Tools to improve private sector operations

30 March 2012
ITC News

The African Development Bank (AfDB) has a mandate to foster social and economic development and reduce poverty in its regional member countries. For many years, it has supported private sector development operations that seek to improve business-enabling conditions, but over the past decade the number of private sector operations (PSOs) approved by the bank has grown considerably, raising two fundamental questions. First, are the bank’s PSOs consistent with its mandate? Second, what can it bring to these operations that commercial operators cannot? In other words, how can the bank’s participation yield development outcomes and additionality in terms of value beyond the results delivered by commercial operations?

To answer these questions, the bank put in place a decision-making tool to assess its private sector projects and ensure they contribute to the achievement of its mandate. In practice, this means testing non-sovereign operations for quality at entry against a predefined set of indicators measuring expected development outcomes and additionality. These are embodied in the ex-ante Additionality and Development Outcomes framework that is an integral part of the bank’s project selection process.


The selection framework

The framework ensures that each operation goes through an holistic economic assessment of direct costs and benefits for all relevant stakeholders. Potential investments are evaluated and rated against a multi-faceted set of expected development effects, including household, gender and social, government and environmental benefits, private sector and infrastructure development, macroeconomic resilience and business success. To reduce subjectivity and improve predictability in assessments, the bank uses core indicators and benchmarks established by the Evaluation Cooperation Group (ECG) to substantiate assessments. The ECG was set up in 1996 by the heads of evaluation in multilateral development banks to harmonize evaluation methodologies and performance indicators. These indicators reflect not only best practice, but also capture the bank’s mandate and strategic priorities, and reflect the realities of the African continent through clear, quantified and monitored development outcomes.  

A project may have a sound business rationale and potential development effects, but it may be that private entities can finance it on their own. The concept of additionality allows development financiers to judge whether financing is fully leveraged and potential development effects are maximized. The ECG considers that the inclusion of development financiers in PSOs yields additionality when their involvement achieves one or more of the following: lowers the perceptions of exposure to political risks; improves risk allocation between the public and private sectors; or improves a project’s quality from a developmental, social or environmental perspective. The concept of additionality is interesting as it allows financial institutions with a development mandate to add value to average PSOs, making them transformational and conducive to development. This is important to ensuring social and economic inclusion objectives are met and that money is spent on appropriate projects.


Social indicators in the assessment of PSO development outcomes

Assessment of the social effects of projects includes measurement of outcomes with a communal dimension, such as related public health, gender and poverty alleviation. This means looking at specific indicators related to outcomes generated by projects. For example, indicators in education projects may include the number of students educated, and in improved access to health projects the number of people gaining access to health care. Indicators such as numbers of female jobs, jobs for unskilled or semi-skilled workers and youth employment may describe benefits accruing to marginalized members of society including women, minorities and other disadvantaged groups.

There is particular emphasis on benefits accruing to poorer segments of society that are captured, for example, through the number of low-income beneficiaries covered and the share of beneficiaries from rural or remote areas. The effects have greater weight when projects are located in fragile states or post-conflict countries. Project effects related to income smoothing, access to better quality or a wider range of consumer goods or services are also assessed.

If a project has negative externalities, for example population displacement, the assessment looks at the number of persons or businesses affected and whether compensation packages are in line with international best practice. To mitigate negative externalities, or as part of corporate social responsibility activities, project sponsors may put in place community development programmes. These are often secondary and weighted as such in the assessment, but their outcomes are acknowledged, documented and monitored. Secondary effects can be transformational, for example in the case of projects that extend social and economic infrastructure to other users in the catchment area.

  From the private sector development perspective, projects targeting underserved market players are assessed favourably from a social and economic inclusion perspective. Specific indicators evaluated include the number of loans that are extended to financial intermediaries that lend on to micro and small enterprises, the number of smallholder farmers benefiting from a project, the volume of business between the project and small local firms, and training and technology transfer. Benefits accruing to disadvantaged members of society as a type of affirmative or corrective action are captured here too. South Africa’s Broad-Based Black Economic Empowerment programme provides an example.

An illustration of a project approved for AfDB funding with potentially high social outcomes is a health sector private equity fund approved in 2009. The fund focuses on health insurance, pharmaceutical production and distribution in sub-Saharan Africa. Investing firms generate outcomes accruing primarily to households, with positive gender and social effects and effects on private sector development delivered by supporting small- and medium-sized enterprises (SMEs). The fund plans to create 1,750 jobs, supply 600,000 outpatient visits per year and provide health insurance to 450,000 individuals per year by investing in 20 to 30 brownfield SMEs.

The assessment framework is also designed to flag projects with insufficient development outcomes, leading to improvement in project design or elimination from the pipeline. For instance, the quality at entry of an agribusiness project was assessed to be unsatisfactory because the terms of the underlying concession were unfair to the government and the communities in the project area. The assessment showed benefits sharing among stakeholders was highly skewed in favour of foreign investors and was not fully aligned with industry and international best practice. The assessment enabled the bank to act as an honest broker and facilitate a realignment of the transaction with its development mandate.


Assessment of inclusive development effects

Recently, it has become paramount for development efforts to go beyond strong, sustained growth and include growth that is shared and translates into poverty reduction. A shift in the international development community towards inclusive growth calls for the assessment framework to be refined and capture inclusiveness better, particularly social effects. In practice, integrating indicators with an inclusive dimension in the assessment framework involves refining the battery of existing sector-specific indicators. By providing a relevant and clear set of criteria and measurable indicators to substantiate assessments, the screening tool enhances the mainstreaming of inclusiveness in projects.

For instance, in projects involving lines of credit for SMEs, indicators such as the share of lending in fragile states, or the share of beneficiaries in rural or other underserved groups become more informative than indicators looking simply at the extent to which SMEs are assisted. While the number of jobs is a core ECG indicator, to capture inclusiveness an assessment should go further by looking at, for instance, the number of skilled versus unskilled positions, employment for locals versus foreigners and permanent versus seasonal jobs. It must also emphasize the qualitative dimensions of projects, for example, assessing whether an operation creates productive employment in an underserved rural area with limited job opportunities. Development financiers can ensure these types of outcomes feature in average transactions at little cost to sponsors by coupling individual projects with technical assistance packages.

For development banks such as the AfDB, using ex-ante cost-benefit analysis tools that capture both the value-added of their interventions and the extent to which they promote development effects is essential. The framework and tools support accountability for shareholders, providing a mechanism through which institutions can demonstrate there is value for money from their interventions and that they produce tangible effects that can be tracked on the ground. However, there are challenges related to keeping the framework dynamic and responsive to evolving priorities such as the recent inclusive development paradigm. Frameworks must be easy to adjust and flexible to capture both the quantitative and qualitative dimensions of interventions. Indicators must remain SMART – specific, measurable, achievable, relevant and time bound – and assessments must remain predictable to minimize measurement error and allow time series performance assessment.