Memorandum submitted by the Department
for International Development
EXECUTIVE SUMMARY
The African Development Bank (ADB) shares DFID's
goal of reducing poverty and achieving the Millennium Development
Goals in Africa. The ADB is becoming an increasingly important
player in the continent. In 2007 it committed about £2 billion
for development projects in Africa: £1.2 billion out of its
non-concessional window for middle income countries and £800
million from its concessional window for low income countries.
The ADB is making concerted efforts to build
capacity and regain its role as a key development organisation.
President Kaberuka's appointment in 2005 saw the launching of
a large reform programme for the Bank which is still being implemented.
In the past 18 months it has reorganised to strengthen its country
focus and to be more selective in its priority areas. The Bank's
focus is on promoting growth through infrastructure development
and regional integration.
Negotiations for the eleventh replenishment
of the African Development Fund (ADF) concluded in December 2007.
Donors agreed a record level of support and over the next three
years (2008-10), the total resources available to the ADF will
reach $8.9 billion (£4.5 billion). This reflects both increased
donor confidence in the Bank due to the implemented reforms, and
also the increased role that its shareholders want to see it playing
in Africa.
Recognising the good progress made and the Bank's
potential, the UK doubled its contribution to ADF 11, pledging
£417 million. In recent years, DFID has stepped up our engagement
with the ADB, providing more support to the reform and policy
agendas. In addition to core funding of the ADF, DFID provides
assistance to the Bank through a Technical Cooperation Arrangement.
This will provide up to £13 million over five years.
President Kaberuka commissioned a High Level
Panel to set out a vision for the Bank and a roadmap for getting
there. The Report states that the ADB "can and must become
the premier development institution in Africa". It sets out
a roadmap which includes: the Bank being selective in its approach,
focussing on regional integration and fragile states, optimising
the use of its capital, and building its capacity.
The World Bank is a larger player than the ADB
and has more resources. The Banks are working together on key
policy areas, and as decentralisation of both institutions increases,
more joint working is expected.
THE AFRICAN
DEVELOPMENT BANK
1. The African Development Bank (ADB) was
set up in 1964, modelled in many respects on the World Bank, but
with exclusively African membership. Its soft loan fund, the African
Development Fund (ADF), was set up in 1972 and its creation led
to non-regional countries becoming members. A third lending window,
the Nigeria Trust Fund, was set up in 1976 and makes limited financial
resources available at below market rates.
2. The UK has been a member of the ADB since
1983, and has 1.676% of the capital, placing it in the 6th position
among non-regional shareholders. It joined the ADF in 1973.
3. African countries retain a dominant position
in the governance of the African Development Bank Group and on
its Executive Board. There are separate Boards for the ADB and
ADF. At the ADB, there are 18 seats, of which 12 represent African
member countries, who hold 60% of the votes. In the ADF, the 12
seats—and the votes—are split equally between the
ADB and donor countries. In both the Bank and the Fund, the UK
shares a constituency with Germany, Netherlands and Portugal.
4. The role of the Board of Directors is
to provide policy direction to the institution and to monitor
and supervise management's actions. In the past, the Board has
not worked as effectively as it could have. It can best add value
by making tamely decisions and providing strategic direction.
The recent performance of the new Board, mostly appointed in 2007,
has been encouraging.
5. The ADB lends to 13 middle income countries
(MICs). In 2007, it committed £1.2 billion in loans. The
ADF provides concessional loans and grants to low income countries,
and committed about £800 million last year. Lending to the
private sector provides finance to non-sovereign entities and
in 2007 it was about £700 million, up from £100 million
in 2004.
6. In late 1980s and early 1990s, through
mismanagement, the Bank's relationships with its members and donors
came under substantial strain. The Bank lost its AAA rating and
members—both borrowers and donors—lost confidence
in the institution.
7. Since then, the ADB has been on a path
of reform. This initially focussed on improving its financial
position and controls, and subsequently has addressed other issues
to improve the management and running of the Bank. Efforts are
now focussed on improving its development effectiveness.
8. Since taking up his appointment as President
in 2005, Donald Kaberuka has continued and accelerated the reforms,
providing strong leadership to the Bank. President Kaberuka came
with a reputation for being a reformist and has implemented many
changes since he arrived. In the last two years, the Bank has
implemented a series of reforms to improve their ability to provide
high quality assistance to African countries.
9. Among the most important reforms is increasing
the number and quality of its staffing. The ADB has reduced its
vacancy rate from 20% to less than 5% (of current staffing levels)
in the past 18 months. The Bank is also in the process of decentralising
its activities. It has opened 23 field offices to increase the
impact of its operations in-country. The ADB has just over 1000
staff in total (although this excludes locally recruited staff
in field offices). There are 290 staff in field offices, out of
which 44 are international technical experts, 64 are locally recruited
technical experts and 180 are support staff.
10. The Bank adopted a new structure in
2006, enabling a clearer country focus in its operations and a
greater focus on development results in its strategies and projects.
It has introduced measures to improve implementation of its projects
and programmes, increased project supervision ratios, reduced
the share of at-risk operations and strengthened its evaluation
systems. The Bank has a set of Key Performance Indicators which
will be used to inform decisions on budgeting and staffing as
well as monitoring overall performance.
11. There is still some way to go to improve
both the Bank's internal processes and its focus on results at
the design stage, during implementation and at the evaluation
phase. Specifically, the ADB needs to intensify its efforts to:
— ensure that all strategies and projects
are well designed, including having appropriate baselines to monitor
progress;
— ensure that all projects are monitored
regularly;
— ensure that evaluation helps enhance
learning ;and
— improve results through greater decentralisation
and harmonisation.
Specific measures have been agreed and will
be adopted in the next three years to address these areas.
12. In February 2003, the Bank was temporarily
relocated to Tunis, because of the conflict in Côte d'Ivoire.
Discussions are underway for the Bank to return to Abidjan. Clearly
the security situation needs to improve and provide the necessary
stability as well as the appropriate facilities for the Bank to
function effectively before a decision to return to Abidjan is
possible.
ADB'S ROLE IN
AFRICAN AID
ARCHITECTURE
13. The ADB is one of the few institutions—and
the only Bank—wholly focused on the development of Africa.
It has the potential to provide a unique African voice and perspective
on development issues across the continent and internationally.
In 2005, the Commission for Africa called for the ADB to become
the "the pre-eminent financing institution in Africa within
10 years". This call was supported by the High Level Panel
appointed by President Kaberuka in 2007 to provide advice on the
future vision and strategy for the Bank.
14. The ADB has built strong partnerships
with, and received special mandates from, African governments
and African institutions. It works with the African Union (AU)
and the United Nations Economic Commission for Africa on African
development issues, and has been given lead mandates by the New
Partnership for Africa's Development (NEPAD) in infrastructure,
corporate governance, as well as for the implementation of the
African Peer Review Mechanism. The Bank also has a mandate to
promote regional integration, and is an active contributor to
the on-going AU initiative to rationalise Regional Economic Communities
(RECs).
15. Recognising the ADB's expertise in infrastructure,
the Bank also hosts the secretariats of the Infrastructure Consortium
for Africa (ICA) and of the African Water Facility (AWF) on behalf
of the international community.
ADB's Objectives and Priorities
16. The ADB is committed to assisting African
countries achieve the Millennium Development Goals. Its mission
is poverty reduction and development through growth and economic
integration. To achieve this, the Bank has committed itself to
help "Africa to diversify, to become competitive, integrated,
globally connected, and increasingly self-financing".
17. The Bank needs to remain relevant for
all its African shareholders, including the MICs. MICs need flexible
financial products to help them address their own development
challenges, and the ADB needs to respond to those needs with its
range of products. Policy based lending has increased in recent
years, but project lending remains the most important instrument
in terms of total commitments. Given the critical role of the
private sector in MICs, the Bank has increased it support focussing
on the financial sector, infrastructure and small and medium size
enterprise development.
18. Many of its shareholders, including
African countries, want the ADB to play a role across the development
agenda, but its capacity has not been sufficient to respond to
this demand, and it has found itself stretched too thinly over
a number of sectors. In the past few years, there has been a concerted
effort to focus its efforts in a smaller number of activities,
recognising the need to demonstrate excellence in a few areas
as a foundation for playing a wider role in Africa's development.
In the next few years, the Bank's priority areas will be:
— Infrastructure—An increasing
proportion of the Bank's new commitments will be in basic infrastructure,
especially transport, power, water and sanitation, and communications.
These investments will be designed to benefit both rural and urban
populations, improving growth, productivity, employment and access
to market opportunities and essential services. Infrastructure
to support agriculture will be priority, with the Bank funding
investments in irrigation, rural roads, marketing and storage
facilities.
— Within infrastructure, there is a
particular emphasis on regional integration. This reflects the
constraints to growth of small domestic markets. Integration allows
African countries to reap the benefits of economies of scale,
stronger competition and more domestic and foreign investment.
— Governance—As an African institution,
the Bank is uniquely positioned to address these challenges. It
will focus its efforts on strengthening transparency and accountability
in the management of public resources, at the country, sector
and regional levels, with a special attention to fragile states
and natural resources management.
— Fragile States—The Bank will
enhance its engagement in fragile states. It will assist fragile
states to become more effective states, and assist post-crisis
and post-conflict countries move towards more stable political
and economic development.
— Private Sector Development—The
achievement of sustainable growth in Africa will be driven by
the private sector. The Bank is supporting private sector development
by: a) improving investment climate through policy-based lending;
b) improving African private sector competitiveness through targeted
support for national and regional infrastructure development;
and c) leveraging innovative and complex Public-Private Partnerships
(PPPs) by combining concessional and non-concessional resources
in low income countries.
— Higher education, technology and
vocational training—Developing high level skills is critical
for inclusive growth. The Bank will invest in a range of activities
to build skills and help address chronic high unemployment.
— Climate Change—The ADB has
the potential to provide leadership and an African voice in international
debates on climate change. In its programmes, it will focus on
clean energy investments, adaptation and climate proofing Bank
investments, and better management of Africa's lakes, forests
and river basins;
19. In focussing ion these areas, the Bank
needs to establish a reputation for delivering results. The Bank
has strengthened its systems and its capacity to demonstrate and
communicate results more effectively by introducing a performance
management framework for the Bank as a whole. Institutional Key
Performance Indicators are linked to the agreed Results Measurement
Framework of ADF 11, which include results on development effectiveness
and also on institutional effectiveness.
Debt
20. The ADB has played a leading role in
helping to resolve the debt problems of heavily indebted poor
countries (HIPCs) in Africa. It participates fully in the Heavily
Indebted Poor Countries Initiative, providing the exceptional
debt relief that is required on ADB and ADF debts. It has also
helped countries to qualify for HIPC relief by establishing the
Post-Conflict Country Facility, which assists HIPCs to clear their
arrears. To date 26 African countries have qualified for relief
under the HIPC Initiative, with 19 countries completing the process.
A further 7 countries could benefit from this exceptional debt
relief if they wish to pursue it and meet the qualifying standards.
21. At Gleneagles in 2005, the G8 agreed
the Multilateral Debt Relief Initiative (MDRI). Since 2006, HIPCs
that complete the Initiative also receive 100% cancellation of
their remaining ADB debts, in addition to cancellation at the
IMF and World Bank.
22. The UK has assisted the ADB Group to
meet the costs of its HIPC and MDRI debt cancellation. We have
provided $349 million (about £175 million) to the multi-donor
HIPC Trust Fund, which helps multilateral creditors to provide
full and timely relief. As of 30 September 2007, the ADB has received
a total of $1.89 billion (about £940 million) from the Trust
Fund. We are also fulfilling the commitment to provide our share
of the costs of MDRI debt cancellation. The ADF share of the MDRI
is currently estimated to cost the UK approximately £433
million over the next 46 years. To date we have provided £11.89
million.
23. The implementation of these initiatives
has helped qualifying African HIPCs to resolve their debt problems.
This should provide a spur to growth, increasing investor confidence
in these countries, as well as freeing up considerable resources
for governments to spend to accelerate progress towards the MDGs.
It has also had the benefit of strengthening the ADB's and ADF's
balance sheets, cancelling large volumes of debt held by poor
countries that could ill afford to service them.
24. The ADB has an important role in helping
countries to avoid future debt problems. It has adopted the Debt
Sustainability Framework, which gives countries and creditors
guidance on prudent levels of borrowing, taking into account their
economic position and policy framework. In countries where debt
levels are too high, or there is a risk of this, the ADF provides
grants or a mix of grants and concessional loans. As part of its
work on strengthening economic governance and public expenditure
management, the bank has a clear role in advising countries on
the level and use of new debt, and the management of existing
debts. In particular, following a call from the Commission for
Africa, the ADB is looking to establish a legal support facility
for HIPCs to help them deal with aggressive litigation (or so-called
`vulture fund' activity), which threatens to divert the benefits
of debt relief away from poverty reduction. Their governance work,
and that of other donors including the UK, will help to avoid
such debts getting into the hands of vulture funds.
AFRICAN DEVELOPMENT
FUND REPLENISHMENT
25. The negotiations for the eleventh replenishment
of the ADF concluded in December 2007. The Deputies Report records
the agreements reached. A total of $8.9 billion (£4.5 billion)
was agreed, with several donors providing large increases in their
contributions.
26. There was strong agreement among donors
that the ADF should focus its efforts on infrastructure, governance
and regional integration. This recognised the importance of these
issues for economic growth and poverty reduction in Africa, and
the expertise and track record of the ADF in these areas. A number
of cross-cutting objectives also received renewed emphasis, including
gender equality, environmental sustainability and climate change
adaptation.
27. New policy frameworks were agreed for
the ADF's assistance to regional projects and fragile states.
Around a quarter of ADF 11 resources will be used for regional
operations, more than doubling the investments made under ADF
10. This will be mainly used for infrastructure—roads to
connect countries and markets, increasing energy supply, and improving
facilities for trade and exports.
28. A Fragile States Facility was also agreed,
with a budget of US $665 million (£330 million). This will
provide countries emerging from conflict and crisis with additional
resources, for example to help rebuild infrastructure and re-establish
critical services. It will also provide supplementary targeted
technical support for capacity building and knowledge management,
across the full range of fragile countries. The facility will
subsume the existing PCCF and will continue to assist countries
to clear their arrears and so open up the possibility of regular
programmes and qualifying for debt relief.
29. There was considerable discussion during
the replenishment discussions about measures to improve the development
effectiveness of the ADF. As part of its continuing efforts to
take forward a wide-ranging reform programme, a new results framework
was agreed. This will monitor development indicators at a country
level and track progress against a range of demanding targets
for improving project approval, implementation and supervision
within the ADF.
DFID'S RELATIONSHIP
WITH THE
AFRICAN DEVELOPMENT
BANK
30. The UK supports the Commission for Africa
call for the ADB to become the leading financial institution in
Africa. We see the Bank as having clear potential to play a larger
role, and we are committed to strengthening African institutions.
We agree that the Bank needs to focus its efforts in a small number
of areas to demonstrate its effectiveness. It needs to establish
a track record of excellence and use that to build up the institution.
This will be the stepping stone to having a more important role
in Africa.
31. The focus of ADB's work on accelerating
economic growth is in line with DFID's objectives. Their ability
to fund infrastructure, particularly regional projects, is an
important complement to the support we provide through our bilateral
programme and the work of other multilateral organisation we support.
32. In recent years, we have stepped up
our engagement with the ADB, providing more support to the reform
and policy agendas. We play an active role in Board discussions
in Tunis, and took a leading role in the replenishment discussions.
We expect our engagement to continue to grow.
33. Our objectives for the ADB were set
out in a strategy paper in 2006, which is a joint paper agreed
by the constituency. This joint approach has enabled us to be
more influential, giving consistent messages to the Bank. The
objectives identified are:
(i) Improving Bank effectiveness at headquarters
level
(ii) Improving Bank effectiveness in country
(iii) Reinforcing ADB's contribution to African
infrastructure
(iv) Sharpening ADB's contribution to good
governance in regional member (African) countries
34. The strategy is pursued by DFID staff
with responsibility for our shareholder relationship with the
Bank and by those working on our bilateral Africa programme.
35. DFID and the ADB agreed to the Enhanced
Collaboration Initiative (ECI) in 2004. This operates in five
pilot countries, Ethiopia, Mozambique, Uganda, Ghana, and Sierra
Leone and its aim is to improve aid effectiveness and harmonisation
through improved ADB and DFID collaboration at country level.
Examples of work to date include co-financed programmes in Ethiopia,
and a proposal that the ADB will represent DFID in the sector
dialogue with other partners on water, sanitation and roads in
Mozambique, as part of our commitment to fulfil the commitments
under the Paris aid effectiveness agenda. Progress in some countries
has been slower than expected due to the limited deployment of
Bank staff on the ground, but increased decentralisation of ADB
staff is expected to strengthen collaboration.
UK Financial Contributions
36. The UK pledged a contribution of £417
million to ADF 11. This doubles our ADF 10 contribution and makes
us the biggest ADF donor for the first time. This decision was
based on the progress that the ADF has made in improving its effectiveness,
the contribution that it can make to economic growth and poverty
reduction, and is part of our commitment to build African institutions.
The ADF works in all poor African countries and scores more highly
on the poverty focus of its resource allocation than other major
development institutions. Nearly 70% of its resources are allocated
to DFID's PSA countries.
37. In addition to core funding of the ADF,
DFID provides assistance to the Bank through a Technical Cooperation
Arrangement. This will provide up to £13 million over 5 years,
from 2007, delivered through streamlined processes. This is the
first such agreement agreed by any donor. Six priority sectors
have been identified which are:
— Climate Change and Clean Energy;
— Knowledge and Statistics; and
— Institutional Strengthening.
38. DFID has also provided staff on secondment,
for example to the Governance Department on Public Financial Management
and also to the ICA.
39. We are also supporting a number of facilities
for which the ADB helps to manage, including the Infrastructure
Project Preparation Facility (IPPF) ($12m). DFID is also providing
Technical Assistance to the AWF (£350k), and the Rural Water
and Sanitation Supply Initiative (RWSSI) (£6 million).
REPORT OF
THE HIGH
LEVEL PANEL
ON THE
AFRICAN DEVELOPMENT
BANK
40. The High Level Panel (HLP) has set out
a vision for the ADB to become the "premier development institution
in Africa". This includes the Bank being selective in its
approach, focussing on regional integration and fragile states,
optimising the use of its capital, and building its capacity.
41. Among the recommendations made by the
HLP is to make the best use of the Bank's capital to accelerate
Africa's progress towards the MDGs. This is in line with some
shareholders' views that the Bank has levels of capital comfortably
in excess of that required to maintain their AAA rating, and that
it could use its capital to have a greater development impact
without undermining its financial viability. President Kaberuka
agreed to undertake a capital review in 2007. The ADB has asked
two private investment banks to undertake independent reviews
of its capital and to provide advice on using any excess capital.
The Bank is at the initial stages of thinking through this issue.
42. The principal new idea is that of `One
Bank'. The Report recommends that the ADB should move away from
being an institution which compartmentalises countries into middle
and low income groups offering only non-concessional loans to
the first group and highly-concessional loans to the second. Rather,
it suggests that the Bank should be offering a more differentiated
set of products to its clients, in particular to low-income countries
which represent a wide spectrum.
43. The HLP also concluded that the Bank
does not have enough staff to deliver what its members expect
of it. The Report recognises that the Bank is making reasonable
progress in changing the way it does business but argues that
it does not have the human resources it needs to deliver an increased
role, particularly compared to other Multilateral Development
Banks. It proposes a medium term strategic `accord' between shareholders
and the Bank to deliver increased administrative resources in
return for improved performance in terms of results and increased
efficiency. This will enable the Bank to hire more staff and allow
it to decentralise further.
THE AFRICAN
DEVELOPMENT BANK'S
RELATIONSHIP WITH
THE WORLD
BANK
44. The ADB has a narrower focus than the
World Bank in its operations, and has fewer resources. At $41.6
billion, IDA 15 is almost 5 times the size of ADF 11. About half
of IDA 15 (about $20 billion) is expected to be spent on Africa,
thus making IDA twice the size of ADF 11 in Africa.
45. The ADB works with the World Bank both
in country and in headquarters. A number of programmes are jointly
funded, and as decentralisation of both institutions increases,
more joint working is expected. The same can be said of the ADB's
relationships with other donors on country: as more ADB staff
is deployed to country offices, this engagement will improve.
46. The ADB has committed to all new partnerships
following the principles of the Paris Declaration, in particular:
harmonisation of procedures and instruments; selectivity of partners
and collaboration; and results management. Partnerships will put
emphasis on strengthening coordination and harmonisation mechanisms
which are crucial for improved aid effectiveness. The ADB will
harmonise its procurement rules, standard bidding documents and
practices with those of the World Bank, subject to restrictions
related to the rules of origin.
47. The multilateral development banks collaborate
on a number of issues. On some topics formal working groups have
been set up eg on climate change, on fragile states, on resource
allocation, and to share experience and discuss issues.
March 2008
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