independent review of the bank’s non-sovereign portfolio: preliminary findings and lessons

Independent Review of the Bank’s Non-Sovereign Portfolio:

Preliminary Findings and Lessons

African Development Bankwww.afdb.org/opev

Mohamed Manai OPEV

Operations Evaluation Department

Four (4) critical work streams were identified:

oStrategic Alignment, oPortfolio Performance, oRisk Management and oInstitutional Efficiency.


©2011 Deloitte Global Services Limited

• Data-driven approach of analyzing overall PSO portfolio data, targeted file reviews, client and internal interviews, external benchmarking

• Core documents for the Strategy workstream included 2004 PSO Strategy and 2007 Update, Business Plan, PARs, ASRs, BTORs, XSR, Project Status Reports, operations policies

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Portfolio data on 137 active projects

File review of reports specificTo each inception question

Benchmarking of comparable IFI’s

Field interviews on 18% of portfolio projects

B: Methodology and Approach

6 Deloitte PowerPoint timesaver – March 2011

Strategic Alignment Workstream

©2011 Deloitte Global Services Limited7

Overview – Strategic Priorities

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Infrastructure,Industry & Service Sectors

LIC’sFragile States

Equity

Risk SharingInstruments

DFIPartnerships

StrongGrowth

CautiousGrowth

PortfolioQuality

Household

Government

Environment

Social

FinancialIntermediary

SupportMSME’s

ExposureLimits

Risk RatingTargets

MemberSupport

OperationalEfficiency

PoliticalRisk


To What Extent is the PSO Portfolio Aligned to the Strategy’s Five Objectives?

1. Improving the Investment Climate

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• Objective fits with “one bank” concept of integrated operations



2. Supporting Private Enterprises

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• 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 PSOand 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



3. Strengthening Financial Systems

• Provision of lower cost funding and longer tenors being achieved, generates financial additionality

• Majority of PSO portfolio in LOC’s and Term Loans to financial institutions• Ratings agencies have raised concerns over concentrations with sub-prime and unrated

bank borrowers

• Concerns over DFI’s following own objectives and priorities vs. those for AfDB• Only three interventions in insurance and leasing sector, huge growth opportunity and

need across sub-Saharan Africa• Strong client demand for local currency loans



4. 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


To What Extent is the PSO Portfolio Aligned to the Strategy’s Objectives?

5. Promoting Regional Integration and Trade

• Implementation through facilitating diagnostic efforts with other DFI’s

• Limited number of dedicated trade finance facilities and export-enhancement credits within portfolio

• Infrastructure projects have great potential to achieve objective. Eg. Senegal.

• Other IFI’s have high level of activity with trade finance programs through local banks

• Financing support for local suppliers would be welcomed

EBRD’s TFP Program•100 partner banks participate•Required EBRD training and TA for minimum of one year•€7 billion in trade finance facilities•Heavy cross-selling with other EBRD bank products


To What Extent Are PSO Interventions Consistent with the Bank’s Priority Areas?

By sector, the portfolio is directionally consistent, greater concentration with financial intermediaries than among AfDB peers

• Portfolio achieved infrastructure targetsbased on volume, fell short for Industry& Services sector

• Higher share of financial intermediary projects than peers

• Greater risk exposure and time requirements to reach disbursementon infrastructure projects, also greatermonitoring requirements

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To What Extent Are PSO Interventions Consistent with the Bank’s Priority Areas?

Portfolio is clearly moving towards income/geography priorities

• High number of projects in LIC’s, tend to be smaller given country risk ceilings

• Increase of 500% in LIC portfolio volume over five years

• Good balance of LIC projects by sector

• Higher weighted risk ratings thanMIC and regional projects

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To What Extent Are PSD Interventions Consistent with the Bank’s Priority Areas?

By instrument type, a majority of interventions are senior loans; equity concentration has grown in line with priority focus; development of other instruments has been slower

• Equity concentration has grown to 17% of portfolio

• Minimal guarantee activity, much higherat other IFI’s

• Higher weighted risk rating (4.9) for equityinvestments than loans

• Lacking correlation between DO andinstrument, but clear additionality on equity investments

• Equity interventions are riskier and need far greater management and monitoring than loans

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Are the PSO Instruments Responsive to Strategic Goals and Objectives?

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Market demand exists for expanded guarantee and trade finance products

• PSO offers 15 instruments of which 9 are in the current approved portfolio


Other IFI’s have higher concentrations in guarantees and equity investments

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Are the PSO Instruments Responsive to Strategic Goals and Objectives?

IFI Guarantee Programs•Majority in trade finance (GTLP, TFP)•Cross-sold through product specialists•In-house training required (EBRD)•Demand strongest in LIC’s

IFC in Sub-Saharan Africa•$5 billion NSO portfolio•150% growth in 5 years•Strong GTLP and Guarantee Programs


Policies can be updated or modified to help PSO more effectively align the portfolio to objectives

•Update of PSO policy guidelines • Project cancellations, ownership status, financing limits, provisioning requirements

•Project development and pipeline management• Decentralize IO function to the field, close coordination with OSGE, ECON, and country teams,

active project development with host government ministries and PPP units

•Enforcement of reporting requirements and policies• Monitoring of DO, financial statements, environmental standards, fund disbursements by client

financial institutions

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Opportunities


Policies can be updated or modified to help PSO more effectively align the portfolio to objectives

•Approval processes • Framework agreements, Board notification vs. approval, uniform approach to all interventions

regardless of size or complexity

•Equity fund and investment guidelines • Overall equity fund strategic framework, return requirements, exit strategies, specialized teams

and guidelines, Board representation

•Loss threatening situations• Stronger and more aggressive workout function on default interventions• Active management on equity fund investments whenever negative returns reach certain

thresholds (-15% or -20% suggested)

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Opportunities (continued)

20 Deloitte PowerPoint timesaver – March 2011

Portfolio Performance Pillar

©2012 Deloitte Financial Advisory Services LLP

Overview of Portfolio Performance: the majority of projects are performing

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Overview of Portfolio Performance – Watch List

22 1: Includes 1 project on the signed not disbursed (watch list)


Overview of Portfolio Performance: Investment profitability

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• 1Investment profitability available for fully disbursed PSO deb projects only

Investment profitability available for fully disbursed PSO deb projects only

Equity investments

Age of fund

Cumulative returns2

Low Average High

Fund raising phase

0 - 2 -97.5% -38.7% -3.7%

Investment phase

3 - 6 -48.5% -1.8% 62.5%

Divestment phase

7+ N/A N/A N/A

2Information Note: Equity Portfolio – Risk Capital Utilization and Performance, October 2012


Additionality: To what extent is the Private Sector Operations (PSO) portfolio contributing; (i) to the catalytic and demonstrational impact, (ii) in leveraging Private Sector Development (PSD) and (iii) in catalyzing additional private sector investment, both domestically and through foreign direct investment (FDI), including the promotion of regional integration?

24 Source: FDI and private capital flow data from World Bank Database



• File reviews and field interviews indicated that the PSO Portfolio is financial additionality is satisfactory:

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Additionality: To what extent did PSO contribute to enhanced visibility, accessibility of financing and technical assistance?

• .

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Overview of Portfolio Performance: Disbursement Delays Often Caused by Cancellations, Recent Approvals or Project-Specific Situations

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Project implementation performance: What are the underlying causes for NSO effectiveness and disbursement delays?

291: Based on available data for 128 projects out of 137 active projects in the NSO portfolio


Development outcomes: To what extent does quality-at-entry default have a cost and negative impact on the portfolio performance?

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1: Based on file review of the ADOA note available on file for the 24 sample projects.


Development outcomes: To what extent did PSO contribute to overall development outcomes (business successes, economic sustainability, social and environmental sustainability, private sector development)?

• The Bank has limited ability to influence use of financing for indirect investments such as equity investments and lines of credit

• Field interview case studies, lines of credit• Field interview case studies, equity investments: Field interview

case studies, senior loans: good examples of projects achieving development outcomes

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• NSO has the process and tools in place for project appraisal and supervision / monitoring for tracking and measuring project implementation;

• ADOA has a comprehensive system is in place to assess development outcomes and additionality at project origination;

• NSO has initiated development outcomes tracking through the use of the core indicator templates.

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Strengths and advantages of the DO monitoring and tracking process


Opportunities

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Project Implementation PerformanceProject Implementation Performance

Topics Opportunities

‒ Implement quarterly investment profitability tracking system for projects;

‒ Review ADOA process efficiencies, allow for a 1 page approval to proceed at the early project acceptance phase, assign 1 ADOA reviewer and 1 peer reviewer etc.

‒ Develop process and tools to capture client’s feedback on the Bank’s additionality of PSO projects;

‒ Explore additional / innovative financial instruments to meet clients’ needs;

‒ Proactive in seeking ways to support political risk mitigation of PSO projects

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AdditionalityAdditionality

Development OutcomesDevelopment Outcomes

‒ Increase alignment between ex-ante DO assessment and ex-post DO monitoring to improve the transparency of DO achievement and to determine the predictive reliability of ADOA

‒ Include development outcomes reporting in the legal agreement to ensure compliance

‒ Bank needs to identify and to prioritize the qualitative factors of PSD strategy/objectives to improve decision-making of PSO projects approval at board meetings, e.g.,


Opportunities

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‒ Implement a more structured approach to project portfolio management.1

‒ Define time- or milestone- based core indications to improve tracking and reporting of development outcomes;

‒ Institute consistent framework and indicators for development outcomes ex-ante assessment and ex-post monitoring;

‒ Utilize a Decision Analysis approach (Multiple Attribute) to facilitate decision-making for the PSO given the multiple priorities.2

‒ Utilize modern portfolio management software solutions, including data visualization, to facilitate improved insights for senior management, decision making, and performance tracking.

Development OutcomesDevelopment Outcomes

1: For example, see: Richard M. Bayney, Ph.D., and Ram Chakravarti, Enterprise Project Portfolio Management, J. Ross Publishing, 2012, pp. 150-161. Also: Michael Meard, A Fish In Your Ear: The New Discipline of Project Portfolio Management, CreateSpace: North Charleston, SC, 2012..2. For example, see: Department for Communities and Local Government: London, Multi-Criteria Analysis: A Manual, Department for Communities and Local Government: London, 2009.

independent review of the bank’s non-sovereign portfolio: preliminary findings and lessons

Documents

portfolio performance

overall pso portfolio

pso strategy

deloitte powerpoint

banks nonsovereign portfolio

risk management

limited ability

overview strategic priorities