Independent Review of the Bank’s Non-

Sovereign Portfolio:
Preliminary Findings and Lessons
Mohamed Manai
OPEV
African Development Bank
www.afdb.org/opev
Operations Evaluation Department
Four (4) critical work streams were identified:

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

Operations Evaluation Department

 B: Methodology and Approach
• 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

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

©2011 Deloitte Global Services Limited

Operations Evaluation Department
 Strategic Alignment
Workstream

6 Deloitte PowerPoint timesaver – March 2011

Overview – Strategic Priorities

Infrastructure,
Industry & Service Sectors DFI
Intermediary MSME’s LIC’s Partnerships
Financial Support Fragile States Strong
Equity Growth

Political Risk Sharing Portfolio Operational

Risk Instruments Quality Efficiency

Member Government
Support Exposure
Limits Social

Cautious Environment
Growth Risk Rating
Targets
Household

7 ©2011 Deloitte Global Services Limited

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

1. Improving the Investment Climate

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

8 ©2011 Deloitte Global Services Limited

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

9 ©2011 Deloitte Global Services Limited

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

10 ©2011 Deloitte Global Services Limited

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

11 ©2011 Deloitte Global Services Limited

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

12 ©2011 Deloitte Global Services Limited

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

©2011 Deloitte Global Services Limited

13
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

©2011 Deloitte Global Services Limited

14
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

©2011 Deloitte Global Services Limited

15
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

16 ©2011 Deloitte Global Services Limited

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

17 ©2011 Deloitte Global Services Limited

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

18 ©2011 Deloitte Global Services Limited

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 ©2011 Deloitte Global Services Limited

 Portfolio Performance
Pillar

20 Deloitte PowerPoint timesaver – March 2011

Overview of Portfolio Performance: the majority of projects are performing

21 ©2012 Deloitte Financial Advisory Services LLP

Overview of Portfolio Performance – Watch List

22 1: Includes 1 project on the signed not disbursed (watch list) ©2012 Deloitte Financial Advisory Services LLP
Overview of Portfolio Performance: Investment profitability

• 1Investment profitability available for fully disbursed

PSO deb projects only

Equity Age of Cumulative returns2

investments fund Low Average High

Fund raising 0-2 -97.5% -38.7% -3.7%

phase
Investment 3-6 -48.5% -1.8% 62.5%
phase
Divestment 7+ N/A N/A N/A
phase
Information Note: Equity Portfolio – Risk Capital
2

Utilization and Performance, October 2012

Investment profitability available for fully disbursed

PSO deb projects only

23 ©2012 Deloitte Financial Advisory Services LLP

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 ©2012 Deloitte Financial Advisory Services LLP
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:

25 ©2012 Deloitte Financial Advisory Services LLP

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?

26 ©2012 Deloitte Financial Advisory Services LLP

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

• .

27 ©2012 Deloitte Financial Advisory Services LLP

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

28 ©2012 Deloitte Financial Advisory Services LLP

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
29 ©2012 Deloitte Financial Advisory Services LLP
Development outcomes: To what extent does quality-at-entry default have a cost and
negative impact on the portfolio performance?

Based on file review of the ADOA note available on file

1:

for the 24 sample projects.

30 ©2012 Deloitte Financial Advisory Services LLP

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

31 ©2012 Deloitte Financial Advisory Services LLP

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.

32 ©2012 Deloitte Financial Advisory Services LLP

 Opportunities
Topics Opportunities

‒ Implement quarterly investment profitability tracking system for

projects;
Project Implementation Performance
‒ 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;
Additionality
‒ Explore additional / innovative financial instruments to meet clients’
needs;
‒ Proactive in seeking ways to support political risk mitigation of PSO
projects
‒ Increase alignment between ex-ante DO assessment and ex-post DO
Development Outcomes 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 ©2012 Deloitte Financial Advisory Services LLP
Opportunities

‒ Implement a more structured approach to project

Development Outcomes
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.

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,
34 Department for Communities and Local Government: London, 2009. ©2012 Deloitte Financial Advisory Services LLP