The Future of UK Development Co-operation: Phase 1: Development Finance - International Development Committee Contents

6  A UK development bank

The potential role of a UK development bank

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.[143] 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.[144] 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.[145] 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 [146]
Financial instrument 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)

Grants IDA (World Bank)


DFID challenge funds (eg AECF, TGVCI)
Direct equity and equity funds CDC
Guarantees 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 (UK)

EBRD: The European Bank for Reconstruction and Development

EIB: The European Investment Bank

FMO: The Netherlands Development Finance Company

IADB: The Inter-American Development Bank

IBRD: The International Bank for Reconstruction and Development (World Bank)

IDA: International Development Association (World Bank)

IFC: The International Finance Corporation (World Bank)

JICA: Japan International Cooperation Agency

KfW: the German, government-owned development bank

MIGA: The Multilateral Investment Guarantee Agency (World Bank)

Proparco: French finance institution, part owned by AfD, which promotes private investment in developing countries

TGVCI: The Trade in Global Value Chains Initiative


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.[147] 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.[148]

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".[149] 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".[150] 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.[151] 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."[152]

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[153]; 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.[154] 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".[155] 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 other forms.

    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.[156]

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.[157] Peter Chowla questioned the capability of a new UKDB to focus, control and monitor the development outcomes of its investments, saying that:

    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.[158]

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 process.[159] Matthew 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.[160] The TUC expressed doubts about the wisdom of establishing another development bank when there were already a considerable number in existence.[161] 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".[162]

Other options

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.[163]

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.[164]

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.[165] 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".[166]

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.[167] 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.[168] 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.[169]

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".[170] 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."[171] 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 right one."[172]

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 do so.

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 of CDC?

·  How would a UK development bank cooperate with other UK finance institutions and other development finance institutions?

·  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

144   Annex 2 Back

145   Annex 2 Back

146   Annex 2 Back

147   Annex 2 Back

148   Q 184 Back

149   Q 104 Back

150   Q 29 Back

151   Q 36 Back

152   Q 177 Back

153   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

154   Eg Q 29 and Ev 114  Back

155   Qq 30, 31 Back

156   Q 51 Back

157   Ev w12 Back

158   Q 29 Back

159   Ev 102 Back

160   Q 27 Back

161   Ev w1, Ev 102 Back

162   Ev w12 Back

163   Ev 98 Back

164   Q 30 Back

165   Q 112 Back

166   Q 177 Back

167   Q 220 Back

168   CDC, DFID Impact Fund,  Back

169   Q 220 Back

170   Q 238 Back

171   Q 237 Back

172   Q 239 Back

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Prepared 13 February 2014