Summary of Opening Statement of Mr

Ad Hoc Expert Group Meeting “Rethinking the Role of National Development Banks” (New York, 1-2 December 2005)

Report

Introduction

1. The UN General Assembly, in its resolution 58/230 of 23 December 2003, called on the Financing for Development (FfD) Office of UN-DESA to “organize workshops and multi- stakeholder consultations, including experts from the official and private sectors, as well as academia and civil society, to examine issues related to the mobilization of resources for financing development and poverty eradication” and “to convene activities involving various stakeholders … to promote best practices and exchange information on the implementation of the commitments made and agreements reached at the International Conference on Financing for Development”. In response, the FfD Office, in cooperation with major institutional and non-institutional stakeholders, launched, in 2004-2005, a series of multi-stakeholder events, to explore selected FfD-related issues on which informal and expert-level discussions by multiple stakeholders might facilitate policy debates in international forums.

2. The Ad Hoc Expert Group Meeting on “Rethinking the Role of National Development Banks” was held on 1 and 2 December 2005 at UN Headquarters in New York. The main purpose of the meeting was to seek intellectual inputs from a representative group of experts from around the world for the launch, in 2006, of a research project, entitled “Multi-stakeholder Consultations on Rethinking the Role of National Development Banks”. To that end, participating experts were invited to engage in an interactive discussion, with a view to identifying and exploring key substantive issues to be addressed during the envisaged consultation process, including relevant national and regional experiences, as well as some organizational matters. The agenda of the meeting and the list of participants are attached to this report (see annexes 1 and 2, respectively). The background documentation before the expert group and presentations made by the panelists can be downloaded from the following website address: www.un.org/esa/ffd/ndb.htm.

3. The present report broadly follows the organizational structure of the meeting. The final section on “Next Steps” outlines the key ideas provided by the participants during the concluding brainstorming session on the way forward. Accordingly, annex 3 contains a draft model agenda, based on the background documentation and the additional points raised by the experts during the meeting, to serve as a framework for the proposed series of follow-up regional meetings on the theme of the project.

1 Session 1. Introduction of the Project Proposal

4. Mr. José Antonio Ocampo, UN Under-Secretary-General for Economic and Social Affairs, opened the meeting. In his introductory remarks, Mr. Ocampo emphasized that the present dialogue on National Development Banks (NDBs) should be seen as part and parcel of the various multi-stakeholder consultations that have been taking place in the context of the UN financing for development process. Indeed, these consultations have been an effective mechanism for following-up on the commitments made and agreements reached by Governments and other stakeholders at the International Conference on Financing for Development, held in Monterrey, Mexico, in March 2002. He pointed out that the principal aim of the present meeting was to understand the potential opportunities and current challenges facing NDBs.

5. Mr. Ocampo stated that NDBs should be seen as entities that complement commercial activities and can help create markets that the private sector cannot develop by itself. He also observed that the functions of NDBs can be manifold. In addition to their role in providing long-term finance, some of these institutions have been involved in providing shorter-term capital for agricultural projects, small and medium enterprises, exports and, in some cases, for educational scholarships. In many of these areas, NDBs complement existing private sector activities. However, in the 1980s, many of these institutions came under pressure owing to excessive risk-taking and a failure to maintain sustainable finance. While many went bankrupt, they did not entirely disappear. In Latin America, in fact, there has been resurgence of the idea of development banking and countries such as Brazil, Mexico, Chile and Colombia have active institutions of this kind. In Asia also, NDBs continue to exist. Moreover, a number of industrialized countries have active development banks.

6. Looking ahead, Mr. Ocampo believed that there was a need to redefine the functions of NDBs. To that end, he presented some possible areas where NDBs could play a useful role. These include the financing of small and medium enterprises, the development of bond markets, infrastructure finance and counter-cyclical financing. In addition, NDBs could also assist in the development of infrastructure for greater economic integration between neighbouring countries. In closing, the speaker presented two issues for consideration that would, in his view, be central to the functioning of NDBs. The first relates to standards of governance. Indeed, the governance structure and the relationship between NDBs and ministries of finance are of critical importance. In particular, where subsidies are given to these institutions by the government, they need to be made transparent so that the social function that they are supporting should be evident. The second issue involves regulation and supervision of NDBs. There needs to be consideration of whether these institutions should be subject to the same regulations as commercial banks, including the Basle standards, or whether they require different rules.

Session 2. Setting the Stage: Sustainability versus Privatization

7. This session was chaired by Mr. José Antonio Ocampo, UN Under-Secretary-General for Economic and Social Affairs. The panelists were Mr. Rommel Acevedo, Secretary

2 General, Asociación Latinoamericana de Instituciones Financieras para el Desarrollo (ALIDE) (Lima, Perú); Mr. Ignace Monkam Daverat, Division banques et marchés financiers, Département secteur financier, Agence Française de Développement (AFD) (Paris, France); and Mr. Lemma W. Senbet, Chair of the Finance Department, Robert H. Smith School of Business, University of Maryland (College Park, MD, USA).

Presentations

8. Mr. Rommel Avecedo’s presentation was titled “Development Banking in Latin America: Present Situation and Prospects”. He outlined the evolution of development banking in Latin America and commented on the commercial viability and prospects for these institutions. Development banks in the region first emerged with the aim of providing long-term financing. More recently, they have also increased services in areas not covered by the private sector. These have included enhancing the access of low-income groups to financial services, directing subsidies to small and medium enterprises and encouraging sectors with positive externalities, such as education and housing. Most of their loans go to agriculture, agro-industry and leasing. In 2004, the combined assets of these development banks amounted to $400 billion, 71 per cent of which were in public ownership and 9 per cent in combined/mixed ownership. Development banks in Latin America have assumed diverse structures and changed their organizational forms depending on local needs, the institutional environment and public policies. These institutions need to develop an inclusive financial system through further diversification of their financial services and instruments. At the same time, they face the challenge to remain financially sustainable. In that regard, critical factors are adequate internal and external supervision, adherence to international norms and banking standards and independent external auditing. In concluding, Mr. Acevedo stressed the importance of a strong relationship between NDBs, commercial banks and other financial intermediaries, the need to carefully assess the viability of their investments, the significance of technology development and innovation for their financing instruments, and their important role in identifying business opportunities.

9. Mr. Ignace Monkam Daverat spoke on “The Quest for Sustainability in National Development Banking”. He argued that the financial sustainability of NDBs was predicated on three factors. The first factor relates to effective governance and management. The important criteria here include having systems to ensure effective supervision of NDBs, such as an independent board, ensuring sound risk assessment of projects, and applying enforceable prudential norms. The second factor that would enhance financial sustainability concerns their competitive positioning. Mr. Daverat emphasized that the activities of NDBs should be complementary to those of private financial intermediaries in all areas, be it the financing of sectors, the targeting of clientele or the provision of financial instruments. Finally, the financial sustainability of the activities of NDBs is also dependent upon their development impact. Producing indicators that measure development impact would provide valuable information for NDBs, governments and donors and serve to enhance the benefits of projects for final beneficiaries. In concluding, Mr. Daverat stressed that each of the above factors should be adapted to the national context and that effective and sustainable NDBs can play an

3 important role in making up for the shortcomings of local financial systems in many developing countries.

10. Mr. Lemma W. Senbet focused on the “Benefits and Costs of Privatization of State-owned Banks”. According to him, the important issue is the balancing of commercial viability with developmental goals. On the one hand, privatization may strengthen competition and improve governance and efficiency. At the same time, private banks do not pursue developmental goals and may shun certain sectors and activities that state-owned banks may serve. Measuring the financial gains from privatization has been difficult in regions such as Africa, which experienced a sharp decline in state ownership of banks. In general, privatizations were less successful where partial and substantial state involvement remained. However, research into the net gains from bank privatizations is difficult since it is often not possible to capture all the relevant dimensions of performance, in particular social returns. Ultimately, according to Mr. Senbet, the effect of privatization on state- owned banks depends on how it is implemented and on what institutional infrastructure exists in the home country. In any event, the role of development banking should not be understated, especially in socially important sectors that may be inadequately served by commercial banks.

Discussion

11. The ensuing discussion included the following points:

 Questions were posed regarding the operations of Agence Française de Développement (AFD) and its sources of finance. Explanation was given as to how third party operations were managed at AFD and the importance of having careful assessment of costs and non-interference from governments. While AFD is partially funded by the French Government, it also raises a significant part of its resources on international financial markets, mainly through bonds that enjoy an AAA rating.

 The critical importance of local capacity building to enhance the knowledge and operations of NDBs was stressed. In that respect, it was pointed out that engaging with the private sector and recruiting external consultants would be helpful.

Session 3. Financing of Infrastructure Development: Mechanisms and Experiences

12. This session was chaired by Mr. Oscar de Rojas, Director, Financing for Development Office, UN-DESA (first part) and Mr. Alex Trepelkov, Chief, Multi-stakeholder Engagement and Outreach Branch, FfD Office, UN-DESA (second part). The panelists were Mr. Daniel Titelman, Coordinador, Unidad de Estudios Especiales, UN Economic Commission for Latin America and the Caribbean (ECLAC) (Santiago, Chile); Mr. Toru Tokuhisa, Resident Executive Director for the Americas, Japan Bank for International Cooperation (JBIC) (New York, NY, USA); Mr. Lumkile Mondi, Chief Economist, Industrial Development Corporation of South Africa and Vice-President, Association of African Development Finance Institutions (AADFI) (Johannesburg, South Africa); and Mr.

4 Akash Deep, Associate Professor of Public Policy, Harvard University (Cambridge, MA, USA).

Presentations

13. Mr. Daniel Titelman’s presentation was titled “Is There a Role for Development Banks in Long-term Financing?” He argued that development banks have had an important role to play in providing finance for medium- and long-term projects due to underdeveloped financial systems in many developing countries. However, he stressed that it was important that their role should be complementary to the activities of private financial institutions and markets and the resources provided should be additional to those provided by them. Moreover, a market for their products must be sufficiently developed if they wanted to be efficient institutions. He illustrated his point with examples from Latin America and, in that context, also argued that development banks should play a role in helping to develop the financial system and capital markets. However, these instruments should be developed taking into account the deepness and development of domestic financial markets. In Latin America, the short-term nature of finance, the scarcity of risk management instruments and the scarcity of credit for smaller enterprises indicate an important role that development banks can play in encouraging financial sector development. Mr. Titelman also mentioned the successful experiences of several development banks in Latin America such as the Banco Multisectorial de Inversiones of El Salvador, COFIDE of Peru, CORFO of Chile, and Corporación Andina de Fomento (CAF) at a sub-regional level.

14. Mr. Toru Tokuhisa looked at the issue of “Supporting Long-term Financing Mechanisms: JBIC’s Experience”. He suggested some critical issues to be addressed with regard to the role of NDBs in long-term financing, based on the experience of the Japan Bank for International Cooperation (JBIC). JBIC is the sole Japanese governmental financial institutions promoting Japan’s economic interchange with foreign countries. Some of its finance for developing countries has been channeled through NDBs. JBIC’s interaction with NDBs and local financial institutions has had positive results, including facilitating and increasing long-term financing and mitigating the credit risks. According to Mr. Tokuhisa, the critical issues to be addressed include the provision of capacity building to improve the ability of these institutions to undertake credit analysis, to enable them to deal with internationally accepted financial practices through technical assistance, and to provide them with the tools to analyze the environmental and social impacts of projects to be financed. He also stressed the importance of developing local financial and capital markets to mobilize local savings and increase foreign investment.

15. Mr. Lumkile Mondi provided an “Evaluation of the Industrial Development Corporation (IDC) of South Africa”. IDC is a self-financing, national development finance institution placed at the heart of South Africa’s industrial development. It is a financial institution, a development agency, and an industrial policy actor. As a financial institution, IDC has an appetite for risk, is able to evaluate it and can also lower it through its participation. As a development agency, IDC represents a centre of knowledge and information. As an industrial policy actor, IDC interacts actively with the government at ministry levels and

5 also has strong links at industry/sector and firms/associations levels. Using its knowledge and analysis capacity, IDC proactively anticipates development needs, understands market failures and uses finance to shape the economy. With respect to the issues that need to be taken up further, Mr. Mondi stressed, among other things, the importance of having a strong focus on small and medium enterprises, given their important role in generating employment. He also called for an enhancement of the screening and prioritization of projects, and emphasized that the performance of firms receiving IDC financing should be more closely monitored. He said that IDC should concentrate on increasing economic linkages in order to maximize the development impact of projects on South Africa’s industry and economy. Mr. Mondi also pointed out the importance of improving information flows and utilizing the existing knowledge base to enhance performance.

16. Mr. Akash Deep spoke on “Public-Private Partnerships for Financing of Infrastructure Development”. He stressed, in particular, the possibilities for NDBs to act as a conduit for government participation in Public-Private Partnerships (PPPs) focused on infrastructure development. He pointed out that while government involvement in infrastructure development was necessary for many reasons, including the significant social benefits and externalities that the private operators may not take into account, its ability to do so may be limited by fiscal pressures. At the same time, private investment in infrastructure has been constrained by a number of factors including concerns about regulatory, currency and political risks. It therefore makes sense, according to Mr. Deep, for governments and the private sector to collaborate through PPPs. There are different models of PPPs, but NDBs can in general usefully serve as a conduit for public participation in them in many ways. These include holding a diversified portfolio of a government’s stake in infrastructure projects, facilitating learning across projects and creating a repository of expertise and information, gaining an inside view of projects at par with private investors and commercial banks, and maintaining a sustained role that provides continuity of public participation. Nevertheless, the effective implementation of such a role by NDBs is dependent upon a number of factors, including its complementarity to their other activities, their relationship with governments, and the financial and economic performance of their investments. Moreover, according to Mr. Deep, there also needs to be objective consideration of whether there are alternative conduits for public participation that may be more effective.

Discussion

17. A number of points were raised during the discussion, including the following:

 On the issue of competition between NDBs and private banks, it was pointed out that such competition was not a problem if state-owned banks were able to compete without subsidies. For example, the State Bank of Chile is a state-owned entity that has a commercial focus but has still maintained its role of fostering economic development.

 One participant suggested that regulation of PPP projects should be carefully thought out. In this respect, the negotiation of contracts between public and private entities has been an important issue. Moreover, insurance may also be necessary to cover

6 the risks of contract renegotiation. Another participant pointed out that contracts cannot be expected to be totally complete; they should instead aim at being robust in the face of small changes, while in the event of bigger shocks an independent settlement process may need to be established.

 It was pointed out that, in regions such as Latin America, NDBs have had an important role to play in attracting and channeling funds from abroad. This led to some discussion of the risk mitigation function that they could perform, though a number of issues remain unresolved including that of whether exchange rate risk should be covered by the public sector.

Session 4. Attracting Private Capital and Private Sector Development

18. This session was chaired by Mr. Robert P. Vos, Director, Development Policy and Analysis Division, UN-DESA. The panelists were Ms. Barbara Samuels, President, Samuels Associates (New York, NY, USA); Mr. Saleindra Narein, Chairman, Centre for SME Growth and Development Finance (Mumbai, India); Mr. Randall Dodd, Director, Financial Policy Forum (Washington, DC, USA); and Mr. Gilles Genre-Grandpierre, Head of Banking & Capital Markets, Proparco (Paris, France).

Presentations

19. Ms. Barbara Samuels focused on “The Role of National Development Banks in Risk Mitigation”. She outlined four critical action steps that would enhance the functioning of NDBs in this area, especially with regard to facilitating private capital into infrastructure projects. First, she called for a reassessment of the missions and culture of NDBs. In particular, there is a need for key stakeholders from the public and private sectors to jointly identify financing gaps, needs and markets failures at a country level and, based on that, determine the core activities and objectives of development banks. Second, Ms. Samuels argued that NDBs could play an important role in identifying tools to better mitigate the risks faced by private investors in infrastructure projects, which relate to the regulatory environment, currency fluctuations and government performance. Third, to enhance the functioning of NDBs, it is important to develop effective performance matrices that would also incorporate new benchmarks such as the amount of additional private finance that has been mobilized through risk mitigation activities. Finally, Ms. Samuels pointed out that NDBs could provide valuable assistance in the development of new delivery mechanisms to speed up capacity building and in building project development capacities.

20. Mr. Sailendra Narain spoke on “Promoting Competition and Entrepreneurship”. He stressed that the debate on NDBs should be addressed in the broader context of the relevance of development finance institutions (DFIs) in the financial system. Mr. Narain highlighted innovative financing tools (equity, venture capital, risk capital, and microfinance) and business development services (including human resource development, capacity building, entrepreneurship development programs, technology upgrading, and

7 market development) as mechanisms through which DFIs could foster entrepreneurship and competitiveness. While stressing that these institutions would need to reform in order to be successful, he pointed out that changing policy towards DFIs in some countries has led to unfair competition between them and commercial banks. DFIs are at a disadvantage here since they have limited access to low-cost deposits and therefore face difficulties in pricing lending products at competitive rates. This can affect sources of long-term financing for industry and also the provision of development-focused services that commercial banks do not usually deliver. Mr. Narain referred to a study on the long-term financing needs of Indian industry, where 80 per cent of the respondents were of the opinion that the revival and strengthening of DFIs was extremely important. He therefore highlighted the need for further discussion on how DFIs and commercial banks could function in a complementary manner.

21. Mr. Randall Dodd addressed the topic “The US Experience: Lessons for National Development Banks”. He pointed out that NDBs in the United States have over time delivered important services, such as credit to farm and rural economies, counter-cyclical financing, as well as financial support for housing, municipalities and education. For example, farm credit system lending entities helped provide public credit to areas and sectors neglected by commercial lending, in particular during economic downturns. Similarly, the counter-cyclical financing provided by schemes such as the Tennessee Valley Authority and the Reconstruction Finance Corporation were also of significant importance since inadequate new lending provided by the financial sector during downturns often prolonged its impact. In housing, likewise, government-sponsored institutions such as the Federal National Mortgage Association (Fannie Mae) were successful in providing a greater amount of credit for home ownership in spite of instances of accounting problems and some failures to properly comply with new derivatives accounting rules. In all those instances, Mr. Dodd stressed, successful efforts to provide remedy for market failures in financial markets had required the creation of a variety of flexible institutions and instruments, including government agencies, as well as publicly and/or privately owned corporations.

22. Mr. Gilles Genre-Grandpierre’s presentation was on “Supporting National Development Banks in Attracting Long-term Capital: Lessons from Experience in Africa”. He focused on the criteria that enabled NDBs to be successful in attracting private capital. A study on this issue had been undertaken by Proparco1, based on its NDB portfolio in Africa. The study explored internal as well as external criteria (sophistication of local banking and financial markets). Successful NDBs were defined as those that succeeded in mobilizing private capital, being financially sustainable and additional in filling market gaps. The initial findings of the analysis were that successful NDBs operated in heterogeneous environments, whether internal (with a mixed shareholding structure), or external (in a competitive environment). The speaker argued that NDBs operating in such conditions were generally more efficient in attracting private capital. Moreover, they exhibited good governance and sound risk management as a consequence of external pressure. The key criteria for successful NDBs include the ability to effectively manage their heterogeneous

1 Proparco is a French Development Finance Institution and a member of the European Development Finance Institutions (EDFI) network that has operations in 60 countries in Africa, the Middle-East, Asia and the Caribbean.

8 internal and external environments, to fill an incremental – but determining – gap in the market, and to avoid market distortions and crowding-out effects on the private sector. In addition, successful NDBs should also be able to mitigate risks. In concluding, Mr. Grandpierre stressed that the existing level of banking and financial sophistication in a country was key to determining the relevant market gaps and appropriate levels of public support for NDBs.

Discussion

23. The main points that came out of the ensuing discussion were as follows:

 On the issue of risk mitigation activities that could be undertaken by development banks, it was suggested that a distinction should be made between financial risk and macroeconomic risk (which includes exchange rate risk). According to one participant, the public sector should not get involved in covering macroeconomic risks for the private sector as this could prove very costly. However, another participant asserted that macroeconomic risk was often a “deal-stopper” for private sector investment and that the public sector had some responsibility for devaluations generated by government policies.

 A participant pointed out that, with appropriate hedging of their internal balance sheets, NDBs could effectively borrow from abroad, provide long-term finance in local currency for infrastructure projects, and at the same time mitigate their currency risks. By directing local currency loans to firms with substantial foreign currency revenues, NDBs could avoid further strain on their own foreign currency borrowing portfolio if a devaluation of the domestic currency occurred.

 The potential role of NDBs in developing the local financial sector was emphasized. In particular, NDBs could play a role in the development of private commercial banks and markets catering to the financial needs of small and medium enterprises. However, the success of such efforts would be greater where real economic conditions and the business environment were stronger.

Session 5. Capacity Building, Governance and Management

24. This session was chaired by Mr. Jan Kregel, Chief, Policy Analysis and Development Branch, Financing for Development Office, UN-DESA. The panelists were Mr. Admassu Tadesse, Head, Corporate Strategy and Planning, Development Bank of South Africa (DBSA) (Johannesburg, South Africa); Mr. Demian Fiocca, Executive Vice President and Director of Control, Infrastructure and Basic Industry Areas, Banco Nacional de Desenvolvimento Econômico e Social (Rio de Janeiro, Brazil); and Mr. Larry D. Hays, Director, Sovereign Ratings, Standard & Poor’s (New York, NY, USA).

Presentations

25. Mr. Admassu Tadesse addressed the issue of “Governance and Management of Development Financing Institutions as a Key Element of Monitoring and Evaluation”. He

9 emphasized that NDBs, to be an effective tool for development financing, needed to have high standards of corporate governance. He observed that there was no one correct formula for corporate governance and the appropriate settings needed to be determined within the framework of a nation’s legal environment. However, he mentioned that four important pillars of corporate governance that had been highlighted in international guidelines were fairness, accountability, responsibility and transparency. Mr. Tadmassu pointed out that evaluation was also an important aspect of governance and must go beyond cost-benefit analysis to address systemic, policy and ethical issues. He then highlighted some aspects of the functioning of the Development Bank of South Africa as examples of good corporate governance. One important factor was the existence of effective oversight and accountability by the board of directors. In that sense, it was important to have an independent, well-informed and diversified board with members from public, private and non-profit sectors. In addition, systems that promoted effective risk management and strategic control were also important. Finally, Mr. Tadesse highlighted the need for codes of ethical conduct to be adopted for board members, employees and suppliers, as well as having a compliance strategy, in order to ensure adherence to those codes.

26. Mr. Demian Fiocca’s presentation focused on the achievements of Banco Nacional de Desenvolvimento Econômico e Social (BNDES) in financing development in Brazil. He asserted that Brazil and many other countries in Latin America had suffered from a shortage of credit rather than savings, which had served to limit infrastructure investment and economic growth. The provision of credit by development banks such as BNDES has been important in that it has taken into consideration factors beyond the financial return of a project and has sought to promote economic and social development. Moreover, according to Mr. Fiocca, lending by these institutions can also be beneficial through having a counter-cyclical effect. In Brazil, for example, lending by the private banking system has been pro-cyclical and has increased in line with economic growth rates. By contrast, BNDES’ share of total credit has grown during periods when the credit/GNP ratio declined; it has therefore provided much needed finance for development at the time when private lending has fallen. Another area where BNDES has played a critically important role has been employment creation. He provided statistics to illustrate that firms supported by BNDES had generated a higher growth in formal job creation than those that had not received such backing. The employment creation effect of such support was even stronger in the case of smaller firms. Finally, Mr. Fiocca outlined BNDES’ sources of funding and emphasized the need for NDBs to have reliable sources of finance, in order to operate effectively.

27. Mr. Larry Hays spoke on “Rating of National Development Banks”. In particular, he focused on the methodology undertaken by Standard and Poor’s (S&P) in rating NDBs. He began by pointing out that it was the sovereign rating group within S&P, not the bank rating group, which had taken the lead in rating NDBs since many of these entities had been incorporated in the public sector. Hence, the rating of a NDB would normally be no higher than that of its country of domicile since the bank situation is dependent upon support from and policies of the government. Mr. Hays then stressed that S&P has had a very narrow focus when undertaking a rating, which has been to assess the willingness and ability of NDBs to serve their obligations in time and in full. He went on to describe the

10 two-step analysis followed by S&P in rating NDBs. In the first step, the rating agency would assess the stand alone strength of an NDB, looking at its financial health and risk- bearing capacity. In the second stage, consideration would be given to government support; and NDBs are in fact divided into different groups depending on their level of integration with the government. Mr. Hays concluded by calling on NDBs to have audited financial statements and to be part of the same regulatory regime as commercial banks. Moreover, he pointed out that the relationship between governments and NDBs should be transparent, especially where subsidies are concerned.

Discussion

28. The discussion highlighted the following points:

 There was some discussion of the relationship between NDBs and the private sector. At one level, it was observed by some participants that private participation in the ownership of NDBs may provide benefits in the form of additional capital. However, the degree of private interest in owning a portion of NDBs is open to question. On another front, some experts argued that the practice adopted by some governments to impose zero losses on development banks’ private portfolios constrained their activities and may also lead to distortions and corruption in the reporting process. Finally, a participant questioned the view that development banks should only work where the private sector would not be involved, arguing that, as long as NDBs were not being subsidized, they should be able to compete with commercial actors.

 Another participant questioned whether there was a danger that BNDES’ support for smaller enterprises may focus on the already strong firms rather than the needy ones. In response, it was pointed out that BNDES provided its support through commercial banks who in fact selected the companies to lend to. In general, commercial banks are likely to use their own deposits to lend to the already fit companies, while BNDES’ resources may be used to provide funding for potentially good but needy enterprises.

 Disagreement was expressed with the view that commercial and development banks should be subject to the same regulations. A participant argued that, in some countries, commercial banks have been in any case subject to advantages that have not been available to NDBs and the playing field should consequently be leveled. In that respect, it was also argued that the Basle regulations, by squeezing liquidity, could hinder NDBs in their employment-generation and risk-covering roles.

 The importance of equity support for SMEs was stressed by a participant. A suggestion was made for international financial institutions to establish a mutual fund for equity development in the various regions, which NDBs could draw upon.

Session 6. Drawing Lessons from Regional and National Experiences

29. This session was chaired by Mr. Jan Kregel, Chief, Policy Analysis and Development Branch, Financing for Development Office, UN-DESA. The panelists were Ms. Jacqueline

11 Noel, Associate Director for Financing Development in Africa, European Investment Bank (EIB) (Luxembourg); Mr. Fulvio Mazzeo, Conseiller du Directeur Général, Banque Gabonaise de Développement (Libreville, Gabon); and Mr. Nicholas Bruck, Special Advisor, World Federation of Development Financing Institutions (WFDFI) and President, International Development Enterprise Associates (IDEA) (Washington, DC, USA).

Presentations

30. Ms. Jacqueline Noel spoke on the issue of “Cooperation between Regional and National Development Banks in Africa”. While the European Investment Bank (EIB) serves as the long-term financing institution of the European Union (EU), Ms. Noel pointed out that its operational priorities also included the support of EU development and cooperation policies in partner countries. In this respect, the EIB has established an Investment Facility (IF) with a budget of 2.2 billion Euros and a special mandate for various developing country regions, in particular those that fall under the Cotonou Agreement, a trade accord between the EU and members of the African, Caribbean and Pacific (ACP) group of states. According to Ms. Noel, the IF has provided various forms of risk sharing financing instruments to most sectors of the economy for projects that were economically, financially, technically and environmentally viable. In providing these services, the EIB has worked with NDBs in Africa and the Caribbean. An important lesson from this experience has been that development financing institutions need to engage with the end- users of loans in order to clearly asses their needs. Moreover, Ms. Noel stressed that successful NDBs need to remain capable of adjusting their governing structures and management strategies to ever-changing market conditions.

31. Mr. Mazzeo’s presentation was on “Gabon Development Bank: Lessons from Experience”. The Gabon Development Bank was established over four decades ago and its core activities comprise small and medium enterprises, consumer loans, investment and other services. Moreover, it has managed to meet and exceed international solvency, liquidity and capital adequacy standards. According to Mr. Mazzeo, the characteristics that have helped ensure the economic viability of the institution include the fact that its public-private ownership structure has not constrained the independent decision-making process of the bank, the absence of excessive state intervention into strategic lending decisions, and the fact that it has played a complementary role to other financial intermediaries and never attempted to substitute private sector banks. Moreover, he emphasized the strong emphasis placed on the Gabon Development Bank’s adherence to prudential regulation, including the Basle norms, and pointed out that its flexibility in redefining its missions and adopting new strategies had been a key factor in its success. He stressed that, with the Millennium Development Goals serving as its overall strategic framework, the Gabon Development Bank would continue to focus on areas where it had a comparative advantage to other financial intermediaries.

32. Mr. Nicholas Bruck spoke on the “Evolution and Prospects of National Development Banking”. He stressed that given the major changes, adjustments and adaptations to create more free market-oriented economies, development banks needed to take stock and develop a new vision for the twenty-first century. This vision would vary with each

12 institution, depending on the local environment. In many countries, it would include expanded roles for these institutions in the development of the private sector and the financial system. Through their activities, development banks could also increasingly assist small and medium enterprises and engage in microfinance. At the same time, according to Mr. Bruck, development banks should not lose their focus on what they know best, which is managing the risks that are inherent in financing long-term projects. Moreover, given that development banks are more specialized and complex than other banks, they require more highly trained staff and need to update their skills in areas relating to financial resource engineering (asset and liability management), risk management and new financial instruments.

Session 7. Next Steps: Refining the Project Proposal

33. The final session was chaired by Mr. Alex Trepelkov, Chief, Multi-stakeholder Engagement and Outreach Branch, Financing for Development Office, UN-DESA. In the interest of time, he proposed to skip oral presentations on the overview of “Multi- stakeholder Consultations on Financing for Development, 2004-2005” and on the background document for a proposed new set of multi-stakeholder consultations on “Rethinking the Role of National Development Banks”, which had been made available to the expert group in written form. Instead, he invited experts to engage in an interactive discussion on ways of taking the project forward, including substantive issues related to the agenda, process and methodology of the proposed consultations.

34. In outlining a proposal for follow-up consultations on “Rethinking the Role of National Development Banks”, Mr. Trepelkov suggested a series of regional meetings, to be held during the period 2006-2007, covering Latin America, Asia and the Pacific, West Asia, Africa and Europe, i.e. the five UN regions. If needed, there could be an additional global meeting. These meetings would be multi-stakeholder and involve participation from interested governments, national development banks (and associations of NDBs), regional development banks, relevant UN agencies, the Bretton Woods institutions, civil society, academia and the private sector. He stressed that these would not be official UN meetings but rather informal expert-level discussions on key policy issues, to be included in a model framework agenda. Nevertheless, their outcomes (i.e., main findings and recommendations) would be reported to the UN General Assembly as part of the annual report on the FfD follow-up process. Apart from a separate report on each meeting, the project as a whole is expected to produce a consolidated publication on the role of NDBs as a renewed mechanism of development finance, to be made available to the 2007 High-level Dialogue of the General Assembly on Financing for Development.

Agenda

35. Many experts felt that there was a need to ensure comparability among the agendas of the various regional meetings. It was pointed out that whereas each region may have its own specific features, which may be different from those of other regions, their development problems and possible solutions to them were, to a large extent, comparable. Thus, there should be a consistent set of themes for discussion throughout all the regional meetings.

13 Moreover, it was suggested that experts from other regions should also participate in each regional meeting, in order to ensure cross-fertilization of ideas. At the same time, several participants stressed the need to avoid coming up with straightjacket solutions that do not take into account regional differences. “One size does not fit all”. In addition, it was suggested that bilateral consultations between various stakeholders should also be built into the work program, since such encounters are sometimes more likely to generate frank views.

36. It was agreed that the FfD Office would prepare a draft model agenda to serve as a framework for a series of follow-up regional meetings. That agenda would be based on the background document on the project proposal and the additional points raised by the experts during the meeting. As part of the draft report on the meeting (see annex 3), the draft model agenda for the proposed consultations was submitted by e-mail to all the participants for their review and comments. In addition, some participants also called for a template of relevant issues, under each agenda item, which would support and strengthen the framework agenda and would contribute to setting the stage for advance assessments and studies, to be analyzed during the consultations.

Process

37. Officials of UN-DESA pledged to provide substantive, organizational and financial support to the proposed series of regional meetings. However, it is imperative to have regional/local sponsors to host the meetings and meet local costs. In that regard, the discussion generated a number of invitations, as outlined in Annex 4: Corporación Financiera de Desarrollo (COFIDE) and the Asociación Latinoamericana de Instituciones Financieras para el Desarrollo (ALIDE) offered to host a meeting in Lima, Peru in early June 2006. The Banco Nacional de Desenvolvimento Economico e Social (BNDES) offered to host a meeting in Rio de Janeiro, Brazil, while agreeing to coordinate with COFIDE and ALIDE’s invitation. Agence Française de Développement (AFD), the European Investment Bank (EIB) and Kreditanstalt für Wiederaufbau (KfW) offered to host a meeting in Paris, France, in late June 2006. The Ministry of Investment, Egypt and UN Economic and Social Commission for West Asia (ESCWA) offered to host a meeting in Cairo, Egypt, in 2006. The Industrial Development Corporation of South Africa and Association of African Development Finance Institutions (AADFI) offered to host a meeting in Johannesburg, South Africa, in August/September 2006. The Centre for SME Growth and Development Finance (CESMED), India in cooperation with United Nations Development Programme (UNDP) offered to host a meeting in New Delhi, India, in November/December 2006. Finally, in the immediate follow-up to the conference, the Center for International Development at Harvard University’s J.F. Kennedy School of Government offered to host the closing meeting in its premises, in Cambridge, USA in January/February 2007.

Methodology

38. It was agreed that NDBs can play an important role in the development process of developing countries, and that their place in the financial system should be sustained. It

14 was also agreed that the overall framework of the consultations should not be restricted solely to NDBs but should include the entire gamut of DFIs at the national and sub-regional levels, including the synergies among them and between them and a broader financial architecture.

39. An important initial step would be to analyze the success stories and failures of NDBs. As part of such a study, there should be identification of best practices that could be scaled up. Some participants called for a proactive stance in disseminating best practices, including having participants fill out a questionnaire on this subject prior to the forthcoming meetings. In addition, there should also be a broad identification of market failures or development gaps across the regions and assessment of the institutions and products that would address them. This would contribute to the reassessment of the mission and products of development banks, by directing their focus to areas where they are deemed to be the appropriate institutions to provide solutions. From this perspective, it seemed that the proper logic was a process that would first identify market failures, then suggest adequate instruments and finally choose the optimal provider. It is thus the process that would yield the rationale of national development banking, and not the rationale that yields the instruments.

40. The above analyses can in turn provide direction to the issues of the financing and governance structure of development banks. The identified mission and products of these institutions would determine the composition of their funding (in particular the mix between public and private funds) and the nature of their management.

41. Participants also identified a need to develop performance matrices that would capture the success of these institutions in fulfilling their mission. Such an appraisal needs to go beyond financial sustainability indices and also capture development impact. Moreover, given the increasing importance of private sector in the developing world, the matrices may also need to capture the extent to which development banks facilitate private capital flows into relevant projects and sectors. In this sense, it would be valuable to ensure that the identified final beneficiaries of the activities of development banks also participate in the regional meetings. This would enable a better assessment of their needs and thereby facilitate the development of performance measures. Moreover, best practices can also be shared between the different institutions and regions on methods of performance appraisal.

42. Overall, it was agreed that the final output of the regional meetings would be a report that could comprise a policy “cookbook” of problems, solutions and best practices. More specifically, participants agreed to address such issues as the possibilities for development banks to undertake equity participation, to facilitate increased lending in local currency, and to promote compensatory financing. There was consensus that the ultimate goal of the project should be to enhance the contribution of development banks to the mobilization of resources for financing economic and social development and poverty eradication.

43. In this context, the Kennedy School of Government’s Center for International Development at Harvard University suggested that a final conference to be held in early 2007 distill the main findings and conclusions from the previous consultations. Selected presenters from

15 the regional meetings will be invited to prepare papers elaborating on their presentations. This set of papers should span most of the issues in the proposed agenda and be presented at the conference. Following the discussion, the revised papers could be published as a volume on NDBs as a renewed mechanism of development finance.

16 Annex 1

Ad Hoc Expert Group Meeting “Rethinking the Role of National Development Banks”

Revised agenda

Thursday, 1 December 2005 – Conference Room 4

Session I Introduction of the Project Proposal

10:00 a.m. Opening Remarks José Antonio Ocampo, Under-Secretary-General for Economic and Social Affairs Oscar de Rojas, Director, Financing for Development Office (FfDO), UN-DESA

10:30 a.m. Multi-stakeholder Consultations on Financing for Development, 2004-2005 Alex Trepelkov, Chief, Multi-stakeholder Engagement & Outreach Branch, FfDO, UN- DESA

10:45 a.m. Presentation of the Project Proposal: Multi-stakeholder Consultations on “Rethinking the Role of National Development Banks” (2006-2007) Hazem Fahmy, Ricardo Espina, Julien Serre, FfDO, UN-DESA

Session II Setting the Stage: Sustainability vs. Privatization

11:00 a.m. – Chair: José Antonio Ocampo, Under-Secretary-General for Economic and Social Affairs 12:00 p.m. Development Banking in Latin America: Present Situation and Prospects Rommel Acevedo, Secretary General, Asociación Latinoamericana de Instituciones Financieras para el Desarrollo (ALIDE) (Lima, Perú)

The Quest for Sustainability in National Development Banks Ignace Monkam Daverat, Division banques et marchés financiers, Département secteur financier, Agence Française de Développement (AFD) (Paris, France)

Benefits and Costs of Privatization of State-Owned Banks Lemma W. Senbet, Chair of the Finance Department, Robert H. Smith School of Business, University of Maryland (College Park, MD, USA)

Session III Financing of Infrastructure Development: Mechanisms and Experiences

12:00 p.m. – Chair: Oscar de Rojas, Director, Financing for Development Office, UN-DESA 1:00 p.m. Is There a Role for Development Banks in Long-term Financing? Daniel Titelman, Coordinador, Unidad de Estudios Especiales, Economic Commission for Latin America and the Caribbean (ECLAC) (Santiago, Chile)

Supporting Long-term Financing Mechanisms: JBIC’s Experience Toru Tokuhisa, Resident Executive Director for the Americas, Japan Bank for International Cooperation (JBIC) (New York, NY, USA)

17 3:00 p.m. – Chair: Alex Trepelkov, Chief, Multi-stakeholder Engagement & Outreach Branch, FfDO/DESA 4:00 p.m. Evaluation of Industrial Development Corporation of South Africa Lumkile Mondi, Chief Economist, Industrial Development Corporation and Vice- President, Association of African Development Finance Institutions (AADFI) (Johannesburg, South Africa)

Public-Private Partnerships for Financing of Infrastructure Development Akash Deep, Associate Professor of Public Policy, Harvard University (Cambridge, MA, USA)

Session IV Attracting Private Capital and Private Sector Development

4:00 p.m. – Chair: Robert Vos, Director, Development Policy and Analysis Division, UN-DESA 6:00 p.m. The Role of National Development Banks in Risk Mitigation Barbara Samuels, President, Samuels Associates (New York, NY, USA)

Promoting Competition and Entrepreneurship Sailendra Narein, Chairman, Centre for SME Growth and Development Finance (Mumbai, India)

US Experience: Lessons for National Development Banks Randall Dodd, Director, Financial Policy Forum (Washington, DC, USA)

How to support NDBs in Attracting Long-term Capital: Lessons from Experience in Africa Gilles Genre-Grandpierre, Head of Banking & Capital Markets, Proparco (Paris, France)

Friday, 2 December 2005 – Conference Rooms 4 (AM) and 8 (PM)

Session V Capacity Building: Governance and Management

10:00 a.m. – Chair: Jan Kregel, Chief, Policy Analysis and Development Branch, FfDO/DESA 11:00 p.m. A Culture of Evaluation – A Key to Effective Governance & Management of Development Financing Institutions? Admassu Tadesse, Head, Corporate Strategy and Planning, Development Bank of South Africa (DBSA) (Johannesburg, South Africa)

BNDES: Financing the Brazilian Development Demian Fiocca, Executive Vice President, Director of Control, Infrastructure and Basic Industry Areas, Banco Nacional de Desenvolvimento Econômico e Social (BNDES) (Rio de Janeiro, Brazil)

Rating National Development Banks Larry D. Hays, Director, Sovereign Ratings, Standard & Poor's (New York, NY, USA)

18 Session VI Drawing Lessons from Regional and National Experiences

11.00 a.m. – Chair: Jan Kregel, Chief, Policy Analysis and Development Branch, FfDO/DESA 1:00 p.m. Cooperation between Regional and National Development Banks in Africa Jacqueline Noel, Associate Director for financing development in Africa, European Investment Bank (EIB) (Luxembourg)

Gabon Development Bank: Lessons from Experience Fulvio Mazzeo, Conseiller du Directeur Général, Banque Gabonaise de Développement (Libreville, Gabon)

Evolution and Prospects of National Development Banking Nicholas Bruck, Special Advisor, World Federation of Development Financing Institutions (WFDFI) and President, International Development Enterprise Associates (IDEA) (Washington, DC, USA)

Session VII Next Steps: Refining the Project Proposal

3:00 p.m. – Chair: Alex Trepelkov, Chief, Multi-stakeholder Engagement & Outreach Branch, FfDO/DESA 6:00 p.m. Refining the Project Proposal: Multi-Stakeholder Consultations on “Rethinking the Role of National Development Banks”

19 Annex 2

Ad Hoc Expert Group Meeting “Rethinking the Role of National Development Banks”

Revised list of participants

List of experts

1. Rommel Acevedo Fernandez de Paredes, Secretario General, Asociación Latinoamericana de Instituciones Financieras para el Desarrollo (ALIDE), Lima, Perú 2. Nicholas Bruck, Special Advisor, World Federation of Development Financing Institutions (WFDFI) and President, International Development Enterprise Associates (IDEA), Washington, DC, USA 3. Akash Deep, Associate Professor of Public Policy, Harvard University, Cambridge, MA,USA 4. Randall Dodd, Director, Financial Policy Forum, Washington, DC, USA 5. Demian Fiocca, Executive Vice President, Director of Control, Infrastructure and Basic Industries Areas, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), Rio de Janeiro, Brazil 6. Gilles Genre-Grandpierre, Head of Banking & Capital Markets, Proparco, Paris, France 7. Larry D. Hays, Director, Sovereign Ratings, Standard & Poor's, New York, NY, USA 8. Racha Khalil, Investment & Financial Services Specialist, Ministry of Investment, Cairo, Egypt 9. Fulvio Mazzeo, Conseiller du Directeur Général, Banque Gabonaise de Développement, Libreville, Gabon 10. Ignace Monkam Daverat, Division Banques et Marchés Financiers, Département Secteur Financier, Agence Française de Développement (AFD), Paris, France 11. Lumkile Mondi, Chief Economist, Professional Services Division, Industrial Development Corporation and Vice President, Association of African Development Finance Institutions (AADFI), Johannesburg, South Africa 12. Sailendra Narain, Chairman, Centre for SME Growth and Development Finance (CESMED), Mumbai, India 13. Jacqueline Noel, Associate Director, European Investment Bank (EIB), Luxembourg 14. Albert Ondo Ossa, Professeur, Laboratoire d'économie appliquée (LEA), Université Omar Bongo, Libreville, Gabon 15. Sherif Oteifa, Advisor on Mortgage Finance, Ministry of Investment, Cairo, Egypt 16. Ricardo Palma-Valderrama, Special Representative, Internacional Organizations and Non- Regional Countries, Asociacion Latinoamericana de Instituciones Financieras para el Desarrollo (ALIDE), Lima, Peru 17. Barbara Samuels, Samuels Associates, New York, NY, USA 18. Lemma W. Senbet, Professor and Chair, Finance Department, Robert H. Smith School of Business, University of Maryland, Collage Park, MD, USA 19. Neo Sowazi, First Vice Chairperson, Association of African Development Finance Institutions (AADFI) and Executive Vice President for Marketing and Corporate Affairs, Industrial Development Corporation, Johannesburg, South Africa 20. Admassu Tadesse, Head, Corporate Strategy and Planning, Development Bank of Southern Africa Group, Midrand, South Africa 21. Toru Tokuhisa, Resident Executive Director for the Americas, Japan Bank for International Cooperation (JBIC), New York, NY, USA

20 United Nations Secretariat

Department of Economic and Social Affairs (UN-DESA)

22. José Antonio Ocampo, Under-Secretary-General for Economic and Social Affairs 23. Oscar de Rojas, Director, Financing for Development Office 24. Robert Vos, Director, Development Policy and Analysis Division 25. Jan Kregel, Chief, Policy Analysis and Development Branch, Financing for Development Office 26. Alex Trepelkov, Chief, Multi-stakeholder Engagement and Outreach Branch, Financing for Development Office 27. Hazem Fahmy, Senior Officer, Multi-stakeholder Engagement and Outreach Branch, Financing for Development Office 28. Ricardo Espina, Economic Affairs Officer, Multi-stakeholder Engagement and Outreach Branch, Financing for Development Office 29. Krishnan Sharma, Economic Affairs Officer, Multi-stakeholder Engagement and Outreach Branch, Financing for Development Office 30. Tania Cernuschi, Associate Economic Affairs Officer, Multi-stakeholder Engagement and Outreach Branch, Financing for Development Office 31. Daniel Platz, Associate Economic Affairs Officer, Multi-stakeholder Engagement and Outreach Branch, Financing for Development Office 32. Julien Serre, Associate Economic Affairs Officer, Multi-stakeholder Engagement and Outreach Branch, Financing for Development Office

Economic Commission for Latin America and the Caribbean (UN-ECLAC)

33. Daniel Titelman, Coordinator, Unidad de Estudios Especiales, UN-ECLAC, Santiago, Chile

Economic and Social Commission for Western Asia (UN-ESCWA)

34. Grace Victoria Chomo, Economic Affairs Officer, Globalization and Regional Integration Division, UN-ESCWA, Beirut, Lebanon

21 Annex 3

Multi-stakeholder Consultations “Rethinking the Role of National Development Banks”

Model Agenda

I. THE EVOLVING ROLE OF NATIONAL DEVELOPMENT BANKS

A. Setting the Stage: Evolution of Development Banking

B. Addressing Market Failures and Development Gaps

C. Relationship with Other Development Institutions and the Private Sector

D. Defining the Rationale and Missions of National Development Banks

II. FILLING THE GAPS: FUNCTIONS AND INSTRUMENTS OF NATIONAL DEVELOPMENT BANKS

A. Providing Effective Financing Mechanisms

B. Assisting Financial Sector Development

C. Supporting the Local Business Sector

D. Facilitating Regional Cooperation and Integration

III. ENHANCING THE EFFECTIVENESS OF NATIONAL DEVELOPMENT BANKS

A. Rating, Regulation and Supervision

B. Governance, Management and Skills

C. Measuring and Monitoring Results

D. Sustainability and Funding

22 Annex 4

Multi-stakeholder Consultations “Rethinking the Role of National Development Banks”

Tentative Schedule of Regional Meetings

i. Sponsor: Corporación Financiera de Desarrollo (COFIDE), Perú and Asociación Latinoamericana de Instituciones Financieras para el Desarrollo (ALIDE). Venue: Lima, Peru. Date: 12-13 June 2006.

ii. Sponsor: Agence Française de Développement (AFD), European Investment Bank (EIB) and Kreditanstalt für Wiederaufbau (KfW). Venue: Paris, France. Date: 27-28 June 2006. iii. Sponsor: Centre for SME Growth and Development Finance (CESMED), India and United Nations Development Programme (UNDP). Venue: New Delhi, India. Date: 27-28 November 2006. iv. Sponsor: Ministry of Investment, Egypt and UN Economic and Social Commission for West Asia (ESCWA). Venue: Cairo, Egypt. Date: Second half of 2006 – early 2007.

v. Sponsor: Industrial Development Corporation of South Africa and Association of African Development Finance Institutions (AADFI). Venue: Johannesburg, South Africa. Date: Second half of 2006 – early 2007. vi. Sponsor: Center for International Development at Harvard University’s J.F. Kennedy School of Government. Venue: Cambridge, USA. Date: First half of 2007.