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Session 1999-2000
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Delegated Legislation Committee Debates

Draft African Development Bank (Further Subscription to Capital Stock) Order 1999

First Standing Committee on Delegated Legislation

Tuesday 25 January 2000

[Mr. Barry Jones in the Chair]

Draft African Development Bank (Further Subscription to Capital Stock) Order 1999

10.30 am

The Parliamentary Under-Secretary of State for International Development (Mr. George Foulkes): I beg to move,

    That the Committee has considered the draft African Development Bank (Further Subscription to Capital Stock) Order 1999.

The Chairman: With this we may consider the draft African Development Fund (Eighth Replenishment) Order 1999, the draft International Development Association (Twelfth Replenishment) Order 1999, and the draft Multilateral Investment Guarantee Agency (Further Subscription to Capital Stock) Order 1999.

Mr. Foulkes: I have not had the privilege of sitting on a Committee under your chairmanship before, Mr. Jones, and I look forward to doing so.

The African Development Bank provides development finance on non-concessional terms to 13 African borrowing member countries. Current lending is running at about $1 billion a year. The bank uses the capital subscribed by its members, including the United Kingdom, as collateral against which it can borrow on the financial and international capital markets. The money that the bank borrows in that way, together with repayments on earlier loans, is then on-lent at a margin to borrowing countries.

In the late 1980s and early 1990s, the bank's financial performance deteriorated because of the absence of a rigorous lending policy, the emergence of a serious loans arrears problem, and weak and inefficient management. However, in October 1995, a new president, Mr. Omar Kabbaj from Morocco, was elected with the mandate of restoring confidence in the bank. During the past four years, as a result of the introduction of stringent financial policies, the bank's financial health has much improved, and it is now performing well on most financial indicators.

The president introduced a programme of institutional reforms covering human resource management, financial management, project quality and institutional governance, through which the bank has achieved a great deal in a relatively short time. However, in terms of the quality of its lending programmes, the bank still has some way to go to reach the level of the other regional development banks. In particular, it remains hampered by inadequate staffing and delays in developing the right skills mix, mainly due to resource constraints--one of which we shall consider today--and recruitment difficulties.

However, Mr. Kabbaj has made a good start in restructuring the bank to make it more effective. It is now better able to draw on its traditional strengths, which derive not only from its substantial resources for lending, but from what is described as its "African character". It is the only institution of its kind that is based in Africa, staffed mainly by Africans, and majority owned by African countries. It is therefore important that the president has, and continues to receive, our support to complete his reforms, so that the bank can fulfil its potential as an African development institution.

The agreement reached in May 1998 on the fifth capital increase, known as GCI-V, was an important step for the bank. It does not at present need more capital for lending purposes. Rather, the capital increase was an important signal of the confidence that members, especially we non-regional members, had in the bank and in Mr. Kabbaj's reform programme. It was also a means of obtaining a more balanced capital structure for the bank, which we had been seeking. Under GCI-V, the authorised capital of the bank will be increased by 35 per cent. Most importantly, GCI-V will increase the non-regional shareholding in the bank from 33 to 40 per cent., and introduce qualified majority voting of 66 per cent.--70 per cent. on key issues--instead of a simple majority. That will meet our and other non-regional members' objectives of securing a larger stake in the bank in order to exercise more effective control, and forestall any reversal of the hard-won policy and institutional reforms that have been secured over the last four years. Subject to the Committee's approval, the cost of the 6 per cent. paid-in share of the capital increase to the United Kingdom will be about 6.9 million over eight years, starting in the current financial year.

The African development fund is the concessional lending arm of the African Development Bank. It provides about 1 billion a year of development assistance to 39 of the poorest countries that are not creditworthy enough for African Development Bank loans. The fund is largely financed by donor contributions. As fund loans are interest-free and have long maturity periods, income is low. Consequently, if the fund is to continue to lend, it needs to be replenished regularly--usually every three years. Negotiations on the eighth replenishment of the fund, ADF-VIII, were concluded in January 1999.

Replenishment negotiations provided an important opportunity for donors to set priorities, and the policy and operational agenda, for fund activities over the next three years. Those are set out in the ADF donors report which lists various actions against which bank progress on the implementation of ADF-VIII will be monitored. In the report, donors strongly endorsed the bank's affirmation that poverty reduction was its central goal, and that it would centre its poverty focus around achievement of the international development targets so that scarce concessional resources could be used effectively to make a lasting impact on African poverty. As members of the Committee know, those targets are central to our policy, to the White Paper and to our work in the United Kingdom.

Under ADF-VII, priority will be given to poor countries that demonstrate a commitment to improving living standards, strengthening institutional capacity, redressing inequities and improving governance. Accordingly, allocation of fund resources will be based on an assessment of actual performance, rather than promises of action.

The 1.8 billion replenishment was only about three quarters of what had been sought by the bank's management. Although donors were strongly supportive of the direction in which the bank was moving, and commended the quality of the papers produced for the negotiations other donors' budgetary positions meant that few were able to reflect that support in their contributions to the replenishment. Therefore, in the interests of fair burden sharing, the United Kingdom pledged to increase our share from 4 to 5.5 per cent. The bank will help to fill the funding gap by making a contribution from its net income. Subject to the Committee's approval, the British share of the replenishment will be around 98.6 million at current exchange rates. Payment will be by three promissory notes, with drawdown of contributions expected to start in 2001, spreading over several years.

Last Autumn, the Secretary of State approved publication of the Department for International Development institutional strategy paper for the African Development Bank, copies of which have been placed in the Library, That sets out the Government's objectives for working with the bank for the next three years. We have three aims. The first is, to continue our support for the strengthening of the bank through the on-going programme of institutional reforms introduced by the president, Mr. Kabbaj, and the second is to help the bank to improve its poverty focus so that it can play its part in contributing towards achievement of the international development targets. Our third aim is to start a process of re-engagement between the DFID Africa division and the bank with a view to helping it to improve the developmental impact of its country programmes. We believe, therefore, that the African Development Bank can play an increasingly important role in the reduction and eventual elimination of poverty in Africa.

The third order concerns the International Development Association, which is the concessional lending arm of the World bank group. It is the largest source of concessional lending, with commitments of 7.5 billion in the fiscal year 1999. IDA provides loans, known as credits, to the poorest countries--mainly those with an annual per capita income of less than 925 in 1996 prices. As with the African Development Fund, IDA credits have maturities of 35 to 40 years with a 10-year grace period; they are interest-free but carry a small service charge. Consequently, IDA too is largely dependent on donor funding, although it can call on repayments from earlier credits and transfers from the net income of the International Bank for Reconstruction and Development--IBRD--which is the non-concessional lending arm of the World bank. For IDA to carry on lending, its resources must be replenished approximately every three years.

Negotiations on the twelfth replenishment of IDA were completed in November 1998. The package of support for IDA-12, agreed by donors, will allow IDA to provide 20.5 billion to poor countries between 2000 and 2002. New contributions from donor countries to the package will total 11.6 billion, with the balance coming mainly from the repayment of earlier IDA credits and contributions from the World bank.

Donors agreed that IDA-12 activities would revolve around the objective of poverty reduction, in support of the efforts of borrowing countries in the context of the international development targets. IDA resources will focus on investing in people, particularly in the social sectors, promoting good governance and broad-based growth, protecting the environment and mainstreaming gender in all IDA operations--I am sure that there are at least two Opposition Members on the Committee who approve of the latter objective. A special effort will be made to allocate 50 per cent. of IDA-12 resources to countries in sub-Saharan Africa that are pursuing sound policies. In response to donors' wishes, IDA's country performance allocation system has been revised to strengthen the link between allocations and policy performance. The system now takes full account of policies for reducing inequalities, and of governance issues including the accountability of public institutions, transparent policy making and openness to participation by citizens.

The Department's institutional strategy paper on the World bank, which is to be published shortly, recognises that the bank has enormous strengths in terms of the scale of its lending, its operations across the globe, the degree of influence it brings to bear on the policies and priorities of borrowing member countries, and its capacity to exercise intellectual leadership on global issues. Among the multilateral development institutions, the World bank plays a leading role in setting and pursuing the international development agenda, and I am glad to say that it is now fully committed to contributing to the international development targets.

Under the leadership of the president, Mr. James Wolfensohn, the bank is making strenuous efforts to become more developmentally effective. We are encouraging the bank to ensure that poverty is mainstreamed into the design and implementation of all its projects and programmes. The Department welcomes the recognition that to be more effective the bank needs to foster more participation and more ownership in the design and implementation of its programmes. We strongly support the principles underlying the comprehensive development framework and the poverty reduction strategy papers, which are essential to help overcome the present fragmented development system by bringing together all the development institutions.

Our institutional strategy paper considers how the Government can continue to work with the World bank group to achieve its and our, overarching objective of contributing to the elimination of poverty. Our goals centre on four issues; the first of which is reinforcing the bank's poverty mission, with the focus on development targets. Secondly, we want to build relationships with other development partners, borrowing member countries, other multilateral institutions, bilateral donors and civil society in the countries concerned. Our third aim is to improve organisation and effectiveness, with a view to achieving greater development impact; the fourth is to strengthen the bank's financial capacity, to enable it to deliver its mandate to promote development. If the draft order receives parliamentary approval, the United Kingdom's share of IDA-12 will be 7.3 per cent. That is worth 511 million and will make us, with France, the joint fourth largest donor to IDA, after the United States, Japan and Germany.

Finally, we come to the Multilateral Investment Guarantee Agency, which is part of the World bank group and works directly with the private sector. MIGA was established in 1988 and aims to help developing countries to attract foreign investment. In return for a premium, MIGA provides insurance to both foreign and domestic private sector investors against non-commercial risks--political risks, for example--such as currency transfer impediments, expropriation, civil disturbance and war. MIGA complements the work of national guarantee agencies, such as the Export Credits Guarantee Department, which, for various reasons, are unable or unwilling to meet all the market demand for such insurance. MIGA also provides Governments with advice on improving the climate for foreign investment.

After a slow start, there was a rapid rise in demand for MIGA guarantees in the 1990s, and annual business is now worth 800 million. To date, MIGA has issued 348 guarantee contracts, which cover direct risks totalling 3.5 billion. The related foreign direct investment facilitated by MIGA involvement is 25 billion. My right hon. and hon. Friends, particularly my right hon. Friend the Member for Coatbridge and Chryston (Mr. Clarke), who used to speak on this subject for the Labour party, will know how important foreign direct investment is in promoting growth and eradicating poverty in developing countries.

In September 1997, agreement was reached on a 1 billion recapitalisation package for MIGA, comprising a capital increase of 850 million and a grant transfer of 150 million from IBRD net income. That capital increase is the first since MIGA was created in 1998 and is necessary to enable MIGA to expand to meet the growing demand for its services. It will allow MIGA to develop a portfolio of new guarantees of between 15 billion and 24 billion up to the fiscal year 2006. The new guarantees will, it has been estimated, facilitate between 105 billion and 168 billion of much-needed new foreign direct investment in developing countries.

It is clear that MIGA is performing a worthwhile function, but there is room for improvement in its method of operation. The DFID welcomes MIGA's agreement, in the context of the capital increase, to ensure that its project selection criteria and underwriting structure should focus on achieving developmental effectiveness. In particular, MIGA should increase its activity in the poorest--inevitably, also the riskiest--markets. Progress has been made on several new policies that are designed to improve developmental effectiveness, such as core labour standards and social, environmental and disclosure policies. We shall press the management of MIGA to ensure that all those are implemented. Subject to party approval, the United Kingdom's share of the capital increase will be 40 million, of which 7 million will be paid over three years, commencing in the current financial year. At the prevailing rate of exchange, that will cost about 1.43 million a year.

We are pleased to continue the support given by successive British Governments to the important institutions that I have mentioned. Clearly, they are dedicated to working for sustainable development and the elimination of poverty. On that basis, I commend the orders to the Committee.

10.49 am


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