Catalog

	Table of Contents
p. 19 of 32 BACK | NEXT I. Introduction II. Assessment of Past Performance III. Rationale and Role IV. Operational Strategy V. Operational Improvements A. Single Project Exposure Limit B. Providing for Smaller Interventions C. Conflicts of Interest D. Screening of Projects E. Streamlining of Business Processes F. Strengthened Risk Management G. Strengthened Management of Nonperforming Investments H. Private Sector Operations at Resident Missions I. Enhancing Technical Assistance for Private Sector Operations J. Active Outreach Marketing K. Establishment of a Financial Reporting System VI. Resource Requirements VII. Conclusions and Recommendations

Private Sector Operations: Strategic Directions and Review : V. Operational Improvements

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B. Providing for Smaller Interventions

77. The most important constraints faced by ADB in smaller direct interventions 55 (e.g., those in support of pilot projects, projects in smaller countries, or small-scale infrastructure projects) are staff resources and processing procedures, which remain inflexible regardless of the size of investment involved. PSG cannot realistically expand its reach to small projects or small DMCs with its current staffing. The high transaction costs and heavy use of staff time for completing due diligence and preparing documents for Board approval, generally mean it is more efficient for PSG’s relatively small staff to focus on larger transactions, which typically are more visible and have greater demonstrational and catalytic impacts than do smaller ones. Small projects, moreover, are often more staff-intensive than larger ones, being in small countries or new sectors where ADB may have little prior experience, or having sponsors who often do not have the benefit of professional advice. Simplified PSO-oriented project processing procedures, different from those applied to ADB's public sector projects, have to be developed to enable efficient consideration of small projects and to match the private sector’s time frames (paras. 87-90).⁵⁶ Alternatively, additional resources would allow PSG to address this mandate.

78. PSG is nonetheless already considering smaller investments that meet the PSD Strategy objectives, but has been able to do so only through partnerships within and outside ADB. For instance, PSG collaborates with other projects departments in ADB such that a small PSO investment is processed as a component or adjunct of a larger public sector project. PSG also works with ADB’s development partners (e.g., other IFIs) and leverages off their resources and skills in performing due diligence work.

79. A modality for smaller interventions in the infrastructure sector, used by EBRD, is the so-called “multiproject” facility, which ADB could also adopt. In this form of cooperation, ADB would combine its risk sharing and mitigation role with the experience, know-how, and risk-taking ability of a sponsor—usually a well-established company (e.g., an international water developer or operator) that has a strategic commitment to the target countries. The sponsor’s role is to assume the responsibility for development, financing, and management of each individual project to be done under the facility. ADB, in turn, would provide an agreed share of cofinancing, normally in the form of loans. ADB’s value added to the facility would come initially from the influence ADB can exert over the sponsor’s choice of target market. Value added would also derive from ADB being able to enhance the development impact of the individual projects, as by imposing minimum standards of environmental compliance and introducing better corporate governance (para. 86). The multiproject facility is similar to an investment fund where the fund manager is a strategic investor as well and therefore has a significant financial stake in the outcome of investments made.

80. Multiproject facilities would normally involve the following elements: (i) a commitment by ADB to finance a defined program of investments embodied in a framework agreement that would support PSG’s target sectors and countries; (ii) reliance on the sponsor’s appraisal of individual projects and on its due diligence; (iii) full recourse to the sponsor in the event of loss due to certain events within its control as developer and manager of the projects or covered by its due diligence; and (iv) standard documentation in the form of sponsor support provisions embodied in the framework agreement. As with fund managers, the degree of reliance on the sponsors makes their selection particularly important. It is necessary that the sponsors have operational experience in the target countries, follow sound project appraisal and due diligence procedures, and have a good track record in the business lines proposed.

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