In Conversation with Andrew Sheng: On Financing for Development

Q: Mr. Sheng, with your academic hat, what do you think of the suggestion that Indonesia needs an Indonesian development bank? Is that the kind of financial development that we need for financing development?

I think it’s a great idea. We’ve now seen the revival of development banks worldwide. The reason is that the world needs funding for infrastructure. Let me say that I thought that Indonesia’s Finance Minister, Bapak Bambang Brodjonegoro has given the clearest, the most realist and pragmatic evaluation of Public-Private Partnerships (PPP) for infrastructure. The issue is not about money. As he said, the issue is about land acquisition and the legal aspects, but actually it (the governance issue) is at the heart of finance, (not the actual funding).

What (then) is the future of Asia’s finance? Asia’s future is bright, but it cannot be debt driven. It has to be about equity and equity is about long-term, risk-sharing and ownership. Similarly, PPP is about investment in the future.

What is the present financial model all about? Debt, more debt and printing of money. (This model) is unsustainable and too short-term, so we need to go back (and redefine) inclusion (and how we look at inclusive growth). Inclusion is about ownership. The poor, the different genders, everybody of diversity must have a share in the future prosperity.

When we have that equity, (that inclusion), it is about capital. Capital is about faith. (IMF Managing Director Christine Lagarde talks about Four “I”s: Innovation, Integration, Infrastructure & Inclusiveness and) to add an extra “I” to this brilliant encapsulation of all this, the last “I” is incentives. If we believe in the future, and we Asians believe in our future, the future is in our own hands. The IMF can help, the rest of the world can help, but ultimately we have to decide what shape our future will be. That means we must have faith and equity is about faith.

When I put my own money in a project, I have to have the faith that I have a stake in it. That stake is not about (just benefitting) the private sector, in terms of the company that implements the project. Bapak Bambang said very clearly, what about the squatters, the people who used to own the land? They must have a stake in its future also. How do we build this?

The old model is saying, “I lend you money, and if you cannot pay, this is a Greek problem that you must pay.” However, it is not my fault that I got into trouble, not completely. If you take away my land for developing this project, of course I benefit (somewhat) from it, but for centuries my family has lived in this land, so there must be some stake in this future

In my view, the model for Asia is to develop new institutional structures, where the development of infrastructures enables not just the government, but also the people and the project implementers to have a stake in its success. There must be equity, because when you borrow too much, the project is fragile. What is the biggest innovation in Asian project finance? It is the sukuk bond. The sukuk is an Islamic finance bond. The sukuk is not about debt, it is about equity, risk-sharing and if you actually finance this long-term with people understanding that they have a stake in the future, everybody wins from this.

Q: How do we make sure that we have the right kind of investors, the right kind of equity? For long time foreign investors have been thought of as very important to Asia’s development, bringing in FDI. Is that still one of our growth models, one of the formulas that we have?

I’m glad that you raised this point about financial deepening. Let’s think about it logically. If you drill deeper and deeper into the Earth, do you solve the world’s problems? This is (just about) not deepening, it is (also) widening. Finance needs not only depth, but breadth – namely, widening inclusion.

What we have done in finance —we are talking about financial deepening – is to drill many holes into the Earth until (these holes make the) whole system is fragile. What is inclusion? Inclusion is about widening. It means that it is not I that prospers alone, but you prosper also. My prosperity is tied up with your prosperity. Inclusion and integration is about sharing.

If we have confidence in Asia’s future, what does that mean? All the numbers show that Asia is a surplus saver. The so-called financial deepening was: I take Asia’s savings, put it in Wall Street and it comes back as foreign direct investment (FDI). Why should that be the case? Why can’t we have confidence in our own future? Our savings should go into our next generation, our young, natural resources, new industries and infrastructure. Hence financial deepening is not the old model of just drilling deeper and deeper into debt. It is about equity-based, sharing and inclusion.

It is about (putting money into soft) infrastructure, not just the hard infrastructure. What Asia has is plenty of hard infrastructure and maybe not enough soft infrastructure such as the legal basis, project management knowledge etc. All these are what we now recognize as a systemic whole. We cannot think in compartments, we should not think in partial silos. That is the old theory. What we now realize is that we all live in a system that is very fragile, that we all in live in glass houses and throwing stones at each other will break this. It is now time to understand that we all have a stake in our future and therefore we must work together to get to a brighter Future of Asian Finance.

This interview was conducted by Channel NewsAsia’s Lin Xueliang and edited for web publication.

The views expressed in this article are the interviewee’s own and do not necessarily reflect Asia Global Institute’s editorial policy.