The Role of Private Sector in Africa: Lessons from MDBs’ Evaluations

Comments by Alejandro Soriano Inter-American Development Bank

December 4 th , 2012

Context: MDBs and the Private Sector (PS)

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MDB’s Evolving Mandate - A Typical Timeline

 Undifferentiated process: initial challenges in handling credit risk  Organizational “fix”: spin-off of PS dedicated entity (or entities)  Initially focused: direct sustitution of public sector role (bidding)  Sector expansion: e.g., financial sector (SMEs, Trade Finance) 

De-facto Business Model - Market driven opportunities

 Key: excel at controlling credit risk (now generally high standards)  Timing : usually late (mostly after sponsor has developed project)  Portfolio: balancing “stable-return” & “developmental” projects 

Lingering Questions - Dev. Effectiveness / Additionality

 Reinforced project level metrics over time: DOTS, DIAS, etc.

 Reaffirmed intended beneficiaries: development through the PS  Emerging sector level rationale: (still weak) linkage to market failures

PS Evaluation Findings - In a nutshell

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Operations and Risk Management

 After a rocky start, now fairly standardized (predictable)  Efficiency still of concern (competition), e.g., legal costs  Safeguards are latent issue (proactive problem solving)  Independence of Risk Assessment (professionalization) 

Portfolio Management

 Growth of FI Lines (Large banks / Trade finance facilities)  SG Coordination, de-facto in the past , almost none now  Waivers, less of an issue due to early prepayments 

Strategic Approach - Pro-forma, “aligned”, but not guiding QUESTION: Not if doing it “well”, but if doing the “right thing”

Purpose strategy as a “tool” to get somewhere Element

Metrics Urgency Selling

Best Practice Issues - Private Sector

Where are we?

  Routinely analyzing readily available data diverts attention from where insight-creating advantage lies: “weak signals in noise” Define clearly what you are moving from and where you are moving to - develop a detailed view of the shifts required, and ensure that processes and mechanisms are in place to effect the changes - quite simply, at the end, strategy is an “action plan” Why do we need to change?

  Many strategies place too much weight on the status quo because they extrapolate from the past three to five years The pressures of “just playing along” seem intense enough, but playing along can feel safer than it is Why is it better for us to cooperate?

  Many good strategies fall short in implementation because of an absence of conviction in the organization Openly question the old assumptions and allow staff to develop a new set of beliefs – “social processes” required to absorb new beliefs don’t occur in “formal meetings”   

Evaluation Findings

No meaningful baselines or targets diagnostic, Only a general description of context and enumeration of priority areas No quantification of the “size” of the problem; and what part of it we could viably address   No focus on whether (and why) there is a need to change?

Experience (own and others’) not critically analyzed   No specificity: “broad nature of

the document does not afford entry into specific contexts or

more nuanced lines of action.” Inward architecture - Policies, strategies, guidelines, etc.

Options - force trade-offs / focus resources Element

Alternatives Uncertainty Balance

Best Practice Issues - Private Sector

What we won’t do?    Most business growth (80%) is explained by choices about “where to compete”, and only 20% by “how to compete” Unit of analysis (market segmentation) significantly influences resource allocation, thus likelihood of success Strategy not just "where and how to compete but also when What do we really know?    A critical step in embracing uncertainty is to characterize exactly what variety you face - a surprisingly rare activity Companies oscillate between assuming, complete certainty and succumbing to a pessimistic complete ambiguity Trends emerge slowly - most fail to respond to them How do we mitigate risk?

  Commitment is the path to sustainable competitive advantage - But it exists in inverse proportion to flexibility Portfolio : (i) “big bets” aimed at significant competitive advantage; (ii) “no-regrets” moves that pay off whatever happens; and (iii) “options” that can be elevated if pan out 

Evaluation Findings

Everything under the sun: e.g., “activities aren’t necessarily limited

to these components. Bank may continue providing lending and non-lending services in other

areas, given sufficient capacity”  Superficial discussion of risks, e.g., “there are a number of potential stumbling blocks … knowledge gaps […], institutional capacity […], political economy constraints […], fiscal constraints”   No discussion of proposed areas of activity as a “strategic portfolio” No clear definition of PS “risk appetite” - only risk tolerance

Capabilities - build on tested, relative strengths Element

Assumptions Insights Fit

Best Practice Issues - Private Sector

How sure are we?

   Test any claimed capability advantage vigorously Beware of mechanisms affecting decision making: anchoring, risk aversion, confirmation bias, herding and champion bias De-bias mechanisms: multiple alternatives, pre-mortem Are we absorbing others’ perspectives?

  Go out of your way to consider the customer’s perspective but first you need to define who your customer is Assess how early adopters are acting; what are small, innovative entrants doing; what technologies under development could change the game Does it make sense for us?

 Make sure your ongoing resource allocation processes are aligned with your strategy. If you want to know what it actually is, look where the best people and the most generous budgets are - and be prepared to change these things significantly  

Evaluation Findings

Advantages based on perception (surveys) rather than objective evidence.

Broad institutional comparative advantages rather than specific, technical ones.

  Strategies use pro-forma public consultations as inputs usually to add more themes Respondents not “true” clients     Superficial or no discussion about organizational issues “Key-person” dependent No real “pain” in resource reallocation decisions Lack organizational synergies

Potential Next Steps - For Discussion

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Existing PS Evaluations:

Draw contrasts and similarities 

Strategy Assessment:

Need to go beyond “alignment” 

Common Evaluation Tool:

Agree on minimum standards  Purpose: Time-bound and evaluable  Options: clearly spelled out and assessed  Capabilities: organizational and process issues 

Evaluating PS Results:

Up Sector Level/Market Failures  Infrastructure: Public-private partnerships  Innovation: increased access through lower transaction costs  CSR: development role large corporates, emerging regionals

THANK YOU MERCI

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