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Private Sector Development Strategy : The need for a strategy

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Why a comprehensive strategy

Support for PSD is not new to ADB (Appendix 1). ADB's first loan was a line of credit to a Thai development finance institution for onlending to small and medium-sized enterprises (SMEs) in the private sector. The indirect financing of private enterprises through government-guaranteed loans to development finance institutions has increased over the years and has been an important mode of ADB assistance for PSD. In addition, other modes of ADB public sector assistance have contributed significantly to PSD. In most DMCs, policy dialogue, technical assistance (TA), and project and program loans have been used to help create a conducive environment for the private sector. Such support for PSD has covered a range of sectors: finance and capital markets, agriculture, industry, trade, and infrastructure. In the 1980s, ADB added direct private sector operations (PSO) to provide direct assistance to private enterprises through equity investments² and loans without government guarantees.³

Two lessons have been learned from the direct and indirect financing of private enterprises. First, the right policy environment is vital for the long-term viability of these businesses. While ADB has assisted DMCs in developing an enabling environment for the private sector, the Asian financial crisis has called for more comprehensive DMC efforts with ADB support. Second, ADB assistance, if combined through the public and private sector windows to address development challenges, can provide synergistic solutions resulting in greater benefits for the host DMC. Such a combination requires public sector assistance to pay more systematic attention to private sector interests and concerns, and private sector assistance to promote development impacts in their activities.

These lessons indicate the need for ADB to articulate a comprehensive, bankwide PSD strategy. ADB’s existing private sector strategy focuses mainly on its direct nongovernment-guaranteed assistance through PSO. The strategy proposed in this paper goes beyond that and addresses the more complex challenge of how ADB's public and private sector operations can both better promote private sector-led growth. This strategy articulates, for the first time, a systematic and coherent framework for ADB’s PSD efforts. However, detailed discussion of PSO-specific operational issues (e.g., approval processes, prudential limits, local currency financing, and TA for PSO) are not included in this paper. These issues will be addressed in a separate Board paper.

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