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

8  Conclusion

94. An increasing number of people living in poverty are in Middle Income Countries, which should eventually graduate from traditional grant aid. Donors are likely to combine grant aid to the poorest countries with new forms of engagement in Middle Income Countries, including technical assistance, support to NGOs and loans. They will want to invest more in supporting South-South cooperation and they are also likely to spend more resources on global public goods. If DFID is to retain a leading role in this changing development world, and maintain its relevance, it will need to innovate in its use of development finance. DFID will need to think carefully about the balance between bilateral and multilateral aid, and about how to deploy new forms of finance.

95. DFID needs to have a more explicit overall strategy on what financial instruments to use when, how much in each case, to which countries, via which channels, under what circumstances, and what skills are required to use them effectively. It also needs to address how the UK can remain relevant for developing country needs, how it can remain an innovator in the provision of aid, what UK aid will look like over the coming decade, and its strategy for getting there. In particular, DFID will need to think carefully about whether and how to provide bilateral loans to developing countries. This will not be a process that can be done quickly, and will require a different set of skills. DFID will also need to consider the mechanisms which would be required for providing bilateral loans, including whether and under what conditions a development bank would be required. To do this effectively, we recommend that DFID develops a comprehensive statement and development finance strategy to define its future role and how it will be financed. This should take the form of a Development Finance White paper, to be published during 2014, which should, inter-alia, set out the contribution of DFID and its financial mechanisms can make towards addressing inequality, equalising opportunities so as to "Leave No One Behind", as advocated by the High Level Panel.

Annex 1: Note on capital flows to developing countries

Note - Dirk Willem te Velde, ODI (10/11/2013)

The nature of capital flows to developing countries is changing. Aid is an increasingly small share of total capital inflows into developing countries although it can still be substantial for specific countries. The UK provides aid and other types of capital flows to developing countries (FDI, bank lending etc.) and these other flows were around 2.5 times larger than UK aid flows in 2011 and 3.5 times larger in 2012.[186]

The figures and tables below show that:

UK ODA now represents a fifth of all UK financial flows going to DAC countries in 2012 (figures 1 and 2).

In 2012, the UK's ODA / GNI ratio (now at 0.56%) was nearly double the OECD DAC average (0.29%) (figure 2).

The combination of UK public and private flows (excluding remittances) to DAC countries reached 2.6% of UK GNI in 2012, and this was much more than the OECD average (figure 3), meaning that the UK is proportionally linked more to DAC countries through financial flows than the rest of the OECD.

Capital inflows to sub - Saharan Africa (SSA) are increasingly diversified (Table 1), and recovered rapidly after the financial crisis (esp. bond and equity flows).

For SSA: capital flows are increasingly in the form of diversified private capital sources. Private capital flows are greater than ODA, closely followed by remittances. (Table 2). Other aid-like flows also important (but not discussed in this note).

The UK is a leading foreign investor in Africa; the UK stock (i.e. accumulated flows) ranks third behind France and the US (Table 3).

The UK is the main sender of remittances from the EU to ACP countries (Table 4). The UK accounts for about 44% of remittances from the EU to the ACP countries and for 13% of the total remittances received by ACP countries. The World Bank estimates suggest that the EU accounts for about 30% of remittances to ACP countries.
Figure 1: UK ODA is a third of all UK financial flows going to DAC countries

Figure 2: The UK's ODA / GNI ratio is nearly double the DAC average

Figure 3: All flows / GNI in UK higher than the DAC average

Table 1: Private inflows into SSA increasing

Source: Global Economic Prospects 2013, Table 2: Capital flows to Sub-Saharan Africa US$ billion
2001 2011
Private capital flows    
FDI, net inflows 1540.9
Bond flows 26
Net portfolio equity inflows -0.98.3
Total above 16.155.2
Other financial flows

Aid for Trade

All ODA aid 1443
Remittances 4.831
IFC investments   2.2
IDA / IBRD credits   36.3

Source: Hou et al (2013)
Table 3: FDI stocks (mn US$) in Africa (whole continent), UK in comparison with other OECD countries
Top of Form

2001Bottom of Form

20022003 20042005 20062007 20082009 20102011Bottom of Form
UKTop of Form

12 978.2Bottom of Form

21 648.1 30 323.8 33 457.6 35 868.9 29 619.7 37 347.5 30 750.8 47 858.8 47 186.9 47 866.9Bottom of Form
USTop of Form

15 574.0Bottom of Form

16 040.0 19 835.0 20 356.0 22 756.0 28 158.0 32 607.0 36 746.0 43 018.0 53 412.0 56 632.0Bottom of Form
Germany Top of Form

3 638.0Bottom of Form

4 251.4 5 150.5 6 264.3 6 103.8 6 611.3 8 245.2 7 575.0 9 469.8 10 436.9 ..Bottom of Form
France Top of Form

6 237.0Bottom of Form

8 592.0 13 895.5 18 516.4 21 514.2 26 566.5 42 012.2 40 875.6 53 136.4 57 891.5 57 816.1Bottom of Form
Netherlands Top of Form

5 017.2Bottom of Form

6 620.4 6 575.2 9 153.3 8 548.1 11 066.8 14 673.9 14 662.9 12 721.5 14 476.2 17 072.5Bottom of Form
JapanTop of Form

623.7Bottom of Form

1 226.9 2 049.5 1 623.1 1 325.8 2 700.3 3 864.9 7 286.9 5 738.9 6 148.8 8 064.8Bottom of Form
Turkey Top of Form

22Bottom of Form

60 67 72 86 90 173 381 470 831 811Bottom of Form
KoreaTop of Form

516Bottom of Form

.. 518.1 592.9 .. 910.9 950.1 1 383.6 1 673.1 5 780.8 7 853Bottom of Form

Source: OECD,

Table 4: Remittances to ACP countries


Annex 2: Note on Development Banks

Note by Dirk Willem te Velde, ODI

Selected options and criteria for a new UK development bank / entity to provide concessional loans

Different options exist for an appropriate institutional setting through which concessional loans could be provided:

Continue with business as usual (enable others such as PIDG, EIB and IDA to provide concessional loans, perhaps with minor modifications)

A DFID unit using DFID's balance sheet e.g. to provide small scale loans (incl. to private sector)

A separate financial and investment account as in new JICA (funded mainly by government, but also potentially through the market)

A specialised financial institution that combines grants, concessional loans to the public sector and non-concessional loans to the private sector, similar to AfD, which funds it operations in part from the market (and needs to comply by banking regulations)

A UK development bank, similar to the KfW development bank, which can borrow from the market

A UK national development bank (similar to KfW bankengruppe, parent of KfW development bank) where part is used for financing global development

Hybrids (e.g. a UK green investment bank that can address climate finance internationally)

The broad criteria to assess suitability of providing new financial instruments through a new UK entity includes the following questions:

Would the new instruments be more effective in fostering growth, reducing poverty and addressing global public goods?

Is there a demand for the instruments provided by a UK development bank?

What is the benefit of doing this via a new UK institution / entity as opposed to an existing institution/entity in UK or elsewhere, including the multiilaterals?

How does it relate to existing (UK) government objectives, obligations and laws?


State-owned financial institutions (SFIs) accounted for some 25% of total assets in banking systems around the world in 2009, and 30% in the European Union (Schmit, 2011).[187] In BRICs, the market share is substantially higher.

Development Banks (DBs) are typically the largest type of SFI and provide credit and other financial services to individuals, firms and strategic sectors of the economy that private financial institutions were unable or unwilling to serve to the extent desired by policy-makers.

The world's largest development banks include China Development Bank, Brazil Development Bank (BNDES), and Kreditanstalt fuer Wiederaufbau (KfW) in Germany. In terms of assets, they are larger than the World Bank. But they are not the only ones, a recent World Bank survey included information on some 90 development banks in 61 countries around the world.

This note covers:

The many differences amongst development banks

Development banks in the G20

Issues involved in setting up a development bank

The link between recent developments in debt

A brief description of JICA, KfW and AfD

An institutional context for providing concessional loans

Questions and criteria to assess suitability of a new UK development bank

Broad differences amongst development banks

DBs differ across a range of variables (Luna Martinez and Vicente, 2012)[188]:

Ownership structure (fully vs. partially owned by government)

Policy mandates (narrow vs. broad mandates)

Funding mechanisms (deposit taking vs. non-deposit taking institutions)

Target sectors and clients (narrow vs. wide focus)

Lending models (first-tier vs. second-tier)

Pricing of lending products (subsidized vs. market interest rates)

Regulation and supervision (special regime vs. same regime applicable to private banks)

Corporate governance (independent vs. government controlled boards)

Transparency standards (wide vs. limited disclosure)

Instrument, sectoral and geographical coverage

Typically DBs are institutions owned, administered, and controlled by the government, which provides the strategic direction of the DB and appoints their senior management and board members. But in other DBs the private sector can also take a managing part. There are different options for DBs to fund their business operations, including (i) taking savings and deposits from the public, (ii) borrowing from other financial institutions, (iii) raising money in the domestic or international capital markets, (iv) using their own equity, and (v) receiving budget allocations from the government. Most DBs combine all these funding options.

DBs are expected to be profitable and financially self-sustainable, and non-reliant on government subsidies or transfers to (partially) fund their operations. Sometimes, DBs - such as KfW in Germany - receive transfers from the government to fund interest rate subsidies to a particular type of borrower.

Mandates can be specific or broad. There are pros and cons in adopting narrow versus broad mandates. On the one hand, narrow mandates encourage institutions to adhere to their original mandates and gain specialization in their target market. Monitoring and performance evaluation becomes easier in DBs with a narrow rather than a broad focus. However, institutions with narrow mandates do not have the flexibility to target various sectors, in some cases limiting their ability to manage risk through diversification. SMEs constitute the type of client they are trying to serve and support. Some DBs lend first-tier (closer to customer, lower interest rates) others second-tier (to financial institutions, lower operation costs, lower NPLs, BNDES, KfW).

The provision of credit at subsidized interest rates by DBs has been a controversial issue. For some, this practice might undermine the solvency and profitability of DBs and distort the competitive environment. For others, the use of subsidized interest rates might be justifiable to support nascent enterprises provided that subsidies are transparent and used for their intended purposes.

Development Banks in the G20

At least thirteen countries of the G20 have some form of national development bank, with combined assets amounting to more than US$3 trillion (Table 1). In addition, France recently created a public investment bank (Banque publique d'investissement, BPI) with a capital of over €20bn, and the United Kingdom announced the creation of the UK Green Investment Bank. There are other national development banks, such as l'Agence Française de Développement (AFD), and other development banks that are oriented mainly towards official development assistance, national overseas development and fostering economic activity in developing countries and emerging economiesTable 1 National development banks in the G20: is the UK the exception?

Source: G20 documentation (group on financing for investment)

Issues involved in setting up a development bank

Establishing a DB involves a lot of activities. First, there are fiscal costs associated as most DBs are created through public funds. However, the leverage can provide an efficient use of public resources. Second, efficient institutional design, administrative procedures and good governance are needed to complement the private sector. Thirdly, it is also important to have knowledge of financial instruments, debt management techniques, development economics and impact assessments.

Do development banks lead to more debt?

National development banks can (i) address market failures in capital markets; (ii) act counter-cyclically. They can be seen as an allocating mechanism, allocating e.g. savings to investment projects. The investee will take on additional debt (often in combination with other financial instruments such as equity and guarantees). If this debt is managed well in a growth enhancing project, this will lead to economic growth, increased tax revenues and less debt in the future. However, not all debt is managed well which can lead to debt instability. This is why development banks tend to have criteria to lend only to those countries who with an ability to manage debt.[189]

Developing countries have recently developed an appetite for more debt to finance their growth potential. Public and private debt has increased in sub Saharan Africa in recent years (after periods of debt relief), while as % of GDP and exports have stabilised. Countries are taking on debt from China and have begun to issue bonds. The remarkable dynamism recently surrounding bond flows in Africa is one example. Bond flows to SSA were valued at US$ 6 billion in 2011 and experienced much dynamism into 2012 and 2013. Several African countries have now issued bonds and others are considering doing so in 2013. Bond yields in Zambia - where the US$ 750 million bond issue (to finance infrastructure) in September 2012 was reportedly oversubscribed 15 times - were, at 5.4% lower than in some European countries (Greece, Portugal, and Spain) in the past year. Nigeria, Angola, Ghana, Kenya and Rwanda plan to issue US$ 4 billion of bonds together in 2013. A US$ 400 million bond in Rwanda in 2013 was over-subscribed 7 times. The bond would be used to finance transport services and infrastructure. The bond issue was discussed with the IMF.Figure 1 External debt in sub-Saharan Africa, as a percentage of exports

Figure 2 Private sector external debt stocks, long-term (bn US$)

Selected information on JICA, KfW and AfD


The current JICA was formed in October 2008 after a merger of:

Technical Cooperation of the existing JICA;

Loan Aid operation (ODA loans and Private Sector Investment Finance (PSIF) of the former Japan Bank for International Cooperation (JBIC), and;

A large portion of Grant Aid implementing operation of the Ministry of Foreign Affairs (MOFA).

JICA provides loans and private sector investment finance through the Finance and Investment Account. This is separate from the general account used for aid. JICA's capital is funded mainly by the Government of Japan (GOJ). The GOJ may, when it finds necessary, make additional capital contributions to the Agency. JICA has received GOJ contribution every year since 1965. With a capital of JPY 7.5 trillion, the capital ratio of JICA's Finance and Investment Account is of 74.5% (very high by development bank standards). The Finance and Investment Account has made profit, since FY 1997 (except in FY 2002). Unappropriated income must be fully accumulated as reserve "until it reaches the amount equal to the amount of stated capital allocated for the Account" (Article 31 (5), JICA Act).

The Finance and Investment Account undertakes financial cooperation operations by providing debt and equity financing. To undertake these operations, it raises funds by borrowing from the Japanese government under the Fiscal Investment and Loan Programme, borrowing from financial institutions, issuing FILP agency bonds, and receiving capital investment from the Japanese government. Issuing bonds enable JICA to raise funds directly from the public who then have a direct stake in development funding. JICA borrows some 10% of the total outlays from the market and the rest from other sources.

KfW Entwicklungsbank[190]

The KfW Entwicklungsbank (KfW development bank) is Germany's development bank, an integral (but small) part of KfW Bankengruppe[191]. It finances, advises and promotes development projects and programmes around the world. The KfW Entwicklungsbank provided a total of €4.5 billion in 2011 for projects and programmes in North Africa/ Middle East, Asia/Oceania, Europe/Caucuses as well as Latin America.

As part of KfW Bankengruppe, the KfW Entwicklungsbank supplements funds from the federal budgetwith significant amounts raised through their own efforts. Some €2.6 billion euros was mobilised on the capital market. The KfW Entwicklungsbank combines the expertise of a bank with a clear development-policy orientation. In German Financial Cooperation (FC) by the KfW Entwicklungsbank uses funds provided out of the federal budget and adds funds raised in the capital market ("KfW funds"). Currently two Euros out of every three spent on development projects in other countries come from KfW's own funds.

The history of the KfW Entwicklungsbank is linked to the formation of the German Federal Ministry for Economic Cooperation and Development (BMZ). As early as 1952 - four years after the Kreditanstalt für Wiederaufbau (KfW) was founded and endowed with Marshall Plan funds - the Federal Republic of Germany provided development assistance in the form of financial participation in the so-called 'extended support programme of the United Nations'. Development policy became a federal task and was given administrative and political expression in 1961 with the creation of the BMZ. Since then, KfW has been responsible for German Financial Cooperation (FC), or capital support. Table 2 Commitments by KfW Development Bank 2009-2011 (in million euros)

2009 2010 2011
Total commitments1 3,482 4,452 4,532
FC grants 1,112 1,0363 1,336
FC loans 230 179 145
FC development loans 878 2,142 1,713
of which budget funds 106 215 134
FC Promotional loans 1,151 1,913 996
Delegated cooperation2 111 183 3434
Memo item: total budget funds 1,448 1,430 1,614

1 Differences compared with previous years due to interest grant adjustments.

2 Excluding intermediary funds: 2011 (73 million euros) 2010 (10 million euros) 2009 (233 million euros)

3 Includes 14 million euros in grants from the budget of the Federal Ministry for the Environment

4 Includes 84 million euros in grants from the budget of the Federal Foreign Office

Differences in the totals are due to rounding.

KfW Entwicklungsbank provided €2.7 billion in the field climate change and protecting the environment (or 60% of the total). Some € 1.4 billion was allocated for "social infrastructure" (31 per cent), of which €750 million supported the improvement of water supply and guaranteed environmentally sound sewage disposal as well as solid waste management. KfW provided around 1.1 billion euros for the "financial sector" in its partner countries (25 per cent). Of this figure, the majority of the funds supported small and medium-sized enterprises. Around €1billion was allocated to the "economic infrastructure" (23% of total).

KfW Entwicklungsbank (KfW Development Bank) provides financing to governments, public enterprises and commercial banks engaged in microfinance and SME promotion in developing countries. It does so through:

Loans close to market terms using its own resources (so-called promotional loans);

Soft loans that blend KfW resources with support from the federal government's aid budget (so-called development loans), and;

Highly subsidized loans (grants and/or loans at advantageous IDA/standard conditions) and grants (both entirely from the federal aid budget).
Figure 3   Financing instruments

Different country groups are offered different financing conditions depending mainly on their per capita income. In German aid, the work of KfW Development Bank is called "financial cooperation" which is complemented by "technical cooperation" by GIZ and other public agencies (see figure below). The loan conditions are tailored to the sector, the nature and cost-effectiveness of the project, the economic situation of the given partner country, its level of indebtedness and its state of development.

Agence Française de Développement (AFD)[192]

Agence Française de Développement (AFD) is a public industrial and commercial entity and a specialized financial institution combined. AFD is wholly owned by the French state, operating under the remit of the French Ministry of Foreign Affairs, the Ministry of Finance, and the Ministry of Overseas Territories. As a bank and specialized financial institution, AFD is licensed and regulated by the French Banking Authority and conforms to national and international banking regulations (incl. ratios). AFD's ability to raise low-cost funding from financial markets and to design innovative co-financing arrangements allows loan recipients to benefit from AFD's leverage, achieving an economic return on their investments that exceeds the cost of their debt.

Funding model

The AFD raises funds in international financial markets. AFD finances its operations and lending activities through internally-generated revenues, public bond issues and private equity investors. It leverages its AA+ credit rating to provide loans at better-than market rates and conditions. The French Government also contributes funds. Funding from the Ministry of Foreign Affairs allows AFD to provide grants and subsidies for projects, including so-called "co-development" projects: these combine official development assistance with the funds of France-resident migrants, targeting both toward investments in migrants' countries of origin. Funding from the Ministry of the Economy and Finance serves primarily to subsidize loans, while the Ministry of Overseas Territories supports overseas province development. In 2011, these French ministries provided AFD with €953 million towards its development projects and programmes this amount included €631 million of grant monies.


The AFD has considerably scaled up its financing volumes in recent years in order to offset the drying up of private resources. Thanks to its Standard & Poor's AA+ rating - (and Moody's and Fitch's AAA) - the highest possible rating for long-term loans - AFD can allocate loans to beneficiaries with more favorable terms than those offered by markets. AFD loans can be allocated to a State or a public entity benefiting from a State guarantee ("sovereign loan"), or an actor (business, private or public entity) that does not benefit from such a guarantee ("non-sovereign loan").

Sovereign loans: taken out or guaranteed by States and destined for countries with low levels of debt that wish or are in a position to borrow. They also concern countries with debt that has returned to a low level following a programme to alleviate their debt (HIPC Initiative). This is, for example, the case of Cameroon, Ghana or Senegal.

Non-sovereign loans: they are rising sharply and are destined for state-owned companies, local authorities, public establishments or NGOs. AFD also allocates subsidized loans to the private sector. For example, some public service missions are sometimes carried out by the private sector. Businesses often replace the State by providing social services to their employees when public authorities are unable to do so. AFD encourages these players to take part in development by allocating them financing with attractive terms. AFD has raised its capacity to allocate non-sovereign loans at its own risk, without guarantees from the relevant States. The size of loans to finance mega infrastructure operations implemented by the private sector is constantly rising.

The AFD allocates both market-rate loans ("non-concessional loans") and subsidized loans ("soft loans").

Soft loans: AFD may subsidize the financial conditions of a loan. The subsidy, which corresponds to the difference in rate between a market-rate loan and a soft loan, is subsequently provided by the French Government.Market-rate loans: AFD has started extending its activity for market-rate loans at the request of its partners and in view of the crisis. These loans are destined for countries with low levels of debt and counterparts with profitable projects to finance. They provide a response to the lack of liquidity caused by the crisis and the urgent need for credit. For example, AFD has allocated its first market-rate sovereign loan to Senegal in order to help its public finances recover. The Pointe Noire Port Authority in Congo has also benefited from a market-rate loan to finance its priority investments.

The conditions for these loans are also defined on the basis of:

The nature of the project (its social, environmental and economic impacts);

The status of the borrower (its business sector, ratings, guarantees), and;

The environment of the project (political, economic, social and environmental context).

AFD also provides equity, guarantees, and subsidies. The distribution is as follows:

The institutional context for concessional loans

The UK currently does not provide concessional loans, although it used to provide sovereign loans in the past. However, after the 2011 review of CDC, it can now provide non-concessional loans to the private sector. The question now is whether the UK also wants to provide concessional loans to public or private sectors, and non-concessional loans to the public sector, complementing the work by others.

The institutional framework is changing and includes bilateral, regional, multilateral and domestic institutions (bilateral European banks, EDFIs, EXIM banks; IDA/IFC; a planned BRICs bank, philanthropists, "impact" investors, etc).

Table 3 provides possible options for the location of a UKDB and how other institutions are located in this space in broad terms.Table 3 Possible locations of a UKDB in the (public) institutional development financing framework; illustrative examples
Public sector Private sector
Concessional loans (ODA) Bilateral: KfW, AfD, JICA

Regional: EIB

Multilateral: IDA


Interest rate subsidies (e.g. by EIB)

FMO government funds

JICA (Private sector investment finance)


Non-concessional loans (OOF) IBRD



KfW (promotional loans)


CDC's new mandate allows loans (also Impact Investment fund)


Bilateral: DEG, Proparco, core FMO

Multilateral: IFC

Grants DFIDDFID challenge funds (e.g. AECF, TGVCI)
Direct equity and equity funds CDC
Guarantees UK export finance (ECGD) for UK exporters and investors


There are by now good overviews on DFIs that cater for the private sector (e.g. IFC, CDC. DEG), see Kingombe et al (2011)[193] but there is less on DFIs/development banks that cater for the public sector (incl. through concessional loans), apart e.g. from Luna Martinez and Vicente (2012).

There are various options in terms of institutional settings through which concessional loans could be provided:

Continue with business as usual or with minor modifications (enable others such as PIDG, EIB and IDA to provide concessional loans)

A DFID unit using DFID's balance sheet e.g. to provide small scale loans (incl. to private sector)

A separate financial and investment account as in new JICA (funded mainly by government, but possibly also be the market)

A specialised financial institution that combines grants, concessional loans the public sector and non-concessional loans to private sector, similar to AfD, which funds it operations in part from the market (and needs to comply by banking regulations)

A UK development bank, similar to the KfW development bank, which can borrow from the market

A UK national development bank (similar to KfW bankengruppe, parent of KfW development bank) where part is used for financing global development

Hybrids are possible. For example, the planned UK green investment bank could be provided with an ability to finance abroad. The UK Green Investment Bank has received £3 bn from the UK government . There had been question on whether it could borrow on the market, but the UK HMT blocked this option, see e.g. .

The above options will need to be assessed on the basis of criteria (see next section).

Questions and assessment criteria

There is potentially a niche for certain financial products such as concessional loans, but the following questions will need to be considered before establishing a UK development bank.

What are the development financing needs?

What are the gaps in instruments (increasing choice and demand for different instruments in developing countries? By both public and private sector actors; bond financing; economics of loans vs. grants; demand is in financing packages)?

What are the gaps in sectors (some sectors need long-term or large up-front financing, e.g. infrastructure; some sectors need special attention because of specific effects, social enterprises)?

What are the gaps in countries (changes in ability to manage loans vs. grants etc.; market access; debt sustainability; MIC financing gap after graduation)?

What would be the pros and cons of a UKDB? Can it fill a niche?

Instruments (loans vs. grants, and other; concessional vs. non-concessional loans)

Sectors (e.g. infrastructure, climate change, agriculture, innovation)

Countries (fragile, LICs, MICs, SVEs)

Can a UKDB build on comparative / competitive advantages vis-a-vis other institutions (table 2)

Home country advantage in being close to UK private sector (but not tied)

Home country advantage in being close to UK financial institutions (e.g. London city with available financial skills)

Overall portfolio advantages (triple AAA status? Using low interest rate in UK to get high returns in high growth countries, so good for sending and receiving countries)

Advantageous funding models (access to wholesale funding markets; access to offshore funds which otherwise would remain idle?)

Comparative advantages in terms of transaction costs

Disadvantage in pooling / scaling / fragmentation

Flexibility / innovative capacity (e.g. helping social enterprises)

Existing partnerships with Commonwealth and "other affiliated" countries

Institutional and legal questions for a UKDB

Institutionalised vs. grouped/co-ordinated activities

How might rules on state subsidies apply (need to break even such as ECGD) and how does it relate to the UK International Development Act

Would loans be counted as ODA, would the amount leveraged in on the capital markets be counted as ODA, what would be the effect on the government budget, and what are impacts on distribution of ODA over time? (see figure 4)

How would a UKDB co-operate with

Other UK financing institutions in the UK (a planned infrastructure development bank)

Other UK public financing institutions operating in developing countries (CDC, ECGD; e.g. KfW is parent of DEG)

Non-UK public institutions in other countries (EIB, etc)

Other: Philanthropists, "impact" investors , commercial banks

The broad criteria to assess suitability of new financial instruments

Would the new instruments be more effective in fostering growth, reducing poverty and addressing global public goods?

Is there a demand for the instruments provided by a UK development bank?

What is the benefit of doing this via a new UK institution / entity as opposed to an existing institution/entity in UK or elsewhere?

How does it relate to existing (UK) government objectives, obligations and laws?
Figure 4 How can ODA be managed when providing grants and loans

Annex 3: The Committee's visit to Washington DC and Brazil

The International Development Committee visited Washington DC, Brasilia and Rio de Janeiro from 4-12 September 2013. The Committee members participating in the visit were Rt Hon Sir Malcolm Bruce (Chair), Hugh Bayley, Fiona Bruce, Richard Burden, Fabian Hamilton and Michael McCann. They were accompanied by Judy Goodall (Inquiry Manager) and Anita Fuki (Senior Committee Assistant).

In Washington, the Committee met representatives from the World Bank Group; the IMF; the Millennium Challenge Corporation; US AID; the Center for Global Development and other research organisations; and the Inter-American Development Bank.

The purpose of the visit to Brazil was to learn about Brazil's experience during its recent period of rapid economic growth and poverty reduction; to hear about Brazil's role in the international development world; and to discuss the potential for future trilateral development cooperation. In Brasilia, the Committee met representatives from the World Food Programme; the Inter-American Development Bank; Embrapa; the Brazil Agency of Cooperation; the Ministry of Environment; the Ministry of Social Development; and the Department of Women of the Chamber of Deputies. In Rio de Janeiro the Committee visited several transport and community facilities and had meetings with representatives of the Rio State Government; and BNDES (the Brazilian development bank). The Committee was accompanied in Brazil by members of the DFID Brazil office.

Brazil began a period of significant reforms to social security and assistance transfers during the mid-1990s, at a time of economic stability, trade reform and privatisation of some state-owned enterprises. Prior to the reforms, Brazil had a high level of inequality, with a low share of the gains from its growth going to the poor. An important part of its strategy to reduce poverty was through redistribution, with a number of conditional cash transfer programmes, several of which were merged into the 'Bolsa Familia' which grew to cover 11 million families or a quarter of the population. It was targeted at poor families and was conditional on their children staying in school and obtaining basic health care. The success of this programme and other social assistance spending, together with greatly reduced levels of inflation, led to a significant reduction in the proportion of extreme poverty in the Brazilian population (from 17% in 1981 to 8% in 2005).[194]

In Brasilia, some of the Committee members visited the Embrapa Genetic Resources and Biotechnology Research Centre and heard how Brazil's investment in agricultural research has led to significantly increased food production. Before the 1970s, Brazil was not a food secure country, but better understanding of tropical agriculture, better agricultural policies, improved institutional building and market knowledge and better developed infrastructure (such as roads and storage facilities) have led to increased land use for agriculture and increased yields. The Brazilian savannah is similar to some parts of the African landscape, which means that, whilst other conditions might differ, some of this learning could usefully inform development in other countries. There are now some major joint projects, for example in Kenya, Uganda, Ethiopia, Ghana and Tanzania. Embrapa is innovating in knowledge exchange, South-South cooperation and investments related to the achievement of the MDGs. Embrapa and DFID both contribute to the Agricultural Innovation MKTPlace, an international initiative supported by different donors which links Brazilian, African and Latin American and Caribbean experts and institutions, and develops cooperative projects for the benefit of smallholder producers.

The Committee met representatives of the World Food Programme, and were told that 47 million children in Brazil receive healthy school meals under Brazil's school feeding programme. The World Food Programme requested Brazil's help in creating a centre of excellence to help establish other national programmes. 23 countries have been involved to date, with the main focus being in Africa, but also Bangladesh, East Timor and a few other Asian countries. DFID is involved with helping visiting countries learn from Brazil's programme, and developing their own programmes. The Committee was told that DFID was valued for its humanitarian and international cooperation expertise, which helps ensure that Brazil's knowledge is transferred more effectively to Africa.

In Rio de Janeiro, the Committee saw some of the several different aspects of the city's integrated poverty reduction programme. This included the new railway control centre; the cable car system which connects residents living in the poorer areas of the city to the more affluent areas with more job prospects; one of the Pacifying Police Communities centres which were installed in territories previously controlled by armed drugs gangs; a local health centre and a local school. The Committee also visited a community to see some of the recent improvements in infrastructure and services, and heard from Rio State Government officials about education, housing and health policies. Officials told the Committee that DFID's assistance with the detailed evaluation of these new policies and projects would be particularly welcome, as well as support in transferring successful learning to developing countries.

186   Given that different data sources might provide different data, care needs to be taken in the interpretation of results (although we stick to the most commonly used or official data sets). Back

187   See Schmit, M., Gheeraert, et al (2011): Public Financial Institutions in Europe. Brussels, EAPB. As cited in Luna Martinez and Vicente (2012) Global Survey of Development Banks, WB Policy Research Working Paper 5969. Back

188   Luna Martinez and Vicente (2012) Global Survey of Development Banks, WB Policy Research Working Paper 5969. Back

189   This is explained in more detail in: Baudienville, Brown, Clay, te Velde (2009) 'Assessing the Comparative Suitability of Loans and Grants for Climate Finance in Developing Countries' Report for DFID and DECC, prepared by the Overseas Development Institute. It addresses (i) Whether development finance experience of loans/grants is relevant for climate finance; (ii) What DFID can learn from other countries (iii) The appropriateness of loans vs. grants depending on sending/recipient country and project characteristics  Back

190   This section depends on information from KfW's website, see e.g. Back

191   In 2012 KfW Bankengruppe committed a total financing volume of €73.4 billion. It was active mainly nationally. However, the KFW's largest subsidiary, KfW IPEX Bank GmbH, lends predominantly internationally. A smaller subsidiary, the DEG, and one of the group's smaller business units, KfW Development Bank, are exclusively active in the international arena, each within their particular business areas. KfW banking group covers over 90% of its borrowing needs in the capital markets, mainly through bonds that are guaranteed by the federal government. This allows KfW to raise and lend funds at advantageous conditions. Back

192   The information in this section depends on the AfD website and related documents (incl. annual report) Back

193   Kingombe, C., I. Massa and D.W. te Velde (2011), Comparing Development Finance Institutions Literature Review, report for DFID. Policy note published. Back

194   World Bank Group, A comparative perspective on poverty reduction in Brazil, China and India, 2011, Martin Ravaillon Back

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Prepared 13 February 2014