Balancing development returns and credit risks: project appraisal in a multilateral development bank

Abstract

Debates amongst civil society organizations on the governance of multilateral development banks expressed concerns regarding institutional capacities to ensure quality-at-entry in private sector projects where developmental and social impacts must balance financial viability. This paper delves upon the African Development Bank's experience in this regard by exploring its ex-ante impact assessment and project appraisal tools. Overall, the introduction of an independent development-oriented project appraisal framework has increased the development focus of portfolio decisions along the lines drawn by institutional mandates. Empirical results suggest that development and risk concerns taken into account during project appraisal are independent from each other, and that no assumption should be made about one with respect to another. Findings also suggest that considerations regarding financial additionality matter when it comes to adding value in projects, as do concerns over benefits to households.

Keywords::

• multilateral development banks
• private sector development
• African Development Bank
• project assessment
• development outcomes

JEL classification::

• F5
• O19
• 022
• H43

Acknowledgements

The authors are grateful to Mthuli Ncube, Léonce Ndikumana, Steve Kayzzi-Mugerwa and Issa Faye for their guidance, to the participants in the internal seminar at the African Development Bank in Tunis held on August 25th 2011, the participants at the Global Development Finance conference held in Cape-Town on 5–7 November 2013, Gary Bond and four anonymous referees for useful comments, as well as to Ichiro Toda for his kind collaboration. Thanks also to José Morte Molina for assisting with data, to Aymen Dhib, Kaouther Abderrahim, and to Yaovi Gassesse Siliadin for his first-class statistical support. Marco Stampini worked on this paper while at the African Development Bank, i.e. before joining the Inter-American Development Bank. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the African Development Bank, the Inter-American Development Bank, their Board of Directors, or the countries they represent.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

^1. It is more specifically the risk to capital ratio which determines the limits of MDB lending. In order to maintain their AAA credit ratings (which allow them to tap the markets with low rates to then on-lend), MDBs impose themselves a very prudent use of capital. This increases the impetus for project financial soundness.

^2. The Evaluation Cooperation Group was established by the heads of evaluation in MDBs in 1996, with the goal of harmonizing evaluation methodologies and performance indicators. Members include the African Development Bank, the Asian Development Bank, the EBRD, the European Investment Bank (since 1998), the IADB, the International Monetary Fund (since 2001) and the World Bank Group. Observer members are: the Council of Europe Development Bank Ex-Post Evaluation, the International Fund for Agricultural Development Office of Evaluation, the Islamic Development Bank Operations Evaluation Office, OECD–DAC Evaluation Network and the United Nations Evaluation Group.

^3. ‘To bring about a more ecologically, socio-culturally and economically sustainable and equitable environment’ (Vanclay 2003, p. 6).

^4. Similarly to the description of institutional resistance to the introduction of social development perspectives in Caribbean Development in Harrison and McDonald (2003), the introduction of the ADOA system was perceived by some stakeholders as increased procedures delaying the pace of project approval. However, with the integration of economists into the project appraisal team (albeit with different reporting lines), the process became more acceptable leading to a gradual shift in mentalities and greater acceptance.