High-level panel issues report on prospects for African Development Bank
15 February 2008
Panel's suggestions include merging of the African Development Fund (ADF) with the African Development Bank (ADB), and eliminating the performance-based allocation (PBA) system.
On January 22, a “high-level panel” convened by African Development Bank President Donald Kaberuka in 2006 released a report entitled “Investing in Africa’s Future: The ADB in the 21st Century.” [Note that the acronym usually used for the African Development Bank is AfDB, to distinguish it from the Asian Development Bank; in this article we stick with the report’s use of “ADB” to avoid confusion.] The panel was chaired by Joachim Chissano, former President of Mozambique, and Paul Martin, former Prime Minister of Canada.
The “headlines” coming out of the report are that the panel believes the ADB should become Africa’s premier public financial institution, and that its donors and regional member states should put more confidence and resources into it. The Bank is currently only the seventh largest source of external assistance, behind even the Dutch government; the panel calls for this to change.
Much emphasis is put on the ADB as a uniquely African institution: the report endorses what it was told by the Africans it interviewed, namely that the greatest value the ADB can offer is as a trusted source of finance, knowledge, and analysis that Africans feel they control. “The ADB,” says the report, “should become the recognized authority on African development, the hub of a network for African policy and research, building understanding of what works in Africa and why—of how policies and investments translate into outcomes.”
The report suffers from the usual problems with such documents – platitudes, generalities, and repetition – but also manages to make a few provocative points well worth considering.
The most significant practical recommendation is for the softening or elimination of the division between the Bank’s two main divisions: the African Development Fund (ADF) and the main African Development Bank, and for the merging of the two boards. The ADF is the Bank’s facility for low-income countries. It lends at heavily-subsidized rates, but has fewer resources. Only 15 countries are eligible for the larger loans available from the ADB; fully 39 deal solely with the ADF. (The ADF is comparable to the International Development Association [IDA] at the World Bank.)
As the panel points out, “the ADF is the point of reference for the majority of the continent, but its board is dominated by the non-African members that give most to the Fund” – a point curiously reserved until the report’s final paragraph. In that concluding paragraph, the panel comes out for eliminating the two-board structure: “In line with our belief that there should be a single bank, we also believe that should be a single board. […] The Bank needs one board where all shareholders are represented and important decisions are made together. This would reinforce African representation and avoid marginalization of the African voice of the Bank.”
The reference to a “single bank” refers to the report’s earlier proposal to revamp the distinction between the two facilities. “The ADB has excess capacity, while the ADF has excess demand. To overcome this mismatch, the ADB should increasingly be managed as one bank, with one set of strategic objectives. It should bring together its concessional and non-concessional windows, its sovereign and non-sovereign operations into a coherent whole.” Blended lending rates would make more sense than the stark choice between ADF and ADB rates it now employs.
Instead of using per capita income to determine whether a country should borrow at concessional or non-concessional rates, the panel suggests that human development indicators might be a less restrictive way to determine the appropriate lending instrument. Another possibility would be to make the type of project, rather than the borrower’s indicators, the determinant of the lending instrument. The panel notes that these alternatives “could increase the number of countries with access to both” windows, the ADF and the ADB. The latter method would also reduce the chances of regional, multi-country projects from facing disapproval because of the profile of just one of the countries involved.
Other suggestions made by the panel include:
- the creation of a “solidarity fund wholly focused on promoting economic integration, especially through cross-border infrastructure, driven by continental and regional priorities.” The panel notes that African countries have more than $300 billion in currency reserves, some of which could be put to work toward this goal. The ADB itself could devote some of its annual income of $300 million to the fund.
- assistance to African countries to implement the guidelines of the Extractive Industries Transparency Initiative (EITI). Towards that end, the Bank should deepen its expertise regarding licensing, managing, and auditing concessions and develop a network of experts with both financial and legal capacity. The panel notes also that the Bank should be sparing in its direct funding for extractive industry projects, since those that are commercially viable should be able to attract financing from other sources.
- the establishment of local equity funds to invest in small and medium-sized enterprises (SMEs).
- assistance to African banks to reduce the costs borne by overseas workers remitting money to Africa, and programs to “harness these huge flows for development.”
- elimination of the ADB’s performance-based allocation (PBA) system. The PBA is the ADB’s version of the World Bank’s “report card,” the Country Policy and Institutional Assessment (CPIA), a complex ranking of governance and economic performance indicators that determines the portion of the Bank’s available capital that will go to each specific country. The panel questions the assumption that some indicators are universally applicable, saying it “leaves little room for country-owned development strategies or continental diversity.” It criticizes the PBA’s needs indicators as too narrow, and says “much of the assessment is essentially subjective and backward-looking,” measuring certain policy choices rather than results. Finally, the panel says that doing annual PBA assessments introduces an unconstructive element of uncertainty into the planning and management process for both borrowers and the Bank itself.
- consideration of “counter-cyclical” financing instruments which would reduce “vulnerability to debt stress by insulating loan repayment from outside shocks.” If a country is heavily dependent on cotton exports, for example, loan servicing costs could be reduced if the international price of cotton declines.
- the restructuring of its partnership with the World Bank that provides a clearer division of labor.
In addition to Chissano and Martin, the panel included Joseph Stiglitz, the Nobel Prize-winning U.S. economist who served as Chief Economist of the World Bank (1997-2000) and has become known for his hard-edged critiques of the IMF; Wiseman Nkuhlu, the South African who headed the New Economic Partnership for Africa’s Development (NEPAD), the controversial development initiative created in 2002 by the G-8 industrialized nations and five African heads of state; and Jean-Michel Severino, a former high-level World Bank official who now heads the French Development Agency, and Soumalia Cissé, the head of the West African monetary zone (UEMOA). Other panelists were the head of the Rockefeller Foundation, the CEO of the Nigerian stock exchange, Uganda’s central bank governor, a former EU commissioner for development, a Belgian legislator, and former officials of the Thatcher and Mobutu governments. The technical team included another former high-level World Bank official, Callisto Madavo, and former Ghanaian government official Kwesi Bothchwey, himself a frequent fixture in similar panels.
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