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The surging role of Public Development Banks

The surging role of Public Development Banks

As the First Finance in Common Summit was held in Paris between November 9th and 12th, Valerie Tehio, the AFD Ethiopian Director to Ethiopia (AFD) converses with The Reporter’s Samuel Getachew on the gathering, on the work on AFD in Ethiopia, on developmental banks in the midst of the COVID-19 pandemic and on the long term vision of development.

What has been some of the work of AFD in Africa, in particular in Ethiopia and some of the partnerships that have been developed so far?

Within Africa, in Eastern and Southern Africa for instance, the Trade and Development Bank and AFD made the choice to join force almost a decade ago, in 2012. As such many positive results have been achieved in the last eight years. As you may know, TDB is a regional bank, by Eastern and Southern African, for Eastern and Southern Africa and the strength is making impactful trade and development projects a reality. The goal is to transform the lives of its final beneficiaries, the communities it serves and see practical change happen.

We, at AFD, are the main French public parastatals dedicated to funding the transitions to a world that is more sustainable and fairer. Both banks complement each other: AFD mobilizes financing that is geared at integrating Sustainable Development Goals in any development project, so that climate change can be tackled and gender equity taken into consideration for example. TDB has knowledge and expertise in the region, is close to its beneficiaries and understands their needs, and has the network and is set-up to address them. And together TDB and AFD can make a difference in the lives of people and their environment.

For example, a renewable energy project from wind and hydroelectric sources is being funded thanks to our cooperation, via credit lines, to boost access to green energy in the highland region of South Tanzania. This project will provide electricity for 42 villages, 4,500 homes, countless SMEs and a factory that is the region’s biggest employer. At the same time, we believe such action will stop using diesel generators, resulting in less pollution.

In Ethiopia, we currently manage a portfolio of more than 500 million euro project. Over the past 20 years, we have had successful partnerships with Ethiopian Airlines, Ethiopian Electric Power and Interaide: a very innovative organization dedicated to agriculture and access to water.  

France hosted a Common Summit in Paris this week. How did that go? 

The First Finance in Common Summit was an initiative of the World Federation of Development Finance Institutions (WFDFI) and the International Development Finance Club (IDFC), of which AFD as well as the Eastern. Southern Africa Trade and Development Bank are members, AFD having the current chairpersonship.

This edition was convened by AFD with the support of Multilateral Development Banks, regional associations of Public Development Banks, International institutions (UNDP, DESA, UNEP, OECD and the European Commission), the French Caisse des dépôts et consignations and the COP26, the COP15 and the Generation Equality Forum.

The summit had three immediate objectives which are to bring together for the first time the 450 Public Development Banks worldwide, and discuss their role, ambitions, challenges and opportunities, to bring together the financial community at large to design, in a spirit of cooperation, a financial system that recognizes the full potential of Public Development Banks in promoting sound climate policies and SDGs, including mobilizing financial flows towards these objectives. It also aimed to contribute to the reinvention of multilateralism that promotes new forms of cooperation. The coalition of actors and the dynamics of cooperation that were formed during the forum thus wish to be a long-term initiative.

Additionally, it highlighted, through concrete elements, the key role that those banks play in our economies and societies, particularly in support of a sustainable economic recovery. Among the deliverables expected from the summit were: A joint declaration of all PDBs, which will translate into a roadmap for the signing of 10 thematic commitments (gender, climate, biodiversity, agriculture etc...) during the high-level discussions that was just held.

Research papers explaining the role of PDBs in building sustainable finance and the actions needed to reveal their full potential as well as databases to guide a sustainable recovery. Concrete projects and initiatives that support the alignment of BDPs with SDGs: AFD is working with the European Commission and other European partners on the international Fin4Dev initiative, which seeks to bring about positive developments towards COP21 and SDGs at the local level, within the financial and PDB sectors.

What are the issues at stake in the joint declaration that has been announced at the summit?

One of the key deliverables of the summit was a joint statement by the 450 PDB. This declaration was a joint declaration signed by all public development banks, where they affirmed their determination to collectively shift strategies, investment patterns, activities and operating modalities to contribute to the achievement of the SDGs and the objectives of the Paris Agreement, while responding to the Covid-19 crisis. Additionally and for greater impact, they committed to join forces and form a global coalition of all PDBs around the world.

The joint declaration and thematic commitments were based on concrete projects and initiatives that support the alignment of the PDBs with the SDGs, as well as the production of scientific content developed by the research program ‘’Realizing the Potential of Public Development Banks to Achieve the SDGs’’, which presented, for instance, the first database on public development banks at the summit.

There were 450 public development banks in attendance and the highlight was on how to survive in the midst of post-COVID. What should African bank, in particular Ethiopian banks, who continue to have other recurring challenges, expect to achieve from such gatherings?

The first aim of the Finance in Common Summit (FICS) was to raise the profile of public development banks. So the shine was on public banks and they are quite diverse in that some operate at the local level, others at national or international level; some are generalists, others specialists in a sector; and their sizes vary considerably. However, what they have in common is that they all have financial and legal autonomy while serving their governments; they can scale up the resources entrusted to them and have a mandate to support development projects. 

Public development banks want to be instrumental in addressing the emergencies of health and environmental crises. We discussed what we can do to free up their potential by giving them the means to make a more effective contribution to the international climate agenda and Sustainable Development Goals (SDGs).

The Covid-19 crisis makes our initiative more necessary than ever, at a time when it is essential to boost public investment. With private financing drying up, sometimes drastically in developing countries, public development banks have a major role to play. During the crisis, they have all deployed instruments to restart the economy and seek to reconcile this financing with the longer-term objectives of nature conservation and the reduction of inequalities. They are all trying to mobilize the private sector for the same purpose.

A concrete example: with our private sector branch, Proparco, alongside the European Union, KFW and IFC, AFD has committed to invest over 200 million euros in the TCX investment fund. The aim: to enable households and businesses in the poorest countries to strengthen their financial resilience in the face of the Covid-19 crises.

Tell me about the International Development Finance Club?

The International Development Finance Club (IDFC) is chaired by AFD and gathers the 26 largest national and regional public development banks in the world. AFD was one of its founding members in 2011 and has been chairing the organization since October 2017.

The International Development Finance Club (IDFC) members, working together to implement the Sustainable Development Goals & the Paris Agreement Agendas, join forces as a platform to promote & leverage Sustainable Development Investment worldwide. They work on common guidelines for their investments, namely projects that promote efforts to reduce or limit greenhouse gas (GHG) emissions or enhance GHG sequestration, or support adaptation projects and sectoral activities.

During the Summit, the IDFC announced new measures, such as tools allowing PDBs to further align policies with the Paris Agreement and add a social dimension to their response to the Covid-19 crisis, while recognizing the interplay between climate change and biodiversity.

Ethiopian banks are in the midst of change, with much talks of international banks entering the Ethiopian market for the first time. What do you think would be the role of developmental banks and what has been your experience in other African nations?

In a nutshell, development banks take the risks that private banks don’t. That is they can open the way for private investment by financing the first round of projects while increasing the capacity of the actors. Specifically, AFD subsidiary for the private sector, Proparco, drives private investment towards development.

In Ethiopia, Proparco has been supporting a dynamic local player via a loan. Turaco is a young group experiencing very strong growth in the manufacturing of cooking oil, soap and detergents. Proparco is supporting its projects to increase its production capacity and build an extraction plant to extract local oil. Proparco’s investment will also contribute to its institutionalization in terms of governance and Environmental and Social standards.

This is the kind of added value Public Development Banks can bring to private banks. In reflection to the current crises, Proparco has three instances adopted from doing its usual large lines of credit, including support in midst of the COVID pandemic challenge by also offering impacting small lines of credit extended to smaller banks.