Catalog

	Table of Contents
p. 23 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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F. Strengthened Risk Management

91. ADB’s private sector investments are not backed by government guarantees. Thus, these investments are exposed to the full range of commercial and political risks. As such, managing risk is a key priority for PSO and further strengthening the credit culture within PSG will continue to be an important objective. Developmental considerations in PSO are necessary but not sufficient: credit must also play a key role in the selection, analysis, approval, and administration of projects. By ensuring quality standards in credit risk management, PSG can avoid adverse impacts from PSO on ADB’s triple-A credit rating.

92. A number of initiatives are under way to strengthen and improve the risk management function. For example, a PSG credit committee is beginning to review projects at key stages of the due diligence process. A credit and risk management manual is being prepared to document the policies and procedures for credit review of new projects, portfolio management, and resolution of problem projects. PSG is also improving its information management and internal control systems to facilitate decision-making. Project supervision is being enhanced through more frequent visits to projects by the assigned officers from PSG, and by regular attendance by ADB-nominated directors and representatives at board meetings of investee companies. While the RMs have also played a critical role in project supervision hitherto, sound risk management in the context of a portfolio involving over $1 billion in PSO exposure means there is a need to install or maintain PSO-dedicated professional staff responsible to PSG, in the RMs in DMCs to which ADB has a large or growing PSO exposure (e.g., PRC, India, Indonesia, and Pakistan). Risk management and the supervision of projects will continue to have significant implications on human and financial resources allocated for PSO.

93. Good corporate governance helps reduce risk (e.g., through timely and accurate financial disclosure) and brings with it financial benefits (e.g., reduced cost of capital) for the concerned company. With these advantages in mind, PSG now assesses all ongoing projects on the state of their corporate governance, and recommends remedial action where appropriate. All new projects are subjected to a similar corporate governance check.⁶³ To sustain this, PSG has continued to enhance its knowledge and skills on corporate governance. In addition, PSG has tapped into ADB’s staff network on corporate governance, as well as into other relevant centers of knowledge.

94. Part of risk management is proactive management of the portfolio, including the timely divestment of equity holdings when ADB has fulfilled its developmental role. In addition, ADB can encourage early repayment of its direct loans by having them refinanced with domestic borrowings or bond issues, thereby allowing the market to assume the financing of a project when construction is completed and commercial operations are profitable. It may also be possible to sell participations in ADB’s direct loans, without recourse, while keeping ADB as the lender of record. Proactive portfolio management will enable PSG to adjust its risk exposure profile and promote more efficient turnover of capital in order to assist new projects.

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