Annual Report 2007

ADB believes that development and poverty reduction can be attained only with a vibrant, confident, and healthy private sector. In adopting the second medium-term strategy in 2006, ADB has placed the highest priority on catalyzing investment.

Beyond providing money, ADB assists host countries and private sector clients in a way that mitigates risks, facilitates regulatory dialogue, and provides technical expertise.

ADB’s Private Sector Operations Department (PSOD) directly assists developing member countries (DMCs) through projects with development impact, which may, however, have limited access to capital. PSOD participates in projects through nonsovereign loans (loans to the private and public sectors, including state-owned enterprises); equity investments; and credit enhancement products (including guarantees and B-loans, where ADB arranges a complete financing package for a project and thus encourages local and international commercial banks to participate). Entities seeking assistance from ADB for a private sector project benefit not only from financial assistance but also from the expertise and guidance of the ADB team.

Operations are directed mainly to the capital markets and financial sectors, and to the infrastructure sector. The regional operations departments began processing nonsovereign projects in 2007.

Nonsovereign operations grew continuously, with total new financing reaching a record $1.8 billion (Table 11) in 2007, 23% above the level for 2006. Growth was relatively uniform across various sectors. New debt financ-ing approvals grew 50% (from $575.0 million to $865.0 million) and guarantees trebled (from $124.8 million to $376.0 million). In the past 2 years, credit enhancement products such as guarantees and B-loans supplemented direct loan financing and equity investments. Because of this, the total nonsovereign financing approved in 2006 and 2007 equaled the financing approved in 1996–2005. The average size of projects processed by PSOD increased from $44.0 million for 9 projects in 2000 to $65.0 million for 27 projects in 2007. PSOD staff members grew from 38 in 2000 to 66 by the end of 2007.

PSOD operations were once again evenly divided between infrastructure and financial services, with new infrastructure financing at $900.0 million and finan-cial market financing at $846.0 million. Infrastructure financing went to the energy, transport, water and waste disposal, telecommunications, and other sectors where ADB participation has a clear development impact, with special priority given to renewable energy use and energy efficiency. For example, a 3.5 billion rupee loan was approved for a wind power project in India, and a $107.0 million financing program with credit guarantees will be used by commercial banks to fund energy-efficient projects in the People’s Republic of China. In the capital markets and financial sectors, priority was given to projects that strengthen and deepen the financial markets in DMCs, such as the development of the secondary markets for nonperform-ing assets, diversified payment rights securitization for banks and other forms of securitization finance, and small and medium-sized enterprise finance.

Nonsovereign operations have diversified geographically. At the end of 2007, nonsovereign projects were being administered in 20 DMCs (compared with only 13 a decade earlier), after the approval of the first private sector projects in Mongolia, Afghanistan, Lao People’s Democratic Republic, Maldives, Cambodia, and the Central Asian republics of Kazakhstan, Azerbaijan, and Georgia.

At the same time, the portfolio quality of private sector financing continued to improve, with impaired assets as a percentage of total nonsovereign-backed financing falling to 2% from 22% in 2000.

Coupled with the increase in financing, this trend underscores the success of ADB’s new strategy for and approach to nonsovereign operations.

UNDERLYING APPROACH

These successes reflect ADB’s strategy, which stresses the importance of private sector development and a close working relationship between ADB’s public and private sector operations groups. These two go hand in hand and are at the core of ADB’s relevance and strength. For example, the public sector operations group led the original privatization of a power utility company in Pakistan that made possible a successful competitive sale to the private sector. PSOD then provided a non-sovereign loan of $150 million to a cofinancing project with other development institutions and private sector banks, enabling the Karachi Electric Supply Corporation to upgrade its generation facilities and its transmission and distribution network, and to cut power losses, use cleaner technology, operate more efficiently, and produce economic benefits for the country.

Despite the current turmoil in the financial markets, the liquidity of the global capital markets has never been higher. This presents a major challenge for multilateral development banks. All were established to financially support development—a role that today is better played by the capital markets. To remain vital, multilateral development banks must reexamine and redefine their absolute and comparative advantages.

Public-private partnership is the core offering of ADB. This pioneering approach is fundamentally different from the traditional approach of multilateral development banks, with its continued emphasis on providing financial liquidity. ADB undertakes transactions in developing member countries where overall risks may be perceived as relatively high but where the commercial deal is compelling and highly developmental. In so doing, ADB can help the private sector (both project sponsors and cofinancing partners) concentrate on business issues rather than the wider risk environment.

Download this document [ PDF: 95kb | 4 pages ]

Nonsovereign operations grew continuously, with total new financing reaching a record $1.8 billion in 2007

Priority was given to projects that strengthen and deepen the financial markets in developing member countries

COFINANCING

As a matter of internal policy, PSOD directly funds no more than 25% of the total cost of any one project. In rare circumstances where small transactions are accepted for their high development impact, the department will directly support a higher percentage of the Priority was given to projects overall financing. PSOD’s efforts therefore require a close and collaborative relationship with the financial community, which is enhanced by the various guarantee and cofinancing products ADB offers, demand for which has increased substantially in the last 2 years.

PSOD cofinanced with ADB’s financial sector partners a total of 25 transactions, catalyzing $425.0 million of direct new money for developing member countries, which went to projects with an aggregate cost of $4.1 billion.

ADB can help the private sector concentrate on business rather than the wider risk environment