Speech by ADB Director-General Marvin Taylor-Dormond on the Role of Evaluation in Assessing Private Sector Operations at the 2nd Asia-Pacific Evaluation Association International Evaluation Conference on 27 February 2019 at ADB headquarters in Manila, Philippines
Dr. Romeo Santos, President, APEA, colleagues and partners in evaluation and in regional development. Dear friends.
Good afternoon to everyone.
I have been tasked with addressing the subject of the role of evaluation in assessing the development contribution of private sector operations.
In doing so, I would like to cover 3 topics:
- The nature and role of private sector operations in development and the work of MDBs in encouraging it;
- The implications of this work for evaluating the contribution of private sector operations;
- Some of the knowledge gained from evaluation evidence on the experience of promoting private sector for development.
The nature and role of private sector operations in development and the work of MDBs in encouraging it:
How and why MDBs promote private sector development?
The private sector is an unmatched force in the development process - it is a prime mover, stakeholder and partner in this dynamic process. As such, the private sector is a critical ingredient of our effort to address the global development challenges that are confronting us. As the group of eminent economists and policymakers responsible for the 2008 Commission on Growth and Development report noted, “there is no known, effective substitute for relying on markets to allocate resources efficiently, led by the private sector”.
The private sector generates 90 percent of jobs in developing countries, and jobs are the best avenue for the poor to escape poverty. The private sector drives economic growth, and thus, it facilitates the improvement of people’s lives by providing goods and services to meet their needs, by promoting innovation and efficiency, and by mobilizing financial resources for progress. And when it is inclusive, the growth propelled by the private sector allows the poor, women and vulnerable groups to participate in the mainstream economy. Likewise, the private sector provides the much-needed tax revenues to support government operations and the delivery of essential public goods. This natural synergy between the private sector and various stakeholders is at the heart of development and progress.
It is precisely this powerful role of the private sector in development that motivates multilateral development banks (MDBs), like the Asian Development Bank and the World Bank Group, to support private sector initiatives for development around the world. Furthermore, the Sustainable Development Goals (SDGs) framework recognizes that to accomplish the 17 goals, strengthening partnerships with the private sector will be one of its cornerstones of success.
Parallel to the global consensus on the SDGs, the ADB’s Strategy 2030 has put private sector operations at the centre of development results in Asia and the Pacific. ADB is ambitiously targeting private sector operations to reach one-third of its total number of operations by 2024. Substantial leveraging of resources is also envisioned by 2030, with every $1 financing of private sector operations matched by $2.50 of longer-term co-financing. In other words, the objective is not only to invest ADB’s own resources but also to crowd-in funding from other private sources towards the region.
Over the years, while promoting private sector operations, MDBs have largely been guided by four principles designed to ensure that private sector initiatives enhance development and mitigate negative externalities.
The first principle is emphasizing the commercial sustainability and profitability of operations. Second, is focusing on addressing market failures originated by asymmetric information, incomplete markets, barriers to entry, government intervention or similar. Third, is promoting high standards of conduct related to environmental, social, corporate governance, transparency and integrity.
Fourth and last, is ensuring additionality, which means that MDBs’ contribution should go beyond what markets are able to provide, avoiding crowding-out the private sector while simultaneously catalysing market development.
The implications of MDBs’ work with the private sector on evaluating their contribution to development:
How is evaluation of private sector operations done in MDBs?
From what I have explained, I trust that it is now evident that institutions intervening in the private sector development space do so with a triple bottom line in mind: (1) financial; (2) economic; and (3) social and environmental. If one would be interested in the financial objective only, the market may suffice. However, in order to understand the combined effects of the three bottom lines, evaluation is indispensable because the market will never provide the appropriate indicators on economic, social and environmental concerns.
Some of you may be asking yourself why am I providing you with so much detail about the nature of interventions to promote private sector development. The reason is that an overarching tenet in evaluation is that our assessment frameworks must be consistent with the object of evaluation. Therefore, in order to evaluate private sector interventions, it is critical to understand their rationale and overall theory of change.
Precisely, to take care of these concerns, MDBs have developed a set of good practice standards (GPS) anchored on the principles I have just described. The GPS takes into account the complex nature of the private sector support while blending financial indicators with economic, social and environmental assessments.
The underlying evaluation framework on private sector operations is thus composed of four core criteria:
- Business success: in response to the market features that I previously explained, the framework recognizes the preponderance of internal rates of returns, i.e. the company or project must make a profit;
- Economic sustainability: considering the public nature of the MDBs’ investments, the framework incorporates the economic rate of return or a proxy for it;
- Environmental and social effects: mindful of potential positive and negative externalities, the framework gives priority to environmental and social effects of investments; and
- Impact on private sector development and broader development influence: conscious of the MDBs’ specific missions, the framework includes the transitional, developmental or structural change objectives of such investments.
Complementing the above, the evaluation framework assesses the institutional financial performance and its additionality, to ensure that market rules prevail and that the institutions do not crowd out private sector operators.
Taken altogether, when evaluating private sector projects, these four core criteria plus the institutional performance and additionality are the determining factors for assessing their development effects, sustainability and contribution.
The knowledge gained from evaluation evidence on the experience of promoting private sector for development:
What do we know about promoting private sector for development?
MDBs vast experience in private sector operations have resulted in a wealth of knowledge of what works, what doesn’t and why in this area. Let me now provide you with a glance of evaluation evidence on the macro, micro and inclusion-targeted/non-targeted interventions of MDBs.
On macro interventions, we have learned that contrary to popular belief, profitability and development impact can go hand-in-hand. Evidence consistently shows that commercial success is closely linked to high development outcomes. We have learned also that promoting the building blocks of business climate reforms (laws, regulations, studies) is insufficient to stimulate the development of the private sector. Good implementation coupled with strong long-term strategic guidance and continuity are necessary.
We too have learned that additionality has strong connection with development impact. Robust outcomes are apparent when strong financial and non-financial (i.e. strong safeguards, capacity building, potential for market creation, etc.) additionality is present.
As for micro initiatives, we clearly understand that strengthening the environment surrounding firms is critical, and that stimulating innovation and entrepreneurship are important for firm and sector competitiveness. But innovative projects tend to have lower success rates, indicating a need to increase the appetite for failure during experiments, for scaling up approaches. Development efforts supporting SMEs have also shown the need to ground support to SMEs on clear understanding of the market failures confronting SMEs, and that providing them with financial support alone is not sufficient, for they also require capacity building to improve efficiency and standards.
On the use of inclusion-targeted/non-targeted interventions, we have evidence showing that focusing on economic growth alone cannot adequately promote social inclusion. In a related manner, efficient investments do not guarantee on their own, broader welfare gains. Critical ingredients for this to happen include effective job creation, access to essential services and good distribution of the benefits of growth.
Let me bring this talk to conclusion in the hope that the potential, rationale and challenges in promoting private sector development, and the complexities to evaluate the associated interventions are now clearer in our minds. On the potential and rationale, China clearly stands out in using the private sector for achieving greater development impact. We have all witnessed what has happened in China! The key lies in making sure that the right public policies for harnessing the potent force of the private sector for development are in place.
This framework is well expressed by the late reformist leader Deng Xiaoping. When he was asked if China was embracing capitalism, he said that, “There are no fundamental contradictions between a socialist system and a market economy. If we combine a planned economy with a market economy, we shall be in a better position to liberate the productive forces and speed up economic growth”. While this approach has worked specifically for China, the general point is that vision, discipline and perseverance in designing and implementing policies conducive to unleash the private sector dynamism is of the essence.
Indeed, China’s patience, wisdom to select the critical areas of reform and pragmatism in the pursuit of its market and private sector growth have led to the most remarkable development performance in history, in just four decades.
As other countries of Asia and the Pacific embark in similar efforts, and organizations like ADB deepen their support to promote the private sector in our region, while at the same time increase our chances of achieving the SDGs, we evaluators must also sharpen our knowledge, experience and practice to accompany these efforts. I therefore trust that this presentation has stirred your interest to explore more on the challenges and opportunities that this trend offers to our countries, to our discipline and to all of us, and invite you to follow closely the work of the ADB and the evaluations of the Independent Evaluation Department in the field of promoting private sector development in Asia and the Pacific.
Thank you very much.