By Cyril Prinsloo

In times of economic distress, a situation South Africa finds itself in at present, governments tend to invest heavily in infrastructure, which plays a central role in economic growth and poverty reduction by promoting greater productivity, increasing trade, reducing the cost of doing business and creating jobs.

Typically, such infrastructure expenditure is channelled through multilateral development banks. These banks play an important role in reducing Africa’s infrastructure financing deficit, projected to be an enormous $100-billion a year over the coming decade.

In South Africa, the Development Bank of Southern Africa is the key domestic financier of infrastructure among development finance institutions. It competes and cooperates on the infrastructure landscape with other development banks, such as the World Bank and the African Development Bank (AfDB).

The recent establishment of the New Development Bank (NDB) by the Brics group of countries – Brazil, Russia, India, China and South Africa – brings to the market an additional competitor and potential cofinancing partner. Considering that South Africa is one of the initial five countries providing capital (read $2-billion of South African taxpayers’ money) for the NDB, South Africans have a vested interest in the sustainability of the bank to safeguard its capital and, equally, to promote economic development.

The NDB was not established to displace or replace traditional development banks. Instead, it will employ a model that is similar to the models employed by these established institutions. By leveraging paid-in capital from their members through international debt markets, development banks are able to secure additional capital relatively cost-effectively. The money is then lent at low interest rates, with the loans having long maturities.

However, the NDB will aim to work more efficiently. Having approved its first loans earlier this year, the bank is actively soliciting input on how it should work in order to be efficient.

A new study undertaken by the GEG Africa programme in response to this request has highlighted how established multilateral development banks, such as the AfDB, are increasingly struggling to find clients (read countries) to borrow from them, partly owing to their own inefficiencies. This is generally attributed to extensive and onerous loan approval processes, the employment of financial management systems client countries are unfamiliar with and stringent environmental and social safeguards that delay project implementation and cause frustration.

To be fair, a key focus of multilateral development banks is to ensure that the projects they finance have significant positive development impacts – hence, the need for due diligence. For too long, many countries and development banks have placed excessive emphasis on ensuring the financial and technical feasibility of projects without due consideration for the environmental and social impact that infrastructure projects could have. When properly conducted, environmental and social assessments ensure, for example, that, when a new dam is constructed, its effects on local communities and/or the resulting environmental degradation are mitigated or minimised.

Nevertheless, countries maintain that traditional multilateral development banks are overly bureaucratic and inefficient. In the AfDB, for example, decisions to approve or deny loan applications were, for a long time, not made at country level, but at the bank’s headquarters, in Abidjan, Cote d’Ivoire. This caused unnecessary delays. Equally, it has been suggested that the bank was understaffed, with the available staff being overstretched, resulting in further delays. The loan process itself, requiring more than 20 formal review and approval steps, is also considered both overly bureaucratic and inflexible.

Equally frustrating for borrowers have been the unique financial management and procurement processes that development banks typically impose on borrowers, despite similar processes being in place in the borrowing countries.

One area where the AfDB has received both praise and criticism has been the way in which it has dealt with countries facing rapid exogenous shocks or domestic crises. Praise has been given specifically for the AfDB’s prompt intervention in crisis situations, especially where high-level political leaders have become involved. Criticism, however, has been directed at the manner in which the AfDB responds operationally to these crises. For example, the approval and disbursement of ‘emergency’ funds often takes more than a year to materialise.

If the NDB is to meet its stated objective to fund infrastructure in developing countries and to “meet the aspirations of millions through sustainable development”, while maintaining its financial stability, it would do well to learn from the experiences of existing banks. It should aim for speedy loan approval processes, avoid inefficiencies by making use of the domestic processes in loan- seeking nations and use its technical expertise to help implement projects once they are financed. In this way, it can chart a new way forward without repeating some of the mistakes of existing banks.

Prinsloo is a researcher in the Economic Diplomacy Programme at the South African Institute of International Affairs