Jeremy Lefroy MP: The case for a UK Development Bank

Jeremy 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.

Current 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.