IDB-9: Assessment of IDB-9's Private Sector Development Framework

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Mar 2013
This background paper assesses the actions of the Inter-American Development Bank (IDB, or Bank) related to private sector development (PSD) that were mandated under the Ninth General Capital Increase in Resources (IDB-9). It finds that Management has taken the necessary formal steps to address most of the requirements: preparing a new PSD Strategy; drafting a Non-Sovereign Guarantee (NSG) Business Plan; creating guidelines for specific sectors, beginning with small and medium-sized enterprises; reviewing the NSG guidelines for entities with public participation; gradually expanding NSG prudential limits; supporting the Inter-American Investment Corporation with subordinated lending; adapting the public-private mix to country requirements; adopting measures to improve coordination among PSD and private sector operations windows; and taking steps to enhance NSG development effectiveness. The major area not yet addressed is the integration of NSG operations in Country Strategies and programs. The paper also finds, however, that these steps do not yet provide an appropriate and effective way to achieve the underlying objectives of IDB-9 with regard to the IDB Group's support for development through the private sector. The strategic documents do not lay out an effective and operationally relevant strategy to ensure substantial value added in IDB's support for the private sector. Such a strategy would need to recognize and build on the drivers of productivity gain and economic growth: fostering entry, creating new markets, and supporting competition and innovation. These drivers depend both on public sector initiatives to improve the business environment and on private sector response, and thus an effective strategy has important implications for the sovereign guarantee (SG) and NSG sides of the Bank and for the IDB Group as a whole. One significant challenge relates to coordination between the two sides of the Bank and among the private sector windows of the Bank Group. Despite repeated attempts by Bank Management to strengthen this coordination, it remains a major challenge. Indeed, the analysis finds that operations with coordinated SG and NSG actions and integrated objectives are rare. Limited coordination has resulted in significant lost opportunities¿ and not only in infrastructure, where improved collaboration would bring clear gains (as in operations involving public-private partnerships and concessions). Coordination could enhance the Bank's additionality in financial sector operations as well, with improvements of financial markets regulation concomitant with second-tier support or the set-up of facilities with client financial institutions. OVE also finds that, despite some progress, the accomplishment of the IDB-9 requirements pertaining to development effectiveness is still a work in progress. Going forward, it is critical for the Bank to forge an institution-wide shared vision for the private sector, while leveraging the potential for collaboration of the public and private sides of the Bank. The paper suggests some structural options and incentive-related steps in that direction.