Regional Development Banks: Stepping Out of the Shadows -

Vol. 8, No. 1

January, 2005

The African Development Bank

by Ike Nnedu
50 Years Is Enough Network

Editor’s Note:

While most of our work’s focus has been on the World Bank and the IMF, there are
many other influential public lending institutions, including a large subset of regional
development banks. These banks wield great influence in their particular regions and
often work in close cooperation with the IMF and the World Bank, including joint
funding of programs and policy conversion. In addition, these regional development
banks share many of the same undemocratic and unaccountable decision-making
processes that characterize the IFIs. The regional development banks are quietly
making decisions that drastically affect the lives of people in much of the world. In
this issue of Economic Justice News, we are profiling two of these banks – the African
Development Bank and the European Bank for Reconstruction and Development. While
they are not as well-known as their counterparts, the Asian and Inter-American
Development Banks, they should not be forgotten in the development equation.

Africa, the continent most subject to IMF/World Bank policies, has had its own regional development bank for four decades, in addition to a number of “sub-regional” development banks. The African Development Bank Group (AfDB) operates largely in the shadow of the World Bank. In the 40 years of the AfDB’s existence, the continent’s economic indicators and social welfare have worsened. Theoretically a “development” bank, it has neither inspired nor created development.

The African Development Bank Group was founded in 1964, but began operations in 1967. By 2003, the AfDB had approved 885 loans and grants worth $48 billion, and offered credit guarantees and co-financing arrangements worth another $70 billion for borrowing members. The AfDB is the only triple A (AAA) rated financial firm in Africa.

Located in Abidjan, Côte d’Ivoire for most if its existence, in February 2003, the AfDB packed up and moved to Tunis, Tunisia, when Côte d’Ivoire began experiencing political instability. In May 2004, it was decided that the AfDB would remain in Tunis at least until May 2006.

The African Development Bank Group comprises three arms: the first, referred to simply as the African Development Bank, makes loans at below-market rates; the second, the African Development Fund (ADF), makes no- or low- interest loans to its most impoverished members; and the third, and smallest, the Nigeria Trust Fund, funded by the Nigerian government and financed by oil revenues, makes loans similar to the ADF. Three-quarters of the Bank’s borrowers (13 of 53) qualify only for ADF loans.

Changes In The 1990s

Like other multilateral development banks, the AfDB has adopted tactful rhetoric. Its “ Strategic Plan” for 2003-2007 and 1999 “Vision Statement” are dominated by terms like “poverty reduction,” “promotion of sustainable growth,” “productivity growth,” as well as “ country ownership” and “participatory approaches” in project management.

In the early 1990s, non-regional members expressed disappointment at the performance of the Bank Group. In response, the AfDB initiated a commission led by former World Bank Vice President David Knox to evaluate the organization. Published in 1994, the Knox Report drew attention to a number of issues, including poor quality of lending; lack of focus caused by the conflicting interests of shareholders; and a discrepancy between official policies and actual practices. The Knox Report led to a period of internal consultations about reform. Occasionally acrimonious, the discussions pitched African and non-African members against each other. At one point, the non-regional members suspended funding for the AfDB.

The AfDB has since implemented several reforms, including increased cooperation with the IMF and World Bank, which was one of the non- regional members’ key demands. Additionally, the 1999 Vision Statement and the Strategic Plan for 2003-2007 mention other reforms in project selection, project monitoring, in implementation culture, and in project reviews. Staff performance is hence to be judged on better quality at entry and on the successful implementation of the projects, rather than on the number of new projects they bring to the Board for approval. The AfDB is also planning decentralization. It intends to narrow its focus and channel its financial, human, and knowledge resources to fewer “ interventions” deemed to have “high impact.”

The AfDB also began changing its governance structure and its corporate management. It has enacted comprehensive amendments to the “ Agreement Establishing the Bank,” purportedly to solve problems with governance. For instance, the share ceiling for non-regional members was increased from 34% to 40%. As votes before the Board of Governors must be decided by a majority of 66.66% voting power of the members, non-regional members hold a veto. And in collaboration with multilateral agencies like the Organization for Economic Cooperation and Development (OECD), the AFDB launched a “results-based management” (RBM) agenda. The RBM process includes the development of quantifiable indicators to monitor and evaluate AFDB operations.

Relations With The IMF and World Bank

The African Development Bank strives for policy harmonization and complementary cooperation with the IMF and World Bank; in fact, it has an official Memorandum of Understanding outlining cooperation with the Washington-based institutions. Many of the AfDB’s procedures, policies, and programs are replicas of IMF and World Bank originals. In effect, the AfDB and the Bretton Woods Institutions work together as a team, with the World Bank cast as the coach.

One potent example of this increased cooperation is the “cross-default” pacts the AfDB formed with the IMF and World Bank, which has strengthened its ability to enforce repayment. It means a country in default or in arrears on its AfDB debts is automatically placed in the same status on its debts to the IMF and World Bank regardless of the actual status of those repayments. The IMF and World Bank stop disbursing funds to such countries until they settle their arrears with the AfDB.

The AfDB helps African countries prepare their Poverty Reduction Strategy Papers (PRSPs) – the controversial new process for getting structural adjustment loans – for the IMF and World Bank and participates in the multilateral Highly Indebted Poor Countries (HIPC) debt relief initiative. The AfDB says it has provided $4 billion of debt relief to the 23 African countries qualified for HIPC, which covers up to 80% of annual debt service the eligible countries owe the Bank Group.

The World Bank and the AfDB jointly finance huge infrastructure projects such as the Lesotho Highlands Water Project. Project critics tend to focus on the World Bank, with scant attention paid to its African ally, appropriate, perhaps, since the World Bank sets the policies and presumably makes the project determinations that the AfDB follows. But this tendency also lets one of the agents of the controversial loans off the hook.

The AfDB supports “structural adjustment” through its “policy-based” lending. In most regards, then, the African Development Bank is an exact replica of the World Bank. Most of these are in support of structural adjustment, but lately some also support “sector adjustment”.

The amplified synergy between the AfDB and the Bretton Woods organizations is facilitated by personal ties at the highest level. From a field of five candidates, Omar Kabbaj was elected President of the AfDB in 1995 after five rounds of deadlocked votes and deadlocked negotiations. Kabbaj had spent 14 of the prior 16 years working for the IMF and the World Bank, on the IMF Executive Board and the World Bank Executive Board.

The African Development Bank also emulates the World Bank’s controversial gauge of borrowing countries’ adherence to “ sound economic policies” and “good governance” (both as defined by the World Bank). At the World Bank, the Country Policy and Institutional Assessment (CPIA) assigns a rating to each borrowing country, which determines how much lending it will be eligible to receive. The AfDB claims it has its own indicator, cleverly named the Country Performance Assessment (CPA), but in fact the CPA differs very little from the CPIA in theory or practice; the rankings are nearly identical for any given country.

One difference may emerge, however. In August 2004, the board of the ADF (the low-interest division) indicated a desire to make the CPA system stricter. They want the ratings to be dependent on the actual implementation of suggested reforms, and not just on the expression of commitment to reform. In addition, in response to criticism, the ADF says it will reform the CPIA process by involving client governments in the CPA process. It is unclear if any concrete steps have been taken to do so, but giving governments a voice in the rating process could be a significant improvement, though the basis of the ratings will remain highly dubious.

On The Reforms

The AfDB’s improved credit ratings indicate the approval of its reforms by the major credit rating agencies. Non-regional members also approve, and express their approval through increased subscriptions to the AfDB. However, the AfDB can be fiscally sound and still fail to achieve the goals that informed its creation in the first place; goals used to justify its continued existence. The Knox Report, whatever its strengths and weaknesses, was not born from a failure to make profit, but from a failure to achieve those goals, including an estimated 40% project failure rate.

The AfDB is a political institution that makes political choices and influences the political choices of member governments. Political decisions should be made democratically, which means citizens should have the final say. And citizens should have input in accountability, in determining what constitutes success and what constitutes failure, and in setting the goals and the means to achieve them. Unfortunately, the reforms have not made the AfDB more democratic nor have they made it more accountable. They have merely exchanged one form of undemocratic decision-making for another.

The ADF is owned almost entirely by non-regional donor countries, each of whom has strategic economic interests; African governments have a voice only through the shares allotted to the AfDB. Through the CPA test and control of needed money, the ADF has a strong lever to force the majority of regional member countries into adopting policies the ADF – and its non-regional members – deems “good.” The governments of the most impoverished African nations, clients of the ADF, are in no position to negotiate, and the citizens of these countries have even less voice. Since the ADF, in practice, reflects the wishes of the IMF and World Bank, African citizens (and governments) seeking to make input in ADF policy-making would have to engage the Bretton Woods organizations (in which they have an even more marginal role), and influence core decisions made in Washington, DC. Effectively, these countries are dictated too, and the respective governments impose the mandated policies with no regard to the wishes of their people. AfDB: Private Sector Promotion In recent years, private sector support and development has been given increased importance, attracting an ever-rising proportion of AfDB funding. It makes loans to what it terms “financially viable private enterprises”. In 2003, the AfDB experienced a reduction in its overall operations, but still saw a 3.5% growth in private sector lending operations which finished the year with 28% of all loans and grants – the latest years in what is a firm trend of continuous year-on-year growth in the magnitude of private sector operations. The AfDB also gives loans to Commercially Operated Public Enterprises (COPEs), and public sector loans earmarked for improving the climate for private investors.

The AfDB directly invests in private sector firms by purchasing equity (stocks and debentures) in privately-owned companies, with an emphasis on companies in the financial sector, and on public sector companies that are in the process of being privatized. The AfDB believes its equity participation promotes the development of the private sector in African member countries. The AfDB’s official policy prohibits the Group from owning more than 25% of any specific company. Sub-Regional Development Banks In addition to the AfDB, a number of regional development banks within Africa have been established. All of them co- operate closely with the AfDB, maintaining a relationship with it similar to the AfDB’s relationship to the World Bank. This relationship is becoming increasingly formalized under the theme of continental integration and the NEPAD (New Partnership for African Development) process. It is not a process that looks for the best choice among alternatives, but rather seeks to implement a “ consensus” built on Bretton Woods guidance.

The AfDB co-finances projects with the sub-regional development banks, and the sub-regional development banks are all dependent on the AfDB for a least a portion of their operating funds, provided through loans and equity participation.

The sub-regional development banks include: n Development Bank of the Central African Countries n Banque de l’Habitat n The Development Bank of Southern Africa (DBSA) n African Export-Import Bank (Afrexim Bank) n Development Bank of the Great Lakes Countries n The East African Development Bank n The Eastern and Southern African Trade and Development Bank (PTA Bank) n West African Development Bank Comment Most of the information about the African Development Bank, its policies and its projects emanates from the AfDB itself (or from associated entities and individuals). There is a paucity of information about Africa generated from within Africa; a disadvantage the AfDB itself recognizes – the AfDB has officially expressed its intention to step into the void and become the continent’s “knowledge bank”. It wants to be Africa’s prime source of information, data, consultancy, advice, research and planning on poverty reduction and sustainable development. But this would only compound the cardinal difficulty for citizens seeking to make informed decisions on public policy issues affected by the African Development Bank Group. Such decisions need independent, objective unbiased information (including information on the comparative costs and benefits of alternative approaches); if the main or only source of information reflects both vested interests and conflicts of interest, citizen democracy is weakened and is political decision-making is not optimal.

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