While ADB approved its first formal private sector strategy paper in 1985, growth in private sector operations within ADB throughout the 1990s was gradual, and it remained modest in size, with limited internal and external market recognition. Following the Asian financial crisis, the need to mobilize private capital to help build the foundation for economic recovery became more apparent. In 2000, ADB prepared the Private Sector Development Strategy. Under that strategy, promotion of the private sector was made one of ADB's three crosscutting themes in the Long Term Strategic Framework for 2001–2015 approved in 2001.

This evaluation study reviews trends in foreign direct investment, noting the rapid growth in private capital flows in developing member countries, followed by a severe contraction following the Asian financial crisis. A literature review presents the findings of a wide range of studies that confirm the strong links between poverty reduction, economic growth, and private sector participation. Evidence indicates that increasingly, clients are seeking ADB's knowledge services in areas such as best practice, and most importantly political risk mitigation.

The study reviews ADB's strategic response to these developments and the results detailed in previous country, sector, and project evaluations, as well as three country case studies conducted for India, Philippines, and Viet Nam.

The scope and scale of ADB's private sector operations are reviewed. The study then formally evaluates ADB's private sector development activities and operations using the following criteria:

• development impact
  
• ADB's investment profitability
  
• ADB's effectiveness and
  
• ADB's additionality.

The overall result was a rating of satisfactory, with performance being undermined by weaknesses in activities to strengthen the enabling environment for private sector and operational effectiveness processing and administering transactions.

Summary of Key Issues and Findings

• Despite strong growth in the size of ADB's private sector operations portfolio, many developing member countries are complaining that ADB is not responding adequately to this demand.
• In most countries in the Asia Pacific region, the private sector's role in financing, managing, and delivering services has increased, particularly in sectors such as finance, energy, transport, and water utilities.
• Governments are shifting their operational focus to policy and regulatory functions. This trend requires changes in the scope of ADB's operations, as well as greater synergy between public and private sector operations.
• The role of private sector operations within the context of ADB's overall operations is expected to grow substantially over the next 5 years. This would require changes in the roles, products, responsibilities, and organization structure; the level and type of resources; and ADB's organizational structure related to private sector operations.

Recommendations

The study notes it is the first of four OED studies that will consider:

• investments in private equity funds, starting in 2007;
  
• private infrastructure portfolio in 2008; and
  
• the effectiveness of strategies for developing an enabling environment for the private sector in 2009.

Within this context, this evaluation found that

• at the corporate level, ADB needs to look at the organizational effectiveness to ensure optimal efficiency in its business procedures and delivery of services.
• at the departmental level, ADB needs to develop country level business plans within the framework of country partnership strategy for its private sector operations and medium term strategic plans.
• there are opportunities to further harmonize operations with other similar multilateral development agencies in developing/fine-tuning guidelines and practices for preparing country and departmental level business plans and implementing environment and social safeguard policies and procedures.
• ADB's aspirations for expanded private sector operations should be accompanied by the resources required to achieve this goal.