Catalog

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p. 30 of 32 BACK | NEXT I. Introduction II. Assessment of Past Performance III. Rationale and Role IV. Operational Strategy V. Operational Improvements VI. Resource Requirements A. Capital Resources B. Human Resources VII. Conclusions and Recommendations

Private Sector Operations: Strategic Directions and Review : VI. Resource Requirements

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A. Capital Resources

106. Because PSO investments are not backed by sovereign guarantees, they are generally regarded as riskier than public sector loans and as such would require relatively larger equity capital backing compared with public sector operations. A review of ADB’s financial resources indicated that ADB currently has scarce equity capital resources. This was the very reason why ADB increased its loan charges in 2000: to improve its equity capital base relative to the risk arising from the OCR loan portfolio. Given the competing demands on the use of its scarce equity capital resources, ADB needs to develop objective criteria for determining the appropriate capital allocation between PSO and public sector operations.

107. In developing such capital allocation criteria, two inputs related to PSO are essential: (i) a risk assessment of the PSO portfolio for the purpose of estimating unexpected losses that would require equity capital backing (similar to that for the public sector portfolio); and (ii) a financial reporting system for the purpose of measuring PSO profitability and sustainability in a transparent basis. ADB intends to undertake the risk assessment and develop the financial reporting system (as envisaged in para. 104) over the next two years. The results of these activities will form part of the basis for formulating the capital allocation criteria to be used by ADB.

108. Until such time that the new capital allocation criteria become operational, ADB needs a pragmatic approach to enabling continued PSO. The proposed interim arrangement is to allow PSO approvals in excess of the existing $1.5 billion PSO capital allocation.⁷⁵ Under this arrangement, ADB intends to pursue a gradual buildup in PSO volume over the medium term, not a rapid scaling up that cannot be supported by resource and prudential considerations. Based on past trends and extrapolating from recent PSO activity levels, ADB anticipates a PSO approval level of $200-400 million a year, or about $600 million over the next two years— approximately 7 percent⁷⁶ of the remaining OCR headroom of $9.2 billion.⁷⁷

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