Evaluation Team

This report was prepared by: Khaled Samir, Senior Evaluation Officer (OPEV.1),Akinola Akintunde and Modou Njie (Consultants) under the supervision of Mr. M. Manai, Division Manager (OPEV.1).

Objective

The evaluation aimed to assess the strategic alignment of the assistance against the relevant policies and strategies of the Bank, Sub-regional banks, and member countries. It also aimed to examine the effectiveness of Bank’s interventions against the defined objectives at appraisal. In addition, the review was tasked to identify lessons to improve the performance of future Bank interventions via sub-regional financial intermediaries and enhance their development effectiveness.

Main Findings

• The Bank assistance to sub-regional DFIs served as viable mean of pursuing its regional integration and poverty reduction objectives. Further, the review found that Bank assistance to the three sub-regional DFIs under review (PTA, EADB, and DBSA), has been relevant, timely and in line with their respective policies, plans and strategies, as well as with the visions of their RECs. However, there were issues concerning the adequacy of the LOCs to enable the sub-regional banks to meet their mandate, gain visibility and effectively play the intermediation roles with significant impact in the sub-regions

• The Bank has utilised the appropriate instruments and volume of funds, which conformed to the Bank’s own strategy and to the strategies of the DFIs and the needs of their respective regions. Moreover, Bank assistance has been responsive to strategic shifts of operational focus as in the case of DBSA. The relevance component of Bank assistance has been rated Successful.

• Bank assistance contributed to improved financial performances of the three SRDBs. The review of the annual audited financial statements of the sub-regional development banks shows that the financial performances of PTA and DBSA are comparatively impressive while EADB’s financial performance has been poor.

• Bank assistance contributed to DBSA’s progressive strengthening, maintaining its record of profitable operations in both South Africa and the SADC1 region while simultaneously improving its internal processes and control through the adoption of a bank wide risk management framework. PTA continues to realize profits, and its basic policies, process and controls are now firmly in place. EADB however, is a concern despite Bank assistance and presence in its board. Its financial performance is poor, and it suffers from a governance crisis. The financial and operational performance of both DBSA and PTA is rated as successful, while the performance of EADB is rated as mostly unsuccessful. It is also noteworthy that despite their recent advances, both DBSA and PTA’s monitoring and supervision practices are still financially based. Neither DFI tracks well-defined development outcome indicators nor do they report it in their supervision report

• Bank technical assistance is rated as mostly successful. ADB’s TA has helped turn around PTA, but it was largely unsuccessful in the case of EADB.

• The business performance of the sub-projects was rated mostly successful (for the three DFIs). There has been a number of sub-projects that faced difficulty due to issues with their supplies or general weakness of management. However, the vast majority of the projects reviewed were viable business concerns, which contributed to the overall development of the economy in their respective regions and provided forward and backward linkages in their supply chains creating a more enabling environment for private sector development. Issues concerning sound environmental management were found lacking despite the best effort of the DFIs. Most of the sub-projects visited did not comply with the EHS related standards, despite declaring the opposite. Finally, The LOCs (given their size) have contributed to the growth of private enterprises and private sector as well as financial market development beyond the sub-regional DFIs themselves. The private and financial sector development component is rated satisfactory

• All the DFIs have been consistent in their performance concerning the debt-service obligations; hence, their capacity to service the debts in the future is not in jeopardy even in the case of EADB. The Bank’s LOCs to the regional DFIs have been profitable in financial terms, the Bank profitability was rated mostly successful

• Bank’s equity participation has been successful; it helped boost the capital base of the sub-regional banks and improved their credit ratings. However, tapping into the international as well as local capital markets for long-term funding (via bond issuance) still holds the promise of freeing sub-regional DFIs from the unpredictability of donor resources.

• The Bank LOCs to DFIs carried three additionality components (financial, operational and institutional). The Bank has been financially additional, by extending long-term foreign currency resources that the DFI that would have not otherwise been able to obtain. The endorsement by the Bank (reduction of risk via equity participation) has also helped to catalyze other funds, which might not have been available without it. The Bank’s assistance also provided operational additionality. The TA grants provided the resources needed for restructuring at PTA, as well as detailed TORs identifying the scope of work for the areas that needed improvement (special advice that compensates for knowledge and skills gaps among clients). Finally, the Bank offered institutional additionality by strengthening the environmental management capacity of the DFIs (the Bank funded the study which formulated PTA’s environmental policy and framework). In certain instances, TA funds were also used for the provision of Corporate Governance training for members of the Board of Directors of the DFIs.

• The Bank’s supervision quality was weak, and the review rated monitoring and supervision as mostly unsuccessful. There is no evidence to support the fact that the Bank was able to foresee the trouble ahead for EADB let alone propose corrective measures to avert the crises. Supervision should have been able to spot the signs of stress in EADB’s performance and the lack of harmony among its top lieutenants. The lack of detailed aide-memoires to document the day-to-day activities and findings of the supervision mission is also another sign of

Main Lessons

• The quality and commitment of the management team as well as the governance profile and structure of the Sub-regional DFIs directly affect the effectiveness of Bank’s assistance: Strong evidence extracted from the mixed success of the Bank’s assistance clearly shows the role of the management of the sub-regional DFIs in the success or lack thereof of any assistance offered. Bank assistance to PTA has been very successful, but Bank assistance to EADB has failed to achieve its objectives. The only difference in both cases was the commitment and quality of PTA’s management team compared to the internal bickering and governance crisis offered by EADB’s management

• Sub-regional DFIs’ size matters: Africa’s development finance needs are enormous, the sub-regional DFIs (aside from DBSA), cannot hope to achieve a sizable impact unless they are allowed to grow. A relatively bigger sized PTA and EADB would be better able to on-lend to other national DFIs or MFI institutions and act as leaders in infrastructure projects in the COMESA or EAC regions.

• Providing a remedy for the failure of the market for long-term funds on its own is not enough: Business development and advisory services to promoters / sponsors during the preparation and implementation of the project need to be developed. Special training, advice, and involvement in corporate governance issues are all-important for start-up projects whose promoter usually lacks business experience. DBSA offers both PTA and EADB a good example in this regard.

• Knowledge of the sectors and the regional context/environment is paramount: If the sub-regional DFIs are to contribute to development in their respective regions or Africa in general, sector expertise is imperative for proper structuring and supervising of their sub-projects.

• The best way to ascertain the EHS compliance of sub-projects is by strong supervision and stringent follow-up: Most of the sub-projects visited were not in compliance with EHS requirements, despite efforts made by sub-regional DFIs. The Bank cannot rely on the sub-regional DFIs alone to do this. Lack of EHS compliance is likely to be more frequent in today’s crisis-ridden atmosphere, as most companies struggle to keep a tighter leash on their spending

• Restriction of ADB’s Board presence to project approvals does not help to avert DFIs management crisis: The Bank’s presence on EADB’s board for example did not avert EADB’s current crisis. This is perhaps a result of the limited role of ADB’s board presence, which was restricted to project approvals. The job of the board of directors is management oversight and the formulation of policies and strategies

• Wholesale lending is a strong option for financial intermediation via sub-regional DFIs: In order to support SME’s, and intra-regional infrastructure in Africa, financial intermediation via sub-regional DFIs is a strong option, particularly if accompanied by the introduction of new financial instruments.

Main Recommendations

Recommendations to the Bank:

• The Bank should strive to finalize its ‘Partnership Strategy’ with the sub-regional DFIs and use it to guide all future operations: The Bank’s efforts to strengthen and develop its partnership with the sub-regional DFIs is represented by the OPSM’s initiative to start a dialogue leading to the formulation of a full ‘Partnership Strategy’ with the sub-regional DFIs is a step in the right direction. However, progress in developing this strategy for partnership with the sub-regional DFIs has been slow, and to date, it is not clear whether this strategy has been finalized. Now is an appropriate time for finalizing this strategy, particularly after more of the infrastructure needed is in place in terms of OPSM’s internal re-organization, and the launch of The Currency Exchange (TCX)

• The new ‘partnership strategy’ should consider wholesale operations via sub-regional DFIs as an option for targeting national DFIs and SMEs: Previous reviews have recommended that the Bank should “consider wholesale LOC operations through regional development banks to take advantage of their local knowledge and presence.” The new partnership strategy should consider wholesale operations to sub-regional DFIs as a strong option for providing support to national DFIs and SMEs, which should be accompanied by the introduction of more innovative financial instruments.

• The Bank should incorporate a special provision for channelling funds through sub-regional DFIs in its “Response to the Economic Impact of the Financial Crises”: The “Bank Response to the Economic Impact of the Financial Crises” lists “Public and Private Financial Institutions” as eligible institutions of the liquidity facility. The rationale behind this is that banks are affected directly by the liquidity squeeze and their ability to borrow during the crises has of course been eroded. However, a special provision for channeling funds through sub-regional DFIs (acting as hubs in their own respective region, and within their absorptive capacity) could help alleviate the effects of the crises for business start-ups that are not usually a favourite of commercial banks

• ADB should leverage all the resources and initiatives available to help the sub-regional DFIs improve and fill any gaps that might exist in their operational performance: An initiative like Making Finance Work for Africa (MFWA) for instance could serve as a good coordination point for capacity building efforts.

• ADB’s experience in monitoring and evaluation should be transferred to the sub-regional DFIs: Sub-regional DFIs’ M&E practice is still financially-based and is not designed to capture the development results of their interventions. ADB’s experience in monitoring and evaluation should be transferred to the sub-regional DFIs and they should be encouraged to become more accountable for ADB’s assistance in terms of development results.

• The Bank Group Evaluation Guidelines for Private Sector Lines of Credit Operations (2005) should be fully utilized: The guidelines should serve the purpose in strengthening the M&E practices of the Bank, specifically the instructions contained in these guidelines on the frequency of supervision.

• ADB should its assistance modalities and include various products such as guarantees and lending in local currency

• ADB should strive to enforce good environmental practice as per ADB standards via strong supervision: Field visits during supervision should be able to detect the EHS compliance or lack thereof by sub-projects

• ADB should catalyse the increased capitalisation through higher shareholding subscription in the sub-regional banks: The Bank should increase its own holdings to at least 10%. The increase should consider the volume of resources required to meet their mandates. This should also be tied more closely to the ability of the sub-regional banks to raise matching or partly matching funding through local or international markets (when the world economy starts picking up) to increase and fully capitalize on and augment the catalytic effect of ADB’s endorsement

• Co-financing of projects should be encouraged between DFIs and ADB: ADB would bring experience, innovative structuring, and best practice to the deal while at the same time benefiting from the local knowledge of the sub-regional DFIs
   
• Secondment of DFI staff to ADB and vice versa should be considered: Secondment should be utilized as a tool to strengthen the DFIs in areas such as credit appraisal, risk management, ALM management, corporate governance etc, technical assistance in the policy framework, procedures including exchange of staff to transfer some specialized skills.

• ADB should consider the inclusion of sub-regional DFIs as a main group of beneficiaries in its exceptional multi-purpose liquidity facility: Sub-regional DFIs’ investments are countercyclical by nature; the Bank, especially in response to the global economic crisis, should consider the explicit inclusion of sub-regional DFIs as a main group of beneficiaries in the Bank’s exceptional multi-purpose facility, or the provision of liquidity support to sub-regional DFIs as an additional instrument.

• ADB should support sub-regional DFI’s strategy for increased capitalisation and expanded membership especially by OECD members: The expanded membership by OECD members will improve the DFIs’ risk profile and consequently their ability to raise funding independently. Moreover, should the opportunity present itself, and DBSA reaches the stage where external shareholding is considered, ADB should step in as a key partner with respect to equity participation

Recommendation(s) to the Beneficiary:

• The sub-regional DFIs should seek to enlarge their balance sheet and strive to establish stronger partnerships with their shareholders: The sub-regional DFIs are relevant, but their impact is limited because of their relatively small size. The sub-regional DFIs should strive to enlarge their balance sheet via full partnerships with their shareholders, this will enable them to play bigger role in supporting regional integration and cross border trade. 

• The sub-regional DFIs should also seek to play a bigger role in supporting regional integration by adopting plans, policies, and strategies of their respective RECs: The sub-regional DFIs should strive to become the main hub for development finance in their respective sub-region regions by adopting and fully subscribing into the development policies and strategies and visions of their respective RECs (DBSA is the most advanced in this regard). 

• The board representative of ADB should come from a higher managerial level, and the Bank should use its presence to influence policy and strategy of the sub-regional DFIs: ADB’s equity participation in both EADB and PTA needs greater attention than it is presently receiving. The board representative of ADB should come from a higher managerial level, and the Bank should use its presence on both boards to influence policy and strategy of the Sub-regional DFI. Currently ADB has a Manager as a board member who reports to OPSM Director. 

• PTA should be encouraged to emulate DBSA in resuscitating some national DFIs (especially with TA packages targeting good governance): DBSA has been offering assistance including TA and LOCs to some national DFIs (especially in the SADC region). This trend could be strengthened by encouraging other sub-regional banks to emulate DBSA to resuscitate some national DFIs (especially with TA packages targeting good governance) and further broadening the means of deepening financial intermediation. DBSA has confirmed an ongoing initiative with ADB whereby a Centre for Corporate Governance is being established jointly to assist national DFIs. PTA is in a state that is suitable for such activity, whereas EADB still has a lot of work on its own governance structures. 

• EADB and PTA need to have clear strategy in terms of SME outreach: It is obvious that direct involvement in the lower end of the SME or the micro finance sector is not viable for reasons of higher administrative costs and risks. Partnering/collaborating with national DFIs as well as micro finance institutions within their respective sub-regions would help the sub-regional DFIs leverage the local experience and knowledge and reduce the risk of small-scale interventions 

• The sub-regional DFIs should establish strong collaboration and partnership with local as well as sub-regional business associations: Business associations have a wealth of information about the various sectors of the economies of the sub-regions and strong knowledge of the quality of promoters/ sponsors.

• PTA and (at a later stage) EADB could follow DBSA’s role in SADC: The role played by DBSA in the SADC sub-region represents a good example that PTA and EADB could follow. For example, the EAC Development Strategy (2006 –2010) proposes a fund for coordinating sub-regional infrastructure interventions to be hosted at revitalized and capitalized EADB. EADB should seize this opportunity to play a bigger role and align its policies, strategies, and operations with the EAC. 

• The sub-regional DFIs should strive to improve the independence and results-orientation of their Evaluation Units, with a direct line of reporting to the Board: A benchmarking exercise towards international best practices for both EADB and PTA is suggested. In addition, the sub-regional DFIs should institute a result-based monitoring and evaluation system. This will help them to become more accountable for the funds they disburse and link development outcomes with their overall corporate objectives

•  The sub-regional DFIs should separate project design and portfolio management functions: There is an apparent conflict of interest if the professionals responsible for originating the project are also the once who monitor and supervise the project all the way to closing. The separation of design and portfolio management functions helps to ensure adequate attention on project implementation and usually leads to better portfolio quality (the DFIs should benchmark themselves against best practice in MDBs).