BACKGROUND INFORMATION
ADB started a review of its inspection policy after its first inspection case, for the Samut Prakarn Waste Water Management project. The first draft of the working paper was released on 3 May 2002. Private sector operations (PSO), which provides equity, loans and various guarantees for projects which cannot secure sovereign guarantees directly to the private sector, were not subject in the past to ADB's inspection policy, as described below.

<Establishment of An Inspection Function, Nov 1995>
"As recognized in the Bank's policy on confidentiality and disclosure of information (R 134-94, approved on 9 September 1994), the Bank's private sector loans and investments differ in a number of fundamental respects from the Bank's public sector operations, necessitating different treatment under certain of the Bank policies. For example, under the Bank's confidentiality and disclosure policy, only limited information concerning a private sector project can be made publicly available without the project sponsor's consent. This special treatment is justified by the expectations of confidentiality that most private sector sponsors have regarding their business plans and operations and by the confidentiality undertakings that these sponsors ordinarily request from their co-sponsors and financiers. Because limited information will be publicly available concerning the Bank's private sector operations, and because the Bank's minority stake in any private sector project will ordinarily limit its ability to influence changes in the scope or implementation of the project, the inspection procedures proposed in this paper may not be effective or appropriate for private sectors"

<ADB's Inspection Policy: A Guidebook, Oct 1996>
"The possible extension of inspection policy to the Bank's private sector operations will be considered as part of a general review in two years."
"What matters are outside the scope of the inspection policy: complaints about the Bank's private sector operations"


■Review After the 1995 Policy
ADB implied review/revision of the inspection function when the policy was initiated in 1995 as follows.

"Given the special considerations and limitations that would apply to any inspections of private sector projects, it is considered advisable initially to exclude private sector operations from the scope of the Bank's inspection function, but to reconsider the matter as part of Management's general review of the inspection function after two years." (p 2, "Establishment of An Inspection Function", Nov 1995)

However, no revision has been made since 1995. Is is said that when a draft was made in 1999, the question of whether or not the inspection function should apply to the private sector was the most actively discussed.（14th Japan MOF・NGO Regular Meetings 2001/1/24）


■Reasons Why ADB Did Not Apply Inspection to the Private Sector in the 1995 Policy
１）Protection of confidentiality
ADB is required to protect private sector's confidentiality, as described the above.
２）The World Bank did not apply inspection function to private sector

"Notably, the World Bank's inspection procedures..., do not apply to the activities of the International Finance Corporation (IFC), its private sector affiliate, and IFC has not established such procedures for its own operations." (p 2, "Establishment of An Inspection Function", Nov 1995)

IFC (International Finance Corporation), the World Bank's private sector affiliate, did not have inspection function in 1995. IFC and MIGA (Multilateral Investment Guarantee Agency) set up the CAO (Compliance Advisor Ombudsman) in 1999, which responds to complaints for problem projects.

POINTS OF CONTENTION IN THE FIRST DRAFT OF WORKING PAPER
（3 May 2002）

■Points of Contention
1.　Small share of private sector operations in ADB operations: "Private sector operations represent less than 10%of ADB's lending activities. "

2. Confidentiality: "the need to protect business confidentiality"

3. Less disclosure: "The relative lack of information available to project-affected people will make it difficult to bring claims sufficiently early in the process to allow for effective remedies." ADB discloses substantially less information about private sector operations. (Note*1)

4. Operational procedure: "differences between private sector and public sector project cycles"

5. Cost increase and uncertainty: "The potential loss of business as increased costs and uncertainty could lead borrowers to seek funding elsewhere."

6. Small ADB stake in private sector projects: "Holding a minority stake may limit ADB's leverage over how the project operates, particularly after ADB has made its investment. "

7. Competitive abuse of accountability requirements: "Business competitors may use an accountability mechanism for their own competitive advantage."

8. ADB's liability: "ADB might face potential legal liability due to delays or increased costs caused in private sector projects."

9. Private sector's opinion: "Most would participate in projects where there is an inspection function, as long as business confidentiality is strictly assured, no extra costs are incurred by them and the project is not delayed." (ADB survey of representatives of the private sector in 2001)


■Comments on the Above
○ Accountability mechanisms for PSO are necessary regardless of the requirements of information confidentiality.

○ ADB, which is a public institution funded by donor governments, must be accountable to donor countries and affected people for effects caused by its lending. This precedes protection of private sector's confidentiality. In principle, ADB must apply the same level of information disclosure.

○ The accountability of ADB must not be diminished, regardless of the speed of a project or ADB's share of a project. Accountability of PSO must take precedence over concerns for project delays or increases in the cost of project preparation.

○ ADB must not diminish PS responsibility by pointing out that borrowers may seek funding elsewhere due to increased cots and uncertainty.

○ The fear of abuse of accountability mechanisms for business advantage must not be the reason for diminishing accountability.

■SUGGESTIONS
1.　Need for ADB's own mechanism to secure accountability
ADB's inspection policy must be applicable to private sector operations (PSO).

2.　Accountability precedes confidentiality
Project Profile (PP) and RRP of PSO must be disclosed to facilitate problem solving at an earlier stage of the project cycle. Otherwise, potentially affected people have no way of collecting information needed to file an inspection claim. If any information must be withheld, the PP and RRP should provide all other information, together with the reasons for withholding the undisclosed information.

3. Clarify operational procedures to secure social and environmental soundness in private sector operations
ADB lacks clarity about operational procedures for private sector operations, especially regarding procedures for social and environmental considerations. This could hinder inspection of ADB-funded enterprises' to check compliance with ADB's operational procedures.
PSO procedures for environmental and social assessment should be described more clearly so they can be more useful for inspections.（For operational procedures, see attached. )

Note*1: For example, Project Profile (PP) is only made available to the public "after Bank Management has determined that the project is likely to be presented to the Board for consideration and the PROJECT SPONSORS have CONSENTED to the Project Profile's release. On the other hand, for ADB Public Sector Operations, the initial PP is released at a very early stage of the project cycle, after the project/program has been included in the CAP (County Assistance Plan) or when concept clearance is issued. Also, Reports and Recommendations of the President (RRP) for specific private sector projects are only released to the public with the PRIOR CONSENT of the PROJECT SPONSOR. (As of April 2002, such consent had never been given.)

Concerns about ADB's Operations Manual (OM) for Private Sector Operations
Regarding the OM, which stipulates operational procedures for ADB staff, in general, we have general concerns that all policies are not incorporated into OMs, and that OMs are sometimes not updated to reflect significant policy developments. Below is a list of issues and recommendations regarding the OMs for private sector operations.

Issues and Recommendations:
１）Assistance to private sector
OM7 "Assistance to Private Sector Enterprises" (Oct 1996)
Issues＞
Regarding the environmental impacts of private sector operation, OM7 states that ADB will consider this aspect "as early as possible" during the project cycle. However, it is entirely unclear what stage of the project cycle this should be done. Also, there is no mention in OM of consideration for social impacts that may arise from private sector operations.
　 To facilitate "speedy action", "sufficient flexibility" is allowed in regard to tendering, bid evaluation, and award of contract for private sector operation.
　Also, OM7 states that ADB respects the confidentiality of information received from the project sponsor as well as other sources regarding projects or assisted enterprises.

Recommendation＞
ADB should clarify in OMs operational procedures regarding social and environmental impacts, the bidding process, and information disclosure. These requirements should be the same as the public sector operations, in principle.

２）Environmental Consideration
OM20 "Environmental Consideration in Bank Operations" (Jan 1997)
Issues＞
OM20 states that "flexible procedure" will be adopted for private sector operations and that substantive requirements pertaining to environmental aspects of private sector loans shall be "similar" to those for public sector loans. On the other hand, environmental policy currently being drafted states that environmental requirements of private sector operations are same as the public sector operation. This becomes conflict.
　For private sector operations, PPTA（Project Preparatory Technical Assistance) is not required, in principle. In this case, it is unclear how ADB will supervise environmental assessments carried out by/for the private sector's .

Recommendation＞
OMs should also state that environmental requirements of private sector operation is same as the public sector operation. Above all, procedures to ensure environmental consideration should be clarified for the private sector operations not requiring PPTA.

３）Social Concerns
OM47 "Incorporation of Social Dimensions in Bank Operations" (Jan 1997)
Issues＞
OM47 states noting regarding private sector operation. As described above, PPTA is not basically required for private sector operation, in principle, which means that ISA（Initial Social Assessment）is not conducted under the ADB's supervision.

Recommendation＞ OMs should state that ISA is required for private sector operations as it is for the public sector operation.

４）Information Disclosure
Issues＞
There is no OM concerning "public Disclosure". Therefore, the operational procedure for information disclosure within ADB is not clear to the public.
　In "Confidentiality and Disclosure of Information" (1994), the Bank adopts "presumption in favor of disclosure for its private sector operations where disclosure would not materially harm the business and competitive interests of Bank clients”. Also, it states that, "regarding business plans and objectives of a private sector client, disclosure must only be made with the client's consent”.

Recommendation＞
ADB should create an OM for information disclosure. The OM should state that ADB requires the same level of information disclosure regarding private sector operation as for public sector operations. If ADB adopts different operational procedures regarding private sector operations, these should be clarified in OMs.

５）Poverty Reduction
Issues＞
There is no OM concerning poverty reduction. Therefore, ADB's operational procedureｓ for promoting poverty reduction are not clear to the public.
　The Private Sector Development Strategy is stated as part of the Poverty Reduction Strategy. However, of the three trusts of poverty reduction, "economic development", "good governance", and "social development", it is unclear how and what private sector development will contribute to the latter two.

Recommendation＞
ADB should create an OM for poverty reduction. The OM should clarify the operational procedures and methods to achieve "good governance", and "social development."