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Regional development banks - the great unknowns

Published: 16. 12. 2010

What do regional development banks actually do? This question is also relevant for Parliament, which is to decide on the scale of Switzerland’s future commitment.

By next spring the Parliament must decide on two issues regarding Swiss participation in regional development banks. First up for discussion is a contribution towards a general capital increase for these banks, which is needed to maintain Switzerland’s quota share and voting rights. The second issue is continued funding for the African Development Bank (AfDB) Group’s Development Fund. The monies for this purpose are included in the additional credit line for increasing Switzerland’s development aid to 0.5 per cent of gross national income.

Voting majority for developing countries

The activities of regional development banks are not well known, however. Africa's AfDB, Asia’s ADB, and the Inter-American IADB often act in the shadow of their «big sister» the World Bank. They provide project lending to developing countries that private banks would furnish only at exorbitant interest rates. The funds come from loan repayments and interest income, as well as from profits on their investments in international financial markets. Besides, private donors regard regional development banks as highly creditworthy. Consequently, the development banks are able to raise funds on international capital markets on very favourable terms, which they then pass on to their customers.

In contrast to the situation at the World Bank, developing countries have a voting majority in regional banks (except at the ADB) and account for most of the executive directors. African countries thus hold some 60 per cent of the voting rights at the AfDB. Furthermore, loans are granted only in the region concerned. Whereas the World Bank is dominated by the interests of the rich industrialized countries, developing countries rightly see the regional banks as «their» banks.

Special funds for the poorest countries

The poorest countries can make very little use of conventional development bank lending, however. Special funds exist for them, from which they are granted very low-interest loans with long repayment periods. In specific cases, these subsidized special funds even provide non-reimbursable project grants.

The proposed increase in development banks’ capital stock will not benefit these funds, however, but will instead profit the advanced developing and emerging countries above all. As part of the 0.5 per cent additional credit the Federal Council is therefore also proposing a contribution of 180 million francs to the AfDB’s special fund for the poorest countries. If Parliament rejects this additional credit, Switzerland would have to fund this contribution at the expense of bilateral aid.

Problem-ridden mega-projects

In the case of the regional development banks, the snag lies in their strong focus on infrastructure mega-projects. In 2005 the AfDB dedicated almost 40 per cent of its funds to such projects, particularly in the energy and transport sectors. Such projects may indeed serve the overall economy of a country or region and benefit large foreign corporations. But the poor rarely derive any direct benefit. Contributions to regional banks are therefore no substitute for bilateral development cooperation, which aims to improve the living conditions of the poorest.

Regional development banks are also criticized for hardly involving the local people in project planning and implementation. Often not even the most basic project information is translated into the local languages. Large infrastructure projects frequently lead to expropriations and evictions and cause massive environmental damage. Moreover, civil society organizations voice the criticism that the affected people have little access to review mechanisms for the purposes of reporting abuses.

Good guidelines poorly implemented

On paper, the development banks have responded to the criticism. The African Development Bank for example has issued excellent internal guidelines for project screening, consultation with civil society and for dealing with displaced persons. Besides, the Independent Review Mechanism (IRM) used several meetings with local people to raise awareness of its existence and to encourage the filing of project-related complaints.

In reality, however, the problems persist. The involvement of communities and their organizations is still optional. Governments, project teams and regional banks are under no real obligation to address the concerns of the population. Moreover, the practical implementation of the guidelines is flawed. Submissions to the IRM show that only a tiny fraction of the affected population has ever been consulted on several major projects.

Even retrospective complaints have been of little avail. In the case of the Bujagali hydropower project in Uganda, for example, many villages have been forcibly relocated. The latest evaluation report by the IRM indicates that many displaced people have received no compensation and have no access to running water or electricity at their new location. This even though already in 2008 the Independent Review Mechanism had recommended urgent action in that connection.

Switzerland and the African Development Bank

Switzerland is represented at the African Development Bank (AfDB) by a permanent advisor and is an executive director on rotating basis with Germany. It advocates vigorously for the systematic review of development outcomes and a sharper focus on poverty alleviation. The official and publicly available Swiss guidelines for cooperation with the AfDB nevertheless date back to the year 2005 and have now become outdated in significant respects. Parliament therefore lacks an up-to-date basis for assessing the development benefits of Switzerland's contribution.
It is high time these guidelines were reviewed, with the involvement of Parliament and interested organizations. Specifically, Switzerland should also strive to get the AfDB to actually implement its own good guidelines on transparency, the inclusion of the population and possibilities for the filing of complaints. This calls for critical, independent evaluations of the activities of development banks.

Mark Herkenrath, Alliance Sud

Classification: Finances
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