African Development Bank Independent Review of the Bank’s Non-Sovereign Portfolio: Preliminary Findings on Private Sector Policy Rakesh Nangia Mohamed Manai OPEV African Development Bank www.afdb.org/opev

Overview – Strategic Priorities Portfolio Concentrations Financial Sustainability Development Outcomes Additionality AAA Credit Rating Infrastructure, Industry & Service Sectors DFI Partnerships Intermediary Support MSME’s LIC’s Fragile States Financial Strong Growth Equity Risk Sharing Instruments Portfolio Quality Political Risk Operational Efficiency Member Support Government Exposure Limits Social PSO has different strategic priorities, each with underlying sub-categories and business targets Cautious Growth Environment Risk Rating Targets Household 2

To What Extent is the PSO Portfolio Aligned to the Strategy’s Five Objectives? Improving the Investment Climate Objective fits with “one bank” concept of integrated operations Macro and Micro levels. Micro level: corporate governance, audits, etc. Macro level: Projects lack universal enforcement of transparency standards Client demand for improving climate (regulatory reform) is high. Clients could not think of specific examples of AfDB impact.

To What Extent is the PSO Portfolio Aligned to the Strategy’s Five Objectives? 2. Supporting Private Enterprises Need to define SME’s and require DO monitoring Interventions through intermediaries and DFI’s have tradeoffs: Positives: financial additionality, reduced risk exposure Concerns: loss of control over funds usage, limited ability to monitor and impact DO, different priorities between PSO and client financial institutions Increasing equity fund investments reach SME’s, create high additionality Strong concerns: far greater risk exposure, need for additional monitoring and management, lack of defined exit strategies, overall coordination Methodology: PARs, ASRs, XSR, interviews Extensive references to this objective in origination documents Need to define SME’s and require DO monitoring to address differences in funds usage and impact Interventions through intermediaries and DFI’s have tradeoffs: Positives: financial additionality, reduced risk exposure Concerns: loss of control over funds usage, limited ability to monitor and impact DO, different priorities between PSO and client financial institutions Strong growth across all geographies in number of projects, less impactful on volume, limited capacity for impactful infrastructure projects across LIC’s and Fragile States Increasing equity fund investments reach SME’s, create high additionality Strong concerns: far greater risk exposure, need for additional monitoring and management, lack of defined exit strategies, overall coordination Best practices include consistent SME definition, mid-loan corrections, additional monitoring of disbursements and DO Review and implement best practices on equity fund investing outlined in the Equity Fund Note and this technical report to reduce exposure and maximize impact

To What Extent is the PSO Portfolio Aligned to the Strategy’s Five Objectives? 3. Building Competitive Infrastructure Very high catalytic effect 43% achieved in LIC’s, a strategic priority Higher risk ratings than overall portfolio Limited use of TA on infrastructure project Portfolio strongly aligns to core objective and multiple priorities Targeted TA utilizing WB Group model can reduce risk exposure, improve outcomes Methodology: PARs, ASRs, file reviews, interviews Strategic priority area for PSO Very high catalytic effect, confirmed by interviews 43% achieved in LIC’s, a strategic priority Higher risk ratings than overall portfolio, difficult to complete multiple projects in LIC’s and Fragile States Limited use of TA, which can be very impactful on infrastructure project success Portfolio strongly aligns to core objective and multiple priorities PSO can more strongly assert requirements for DO tracking and other core requirements Targeted TA utilizing WB Group model can reduce risk exposure, improve outcomes Clarify internal balance of weighted risk/reward tradeoffs for future infrastructure interventions

Approval Stages (1 of 4) Gating stages during the approval process Approval process stages are similar to benchmarked MDBs, but AfDB’s internal steps are more cumbersome AfDB has twice as many approval gates as other MDBs Criteria AfDB IFC EBRD AFD IDC DBSA Approval duration 11 months (5 year avg.) 6 months 4 – 6 months 3 - 6 months Exploratory review Divisional Management Combined with concept review Concept Review / Preliminary analysis Departments Review Senior Management Opscom Screening Committee Head of Business Unit Opscom equivalent Country Team Credit Comm. OIVP Stages are termed differently (business development and exploratory, concept, and final/ appraisal reviews) Governance Streamline the approval process by combining the review stages. Some options based on best practices at other IFI’s include: For concept review, combine country review, Opscom secretariat, OIVP and credit committee into one approval meeting instead of individual approval processes For concept review, delegate authority to OPSM divisional management to approve the decision for appraisal Combine the exploratory review with the concept review if the structure of approval gates is not reduced For appraisal stage, combine individual reviews into one approval meeting at Opscom. Country team’s approval of concept should not have to be revisited after appraisal For Board approvals, allow projects below a certain value and risk level to be approved by either the credit committee or Opscom Develop the operational processes to test framework agreements concept that EBRD uses on future non-sovereign interventions Delegate approval authority to levels below board to allow for faster and empowered decision-making and more efficient approval processes

Approval Stages (2 of 4) Gating stages during the approval process Repeating approval steps between Concept Review and Final Review is more detailed than other IFI’s, adds time and administrative requirements Other IFIs utilize Board notification on smaller projects and finish approval steps within division management/OPSCOMM reviews Criteria AfDB IFC EBRD AFD IDC DBSA Final Review/ Project appraisal Department Review Departmental Management Opscom Project Committee Head of Business Unit Opscom equivalent   Country Team Credit Comm. OIVP Credit committee Secretariat Final Approval COO Board Notification for smaller projects Board Notification for projects under €10 million Investment Committee/ Board Credit Committee/ Executive team/ Board Board President * Stages are termed differently (business development and exploratory, concept, and final/ appraisal reviews)

F: Timeline for Submission of Independent PSO Review Finalize Technical Draft Reports by End Of November Discuss Draft Consolidated Report by Mid-December Submit Consolidated Report and Final Technical Reports for Management Response by End of December Submit Consolidated Report and Final Technical Reports to CODE for Consideration by End of January 2013 (a staff time-recording system to measure transaction costs, an electronic archive system for storing and accessing project documents and correspondence, online databases for portfolio performance data such as credit risk ratings, loan impairment, equity cash flows and valuations…) These will need to be bespoke for private sector projects; rather than inherited from the Bank's public sector operations. Then, looking further ahead, it should be much easier to prepare future reports on portfolio performance and development impact, and they will benefit from a much more robust evidence base.

Thank you