Design of Establishment

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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
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• 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

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• 1. Introduction
• Lagged economic development of Northeast Asia far
  behind the rest of Asia
• Obsolete and inadequate infrastructure base for
  achieving regions self-generating development
  objective

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• 2. Need Justification for the proposed NEADB
• Large and continuing investments in
  infrastructure projects required to bring
  regions infrastructure level up to competitive
  international standards
• The required amount clearly exceeds the regions
  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

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• 2. Need Justification for the proposed NEADB
• (Contd)
• Required net foreign capital inflows reach at
  7.5 billion a year, for several decades in the
  future
• Estimated amount is beyond the regions 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

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• 2. Need Justification for the proposed NEADB
• (Contd)
• By optimistic assumptions, the regions 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

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• 3. Role and Features of the new NEADB
• Purpose of NEADB would
• To make even a start in filling the regions
  projected 5.0 billion infrastructure financing
  gap will require a new institutional arrangement
  created for the purpose of helping to meet more
  fully Northeast Asias 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 Asias
  projected infrastructure financing gap.

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• 3. Role and Features of the new NEADB (Contd)
• 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

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• 3. Role and Features of the new NEADB (Contd)
• 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 intl 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

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• 3. Role and Features of the new NEADB (Contd)
• 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,

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• 3. Role and Features of the new NEADB (Contd)
• Financial structure of the NEADB would
• The representatives of the founding member
  countries would decide at pre-inaugural meetings
  (contd)
• 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
  Banks strength in foreign capital markets

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• 3. Role and Features of the new NEADB (Contd)
• Financial structure of the NEADB would
• For illustrative purposes, a figure of 40billion
  might be considered a reasonable first
  approximation for the Banks authorized capital.
  This capitalization would be evidenced by 400,000
  shares of equity shares valued at 100,000 each.
• A substantial block of the Banks total shares,
  and the associated board membership and voting
  power, would presumably be taken up by
  subscriptions by the Banks 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.

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• 3. Role and Features of the new NEADB (Contd)
• 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 countrys 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.

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• 3. Role and Features of the new NEADB (Contd)
• Financial structure of the NEADB would
• The balance of each countrys 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 Banks bonds as the ultimate
  security for investments.

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• 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
• 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
• Funding and organizing a new sub-regional bank
  would be very expensive and
• A Special Fund set up in the ADB and IBRD would
  serve the same purpose as the new Bank

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• 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 Banks 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 regions annual requirement
  (7.5billion)

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• A rebuttal to each objections (contd)
• 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 Banks
  possible capital structure are presented in the
  paper. Depending on the Banks 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
  Banks founding member countries.

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• A rebuttal to each objections (contd)
• 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.

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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 Asias
  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

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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)

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

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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!