Private Sector Financing: FAQs
How does ADB help the private sector?
ADB supports private sector development in various ways:
It provides direct financial assistance by funding and supporting approved private enterprises, financial institutions, and private equity funds, as well as by mobilizing international capital for private companies.
It also provides indirect assistance by engaging governments in dialogues, especially in areas that pertain to regulatory frameworks and reform. Many financial institutions view ADB's influence as a factor that mitigates risk because governments are less likely to intervene capriciously when ADB is part of the transaction.
What are the advantages of working with ADB?
ADB's involvement in a project or transaction, whether through financing or in the form of guarantee support, gives the project or transaction an additional measure of credibility with host governments, private investors, and lenders. ADB's 4 decades of experience in the region have given it a wide network of government agencies and financial institutions. It also enjoys the support of 67 governments, providing it with access to many local agencies.
These factors bestow on ADB the advantages of both a private and a public institution. As such, it is able to
- provide risk mitigation to both its sponsors and host governments;
- initiate constructive dialogue with host governments in support of regulatory reforms and changes;
- foster sector knowledge;
- provide for longer loan maturities when warranted;
- promote transparency, corporate governance, and risk management;
- improve compliance with laws and regulations;
- support environmentally sound projects; and
- mobilize additional financing when needed.
How does ADB mobilize capital for private enterprises?
ADB designs financial solutions to manage investors' risks when investing in developing member countries (DMCs). Solutions may include a combination of private and official funding sources.
In providing assistance to the private sector, ADB uses equity investments (which may include preferred stock), loans, guarantees, and syndications (including B-loan or lender-of-record arrangements and guarantor-of-record arrangements) to mobilize private investments.
Although ADB cannot guarantee equity, there is eligibility of guarantees to investors for shareholder loans and shareholder loan guarantees. ADB can also guarantee local and foreign investors and lenders. A guarantee may be issued in any currency in which ADB can efficiently intermediate, including the currencies of certain of its DMCs. ADB's guarantees cover risks that the private sector cannot absorb or manage on its own, such as political risks. Reducing these risks allays the fears of investors, thus paving the way for more funding and investments.
What sectors of the economy does ADB focus on?
ADB currently prioritizes two areas: capital markets/financial sectors and infrastructure.
Through its work with private financial intermediaries, ADB's private sector operations focus on expanding access to finance, particularly among lower-income groups (microfinance and housing finance) and micro-, small, and medium-sized enterprises, as well as on infrastructure development and climate change finance. The financial intermediaries through whom it impacts the real economic sectors include banks, nonbank financial institutions, and private equity funds. Finally, trade finance activities, through the Trade Finance Facilitation Program (TFFP), help reduce the negative impact of the financial crisis on the most vulnerable countries, while furthering regional integration.
In infrastructure development, ADB is focused on the following core sectors of operation: energy (including power), transport, telecommunications, water, and urban infrastructure. ADB also finances existing infrastructure projects for upgrading or expansion.
Various forms of risk-sharing and ownership arrangements, including build-own-operate and build-operate-transfer structures, have been designed by ADB to help governments and investors in infrastructure projects.
Agribusiness and manufacturing in the most vulnerable DMCs will also be looked at, though very selectively, as these are not part of ADB's Strategy 2020 core sectors.
How much assistance does ADB give?
ADB gives priority to sectors in which a country has a comparative advantage, and to sectors and companies deprived of capital in the face of market imperfections and high levels of perceived risk. Its aim is to catalyze financing from local and foreign sources, not compete with them. Thus,
- ADB will seldom take an equity stake larger than 25% of total share capital.
- It will seldom be the largest single investor in an enterprise.
- It will not assume responsibility for managing an enterprise.
If needed, ADB can help mobilize additional debt from other financing institutions in the form of parallel financing or syndication arrangements in which ADB acts as the lender of record, and banks take participations in the loan. It may also provide guarantees to commercial financial institutions.
What are ADB's requirements for screening, analysis, and planning to manage environmental impacts of private sector projects?
Through the implementation of environmental safeguards, ADB seeks to ensure the environmental soundness and sustainability of projects and to support the integration of environmental considerations into the project decision-making process.
Environmental assessment reports (such as environmental impact assessments or initial environmental examinations) are prepared for a project to identify potential impacts and risks. These describe the project, its environmental setting, the alternatives considered and selected, where relevant, the consultation and disclosure undertaken, and the environmental management plan to be implemented by the borrower/clients.
Depending on the project, other instruments such as an environmental assessment and review framework, environmental audit report, environmental and social management systems, or strategic environmental assessment can be used to satisfy ADB's requirements on environmental assessment and planning and management.
What are ADB's requirements for screening, analysis, and planning to manage social impacts of private sector projects?
ADB has policies and procedures establishing essential requirements and good practice for social soundness. Social issues in private sector projects may pertain to (i) adding social value and helping create broader social support (for example, through community outreach programs to promote sustainability, based on international standards of corporate social responsibility); and (ii) managing social safeguards including involuntary resettlement and Indigenous Peoples issues as well as social risks related to labor, public health, and gender equity. Social impact assessments can be undertaken as part of overall environmental assessment. Based on the outcome of the environmental and social assessment and depending on the project modality, social documentation are prepared such as resettlement plans and frameworks, Indigenous Peoples plans and frameworks, social safeguards audit reports, environmental and social management systems, gender action plans, among others.