Why partnering with the private sector is key to inclusive growth

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By Lakshmi Venkatachalam, Vice-President of Private Sector and Cofinancing Operations, Asian Development Bank

 
Over the past couple of decades, no one can deny that the Asia and the Pacific region has represented a remarkable success story. Absolute poverty levels have fallen significantly and the region is on course to achieve a number of Millennium Development Goals (MDGs).

But more than 1.6 billion people in the region continue to live on less than USD 2 a day and remain vulnerable to shocks — whether economic or environmental. The region is also confronting widening inequalities and the challenge of enabling a decent quality of life.

A strong need remains for both dedicated knowledge support and for financing to address the region’s social and infrastructure gaps, including urgent measures to address climate change.

Over the past few years, policymakers and development finance institutions (DFIs) have increasingly looked to the private sector to help meet these financing needs. In the right investment climate, the private sector can support the inclusive and environmentally sustainable growth that is at the heart of the global development agenda.

A key contribution of the private sector is in promoting economic growth, which it does through investments, knowledge transfer, and enhanced productivity. By creating new markets, fostering competition, and making investments, the private sector helps allocate resources productively and efficiently, improving prospects for economic growth. Economic growth generates resources that can be used for future investment as well as social development.

According to the World Bank, the private sector is the source of nearly 90% of the world’s jobs. So by providing direct employment, as well as finance to the sectors and geographic regions where it is most needed, the private sector promotes not just growth — it promotes inclusive growth.

The private sector also helps to boost living standards. This extends beyond extreme poverty as captured in the MDGs to areas such as the availability and quality of goods and services such as housing, infrastructure, health, and education. In this context, the private sector also plays a critical role in improving service delivery through public-private partnerships. These are particularly relevant in the case of infrastructure, as they allow for risk sharing, and are benefitting from improved institutional capacity and clearer legal and regulatory frameworks.

The private sector can also promote the adoption and/or retrofitting of environment-friendly technologies. This is valuable in the face of climate change, which can adversely impact many critical development goals such as food security, health, and water. The largest mitigation opportunities, especially for energy efficiency, remain in middle income countries.

Lastly, the private sector is a reliable source of revenue for government operations through its contributions to taxes and duties.

Given these advantages, it is not surprising that DFIs have come together relatively quickly to agree on a core set of principles that would guide support for private sector initiatives. These include commercial sustainability, promotion of high standards and additionality – that is, the extent to which a new input or action can add to already existing ones. More importantly, the private sector itself, not least due to the fall-out from the global financial crisis, has begun to reexamine its role in promoting economic growth as well as its responsibility to society. It is therefore increasingly open to engagement on these issues, particularly with DFIs.

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Asia and the Pacific’s financing needs are indeed daunting. We, the multilateral development banks, need to engage the private sector on all fronts to an even greater extent than we currently do, to leverage both finance and knowledge.

The Asian Development Bank (ADB) has long recognised the private sector as a key driver of change in attaining its three long-term strategic agendas of inclusive growth, environmentally sustainable growth, and regional integration. In line with our commitment to transparency, ADB publishes the annual Development Effectiveness Review, with 89 performance indicators to assess progress in implementing these priorities. The dedicated 2013 private sector operations Development Effectiveness Report was published on July 25th.

With $1.8 billion approved in 2013, our Private Sector Operations Department provides comprehensive financial assistance including loans, equity investments, guarantees, cofinancing and technical assistance. Our clients are private companies, banks and financial institutions, investment funds and state-owned enterprises. All our private sector interventions are aimed at maximising development impact. In doing so, our aim is to supplement or complement commercial finance, particularly in areas where perceived or persistent market gaps are inhibiting private investments.

What can ADB contribute to effective development co-operation with the private sector? Firstly, we are an Asian institution with a long and stable relationship with developing countries in the region. Based on the foundation of our strong infrastructure and financial sector exposure, we are increasingly entering sectors where we see promising potential for sustainable inclusive business models, such as agribusiness, education and health. Our strength lies in the synergies we derive from our sovereign operations in the core areas of policy and regulatory support.

Our private sector portfolio has more than doubled since 2006, totaling $6,219 million in 2013, comprising 155 accounts and 140 projects in 20 countries. Aligned with ADB’s core specialisations and sector priorities across individual member countries, 96% of the portfolio supports infrastructure, environment, and finance sector development.

Asia and the Pacific’s financing needs are indeed daunting. We, the multilateral development banks, need to engage the private sector on all fronts to an even greater extent than we currently do, to leverage both finance and knowledge.


VenkatachalamBio

Lakshmi Venkatachalam is the Vice-President (Private Sector and Cofinancing Operations) of Asian Development Bank since June 2010, leading ADB’s private sector initiatives and cofinancing activities. Based on the Midterm Review of its Strategy 2020, ADB’s activities in private sector development and private sector operations are targeted to reach 50% of its annual operations by 2020.

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  1. Reblogged this on Bloggeando.

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