African bank receives funds; enters centre stage

In April 2010, the African Development Bank Group was granted a 200 percent increase in capital, boosting it to $100bn, to take effect in 2011


While few people would disagree that “Africa’s Bank” deserved this hefty financial injection, even so some observers were surprised the institution achieved it in the face of a world economic and financial crisis.

Part of the answer to the bank’s success in gaining its General Capital Increase (GCI) lies in the many changes that have occurred at the institution over recent years, and the reforms that still lie ahead.

The GCI is linked to a wide-ranging and deep process of reform at the bank, a process which has already begun and is a continuation of reforms that have already been made.

The African Development Bank (AfDB) has transformed itself since Donald Kaberuka began his first five-year term as president, in both the nature of its strategy and the extent of its investment in African projects (Kaberuka was re-elected for a second five-year term at the bank’s Annual Meeting in May 2009 in Abidjan, Côte d’Ivoire).

In 2009, the bank made approvals for operations totalling almost $12.7bn, or nearly four times as much as in 2005. Almost half of that 2009 figure was spent on infrastructure – building and improving roads and railways across Africa and providing power and energy to the continent.

Infrastructure is one of the core priorities of the bank’s strategy, and it is considered crucial to the successful economic and social development in Africa. Strong growth in trade, agriculture, industry and employment is near-impossible without adequate infrastructure on the continent.

Africa’s 17 landlocked countries are in particular need of good road and rail links to the coast if they are to have any chance of building a good export trade for their products.

But by their very nature, infrastructure projects are expensive, hence the need for a much bigger capital base to bolster one of the bank’s main investment activities.

Even the very high levels of infrastructure spending by the bank are not enough. Africa needs much more. A 2008 report by the Africa Infrastructure Country Diagnostic, made up of numerous African and international institutions, estimated that the continent needs $75bn every year for the next ten years to close the infrastructure financing gap.

Surging demand
The financial and economic crisis made the GCI that much more urgent. It caused a surge in demand from member countries, so the Bank used its resources much quicker than foreseen, making a GCI necessary in 2011, two years earlier than anticipated by the Bank’s Medium Term Strategy (MTS).

The MTS had been developed for the period 2008 to 2012, against the backdrop of a positive economic outlook for the global economy together with stability on the international financial markets.

But the crisis changed the African landscape. Africa’s average GDP growth fell to two percent in 2009 and to only 1.1 percent in sub-Saharan Africa, from an average of close to six percent over the previous decade. Access to the international financial markets dried up.

Thierry de Longuemar, the AfDB’sVice President of Finance, commented: “In response to the crisis, the bank demonstrated speed, innovation and its earnest best efforts. It frontloaded its commitments, put in place new instruments to facilitate trade, increased the use of fast-disbursing instruments, accelerated and restructured its portfolio to release additional resources, and generally expedited its operational processes.

“Member countries increasingly turned to the bank as its partner of choice, preferred lender and key provider of technical assistance.”

This proactive response led to a surge in lending levels.  The MTS had envisaged lending in 2009 at less than half of what it turned out to be.

This, together with the AfDB’s attempts to fully maximise its balance sheeting pending a GCI, placed severe capital constraints on the bank. Its prudential ratios were stretched to their limit. The leverage ratio was estimated to reach its maximum limit by the end of 2012, and the Risk Capital Utilisation Ratio (RCUR) to reach its ceiling in 2013.

A GCI was urgently needed if the bank was to sustain its long-term lending programme while maintaining its financial soundness and its AAA rating.

The outcome was a tripling of the bank’s capital to almost $100bn, with six percent paid up capital, a move that was approved in Abidjan.

Resultant changes
That the bank achieved such a record increase in the face of financial and economic upheaval across the developed world and immense competing claims to capital was a strong testament to the faith of its shareholders in the institution’s recent record and planned reforms.

Mr de Longuemar commented: “We could not have had a better result at a worse time”.

The GCI is the biggest capital increase in the bank’s 46-year history.  It will have an unprecedented impact on the bank’s operations, and will provide the bank with a sustainable level of lending (SLL) of approximately $5bn a year for the next decade.

The importance of the GCI cannot be overestimated for the future development of Africa.  If there had not been a GCI, the bank would have needed to scale back its annual commitments to less than a third of that figure.

Instead, the GCI paves the way for the bank to meet the expected huge surge in demand from both its middle income and low income member countries. It also allows the bank to continue to raise money at competitive rates on the capital markets, and maintain its AAA rating.

Just as important as securing the finance is how it will be used. The bank’s plans for Africa’s development remain clear, focused and ambitious. As set out in the MTS, the core strategic and operational priorities are infrastructure, the private sector, regional integration, governance and higher education and skills development.
While the bank’s balance sheet has been transformed, its strategy remains the same. “We are pursuing a steady course”, said de Longuemar.

With the GCI now in place, these areas have an even higher priority and the attention given to them by the bank can grow, change and adapt to different needs and circumstances of each of their 53 regional member countries without fear of containment due to tightened purse strings.

Investment in infrastructure and the private sector were particularly vulnerable because they were severely hit by the shortfall in FDI in Africa, which slumped by at least 50 percent in 2009 as compared to 2008.

One of the areas marked out for more action is climate change. Climate change was envisaged in the MTS, and it has become increasingly important and central because of recent developments, not least the Copenhagen Conference.

The GCI will also smooth the way for a strong process of internal reform in the bank to make it much more effective and results-oriented in the pursuit of these core aims. “The bank is seriously committed to these reforms”, said de Longuemar.

The reform process is wide-ranging, comprehensive and deep and is affecting and will affect every aspect of the bank and how the bank operates. It includes loan policy, business processes and organisation, human resources, the bank’s income model and risk management capacity, an urban development strategy, decentralisation of the bank within Africa, results management and measurement, transparency, an MTS review and creation of a long-term strategy.

Addressing challenges
The reform process will also include the bank’s policies on private sector development, the energy sector, large loans and policy-based loans.

It will also develop guidelines on political challenges – how to react to them and to have a coherent guide and blue print for reaction to such challenges, along with partners such as the African Union and the UN.

There will also be a review of this GCI-related reform process, involving enhanced accountability and mechanisms to demonstrate the progress of bank reform to member governments and parliaments.

In short, it is a root and branch reform of the bank in the context of its much stronger financial capability, and in the face of the challenges of the next ten years of Africa’s development.

Some progress has already been made, for instance, in areas including business processes and organisation (including the appointment of a COO, and more delegation of authority); budget management and managing for results.

As for the rest of the reform programme to come, there are clear timelines and frameworks for the introduction of every aspect.

With these reforms and with the capital increase, Africa can look forward to an even brighter development future with the help and partnership of “Africa’s Bank”.