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Private Sector Development Strategy : The required internal changes

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Operational orientation, skills, and processes

For the strategy to be successful, ADB must make a commitment to change its operational orientation, its mix of staff skills, and its processes and procedures. Such internal change is at the heart of the strategy.

Operational orientation

In support of its primary objective, ADB must place poverty reduction as the centerpiece of all its operations. ADB as a whole must recognize the essential contribution of the private sector to pro-poor growth, which is needed to achieve sustained poverty reduction. With this recognition, ADB will need to institute a systematic process to ensure that public sector projects are designed to incorporate, to the extent possible, elements that promote a better business environment and/or provide appropriate scope for private sector participation in projects. In PSO, on the other hand, there will be a need to ensure that ADB pursues private sector projects with specific development impacts and/or demonstration effects.

Staff skills

The strategy will require new staff skills from PSD specialists (as distinguished from PSO investment officers). Such skills will constitute a core of intellectual capacity in ADB to address public policy issues related to private sector participation in development (similar to the approach used for social development and environment issues). These PSD staff will prepare working guidelines to implement the strategy and sensitize other staff to PSD issues through training and consultation. PSD specialists will help identify areas for public-private partnerships, lead dialogue with governments on PSD issues, review ADB projects for private sector potential, and review government policies vis-a-vis the private sector. Skills relating to legal aspects of PSD, e.g., regulation of privatized utilities, will also be required.

Processes and procedures

A country-specific PSD strategy should be made an integral part of the country operational strategy (COS) to ensure that development of the private sector is explicitly targeted in ADB’s programs for any given DMC. This operational integration should not be difficult as ADB's public and private operations are under the same charter, management, and institution. PSO should support the development goals of the COS. In this context, catalyzing private investments under PSO may be needed even in sectors that are not prioritized for public sector operations.¹³ The country assistance plan¹⁴ should, at the earliest stages, proactively consider private sector alternatives to, and/or commercial cofinancing of, prospective public sector projects or parts of these projects. Such private sector alternatives need not involve ADB support through PSO, but may be considered for direct ADB assistance only if they can contribute to pro-poor growth. The Inter-American Development Bank systematically asks why the private sector is not taking up some of the burden in a public sector project when designing, selecting, and processing projects.

PSD specialists, as well as PSO investment officers, will need to work as part of the now largely public sector country teams that are responsible for country-level strategies and programs. PSD specialists will provide advice on PSD from a public policy perspective, while PSO investment officers will represent the private sector view based on their hands-on experience with private sector projects. Additionally, PSO investment officers will be included on project teams on a case-by-case basis where their skills are required in processing infrastructure and other projects involving public-private partnerships and public sector projects that have potential for private sector participation. Country and sector specialists in the programs and projects departments may support the processing of private sector projects, but because of the nature of risks involved and potential conflict of interest (Box 4), the lead responsibility will be with PSO investment officers.

ADB-assisted private sector projects will be screened for their development impact and poverty reduction contribution. The success or failure of any given private sector project will, from ADB’s point of view, be evaluated on how well it meets the development impact areas identified at appraisal, in addition to its financial performance. The impact of ADB’s public sector operations on PSD should likewise be benchmarked and tracked in terms, for example, of a public sector loan's contribution to creating a policy and/or physical environment conducive to private investment or to generating investment opportunities for the private sector. Scorecards will be developed, based on the rudimentary illustrations in Appendix 3, with each impact area in the scorecards to have specifically defined criteria.

ADB will need to enhance and institutionalize partnerships between public sector operations staff and PSO staff to achieve synergy across the organization, while keeping in mind the possibility of conflict of interest (Box 4). Networking and sharing of professional expertise will be encouraged. Disincentives to close collaboration will be removed.

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