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, www.worldbank.org Table
2: Capital flows to Sub-Saharan Africa US$ billion
| 2001
| 2011
|
| Private capital flows
| |
|
| FDI, net inflows
| 15 | 40.9
|
| Bond flows
| 2 | 6
|
| Net portfolio equity inflows
| -0.9 | 8.3
|
| Total above
| 16.1 | 55.2
|
| |
|
|
| Other financial flows
Aid for Trade
| 2.5 | 9.2
|
| All ODA aid
| 14 | 43
|
| Remittances
| 4.8 | 31
|
| IFC investments
| |
2.2 |
| IDA / IBRD credits
| |
36.3 |
Source: Hou et al (2013) http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/8322.pdf
Table 3: FDI stocks (mn US$)
in Africa (whole continent), UK in comparison with other OECD
countries
| Top of Form
2001Bottom of Form
| 2002 | 2003
| 2004 | 2005
| 2006 | 2007
| 2008 | 2009
| 2010 | 2011Bottom of Form
|
| UK | Top 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
|
| US | Top 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
|
| Japan | Top 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
|
| Korea | Top 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, www.oecd.org
Table 4: Remittances to ACP
countries
Source: http://ec.europa.eu/europeaid/what/migration-asylum/documents/eu_remittances_for_developing_countries_final_19-11-2012.pdf
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?
Introduction
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
JICA
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.
Instruments
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
UKDB?
| Interest rate subsidies (e.g. by EIB)
FMO government funds
JICA (Private sector investment finance)
UKDB?
|
| Non-concessional loans (OOF)
| IBRD
EIB
AfDB, AsDB, EBRD, IADB
KfW (promotional loans)
UKDB?
| CDC's new mandate allows loans (also Impact Investment fund)
EIB
Bilateral: DEG, Proparco, core FMO
Multilateral: IFC
|
| Grants |
DFID | DFID challenge funds (e.g. AECF, TGVCI)
|
| Direct equity and equity funds
| | CDC
|
| Guarantees
| | UK export finance (ECGD) for UK exporters and investors
MIGA
|
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 http://www.greeninvestmentbank.com/
. There had been question on whether it could borrow on the market,
but the UK HMT blocked this option, see e.g. http://www.e3g.org/programmes/systems-articles/uk-green-investment-bank/
.
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.
https://www.kfw-entwicklungsbank.de/International-financing/KfW-Entwicklungsbank/About-us/Unsere-F%C3%B6rderinstrumente/ 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
| 
