple amounts
       of capital resources from overseas capital markets to
       Northeast Asia for financing infrastructure projects
                                                            8
3. Role and Features of the new NEADB (Cont’d)
Operations of NEADB would….

   In the financing area, NEADB would supplement the
   capital transfer activities of IFIs, and would open a
   new channel for transferring financial resources from
   int’l capital markets to the region
   In the operational area, NEADB would coordinate
   closely with the IFIs (notably with the World Bank and
   ADB), allocation and funding of national and regional
   infrastructure projects. NEADB would more focus on
   helping fill the shortage of long-term financing for
   infrastructure projects in the region
   Bank would neither overlap nor duplicate the
   activities of the existing IFIs
                                                            9
3. Role and Features of the new NEADB (Cont’d)
 Financial structure of the NEADB would ……

   Follow the existing templates of other development banks
     (World Bank, ADB, AFDB and the IADB)
   A multilateral, quasi-commercial bank with ownership
     evidenced by shares of capital subscribed and purchased for
     the most part by national governments as Bank shareholders
   The representatives of the founding member countries would
     decide the followings at pre-inaugural meetings;
        1)total authorized capital,
        2)tentative allocation of shares (founding members, other Asian
          countries, non-Asian countries and organizations),
        3)proportion of each subscription that would be “paid-in”,

                                                                     10
3. Role and Features of the new NEADB (Cont’d)
 Financial structure of the NEADB would ……

 The representatives of the founding member countries would
  decide at pre-inaugural meetings; (cont’d)
       4) The national and/or convertible currencies in which these amounts
            would be paid-in,
       5) The balance of subscribed shares that would remain “callable”;
            and
       6) The currencies in which the callable shares would be denominated
            on the books of the Bank`

 Many possible combinations of amounts and types of
  currencies to be paid in to the Bank and, in turn, that would
  affect the perception of the Bank’s strength in foreign capital
  markets
                                                                       11
3. Role and Features of the new NEADB (Cont’d)
 Financial structure of the NEADB would ……

   For illustrative purposes, a figure of $40billion might be
     considered a reasonable first approximation for the Bank’s
     authorized capital. This capitalization would be evidenced
     by 400,000 shares of equity shares valued at $100,000
     each.
   A substantial block of the Bank’s total shares, and the
     associated board membership and voting power, would
     presumably be taken up by subscriptions by the Bank’s
     founding Northeast Asian member countries – Japan,
     South Korea, North Korea, Mongolia and Russia. Proportion
     of shares would be decided depends on the wish-to-join
     list of non-regional members.
                                                           12
3. Role and Features of the new NEADB (Cont’d)
 Financial structure of the NEADB would ……



 Following the ADB model, an indicative allocation of capital
  shares might be based on economic yardsticks, such as total or
  per capital GDP, adjusted to ensure equitable participation by
  smaller member nations.
 Although each government would subscribe to a specified
  number of shares, only a percentage of each country’s total
  subscription (“paid-in portion”) would require actual payment in
  gold or currencies by the subscribing country to the Bank. For
  the paid-in portion, 3-5 years installment payment could be
  made.

                                                              13
3. Role and Features of the new NEADB (Cont’d)
Financial structure of the NEADB would ……



    The balance of each country’s subscription, their
     “callable capital shares”, would represent a contingent
     liability to the Bank, but these shares would not require
     any payment at the time of subscription. “Capital
     shares callable in convertible currencies” are of some
     importance since they would be considered by
     prospective purchases of the Bank’s bonds as the
     ultimate security for investments.



                                                            14
4. Rejoinder to Objections to Establishing the
                   Northeast Asian Development Bank
 Three main objections concerning the need for establishing a
   new Development Bank for Northeast Asia
1) A new Bank is not needed because the World Bank and ADB
   can provide all the infrastructure project financing that the
   Northeast Asian region requires;
2) Funding and organizing a new sub-regional bank would be
   very expensive; and
3) A “Special Fund” set up in the ADB and IBRD would serve the
   same purpose as the new Bank

                                                           15
A rebuttal to each objections
1) A new Bank is not needed because the World Bank and
   ADB can provide all the infrastructure project financing
   that the Northeast Asian region requires;
   From the time the NEADB was firstly proposed in 1988, critics have
    often casually dismissed the proposal and instead have put forward
    the notion that the World Bank and ADB are capable of providing all
    the long-term financing needs
   Both Bank’s Annual Reports and related loan documents fully set out
    the magnitudes and types of their respective loans to the region for
    infrastructure projects  during the period of 1999-2001 ranged from
    a low of $135million to a high of $295 million a year – and the amount
    was in fact zero in some years
   IBRD and ADB could together provide up to $1.5 billion of the region’s
    annual requirement ($7.5billion)

                                                                      16
A rebuttal to each objections (cont’d)
2) Funding and organizing a new sub-regional bank would
   be very expensive;
   Based on the actual costs of establishing and capitalizing the ADB
    and IBRD, the costs of creating a new NEADB would be relatively
    modest for shareholding countries.
   Illustrative alternate models of the Bank’s possible capital structure
    are presented in the paper. Depending on the Bank’s total
    capitalization and the portion represented by paid-in shares, the
    three annual installments paid by subscribers.
   Compared to other capital or current budgetary expenditures by
    governments, the amounts involved would represent relatively
    modest outlays by the Bank’s founding member countries.




                                                                     17
A rebuttal to each objections (cont’d)
3) A “Special Fund” set up in the ADB and IBRD would serve the
   same purpose as the new Bank;
     It is clear that a special or dedicated fund is not a match for, nor a
      viable alternative to, a banking-type institution.
     One dollar contributed to a special fund for Northeast Asian
      infrastructure would produce one dollar of financing for an
      infrastructure project.
     A capitalized banking-type organization as NEADB proposed is a
      completely different concept because it has its own capital base and
      financial resources (capital markets)
     Thus, it would achieve a highly leveraged volume of lending           that
      would be related to its callable capital in convertible currencies.
     Highly important multiplier-related benefits as a bank – capital
      market borrowing, transfers and leveraged lending for infrastructure
      projects in the region.
                                                                            18
    5. Conclusion
   A New, sub-regional development bank – the Northeast Asian
    Development Bank (NEADB) would be the most viable and
    effective institutional arrangement for helping to meet
    Northeast Asia’s projected infrastructure financing gap.
   Access the private capital market in NY, London, Tokyo,
    Frankfurt, HK, and elsewhere and would borrow long-term
    funds by issuing its own bonds, secured by NEADB capital
    callable in FX and its statutory reserves
   Bank would represent a pro-active, new investment channel
    for securing and transferring multiple amounts of capital
    resources from overseas capital markets to Northeast Asia for
    financing infrastructure projects


                                                               19
                                                                                                                   Annex A



            Summary of Costs and Benefits of ADB membership
                              for Japan, South Korea and China


The authorized capital of ADB as of 12/31/99 = $47,597million
Paid-in capital $3,348 million (7%) + Callable capital ($44,245 million (93%)
- budgeted cost for shareholders                               - contingent liability only
                                                                                                        (Unit : U$ million)

                    % of Bank's       Total      Paid-In     Callable    Commercial, Development and financial benefits
    Country
                   Capital Shares Subscription Amount *      Amount              of being shareholder in ADB *

                                                   7%          93%       In 2000 (A) Cumulatively (B)       Loans ( C)
 Japan                     15.93%      $7,185        $504       $6,681          $131           $7,041                        -
 South Korea                5.13%      $2,320        $162       $2,158          $109           $3,526               $6,338
 China                      6.56%      $2,970        $208       $2,762          $783           $5,492             $10.3 Bn
 Mongolia                   0.15%        $6.93       $0.49       $6.44

 •* A & B : member countries share of ADB procurement contracts for goods, related services and consulting services
 • C        : total amount of development loans from ADB


                                                                                                                    20
Let me quote Korean proverb : “If midnight comes, the dawn is near”.


The goal seems to be very far to reach, but since NEAEF members are
gradually approaching toward the goal, the idea of NEADB(or NEADF)
will surely come true in the near future.




                             Thank you for your patient listening!

                                                                     21

				
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