Examination of Witnesses (Questions 60-79)
GILLIAN MERRON
MP, MR RICHARD
DEWDNEY AND
MS SALLY
TAYLOR
24 APRIL 2008
Q60 Sir Robert Smith: It is just
that the High Level Panel in their recommendations were quite
strong and went on to say "willingness to adhere to the EITI
principles sends an important signal to investors and it should
be a prerequisite for any Bank private sector financing."
Gillian Merron: Yes, I do think
it is a basic principle which does add to the support of good
governance and transparency, and all those are important not just
because they are the right thing to do but because they also support
development. I do believe that the High Level Panel report is
right to make those kinds of comments. How it translates in reality—I
am just going to ask Richard if he has a comment to make.
Mr Dewdney: Thank you, Minister.
I am trying to reflect on my own experience sitting on the Board
and looking at private sector extractive projects over the last
year or two, and I am struggling to think of examples where there
was a tension, where what we were doing was in conflict with the
EITI. In reality, I do not think that has been the case.
Q61 Chairman: Reinforcing what Robert
Smith is saying, as a Committee, we have been somewhat exercised
about this whole area. We did a conflict report which produced
a certain amount of disquiet about DRC.[1]
We subsequently pressed what was then the DTI hard, and, I have
to say, were very unsatisfied with the DTI's response to promoting
these kinds of approaches. That is history. It is on record. We
were very sharply critical. I think it would be unthinkable that
the Bank would be involved in extractive industry projects with
companies that were not fully signed up to the Initiative. I am
not sure, taking Sally Taylor's reservations about imposing conditions;
it seems to me it is almost a given. Why on earth would the Bank
be engaged with any company that was not comfortable with the
EITI?
Gillian Merron: We are very positive
about the progress that has been made to date on transparency,
and that needs to continue. As we all know, that is part of the
work on good governance and supporting positive development into
the future.
Q62 Jim Sheridan: Minister, can I
just ask you to expand on what you were saying about the Bank
tackling corruption in African countries? There is none more corrupt
than Nigeria. I just wonder what progress, if any, has been made
in tackling corruption, and can you give us examples of what measures
have been taken to try and encourage these people to play within
the rules?
Gillian Merron: I will answer
in general, and turn to my colleagues for a specific on Nigeria.
The reality is there have been a few cases in terms of the Bank.
They have all been investigated or they are ongoing and, looking
at the latest annual report—this is just in respect of the
Bank—it shows seven cases under investigation and nine completed
with action taken over the last two years. What is important to
me is, first, that the Bank has a process in place, and also that
it acts clearly and seriously. As I said earlier in our discussions,
the President has given very high-level and high-profile support
for the Auditor General and has absolutely insisted that where
internal audit reports show up difficulties, that those are followed
up.
Mr Dewdney: On the specifics of
Nigeria I am afraid I am not in a position to comment but I am
very happy to get back to the Committee.
Gillian Merron: We would be pleased
to write back on that.[2]
Q63 Sir Robert Smith: Just following
up the Chair, obviously the companies involved have to sign up
to the Initiative but also the countries have to sign up to it.
There are only 13 African countries signed up at the moment so
are there projects that come forward from countries that are not
signed up where the Bank has to think carefully?
Gillian Merron: The Bank obviously
assesses all of the projects before it and has a whole set of
processes to put in place.
Mr Dewdney: Again, I am trying
to think of cases where that might have arisen. Thinking of extractive
projects, they are in countries that are EITI countries at the
moment.
Gillian Merron: Again, if there
are specific examples that the Committee wants to draw to my attention,
I am very happy to give a more detailed response by writing back
to the Committee.
Q64 Chairman: I think we can feel
a recommendation coming on.
Gillian Merron: I hope that is
a good feeling.
Q65 Chairman: We are intrigued, I
have to say, about the structure of the Board of the Bank and,
sparing his blushes, can I say we heard some very spontaneous,
complimentary remarks about Richard Dewdney's engagement with
the Bank and contribution, not just in terms of representing the
UK and the constituency but in terms of the input to the Bank
as a whole. Naturally, we have some concerns that his tenure finishes
in July and that for six years thereafter the constituency will
be led by a German director. I have no inbuilt prejudice against
Germany or the role of the German director, and I know nothing
about the likely personality, but it does seem to me extraordinary
that the United Kingdom, as the biggest bilateral donor to the
Bank, should be in a position where all we have is an adviser
to a director rather than a more active participation—not
perhaps at all because there is a rotating process, which I guess
is not going to change, but for six years as opposed to three.
I understand, looking at the voting rights, that the UK has 1.68%
and Germany 4.09% but when you press people, it is all to do with
the historical structure and so on. Surely, there must be some
mechanism for reviewing this. I say this not in the British national
sense, that of course we are big donors therefore we must have
a voice. It is the quality of the contribution that we make. Not
surprisingly, if you are the biggest bilateral donor, you are
going to be engaged. Are you comfortable with this situation,
and is there anything you feel could be done about it?
Gillian Merron: First of all,
can I endorse your comments about Richard—and make him blush—but
say we are going to be happy to have him back in the UK as well.
Again, it is a fair question and I think, again, it is right that
the Committee seeks to consider it. The African Development Bank
is, first of all, as we know, an African institution, and we share
a constituency with Germany, Netherlands and Portugal and, as
has been outlined, we do alternate the Executive Director slot
with Germany. My understanding is that our work within that constituency
is very positive. We are like-minded, we are collaborative, and
I think probably our leadership in terms of financing has brought
great results because of that. There is a historical point, which
I know the Committee is aware of but probably bears repeating,
but it is actually that constituencies and voices are determined
in the way described by the size of the shareholding in the Bank
rather than the financial contribution. We as a country have a
relatively low shareholding but, as Mr Bruce has rightly said,
we are now the largest contributor to the fund. The other point
to emphasise is that our constituency will be contributing one-third
of the African Development Fund's latest replenishment of resources,
so it is not even just a UK issue to me but also a constituency
one. Things are never set for ever, is my first point. But I actually
again would step back and say how are we best supporting this
African institution? What I do feel comfortable about is the way
in which the constituency operates, the way in which the UK plays
its role and how we work with our colleagues, both the donor constituencies
but also the African constituencies, to make the kind of difference
in terms of results. The area that I take the point on that you
make, Mr Bruce, is about the rotation of the position, with the
UK holding the position for three years and then Germany for six.
As I say, the Bank is undergoing a whole range of changes at present
in terms of practical reforms. We should support that. I can in
all honesty say to the Committee that I am not concerned that
the UK is not exerting a positive influence. I believe it is.
I believe it is playing the right kind of role and I believe it
is doing it under the current arrangements. That said, should
there be benefits to this African institution by changing that,
then maybe we should look at that but there is not, I sense, a
great appetite for that.
Q66 Chairman: Obviously, in practical
terms the current arrangements end in July but perhaps I can take
that point on, because the other issue is actually the nature
of the Board and how it operates. Obviously, if that changes,
the argument about how the directors operate and constituencies
function may also change. When we had a session here with Mark
Lancaster, a Member of Parliament, who had spent a week at the
Bank and shared his thoughts with us, he had the benefit in a
week that we did not have in a day and a half of actually sitting
in on Board meetings and so on. He is not the only one who has
made this comment, obviously, but there was a feeling that the
Board, far from being a strategic board, is a day-to-day management
board, sitting almost every day and having an input in detail.
Is there a case for changing that so that the managers manage
and the Board sets the overall strategy and reporting environment
and would not even necessarily need to be resident? Is that something
that the UK Government feels is something that could be explored?
Clearly, if something like that happened, the issue we have just
discussed about the role of the director would not be quite so
sharp.
Gillian Merron: I know that there
have been problems in the past with micro-management and I am
going to ask Richard to comment on that because he will know far
better than me about that. On the issue of resident versus non-resident
Board, currently the resident Board is helpful. I believe that
it remains helpful while it provides that strategic direction
that you spoke of, the agreement of policy and the overseeing
of implementation rather than being micro-managing. I think what
I would say looking to the future is, as the Bank improves and
moves on through its reform agenda, it may be that is something
we do need to look at. I think for the time being I am content
that we have got it in the right place in the right way, but I
would see it as part of the ongoing reform agenda that, as the
Bank changes and improves, we look at how we best support that.
I will ask Richard to comment on the micro-management because
I am aware that has been a criticism in the past.
Mr Dewdney: Indeed, it has been
an issue. I think the first thing to note is indeed the quiet
revolution in the performance of the Board over the last year,
reflecting the constituency report we spoke of earlier. It is
a highlight for me personally that the Board is much more cohesive
internally and is much more in line with management, so those
frictions are much reduced. Historically this was not the case.
My first couple of years on the Board were at times quite difficult
and the Board did indeed micro-manage. It took an unnecessarily
adversarial position with management. Because we have a change
in personnel, because countries are sending, frankly, better people,
that situation has changed. It reached a particular nadir, in
my view, about 18 months ago, when the General Counsel had to
instruct the Chair of the Human Resources Committee to stop drafting
the human resources strategy, which was clearly a prerogative
of management to draft, and for the Board to say yae or nay. That
has changed, as I said, dramatically over the past year and there
has been a particular push as well within the Board to try and
increase its efficiency. As the Minister said, this is something
we need to keep under review. Once there is a shared sense around
the Board that management is delivering at the kind of level that
we expect of it, then there will be the possibility of building
a consensus to consider this issue. I have to say I know that
the views of my colleagues around the table on the Board are pretty
hostile to the idea of moving to a non-resident Board, in particular
amongst many of the African members, who do not have the same
kind of networks and capitals to draw on, in a sense precisely
because they are empowered and capable of making those kinds of
decisions.
Q67 Chairman: That is a clear answer
about the actual reality, I suppose. Just to finish, you will
leave in July. DFID will not exactly replace you but will appoint
an adviser rather than a director. Are you in a position to give
me an indication of how you think that might work? For example,
the adviser can presumably sit in on Board meetings but not speak
or participate. Would that be right? Just in practical terms.
Mr Dewdney: Absolutely. Just to
repeat what the Minister said earlier, we are a very collective
and collaborative constituency, and certainly in the time I have
been there, we have run it in that way, in a very non-hierarchical
way. The Bank at times is much more hierarchical and you have
to go against the grain in that respect. A senior adviser from
the UK would indeed sit in at Board meetings occasionally, if
the Executive Director were not there; would sit in committee
meetings; would be empowered to pursue collective interests. I
am very confident that that arrangement will continue.
Q68 Chairman: Perhaps it is something
we need to keep an eye on. It may be that our concerns are not
well-founded that there clearly could be problems. You are reasonably
encouraged that the mechanism within the constituency should maintain
adequate influence?
Mr Dewdney: It works very smoothly,
both within Tunis and between the four capitals, and on the very
rare occasions, because we are a like-minded group, that we have
disagreed about things, we are very open and transparent about
that and I, as an Executive Director, would have flagged that
in the Board thoroughly and would expect, should it arise again,
the German Executive Director to do the same.
Q69 Mr Singh: One of the roles the
High Level Panel outlined for the Bank was promoting the private
sector, and indeed, private sector lending has been increasingly
sharply. If African growth continues in the way it has been, one
would expect that to increase again, but what the High Level Panel
did say was that the lending should add value and not crowd out
other private sources of financing. In what ways does DFID think
that lending is adding value or in what way should it add value?
Gillian Merron: First of all,
I would agree with that. The Bank should indeed be different in
that respect. The first point for me is that growth is very much
dependent on the private sector. It is the way out of dependency,
which is why we are keen to encourage that, including, particularly,
in the low income countries. The Bank's private sector work is
growing rapidly, with a big focus on infrastructure, including
in the energy field. If we are looking at the wider considerations,
for example, climate change, I think that does give the Bank a
unique role in terms of being able to influence developments.
It does bring confidence, and I think it brings standards as well,
environmentally and socially, in terms of the work of the private
sector, again, something we are very keen on in the UK. The other
thing to say to the Committee is that I note with the Bank that
it realises it has to prioritise investments, and that it has
to prioritise them in a way that ensures they are adding value,
not simply replicating what is likely to be done elsewhere. I
think perhaps an example of the kind of work I mentioned about
the environment is in South Africa, where there has been a power
project financed in terms of the Eskom power supply project, which
is US $500 million to support the country's large-scale electrification
programme. That is an example of where the Bank is not just a
regular bank, but actually adds in terms of technical expertise,
and also ensures that environmental considerations are not just
an addition but are crucial to it. I am quite excited about the
greater possibilities for the Bank in terms of the private sector,
also because that kind of confidence brings a greater opportunity
for public-private partnerships and also levers in other monies
because of the reputation and standing of the Bank. So yes, there
is a whole range of areas in which the Bank in particular is adding
value. Their job, I believe, is to make sure that that is what
they are doing when they are looking at opportunities for project
work. As I say, we are very keen to see that developed, particularly
in the low income countries.
Q70 Mr Singh: In terms of risk, should
the Bank be prepared to go that extra mile, or is it the case
that, because of its poor history, it is quite risk-averse?
Gillian Merron: The most recent
assessments of the Bank have suggested, whilst being financially
sound—more than financially sound—it has a triple
A rating in terms of its financial work. Where it needs to get
to, taking us back to the previous discussion, is a triple A rating
in terms of its development work. In terms of risk, it should
be financial risk of a reasonable nature, and they have actually
received advice to that effect. Goldman Sachs and Citibank have
actually made reports to that end to encourage the Bank, particularly
with its capital, to be development focused as well as understanding
risk levels. As with all of these things, we are talking about
balance, of course.
Q71 Mr Singh: In terms of private
investment into Africa, it is quite low compared with other areas
of development in the world. One of the things that the Bank needs
to do, the High Level Panel would say, is to create a better investment
climate, address the issues of obstacles to business development
in Africa in terms of regulations and the business environment.
What is the Bank doing practically to achieve those objectives,
to create a better investment climate?
Gillian Merron: First of all,
I would certainly agree about the improvement in the investment
climate, and that is one of the five focal points that the Bank
through its private sector development strategy has, the other
areas being supporting private enterprises, strengthening financial
systems, building a competitive infrastructure and promoting regional
integration and trade. In terms of improving the investment climate,
one of the ways in which it is doing that is, as I referred to
earlier, about encouraging what can be quite complex and innovative
public-private partnerships, particularly in the low income countries,
and there is also consideration going on of how the current credit
crisis is affecting Africa. Perhaps I can turn to Richard or Sally
for more detail on this.
Mr Dewdney: Just to add a few
remarks, it is an area historically where the Bank has been relatively
less engaged, partly of course due to the constraints on its staffing.
We have put money into the investment climate facility that is
based in Tanzania and arose partly out of the UK initiative in
2005. So we are promoting that work indirectly because of those
broader constraints. This is however one of the pillars in the
draft governance strategy that we have before us as a Board, the
main plank of that work being, as the Minister said before, to
promote transparency around the use of public resources, but it
is also going to be something that the Bank will drive forward
through that strategy.
Q72 Sir Robert Smith: I am not sure
how reliable some of the private banks are as a source of risk
advice at the moment!
Gillian Merron: Noted. Thank you
for that.
Q73 Sir Robert Smith: You talked
a bit earlier about climate change. In the written submission
DFID has said that the Bank has the potential to provide leadership
and an African voice, yet when Joseph Eichenberger gave his evidence
to us he told us he did not believe the Bank is ever going to
be an intellectual leader in the climate change debate. How do
you reconcile those two different views?
Gillian Merron: Maybe being an
intellectual leader is not what it is going to do, but what it
can do is rather more practical, which I think is in terms of
building capacity. One of the things DFID is doing is actually
funding three technical climate change posts to support the Bank
to lead practically. Whether you regard that as intellectual I
do not know. That would be a matter for you. The important thing
to me is about delivering the results. I think the approval of
the Clean Energy Investment Framework for Africa in March is helpful.
It allows the Bank to have something to build on in terms of preparing
an action plan. The important thing in all this is that access
to energy and factoring climate change impact into investment
decisions in Africa is absolutely crucial in terms of the Bank.
I do not know how the Committee felt but I certainly felt satisfied
that that was factored in in terms of the Bank and how it is working,
and is also part of its reform agenda. It knows that it has to
meet this and that, in terms of sensible development decisions,
there is not any other way of doing it; it has to be right there
in the centre. That is how we are going to be helping the Bank
and helping countries to actually consider limiting negative impact
in terms of the environment.
Q74 Sir Robert Smith: His point was
it is probably not where they should be because he felt there
were a lot of players in the game. We have very good integration
with the World Bank and others on this issue. Maybe he felt there
was not any point in making the Bank the leader in that when there
are other sources by working in partnership.
Gillian Merron: I think, again,
it is back to our previous discussion. My view on the Bank is
that it has to be fundamental to the work, without a doubt. The
question about whether it is the expert is another matter. If
the Bank can gain by good partnership with other regional institutions
like the African Union, like the multilateral development banks,
particularly the World Bank, fine, but it still has a job to do
as an African Development Bank. How it does that I think is about
maximising what is possible. That is one of the reasons, as I
say, that DFID is very specifically putting in this technical
support to allow the Bank to have the capacity.
Q75 Sir Robert Smith: Is the technical
support at the centre? How do you feel about the amount of effort
being developed in in-country capacity to analyse climate change
and its implications? Is the technical support coming from DFID
for a central role?
Gillian Merron: Yes, it is.
Q76 Sir Robert Smith: Do you think
the Bank is doing enough in country?
Ms Taylor: As the Minister was
saying, I think it is something that they need to do in partnership
with others. The World Bank has a lot of expertise. There is something
around helping African countries perhaps have more of a voice
in the whole climate change debate. Perhaps that is something
which reflects their more political AU role in terms of being
able to help Africa articulate its views a bit better.
Q77 Jim Sheridan: I would ask maybe
a double-barrelled question in terms of how significant a role
the Bank played in the HIPC[3]
initiative and indeed the MDRI[4]
and have DFID and the other donors reimbursed the Bank for the
funds that they lost through both these initiatives?
Gillian Merron: The answer is
that the Bank has played a very important role, a very significant
role, in resolving the debt problems of the poorest African countries,
and certainly it has participated fully in the HIPC and also the
Multilateral Debt Relief Initiative as well, providing over $14
billion through both. In total, over $88 billion of debt relief
has been provided to African countries through these two means
since 2000 and that has allowed countries to invest more in poverty-reduction,
so they certainly have had a very significant role. I am just
going to bring Sally in; this is very much her area of work.
Ms Taylor: In terms of how they
meet their costs, under the HIPC initiative, it is agreed, and
I guess it is part of the sort of make-up of the Initiative, that
all creditors make some contribution towards their costs, as much
as they can, and the Bank has contributed about a third of it
and donors have contributed the other two-thirds. Of course, as
you may know, the Multilateral Debt Relief Initiative is entirely
funded by donors and that is actually the bigger of the two costs.
Q78 Jim Sheridan: But, as I understand
it, they have lost money. Through both of these initiatives, the
banks have lost money. Is that the case?
Ms Taylor: Well, they have written
off their debts, yes.
Q79 Jim Sheridan: So they have been
repaid then, or reimbursed?
Ms Taylor: They have been reimbursed
for 85% of it, 100% of the Multilateral Debt Relief Initiative
and two-thirds of the HIPC initiative, and they have their own
resources, including net income, the money that they would make
on loans to middle-income countries.
1 Democratic Republic of Congo Back
2
Supplementary memorandum submitted by DFID Back
3
Heavily Indebted Poor Countries Back
4
Multilateral Debt Relief Initiative Back
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