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

Private Sector Operations: Strategic Directions and Review

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VII. Conclusions and Recommendations

114. The development of Asian economies hitherto has been driven to a large extent by the private sector, both domestic and foreign. In the transitional economies where private investment played virtually no role in the 1980s, the share of the private sector in fixed investments has grown significantly during the 1990s. While the recent financial crisis exposed certain weaknesses in the performance of the private sector and in the government’s regulatory function, the recovery and further development of the region will continue to be driven by private sector investment.

115. ADB will continue to provide direct assistance to the private sector and focus primarily on its existing strengths in PSO, particularly in areas where it enjoys a comparative advantage—in the infrastructure sector and capital markets. In response to the changing needs of DMCs, new areas, such as social infrastructure and ICT, will be explored through pilot projects. ADB will build on its accumulated country experience related to PSO, continuing to operate in the middle-tier and larger DMCs where it has been most active in the past while extending the reach to the transition economies and smaller countries. A more regular involvement in all DMCs is the long-run goal for PSO.

116. ADB will also enhance its PSO focus on development impact through the upgraded screening of private sector projects. The impact of PSO is expected to be enhanced by extending country and sector reach, piloting innovative projects, utilizing different financial instruments, building synergy, gaining knowledge, and leveraging resources through strategic alliances, particularly with other IFIs. Risk management will continue to be accorded the highest priority in PSO.

117. In addition to development impact, ADB is expected to generate sufficient resources in PSO to make these operations self-sustaining. A financial reporting system will be established to track the financial performance of PSO. This system will also be useful for the risk assessment of the PSO portfolio, which is needed in developing objective criteria for determining the appropriate capital allocation between ADB’s public sector operations and PSO.

118. To meet the expanded mandate under the proposed PSO operational strategy, there is a need to allocate an appropriate level of staffing for PSO. This includes PSO-dedicated professional staff at resident missions in countries with ADB has a large and growing PSO exposure. In addition, TA funds have to be accessible for use in PSO to enable a more proactive role for ADB in the design of developmental private sector projects. The PSO approval process for new projects and for restructuring has to be streamlined, while ensuring credit quality and protection of ADB’s interest.

119. The Board is requested to endorse the general thrust of the updated PSO strategy as outlined above. In addition, Board approval is sought for the following specific recommendations:

1. adoption of an operational strategy for private sector operations with four main elements: (a) focusing primarily on existing strengths in infrastructure and capital markets; (b) extending country and sector reach and pursuing projects in new areas on a pilot basis; (c) making wider use of innovative financial instruments; and (d) building strategic alliances and partnerships with other development agencies (paras. 47-72);
2. allowing approvals in excess of the existing $1.5 billion capital allocation for private sector operations as an interim arrangement pending implementation of objective criteria for determining the appropriate capital allocation between public and private sector operations (paras. 106-107);
3. increase in the limit for single project exposure to the lesser of $75 million or 25 percent of project cost (paras. 74-76);
4. delegation to the President of approval authority for loan restructuring proposals where no additional ADB funding is involved and all other recovery alternatives are less advantageous to ADB, and Board approval on a no-objection basis for loan restructuring proposals which involve additional ADB funding (para. 97); and
5. delegation of authority to the President for approving the funding of costs and expenses related to investment recovery operations, up to a cumulative amount not to exceed $2 million (para. 98).

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