Making private sector investments deliver development impacts

By Vinod Thomas on Wed, 16 October 2013

For development institutions, private sector investments offer plenty of potential for promoting inclusive and environmentally sustainable growth at a profit. But how successful are they in achieving actual development gains?  

A new evaluation of the Private Sector Operations Department (PSOD) shows a mixed picture. It notes that while private investments over the last decade were profitable overall, their development effectiveness varied greatly.

Pioneering efforts in solar energy in India and Thailand, and wind power in Pakistan offered some environmental successes. But making private investments inclusive by broadening access to economic opportunities for the lower income strata was challenging.

The private sector is pivotal to economic growth and poverty reduction. ADB approved its Private Sector Development Strategy in 2000 to strengthen private sector participation in developing member countries. The strategy aims to identify how to overcome barriers to private sector growth, and focuses on ADB acting as a catalyst for investments to promote inclusive growth, which the private sector might not otherwise be willing to shoulder.

The vision is for ADB’s private sector operations to contribute to growth and to incorporate environmental and social concerns—the triple-bottom-line pattern of growth that multilateral development banks are urging client governments to adopt in their national plans.

Some 60% of approved PSOD commitments totaling $10.7 billion during 2000–2012 focused on infrastructure, particularly energy, and 27% on operations to improve access to finance for high-growth industries and medium-, small- and micro-sized enterprises. Overall, evaluated infrastructure investments achieved better ratings than financial market transactions.

Investing for inclusive growth proved challenging: some 13% of projects of a growing portfolio explicitly promoted inclusion by increasing economic opportunities for the poorer segments. One limitation was the policy and regulatory constraints to private participation in sectors that have the potential to improve the livelihoods of the poor, such as electricity distribution, water supply, and rural finance.

Employment generation was a key objective for SME interventions. These enterprises are the backbone of employment in many countries, but access to finance remains a significant barrier. For SME operations, many selected financial intermediaries lacked on-lending strategies for industries that could generate above-average inclusive job growth. At least empirically, the link between SME development and inclusive growth has so far not been proven.

A brighter picture emerges for PSOD’s sizable private sector investments in energy. The focus on expanding generation capacity has played an important part in implementing this agenda. In developing Asia, some 800 million people still have no access to electricity; despite the region’s economic success. Sustaining growth depends on a sufficient energy supply, yet this is lacking in various degrees across the region. In Pakistan, 75% of small enterprises perceive energy problems as a major constraint to doing business.
 
For environmental sustainability, Strategy 2020 resulted in a marked shift toward projects with objectives to help countries lower carbon emissions. Support for private sector investments has played an important part in implementing this agenda.

While financial and economic returns on renewable energy projects are well below those for conventional ones, renewable energy costs—such as global prices for photovoltaic modules for solar energy—have fallen faster than expected, thus demonstrating a lessening trade-off between environmental and economic benefits.

And here lies the study’s take-home message: private sector investments can contribute to inclusive and sustainable growth and be as commercially viable as other types of investments. This was the case in a number of ADB-supported telecommunications projects.

Among the study’s key findings was that the link between economic and inclusive growth can be strengthened by a greater stress on choosing projects in sectors or regions with a high likelihood of direct or indirect effects on the poor. A good example of an initiative with indirect effects is the ADB-supported Nam Theum 2 project in the Lao People’s Democratic Republic. It required revenue generated by electricity exports to be used to finance budget expenditures on health and education.

There is considerable scope for PSOD to increase support for inclusive and environmentally sustainable businesses, and to boost the development impacts of its activities.

Read the summary of Independent Evaluation’s thematic evaluation study: ADB Private Sector Operations: Contributions to Inclusive and Environmentally Sustainable Growth.