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Independent Review of the Bank’s Non-Sovereign Portfolio: Preliminary Findings and Lessons. Mohamed Manai OPEV. African Development Bank www.afdb.org/opev. Outline. Four (4) critical work streams were identified: Strategic Alignment, Portfolio Performance,

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Independent Review of the Bank’s Non-Sovereign Portfolio: Preliminary Findings and Lessons

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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

Mohamed Manai

OPEV

African Development Bank

www.afdb.org/opev


Outline

Outline

Operations Evaluation Department


Independent review of the bank s non sovereign portfolio preliminary findings and lessons

Four (4) critical work streams were identified:

  • Strategic Alignment,

  • Portfolio Performance,

  • Risk Management and

  • Institutional Efficiency.

Operations Evaluation Department


Independent review of the bank s non sovereign portfolio preliminary findings and lessons

  • 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

B: Methodology and Approach

Portfolio data on 137 active projects

File review of reports specific

To each inception question

Field interviews on 18% of portfolio projects

Benchmarking of comparable IFI’s


Independent review of the bank s non sovereign portfolio preliminary findings and lessons

Operations Evaluation Department


Strategic alignment workstream

Strategic Alignment Workstream

Deloitte PowerPoint timesaver – March 2011


Overview strategic priorities

Overview – Strategic Priorities

Infrastructure,

Industry & Service Sectors

DFI

Partnerships

Intermediary

Support

LIC’s

Fragile States

MSME’s

Strong

Growth

Financial

Equity

Risk Sharing

Instruments

Portfolio

Quality

Operational

Efficiency

Political

Risk

Member

Support

Government

Exposure

Limits

Social

Cautious

Growth

Environment

Risk Rating

Targets

Household

7


To what extent is the pso portfolio aligned to the strategy s five objectives

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


To what extent is the pso portfolio aligned to the strategy s five objectives1

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


To what extent is the pso portfolio aligned to the strategy s five objectives2

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

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


To what extent is the pso portfolio aligned to the strategy s five objectives3

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

  • 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

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


Independent review of the bank s non sovereign portfolio preliminary findings and lessons

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 targets

      based on volume, fell short for Industry

      & Services sector

    • Higher share of financial intermediary

      projects than peers

    • Greater risk exposure and time

      requirements to reach disbursement

      on infrastructure projects, also greater

      monitoring requirements

13


Independent review of the bank s non sovereign portfolio preliminary findings and lessons

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 than

      MIC and regional projects

14


Independent review of the bank s non sovereign portfolio preliminary findings and lessons

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 higher

      at other IFI’s

    • Higher weighted risk rating (4.9) for equity

      investments than loans

    • Lacking correlation between DO and

      instrument, but clear additionality

      on equity investments

    • Equity interventions are riskier and

      need far greater management and

      monitoring than loans

15


Are the pso instruments responsive to strategic goals and objectives

Are the PSO Instruments Responsive to Strategic Goals and Objectives?

  • Market demand exists for expanded guarantee and trade finance products

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


Are the pso instruments responsive to strategic goals and objectives1

Are the PSO Instruments Responsive to Strategic Goals and Objectives?

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

  • 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


Opportunities

Opportunities

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


  • Opportunities continued

    Opportunities (continued)

    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)

  • 19


    Portfolio performance pillar

    Portfolio Performance Pillar

    Deloitte PowerPoint timesaver – March 2011


    Overview of portfolio performance the majority of projects are performing

    Overview of Portfolio Performance: the majority of projects are performing


    Overview of portfolio performance watch list

    Overview of Portfolio Performance – Watch List

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


    Overview of portfolio performance investment profitability

    Overview of Portfolio Performance: Investment profitability

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

      Investment profitability available for fully disbursed PSO deb projects only

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


    Independent review of the bank s non sovereign portfolio preliminary findings and lessons

    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?

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


    Independent review of the bank s non sovereign portfolio preliminary findings and lessons

    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?

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


    Independent review of the bank s non sovereign portfolio preliminary findings and lessons

    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?


    Independent review of the bank s non sovereign portfolio preliminary findings and lessons

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

    • .


    Independent review of the bank s non sovereign portfolio preliminary findings and lessons

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


    Independent review of the bank s non sovereign portfolio preliminary findings and lessons

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

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


    Independent review of the bank s non sovereign portfolio preliminary findings and lessons

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

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


    Independent review of the bank s non sovereign portfolio preliminary findings and lessons

    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


    Independent review of the bank s non sovereign portfolio preliminary findings and lessons

    Strengths and advantages of the DO monitoring and tracking process

    • 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.


    Opportunities1

    Opportunities

    Topics

    Opportunities

    Project Implementation Performance

    • 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.

    Additionality

    • 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

    Development 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.,

    33


    Opportunities2

    Opportunities

    • 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 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.


    Thank you

    Thank you


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