This story originally appeared in our June 2nd, 2011 e-magazine. Click here to subscribe.
Bart Edes, Director of Poverty Reduction, Gender and Social Development at the Asian Development Bank, shares his thoughts on the importance of the private sector and the role of private equity.
You mentioned at the Sankalp Forum 2011 that ADB is moving half of its resources to the private sector. Why is that?
To be clear, our long-term strategic framework, which we call “Strategy 2020,” indicates that 50% of our operations will be private sector operations or private sector development. That will include investing with private sector partners or working with governments to nurture the environment for the private sector. The reason that we are moving in this direction is that, as we have seen in the last many years in the Asia Pacific region, the private sector has been the engine that has driven the high growth rates you’ve seen in many countries, including here in India. That this is where growth is going to come from is clear and we need to do a bit of rebalancing in the years ahead to promote this great engine of growth.
How will you route your funding?
In the years ahead, we will continue to lend most of our money to the public sector for development, keeping in mind that that half in private sector also includes programs of the government to improve regulations, development of the capital markets, managing SMEs and that kind of thing. So most of our lending will go to governments in the next 10 years, but a share will go in the form of investments and lending with private sector partners.
The microfinance sector in India is in a state of crisis, what is your reading of that?
I won’t comment on the microfinance crisis in India, but to take MF generally, ADB has supported microfinance. This is an area where we were involved in social enterprise, many years ago, before the term ‘social enterprise.’ We can be considered part of the range of measures and approaches to democratize finance to empowering those who don’t have basic capital to invest and improve their lives in great opportunities. We definitely support MF and we will continue to be part of overall work in the financial sector
How do you see ADB vis-à-vis private equity as a tool for getting money to enterprises that need it the most?
In many cases, the projects we are financing would not be interesting to private equity. Part of the nature of being a development institution is that we will take on riskier projects, or projects that the private sector is wary of, [or] the government doesn’t quite have the resources for, or sometimes we are involved to help bring parties together, including equity funds. So the nature of the projects will vary, oftentimes there certainly will be overlap. [With] water or energy, for example, there will be private investment, as well as ADB investment.
[With] energy, we might be pushing more of a development agenda, so we have our own criteria for due diligence to make sure that environmental and social criteria are met. We might be encouraging the sponsors to adopt energy efficient modes in their energy plant or project. So we will be looking at it from that angle, not only the rate of return [or] a minimal meeting of legislation law requirements of the country, but maybe a step more – what can we do to make this project more social or environmental?
But given that PE is so often mostly focused in rate of returns, do you see it as a wise move for them to even be in social enterprise. Are they necessary?
I was in Thailand recently and there was a strong view in the case of social enterprises: they shouldn’t make more than a certain amount of money; they should cap their profit. There are varying views of this – there’s no set definition whether social enterprises should limit themselves.
ADB doesn’t have a position on this, but the question to me is would you rather have private equity funding the making of widgets, or would you rather have investing in some creative clever idea that is helping tens or hundreds of thousands of people access to basic healthcare, or to have employment, or provide access to energy? If it means the investor makes a high profit, if that has the effect in a particular case of expanding a service that can help disadvantaged, marginalized, excluded communities – that’s a positive thing.
There was an interesting debate at Sankalp where some said social entrepreneurs are different, while others said an entrepreneur is an entrepreneur. How does ADB see this debate?
My personal view is that social enterprises need to be driven by an entrepreneur. I would differ with those who say it’s all part and parcel of the same thing. Yes, entrepreneurs bring something valuable to the economy, to society by creating jobs and providing commodities or services that people are interested in in meeting needs. But you do see, when you sit down and talk with a social entrepreneur [or] the average entrepreneur, you see a difference most of the time. You see the heart, you see the drive, you see the ultimate mission a little bit differently, how they structure their business. There is something else at stake.
Should we welcome more entrepreneurial activity? Absolutely, whether it’s social or not, as long as it’s within the law, it’s a proper business operating with integrity and it adds additional social value over and beyond a normal business, I think that’s even better.
