Bank watchdog calls ADB response to financial crisis a sham: Deep concerns about high risk offshore private equity portfolio

According to Red Constantino of the NGO Forum on the ADB, "the bank is proposing a blinkered, business-as-usual program that will not prevent developing countries from sliding back into poverty but instead is likely to cause environmental destruction and social dislocation."

The NGO Forum on the ADB also released a scathing report detailing the ADB's high-risk low-return foray into private equity funds and pointed to the potential large-scale misuse of the 200 percent capital increase the ADB recently secured.

"The ADB's handling of its private equity funds is scandalous and presents a material risk not only to the ADB but to project affected communities and the environment," said Stephanie Fried of Environmental Defense Fund.

According to a 2008 report released by the ADB's own audit department,  the Operations Evaluation Department, "[T]here seems to be no regular internal ADB assessment, reporting, or focused management of reputational, environmental, or other nonfinancial risks [for Private Equity Funds (PEFs)]. This issue is particularly important at the investee level where any problems such as environmental damage, child labor, or other forms of corporate misconduct, are most likely to occur." [1]

The ADB's portfolio of private equity funds are largely domiciled in secrecy jurisdictions such as the Cayman Islands, Basic information about the funds – including the names of the investee companies held by the funds, assessments of the environmental and social impacts of the investee companies -- are not made public.

The ADB has targeted PEFs as a key component of its private sector development strategy.  It has invested in close to 40 PEFs which for the most part are domiciled in secrecy jurisdictions such as the Cayman Islands. The funds appear to be outside the scope of reasonable due diligence pertaining to the financial aspects of these funds as well as the poverty alleviation, environmental, labor and other impacts of their investments. According to the ADB, these funds may have invested in over 400 portfolio companies in sectors which include infrastructure, energy, and manufacturing.  Over 50 percent of the funds have been initiated since 2003 and, as of last year, the entire portfolio was overseen by two junior staff.

In 2008, the ADB Board approved a suite of 5 “clean energy” private equity funds to implement 60 to 80 “clean energy” projects by 2014. “The astonishing thing is that the so-called “clean energy” equity funds include proposals for financing Indonesian palm oil operations and other highly controversial projects which are likely to have significant negative climate impacts,” said Stephanie Fried. “Yet, there is no information on the proposed portfolio companies and no way for the public and affected people to have any sort of input into the process.”

The names of  portfolio companies funded by ADB’s equity funds are not made public, nor are any documents pertaining to environmental and social impacts

The Bank's audit department found that the "development impacts are not clear, and financial performance has been poor. Post-investment approval, funds have often departed significantly from approved investment concepts and there are few mechanisms available to Private Sector Operations Department (PSOD) to mitigate this risk." In addition, according to the audit department  "ADB has not made sufficient use of provisions in fund agreements such as a requirement for comprehensive business plans, opt-out clauses, and veto rights. [2]

The NGO Forum on the ADB questioned the rationale for public financial institutions such as the ADB financing off-shore funds.

Despite past failures at fast-disbursing "crisis funding" - including the Bank's response to the Indonesian monetary crisis in the late 1990s - the Bank's push for large infrastructure projects such as the controversial West Seti hydropower project in Nepal and continued reliance on offshore private equity funds, while reducing environmental and social safeguards, is likely to prove a direct threat to the lives and livelihoods of the poorest of the poor. "The ADB's track record with large infrastructure is rife with examples of massive displacement of impoverished communities, destruction of forests and river systems upon which local communities depend, " Constantino said. "We urge a total rethink of this plan."

The Forum raised the conflict between the ADB's mandate of poverty-alleviation and its recent re-commitment to private sector large-scale infrastructure. "It highlights a disturbing trend likely to lead to further impoverishment and environmental degradation, including more severe climate impacts," said Ahmed Swapan of the Dhaka-based organization VOICE. "Experience and numerous studies have shown that unsustainable solutions fail the poor and introduce financial risks," Swapan said.

The Forum expressed shock at what it called "a cynical attempt by the ADB to use the current crisis to re-promote discredited large-scale infrastructure-biased development." In a meeting with the NGO Forum last Saturday, the ADB's Auditor General explained that rapidly disbursing crisis loans are the most prone to corruption and fraud. "The contradictions are screaming," said Constantino, who pointed to the ADB report released in its 42nd annual meeting where the ADB committed to "consider increasing its share of financing for ongoing infrastructure projects and simplify feasibility analysis and approval processes" in response to the financial crisis.[3]

The NGO Forum on the ADB is an Asian-led, 250-strong network of civil society organizations that has been monitoring the bank's policies, projects and programs since 1992.

[1] Operations Evaluation Department, Asian Development Bank, “Private Equity Fund Operations, Special Evaluation Study,” July 2008, page 95, Appendix 5.
[2] Ibid.
[3] The Global Economic Crisis: Challenges for Developing Asia and ADB's Response, p. 21. The full section where the quote is from is: "ADB will be flexible in financing identified shovelready infrastructure projects. To deliver stimulus quickly, these projects need to start soon—or already be under way. ADB will consider increasing its share of financing for ongoing infrastructure projects and simplify feasibility analysis and approval processes. It will also examine possibilities for financing infrastructure operations and maintenance, another quick-start option. In private sector operations, ADB will consider financing more than the usual 25% of the cost of high-impact infrastructure projects.”