Lefroy_1008Jeremy Lefroy is Member of Parliament for Stafford.  Follow Jeremy on Twitter.

The UK's
international development programme is placing increasing emphasis on assisting
the private sector (including agriculture) in low income countries.

It is the
private sector which will generate most of the work opportunities so much
needed by growing populations and the tax revenues to pay for public services
such as health and education. So it is sensible for the UK to support something
which will lead to less need for aid.

Some of the
work to help strengthen the private sector is probably best done by grants.
Training of business trainers and basic rural infrastructure are two examples.
But much could be done by loans or other repayable instruments, especially when
the assistance is given directly to private companies. The funds could then be
recycled by the UK into other development work when they have been repaid.

However the
UK does not currently have a means for doing this. True, certain grant funding
is given to bodies such as the African Enterprise Challenge Fund which then
make a combination of grants and repayable loans to private companies. But the
repaid funds are retained within the fund rather than eventually being returned
to the UK taxpayer.

France and
Germany both have development banks. They differ in several respects. But they
can make medium or long term repayable concessional funding available to
projects or companies in low income countries. The UK has CDC (formerly the
Commonwealth Development Corporation) – this invests exclusively in private
businesses and is not suitable for concessional lending on a substantial scale.

The French
and German banks can also raise funds on the market based on the strength of
their balance sheets. This third party funding, when advanced on concessional
terms, may count towards their Official Development Assistance (ODA) without
impacting on the national budget. Of course, when a loan is repaid, it reduces
the ODA for that year. But a gradually expanding portfolio of such loans will
mean that their net contribution to ODA will still rise.

I believe
that establishing a UK Development Bank will bring several benefits.

  1. Development
    funding for work, especially in the private sector, would be used more
    carefully, efficiently and effectively. More would be in the form of loans or
    repayable capital, less as grants.
  2. The ability
    to raise money on the market would mean that UK taxpayer's money would help to
    leverage greater sums. The portfolio of the French Development Bank (Agence
    France de Developpment) is €16.1 billion at end of 2011. During that year, it raised
    €3.845 billion from the issue of bonds.
  3. The target
    of 0.7% of GNI being spent on ODA could be achieved even at times of great
    pressure on the national budget. Third party funding raised through the fund
    and advanced on concessional terms would be included in ODA.

I have long argued that a UK Development Bank could be
established quickly and with no additional government funding. Today the
International Development Committee – of which I am a member – has called on
the Government to makes that step. In our ninth Report of Session 2012-13, The
Department for International Development’s Annual Report and Accounts 2011-12,
we call on the Government to establish a Development Bank which could offer concessional loans alongside the
Department’s traditional grant aid – as a possible solution to the concerns
raised by the Committee. This would free DFID from the constraint of having to
ensure that cash was spent by the end of the financial year.

projects which are suitable (for instance, the £20m allocated to the credit
enhancement and SME guarantee funds in Pakistan) could be transferred to the
bank; and an annual transfer could be made to the bank from DFID's existing
budget beginning in 2013/4. Even at 5% of DFID's annual budget (£500m pa) the
Bank would quickly become a major international source of development finance.

At a time
where it is more important than ever to ensure the best use of taxpayer's
money, a Development Bank would give the UK another means of achieving this.

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