6 A UK development bank |
The potential role of a UK development
70. The UK is unusual in not having
a development bank. Witnesses have suggested that there could
potentially be a niche for certain bilateral financial products
such as concessional loans, either for the public sector or the
private sector or both.
In Chapters 3, 4 and 5 we noted that despite the emergence of
new sources of finance, there is still a need for different types
of funding for development projects, and that for some of these
projects, loans or other forms of returnable capital could potentially
be more appropriate than grants.
71. Development banks provide credit
and other financial services to individuals, firms and strategic
sectors of the economy that private financial institutions are
unable or unwilling fully to service. The world's largest development
banks include the China Development Bank, the Brazil Development
Bank (BNDES) and the German Development Bank (KfW). At least thirteen
G20 countries have some form of development bank, with combined
assets amounting to more than USD 3 trillion.
There are different options for development banks to fund their
business operations, including taking savings and deposits from
the public; borrowing from other financial institutions; raising
money in the domestic or international capital markets; using
their own equity; and receiving budget allocations from the government.
Most development banks combine all these funding options. Development
banks are expected to be profitable and financially sustainable,
and can have specific or broad mandates.
Development banks address market failures in the availability
of long term finance, ensure that long term savings are allocated
to the long term finance needs and can be used to raise funds
on the capital markets and allocate those funds to developing
countries. Development banks can also use innovative instruments
to leverage funds from other sources, including private citizens
and diaspora communities. The table below shows the functions
of existing development banks, indicating which financial instruments
they provide and which fund public and which the private sectoras
well as the functions a UK development bank might undertake.
Table 2 Financial instruments
of leading development finance institutions, including possible
functions of a UK development bank 
||Finance for the public sector
||Finance for the private sector
|Concessional loans (ODA)
||Bilateral: KfW (Germany), AfD (France), JICA (Japan)
Regional: EIB, AsDB, AfDB
Multilateral: IDA (World Bank)
|Interest rate subsidies (eg by EIB)
FMO(Netherlands) government funds
JICA (private sector investment finance)
|Non-concessional loans (Other Official Flows)
||IBRD (World Bank)
KfW (promotional loans)
|CDC's new mandate allows loans (it also manages the Impact Investment Fund)
Bilateral: DEG (Germany), Proparco (france) , core FMO
Multilateral: IFC (World Bank)
||IDA (World Bank)
|DFID challenge funds (eg AECF, TGVCI)
|Direct equity and equity funds
||UK export finance (ECGD) for UK exporters and investors
MIGA (World Bank)
AECF: Africa Enterprise Challenge
FundAfDB: African Development Bank
AfD: Agence Française de Développement
- France's public development finance institution
AsDB,: Asian Development Bank
CDC: UK's Development Finance Institution
DEG: the German development bank for
the private sector ECGD: Export Credits Guarantee Department
EBRD: The European Bank for Reconstruction
EIB: The European Investment Bank
Netherlands Development Finance Company
IADB: The Inter-American Development
IBRD: The International Bank for
Reconstruction and Development (World Bank)
IDA: International Development Association
IFC: The International Finance Corporation
JICA: Japan International Cooperation
KfW: the German, government-owned development
The Multilateral Investment Guarantee Agency (World
Proparco: French finance institution,
part owned by AfD, which promotes private investment in developing
TGVCI: The Trade in Global Value Chains
POTENTIAL BENEFITS OF A UK DEVELOPMENT
72. In order to assess the potential
benefits of established a UKDB, there are a number of questions
which would first have to be considered. These include whether
the new instruments offered by a UKDB would be more effective
in terms of fostering growth, reducing poverty and addressing
global public goods; whether there was a demand for the additional
finance instruments which could be provided by a UKDB; what would
be the additional benefits of setting up this new institution
rather than providing instruments through existing entities; and
how a new UKDB would relate to existing UK Government objectives,
obligations and laws.
The establishment of a UKDB could reduce the amount of ODA that
the taxpayer would need to fund, if the bank raised funds from
capital markets and if it were able to increase the value of its
loan book. Holger Rothenbusch, CDC, pointed out that this was
a model used by France and Germany, and which was compliant with
the current calculation of ODA.
73. Marc Englehardt, KfW suggested that
having a UKDB would provide the potential for new joint ventures
between DFID, KfW and other donors, and that the UK "would
be a highly welcome partner, as an additional European development
bank in EU blending".
Professor Griffith-Jones agreed, saying that KfW, AFD and EIB
had an informal consortium where each one took a lead in particular
projects, and that the model could perhaps be replicated with
a UKDB joining them".
JICA indicated in informal meetings that it would be interested
in joint ventures with the UK; the establishment of a UKDB with
a wider range of financial instruments could facilitate this sort
of cooperation. Professor Griffith-Jones said that if a UKDB were
to borrow money, it could borrow more cheaply and transfer that
cheapness to developing countries.
Diana Noble, CDC, suggested that a UKDB could play an important
role "but not obviously at the expense of retaining a significant
aid budget. There will always be areas of public sector good that
can only be funded through grants."
74. In addition, the creation of
a new UK institution with the capacity to provide a range of bilateral
finance instruments and technical assistance and the ability to
work in partnership with other development banks and multilaterals
could enable it to deliver a range of longer term support to build
on its humanitarian and rapid response to emergencies, such as
that to Typhoon Haiyan in the Philippines. The Philippines is
a lower middle income country with which the UK has no bilateral
aid programme. It will need substantial investment to enable it
to rebuild essential infrastructure and services. DFID has promised
to assist in the reconstruction of the Philippines;
the technical assistance, guarantees and loan finance which will
be needed might best be delivered through a development bank.
75. Several witnesses raised the question
of the setup costs and effort of establishing a new UKDB.
Matthew Martin suggested that, given the current severe budget
constraints, setting up a whole new UK development bank institution
"would seem really likely to undermine public support for
development assistance in this country".
Andrew Rogerson, ODI, said that DFID would need to be very careful
not to lose its current advantage of "combining a very large
portion of the UK's external aid effort under one roof and then
being present in-country with that same sort of unified voice".
He added that:
We should be careful. If the answer
to a problem is concessional loans or guarantees, then DFID already
has the powers ... but it should be very careful not to throw
away that advantage by creating something apart from DFID that
then adds to the general fragmentation in-country and does not
necessarily dovetail with how taxpayers' money is being used in
Concessional loans potentially have
their place, and the world will probably need more of them, including
through IDA, the EIB and other people you will be talking to,
but not necessarily as a free-standing, brand-new bank that one
would magic up, with all the transaction costs that might involve.
76. UKAN and BOND argued that evidence
from other OECD development finance institutions suggested that
their priorities and performance measurements were more often
weighted towards financial return and evidence of contribution
to financial growth rather than social development impacts.
Peter Chowla questioned the capability of a new UKDB to focus,
control and monitor the development outcomes of its investments,
I am very, very wary about setting
up new institutions thinking that the UK could become a model
provider so quickly, because it is really complex, particularly
where you are doing things like private-sector work or project
work on the grounds that you are doing loans for these things.
The social and environmental safeguards are really complex and
the need to have people on the ground to monitor, supervise, course-correct
and take feedback, and even project design at the very beginning,
is very intensive.
77. Other witnesses suggested that a
UKDB would not necessarily be responsive enough to meet the needs
of developing countries. Adam Smith International said that development
banks tended to be slow and risk-averse and overly focused on
Martin suggested that low income countries would rate bilateral
development banks and development financing institutions "in
the last place" and would prefer donors instead to give good
replenishments to existing multilateral institutions.
The TUC expressed doubts about the wisdom of establishing another
development bank when there were already a considerable number
UKAN and BOND concluded that "there is currently insufficient
evidence to suggest that a new UKDB or loan facility would provide
true development additionality or that it would be an effective
modality to deliver UK aid".
78. Witnesses commented on some of the
alternatives to a new UKDB. Caroline Ashley suggested that DFID
had five broad options for managing an expanded range of development
finance: running it from within DFID; contracting out programmes
to external organisations; expanding the focus of CDC; setting
up a development bank; and channelling money via multilateral
institutions, and described some of the main advantages and disadvantages
of each option.
79. Matthew Martin proposed that DFID
could create an implementing agency within DFID, which would act
as a virtual bank, and assess credit-worthiness, provide grants,
loans and equities and organise co-financing with other organisations:
For me, you could have something
that I would call a "virtual" bank, where you would
say, "DFID will now lend money for the countries that can
afford it and for high-return projects," but keep it within
the programming and planning framework of DFID. The goal would
be poverty reduction, funding the private sector, making sure
it is untied and focusing on DFID's key countries, and bringing
in the idea that you would then co-finance, so you would need
less investment and a huge amount of extra staff capacity and
overheads within DFID. That would seem to me to be an ideal midway
solution that one could adopt.
However, Tamsyn Barton questioned whether
such an arrangement would provide DFID with the necessary expertise,
and stressed the need for appropriately skilled staff to be available
throughout the duration of the loan period.
Another option would be to expand the remit of CDC. Diana Noble
said that if a separate UKDB were established, "there would
need to be a huge amount of cooperation and clarity between the
institutions [CDC and the UKDB]", and that "we at CDC
would be extremely cooperative, constructive and helpful".
She explained that "If it [the UKDB] is outside CDC, it would
be very important to have absolute clarity of mission between
the two organisations to avoid confusing the market and creating
unhealthy competition between teams".
80. In terms of DFID's current range
of instruments, the Secretary of State made it clear that in the
case of countries such as India which were transitioning from
grant based bilateral country programmes, DFID aimed to use a
range of different finance instruments, including loans as well
as grants. For
example, a portion of DFID's recently launched Impact Investment
Fund is available to invest in businesses which focus on pro-poor
projects in India.
The Secretary of State told us that:
It is quite right that we are starting
to transition our relationship with the Indian Government on to
one where we provide technical support. We move steadily from
an aid-based relationship with them to trade-based. ... DFID has
a role to play in that transition ... by steadily moving away
from aid on to a more technical assistance, returnable capital
basis, where it is not pure grants.
More generally, she explained that DFID
was reviewing its investment policies and instruments, including
the possibility of using more loans and that "it may well
be that the most effective thing for us to do is to see whether
we can achieve those outcomes through existing channels".
She also told us that "any move to set up a development bank
is not going to happen overnight. It is a significant undertaking.
... I would describe any discussions around setting up a development
bank as at a very early stage."
Professor Dercon said that the case for either lending instruments
or a development bank was "clearly something that we have
to keep live and keep on thinking about. ... The choice at the
moment to be a bit cautious and not jump into it seems to be the
81. The UK is unusual in the G20
in not having its own development bank. Establishing a UK development
bank could give the DFID bilateral programme a way of providing
a wider range of finance instruments, to complement its grant
aided programmes which we would expect to continue for the poorest
countries. A UK development bank could offer a range of new instruments,
including concessional loans, together with technical expertise
which is often valued as much as finance. However, there is a
real danger that establishing a new UK development agency outside
DFID would fragment UK development policy. Great care would need
to be taken to avoid this danger and to ensure that a new development
bank would work closely with existing institutions.
82. We recognise that establishing
a new UK development bank would be a major undertaking, which
would need careful planning and a measured implementation, but
believe that DFID should plan for the long term. Creating new
institutions is challenging but not impossible; for example the
Government has created the Green Investment Bank in less than
three years. The 'do nothing now' option carries the risk that
DFID's bilateral approach becomes less effective over time and
that it is unable to play a key role in the future.
83. We recommend that DFID establish
a financial instrument team that can prepare a development finance
strategy; coordinate the various finance initiatives that are
currently being piloted by DFID; draw together the different bilateral
and multilateral approaches; design new instruments and build
up the necessary skills for future innovation and development.
Without this effort, DFID may not be in a position to establish
a development bank if and when it were deemed advantageous to
84. We recommend that DFID considers
the following questions in its finance strategy:
· What are the development
financing gaps in terms of instruments, sectors and countries?
What niche could a new UK development bank fill? Would the new
instruments be more effective in terms of fostering growth, reducing
poverty and addressing global public goods?
· What would be the potential
advantages and disadvantages of establishing a UK development
bank? What could be achieved, or achieved better, through a new
UK development bank compared to existing institutions? What comparative
advantages would a UK development bank have over existing institutions?
· What are the pros and
cons of other alternatives, including no change; developing closer
working arrangements with multilaterals; providing concessional
loans through the existing DFID structure; and expanding the scope
· How would a UK development
bank cooperate with other UK finance institutions and other development
· What are the institutional
and legal issues which would need to be addressed?
· What would be the costs
and possible timetable for establishing a UK development bank?
· What new skills would
DFID need to acquire and how would it do so?
· What is the potential
role of new finance instruments, such as Development Impact Bonds
and Diaspora Bonds?
143 Eg Q 30, Ev 100 Back
Annex 2 Back
Annex 2 Back
Annex 2 Back
Annex 2 Back
Q 184 Back
Q 104 Back
Q 29 Back
Q 36 Back
Q 177 Back
DFID Press Release, 24 december 2013, British support for reconstruction
and recovery to help rebuild homes in the Philippines and get
people back into jobs Back
Eg Q 29 and Ev 114 Back
Qq 30, 31 Back
Q 51 Back
Ev w12 Back
Q 29 Back
Ev 102 Back
Q 27 Back
Ev w1, Ev 102 Back
Ev w12 Back
Ev 98 Back
Q 30 Back
Q 112 Back
Q 177 Back
Q 220 Back
CDC, DFID Impact Fund, http://www.cdcgroup.com/dfid-impact-fund.aspx
Q 220 Back
Q 238 Back
Q 237 Back
Q 239 Back