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Annual Report 2002 : Operational Priorities and Performance : Thematic priorities
Private sector developmentDMCs received $15.6 billion in official flows and $89.4 billion in private flows in 2000. These figures underline the importance of the private sector in development and the resulting economic growth in Asia. Support for private sector development is an integral component of ADB’s Poverty Reduction Strategy, and private sector development as an engine of growth is a pillar of ADB’s LTSF for poverty reduction. Mobilizing the resources required to achieve economic growth necessary for poverty reduction—including providing infrastructure, social services, and employment—needs the active participation of the private sector. Continued budgetary pressures increasingly lead DMCs to look for private sector investments to stimulate growth and create jobs. Public involvement in the productive sectors is often not the most effective use of scarce funds, particularly if done at the expense of the social sectors where these funds are truly needed. Private investment and management in properly regulated infrastructure and sustainable social services projects can relieve pressure on public budgets and enable the government to redirect more resources to social spending. Consequently, governments need to shift from playing the role of an owner/producer to becoming a facilitator/regulator to ensure markets work and protect the public interests. ADB is committed to expanding and facilitating the role of the private sector in its DMCs. With its capacity for both public and private sector operations, ADB is uniquely positioned to effectively promote and foster private sector-led growth. ADB assistance, combined through the public and private sector windows to address private sector development, can deliver synergistic solutions to problems that impede private sector-led growth in DMCs. ADB has developed two complementary strategies in support of private sector development: the Private Sector Development (PSD) Strategy, approved in March 2000, and the Private Sector Operations: Strategic Directions and Review (PSO Strategy), approved in September 2001 (see boxes below). The PSD Strategy represents a systematic and coherent framework within which ADB seeks to promote the private sector to support growth and reduce poverty. This framework provides broad strategic direction for both public and private sector operations in terms of major strategic thrusts and priority areas for private sector development. The PSO Strategy is an operational framework for providing direct financial assistance to the private sector in the context of the broader ADB strategy for private sector development. The PSD Strategy guides ADB’s private sector development activities across a region where the stage and status of private sector development differ widely among DMCs. The actions proposed in the Strategy have to be tailored at the country level to meet the diverse conditions and changing needs of individual DMCs and to maximize their contribution to growth and poverty reduction. In pursuing the goals of the PSD Strategy, ADB conducts private sector assessments to identify constraints to, and opportunities for, private sector development in each DMC and addresses these through strategically planned private sector development operations. The assessments and priority operations identified therein serve as inputs to ADB’s country-specific strategies and programs, which are being formulated within the framework of the PSD Strategy. Through these programs, ADB assists DMCs in building and reinforcing the confidence of investors and commercial lenders. Strengthening the Role of the Private Sector Private Sector Development StrategyDevelopment of a strong and dynamic private sector is essential to long-term economic growth, a necessary condition for sustainable poverty reduction. ADB’s Private Sector Development (PSD) Strategy (approved March 2000) aims at strengthening the role of the private sector in Asia and the Pacific by addressing the complex challenge of how ADB’s public and private sector operations can better promote private sector-led growth. 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. The PSD Strategy has three mutually reinforcing strategic thrusts: creating enabling conditions, generating business opportunities, and catalyzing private investment. Creating enabling conditions: The right policy environment is critical for the long-term viability of the private sector. One of ADB’s strengths lies in conducting policy dialogue with governments on needed reforms. Under the PSD Strategy, the reform agenda seeks to achieve a stable macroeconomic environment; investment, trade, and price liberalization; reduced barriers to competition; well-functioning financial and capital markets; flexible labor and land markets; appropriate physical, social, and technological infrastructure; equitable tax systems; and legal and judicial systems that protect property rights, enforce contracts, and provide for dispute resolution. Generating business opportunities: Under the PSD Strategy, ADB takes deliberate steps to ensure that, where appropriate in its public sector projects, business opportunities are generated for the private sector, particularly for the domestic private sector. ADB’s public sector operations can be formulated to provide specific opportunities in which the private sector can participate. Such opportunities may include model private sector projects designed to include poverty reduction impacts. Catalyzing private investments: ADB provides direct financial assistance to private sector projects. While ADB’s participation is usually limited, it leverages a large amount of funds from commercial sources to finance these projects. As a multilateral development organization, ADB does not finance private sector projects based solely on their financial viability. Projects must also have clear development impacts and/or demonstration effects that go beyond the benefits captured in the financial rate of return. The three strategic thrusts of the PSD Strategy are pursued in four priority operational areas: governance, financial intermediation, public-private partnerships, and regional cooperation. Catalyzing Private Investments Private Sector Operations: Strategic Directions and ReviewThe third thrust of ADB’s Private Sector Development (PSD) Strategy (see Box above) is to catalyze private investments through direct financing, credit enhancements, and risk mitigation instruments. ADB performs this function through its Private Sector Operations Department. ADB approved the Private Sector Operations: Strategic Directions and Review (PSO Strategy) in September 2001 to enhance the impact of such operations. ADB’s strategic objective for private sector operations is to increase the flow of capital into and within its developing member countries (DMCs) and, more importantly, to broaden the flow into more countries and sectors. The PSO strategic framework demands a sharper focus on development impact, and emphasizes private sector participation in infrastructure and capital market development, gradual broadening of the country and sector reach, wider use of credit enhancement and other instruments, and strategic alliances with other development agencies. In its PSO, ADB builds on its existing strengths in infrastructure and capital market development and seeks to assist private sector projects in these two areas in more DMCs. Priorities include infrastructure projects in the energy, water, telecommunications, and transport sectors. In capital markets, ADB emphasizes investments in key market institutions and investment funds that can serve as vehicles for mobilizing resources to finance small-scale infrastructure and small-and medium-sized enterprises. ADB also intends to gradually extend its reach to new sectors, such as education and health care. This is being done selectively on a pilot basis. ADB provides direct funding assistance through loans and equity investments. In addition, it uses its political risk guarantee and partial credit guarantee instruments to enhance transactions, thus attracting foreign commercial lenders to projects in the DMCs or domestic banks and institutions to stretch the maturities of their local currency loans. ADB has long enjoyed constructive partnerships with other international financial institutions and development agencies. Such strategic alliances are being intensified to facilitate the knowledge and risk sharing needed to make challenging projects bankable. Joint support by multiple agencies for a given project also gives a strong signal of confidence in the overall country environment and paves the way for further private capital. Investment officers in the resident missions enhance ADB’s private sector activities in-country and help facilitate processing of new projects. More importantly, in-country presence allows closer project administration and risk management, which are critical for sustained operations. ADB’s operations in support of the PSD Strategy range from public to private sector operations and comprise trade and investment facilitation, including customs harmonization to foster cross-border trade; strengthening of the financial sector through financial sector reforms and capital market development programs; state-owned enterprise reforms, including governance and privatization programs; small-and medium-sized enterprise support; and public-private partnerships in infrastructure, particularly in the power, transport, water, and social sectors. ADB operates under the principle that DMCs must exercise leadership and ownership of their own development agenda and priorities by demonstrating initiative, commitment, and accountability. Country ownership and leadership in the PSD process require capacity building, as well as continued dialogue and consultation between ADB and key stakeholders. ADB facilitates such exchanges through policy dialogue, workshops, conferences, and training. The highly successful conference on infrastructure development—Private Solutions for the Poor: The Asian Perspective, held at ADB headquarters in Manila in October 2002—is an example (see Box below). In addition, ADB’s resident missions interact closely with governments, chambers of commerce, and the private sector to facilitate exchanges on PSD. Private Solutions for the Poor The ADB and Public-Private Infrastructure Advisory Facility (PPIAF) conference on infrastructure development—Private Solutions for the Poor: The Asian Perspective—in October 2002, facilitated discussions on methods for identifying, disseminating, and promoting best practices in pro-poor infrastructure projects; increasing private sector participation in financing, owning, constructing, operating, rehabilitating, maintaining, and managing pro-poor infrastructure activities; and strengthening pro-poor public-private infrastructure partnerships. The conference was attended by over 160 senior developing member country (DMC) decision makers, including representatives from government ministries and agencies involved in formulating and implementing policy on infrastructure reform; representatives of civil society, including nongovernment organizations working with low-income households and communities to improve infrastructure services delivery; multinational and regional private sector providers and financiers of infrastructure services; and funding agency representatives. For more on the conference, go to http://www.adb.org
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