Move is on to spur Asian development projects with petrodollars
Almost every day, private bankers knock on the doors of the Asian Development Bank (ADB) seeking joint investment ventures to recycle petrodollars. But the ADB and commercial financers usually go their separate ways.
High hopes that the world's lopsided oil wealth could be redistributed through joint loans of commercial and development banks have largely remained just that -- hope.
Still, said Taroichi Yoshida, president of the bank, at its annual meeting this spring in Hawaii, "The Bank will continue its effort to increase co-financing and explore all appropriate opportunities for this purpose."
Such co-financing, as it is called, became a popular idea in the mid-1970s. Private banks -- with their vaults loaded with the oil nation's profits -- have escalated their lending to developing nations. They overtook official aid spending in Asia, and now account for over half the region's capital inflow.
ADB's first two co-financed project were in 1976: a Singapore water project for $5 million with Bank of America, and an $8 million National Power Corporation project in the Philippines with California First Bank.
But the next one did not come until 1980, which involved an $11 million pumped water storage project in South Korea in conjunction with the London branch of the French-based Society General Bank.
By using its capital to "lever" more capital, ADB hopes to enlarge projects, serve as a catalyst for development, and fulfill its charter of increasing capital flow of Asia.
It believes it can offer private banks, especially new ones in Asia, some security in lending by closely monitoring both a country's economy and a project being supported.
The key to attracting private banks into co-financing agreements has been an "optional crossfault" clause. This allows ADB to accelerate repayments, or cancel or suspend its part of the loan, should the borrowing country default on the private-bank loan. The bank also provides a service in acting as collection agent.
But so far, most co-financing by multilateral or bilateral agencies has been with other development organizations. ADB's major co-financers, involving about especially Saudi Arabia.
Suggestions that Saudi Arabia be invited as a donor member of ADB have been rebuffed by its officials.
"Letting Saudi Arabia become a member would cause many problems," a top ADB official said. "The Middle East is not very stable. And they may attach religious strings to their money." In Pakistan, for instance, the Saudis co-financed a $152 million power plant with the ADB to help anther Muslin nation. Other Muslim nations are being co-financed also, most through the OPEC Special Fund.
Co-financing's pitfalls are many, including a lack of strict definition. Joint lending is sometimes quite separate if, for instance, donor countries "tie" aid to purchases of their exports for a project, or if an Arab nation blacklists Israeli contractors.
The small-scale ADB now co-finances 40 percent of its lending, while the World Bank gets by with 8 percent. Commercial bank, in like measure, have joined together in a few cases to provide poor nations with "jumbo loans" to restructure debt loads increasing under the strain of higher oil import bills.
One reason that co-financing is not catching on in Asia is that most development programs are small rural projects rather than large industrialization. The World Bank, for instance, has only 12 percent of its co-financing in the region. Also, banks prefer projects with quick completion and profit, whereas development banks fund long-term infrastructure.
But the main barrier appears to be lack of interest by developing countries themselves. "The countries think they can negotiate a better deal than the ADB, " one official said.
Pipelines of low-interest development loans and high-interest commercial lending are both very available. No shortage in either has yet forced much co-financing.
"Recycling petrodollars is a problem here, and it will get worse," says S. Stanley Katz, ADB's executive vice-president. Still, last year the ADB made a modest borrowing of $52 million from the Saudi Arabian Monetary Authority.
In Latin America, where co-financing caught on fast, countries accept 30 percent debt-service ratios, unlike Asia's 20 percent norm. The high debt scares many lenders, making co-financing look good.
One proposal, suggested by World Bank president A. W. Clausen, would allow a country to pay back the commercial loan first, then begin payments on development loans. But in essence, that just means the development bank takes on more financial burden.
If any hope still exists for co-financing with private banks, ADB looks to its new emphasis on energy development, a more commercia lly interesting direction.