Catalog

	Table of Contents
p. 3 of 32 BACK | NEXT I. Introduction II. Assessment of Past Performance A. Country and Sector Coverage B. Impact of Private Sector Operations C. Financial Performance D. Risk Exposure E. Portfolio Administration F. Lessons Learned III. Rationale and Role IV. Operational Strategy V. Operational Improvements VI. Resource Requirements VII. Conclusions and Recommendations

Private Sector Operations: Strategic Directions and Review : II. Assessment of Past Performance

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A. Country and Sector Coverage

4. Since its creation in 1995, PSG has successfully implemented the 1995 PSO strategy to support investment in projects that met country-specific development needs in the two priority sectors (infrastructure and financial sector). Of the 46 new projects approved between 1995 and 2000, 15 were infrastructure projects and 29 were financial intermediaries, including funds.⁵

These projects have supported ADB's country-specific operational strategies for infrastructure and financial sector development; leveraged ADB's financial resources by catalyzing funding commitments from other investors and lenders; complemented, not substituted for, commercial sources of finance; provided a model for private sector participation in delivery of basic services; and/or enabled ADB to add value and influence project design to improve the development impact.

1. Country Coverage

5. Project approvals in PSO have been concentrated in DMCs with environments receptive to private investment. These DMCs have generally large markets that offer attractive opportunities for business. Thus, while ADB has approved $1.9 billion of funding commitments for some 146 private sector projects⁶ in 14 DMCs since PSO started in 1983, over 60 percent of the total amount approved has been for projects in six DMCs: Bangladesh, People’s Republic of China (PRC), India, Indonesia, Pakistan, and Philippines.⁷ Also, the 21 regional projects approved so far—mostly funds and accounting for about 21 percent of all approvals—have assisted subprojects that are mainly in four DMCs among the same group. Evidently, most of the existing client DMCs are being served intermittently. During 1995-2000, PSG sought to extend the country reach of PSO but, due to difficulties in the environment and resource constraints, private sector investments in only three “new” client countries—Bhutan, Samoa, and Viet Nam—were added, and these constituted only about 3 percent of approvals during the period. PSO assistance has yet to reach over 20 DMCs, mostly those in Central Asia and the Pacific.

2. Sector Priorities

6. Up to the early 1990s, ADB was assisting private sector projects in a wide range of sectors (including manufacturing, agriculture mining, infrastructure, and financial sector) with no specific prioritization. The 1995 PSO strategy, however, sharpened the sector focus by giving priority to infrastructure and financial sector projects and downplaying projects in manufacturing, agriculture and mining sectors. ADB realized that, with constrained resources, it had limited ability to assess manufacturing, agriculture and mining projects and modest capability to add value to them. Most of its manufacturing projects turned out to be problematic. Thus, ADB repositioned its PSO in favor of infrastructure projects, where PSG has concentrated expertise in project finance, supplemented by organization-wide expertise in infrastructure development. The 1995 strategy also continued to give priority to financial sector projects (including capital market institutions, financial intermediaries and investment funds), which had been important planks in PSO from the start. With the sharpening of sector focus, ADB was able to direct its PSO to the challenges faced by DMCs in infrastructure and capital market development, challenges that must be overcome to achieve sustained growth. During 1995-2000, the share of infrastructure in the total PSO portfolio⁸ increased substantially from 27 percent to 47 percent.

This increase was matched by a decline in the share of manufacturing and other sectors from 27 percent to 16 percent.⁹

7. Infrastructure. PSG’s infrastructure projects approved during the past six years reflected the 1995 strategic priority to help address infrastructure bottlenecks in DMCs. The catalytic effect and value added of ADB's direct participation in these projects proved essential in attracting commitments from other foreign lenders and investors. Most of the projects were pioneering public-private partnerships that were expected to deliver significant development impacts and demonstrate the private sector’s ability to help meet supply shortages in infrastructure services. Among these were power generating plants of various fuel types, bulk water treatment plants, a water distribution concession, a rural cellular telephone network, a container port, an international airport terminal, and a major toll road, typically in countries or sectors where no major build-operate-transfer projects had been executed previously. Hands-on experience across a broad range of subsectors in infrastructure, especially where ADB has been involved at the design phase of a project, is a strength that has made ADB a reliable partner for project sponsors and lenders. 8. Financial Sector and Capital Markets. The financial projects approved during 1995- 2000, in particular, dovetailed with the relevant country strategies and programs, and complemented ADB’s public sector operations in the concerned DMCs. For instance, ADB invested in a newly established commercial bank with a nationwide presence in the PRC, to complement a government-guaranteed loan from ADB's public sector operations. This first foreign investment in a PRC state-owned commercial bank supported the broadening of the bank’s ownership base and its strategic plan to transform itself into a shareholding bank grounded on “best practice” principles. Another important PSG intervention was a loan without government guarantee to a development bank in Sri Lanka. This ADB loan was combined with a syndicated loan that gave the bank funding access to international commercial banks and provided resources for onlending to small- and medium-sized enterprises (SMEs). The syndicated loan was covered by a partial credit guarantee provided by ADB under its public sector operations against a counterguarantee from the Government of Sri Lanka.

9. Investment Funds. As part of its focus on the financial sector and capital markets, PSG has promoted various types of investment funds to help transfer scarce, long-term risk capital from capital-rich countries to the DMCs and, to some extent, mobilize domestic capital for financing private investment. Such funds help stimulate and broaden emerging securities markets and function as proxies for overseas investors wanting to invest in DMC portfolios. PSG has supported regional funds that tap huge amounts of investible savings from pension funds, insurance companies, and other institutional investors in developed countries. PSG has also found investment funds to be a flexible vehicle for mobilizing resources and for reaching out to relatively small private sector projects that would not be cost effective to assist directly. Investment funds have been used to introduce DMCs to new instruments, such as “mezzanine” capital, to facilitate infrastructure development.

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