FUNDS FOR DEVELOPMENT:

Paradigms of Organisational and Institutional Structures and Governance of Multilateral Financial Development Institutions (MFDIs)

Gerd Droesse
8 June 2011

Current Aid Architecture

Proliferation 230 aid organizations Fragmentation large number of donors providing a small percentage of total aid to a given country Use Proliferation division of aid in a wide variety of end uses, i.e. many small projects and programs Earmarking of ODA for special purposes

 Increased number of multilateral donors, including emerging new donors, private sector, philanthropic sources Strong increase in thematic funds and earmarking Thousands of NGOs assisting DMCs Great complexity of current aid architecture

Organizations are chameleons

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which change color

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as they assume new functions or drastically change functions to be responsive to the

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Reasons for Proliferation and Fragmentation

1. Law of complexification Traits of biological systems:
a striving to grow as far as resources allow a tendency to proliferate a resistance to annihilation unless survival by successors is assured
Paul Szasz

2. Organizations hardly ever die vested interests and qualified majorities are formidable obstacles to reform. 2. New organizations created in response to emerging needs 3. Dissatisfaction with decision-making procedures of existing organizations 4. Easier to establish new organizations than amend their charters

Four Generations of International Organizations

Organizations are generational in character.
John W. Head

Generation here is used to refer to a wide range of entities, institutions, alliances, facilities and financial intermediary funds serving as channels of multilateral concessional financing, in addition to MDBs and other multilateral financial development institutions (MFDIs).

Four Generations 1. First Generation (1948 1960) 2. Second Generation (1960 1980) 3. Third Generation (1980 2000) 4. Fourth Generation (2000 present)

First Generation
(1948 1960)

Institutions established as financial intermediaries without concessional window None of their charters provided for a concessional window but each found a way to provide concessional financing, directly or indirectly

 IMF radically changed its functions to provide concessional financing through trust funds IBRD sponsored the establishment of IDA as the concessional arm of World Bank Group CEB provided subsidies from a trust account funded by profits EIB administers funding from European Union

Second Generation
(1960 1980)
Emergence of concessional windows Intergovernmental organizations, including concessional arms of groups With legal personality under international and municipal law Offered initially only limited concessional products (loans and TA) except OFID which also provided balance of payment support

Second Generation Organizations

1. Multilateral Development Banks

Internation al Developm ent Associatio n

Asian Inter-American Developme Development nt Bank Bank

African African Developme Developme nt Bank nt Fund

2. Subregional development banks

Latin America and the Caribbean (e.g. Central American Bank for Economic Integration [CABEI] and Caribbean Development Bank [CDB]) Africa Arabic countries and for the Black Sea

3. Other international financial institutions

International Fund for Agricultural Development

OPEC Fund for International Development

Islamic Development Bank

4. Other concessional windows

Consultative Group on International Agricultural Research (CGIAR) (1971)

Sponsoring agencies: World Bank, UNDP, FAO, and IFAD Research centers posses legal personality, but CGIAR itself does not

Onchocerciasis Control Program (1974)

collaboration among UN agencies, the private profit and non-profit sectors, and governmental agencies to protect 30 M people in 11 in West African countries from river blindness

http://www.who.int/apoc/onchocerciasis/ocp/en/index.ht

Third Generation
(1980 2000) 1. Intergovernmental organizations

Nordic Development Fund

Nordic Development Fund (NDF) (1989)

Channel of Nordic development aid Initially, only offered concessional loans 2005 Nordic Development Cooperation Ministers recommended a wind-up of NDF 2008 NDF given new focus - climaterelated interventions in poor developing countries

European Bank for Reconstruction and Development (EBRD) (1991)

to foster the transition towards open marketoriented economies based on political conditionality and with strong private sector focus initially did not establish special fund for concessional loans, but only funds for technical assistance EBRD Shareholders Special Fund only established recently

Black Sea Trade and Development Bank (BSTDB) (1999) charter provisions on special funds similar to AfDB and ADB no window for concessional loans special funds exclusively used for TAs

Third Generation: New Developments

Urge to establish new multilateral organizations and affiliated organizations subsided. Instead states opted for establishment of autonomous institutional arrangements created by multilateral environmental agreements and other ad hoc financing arrangements, notably through trust funds.

 Established by multilateral environmental agreements Informal and flexible approach to institutionalized cooperation among states Generally comprise Conference or Meeting of Parties with decision making powers (does not meet at one location) Secretariat and subsidiary bodies May comprise financial mechanism Members of constituted bodies under AIAs (e.g. under Clean Development Mechanism and other mechanisms under Kyoto Protocol) often not covered by privileges and immunities

2. Autonomous Institutional Arrangements (AIAs) with Financial Mechanisms

AIAs with Financial Mechanisms:

Multilateral Fund for the Implementation of the Montreal Protocol United Nations Framework Convention on Climate Chance Kyoto Protocol Convention on Biological Diversity Stockholm Convention on Persistent Organic Pollutants United Nations Convention to Combat Desertification

3.Third Generation Financial Intermediary Funds (FIFs) Have been established for many purposes Substitute for the establishment of intergovernmental organizations Generally not endowed with legal personality

Examples: (a) GEF (b) HIPC (c) PCF

Restructured Global Environment Facility (GEF) (1994) established by separate resolutions of the three implementing agencies as a sui generis financial mechanism, representing a unique blend of United Nations and Bretton Woods practices. (Ragazzi)

GEF paved the way for a new type of trust fund for development finance Fund managed by a trustee (the World Bank) but its the contributors to the Fund (GEF Council), not the trustee, who allocate the resources to beneficiaries Funded through a regular, formalized replenishment process
Sophie Smyth

GEF Implementation arrangements 3 implementing agencies (World Bank, UNDP, UNEP) 7 executing agencies
1. ADB 2. AfDB 3. EBRD 4. FAO 5. IADB 6. IFAD 7. UNIDO

Under umbrella institutional arrangements, GEF manages the Least Developed Countries Fund (LDCF) and the Special Climate Change Fund (SCCF)

HIPC Trust Fund (1997) Trust fund administered by World Bank Special decision-making procedures and consultative mechanisms apply

Prototype Carbon Fund (1999) Emerged under the auspices of Kyoto Protocol for combating climate change High-quality greenhouse gas emission reductions Public-private partnership IBRD is administrator and as trustee, legal owner of assets

Fourth Generation
(2000 present) States continued to be reluctant to establish new intergovernmental organizations However, legal personality is at the forefront of discussion and policy agenda

(e.g. proposal to confer legal personality to CGIAR consortium)

 Explosive growth of FIFs, particularly in the health sector

Hybrid class of new organizations (e.g. Global Fund to Fight AIDS, Tuberculosis and Malaria) established under municipal law but with privileges and immunities in host country and other countries GAVI Alliance and the International Finance Facility for Immunization (IFFIm)

Different approaches in other sectors: New FIFs were not endowed in all cases with legal personality under municipal law
e.g. UNITAID leverages price reductions of quality drugs funded by airline tax WHO-hosted and administered

In some cases, conferring legal personality was the result of progressive institutionalization.

Governance structures and modalities of concessional financing reflect evolving development agenda

The Education for All Fast Track Initiative (EFA FTI)

rooted in Paris Declaration principles supports the use of country systems through - a single country-led education program - modalities such as budget support, sector support, and fund pooling arrangements

Global Agriculture and Food Security Program (GAFSP) (2009)

World Bank acting as trustee, host of a coordination unit and possibly as supervising entity Example that organizations may react quickly to emerging needs by creating thematic funds

New Climate Change-Related Funds

Adaptation Fund (2007) Climate Investment Funds (2008) Green Climate Fund (2010)

Adaptation Fund (2007)

Established by Parties to the Kyoto Protocol to fund concrete adaptation projects and programmes Funded by a share of the proceeds of the Clean Development Mechanism Example of institution channeling funds generated globally Governed by Adaptation Fund Board (GEF is the Secretariat)

Climate Investment Funds

Clean Technology Fund (CTF) Strategic Climate Fund (SCF) Forest Investment Program (FIP) the Pilot Program for Climate Resilience (PPCR) Program for Scaling-Up Renewable Energy in Low Income Countries (SREP)

CIF funding should be transformational and additional

as a source of finance, so that CIF contributions are new and additional in the context of donor country funding flows; and In the way funds are used, so that CIF funding does not simply displace other sources in financing projects

Governance structure draws on GEF experience before and after restructuring but is different from GEF
Trust Fund Committee and Subcommittees MDB Committee Partnership Forum Administrative Unit and Trustee

CIF implemented by MDBs working separately but with new mechanisms that enhance MDB cooperation Consensus-based decision-making procedures

Green Climate Fund (December 2010) Creation decided at Copenhagen and confirmed at Cancn Fund will be designed by Transitional Committee Core elements determined at Cancn Management by board comprising equal number of developed and developing parties (24) Standing Committee World Bank appointed interim trustee National institutions may have direct access to GCF financing

Climate change-related funds

Exponential growth of new climate-related

funds Cumulative resources received by GEF as of March 2009 amount to USD eq. 9.5 billion
GEF. 2009. Review of the GEF Trust Fund: Contributions, Funding Availability and Financial Risk, p. 8.

Climate Investment Funds (CIF), the Clean Technology Fund (CTF), and Strategic Climate Fund (SCF) with its three targeted programs, have already mobilized $6.4 billion since their establishment in 2008.

 Green Climate Fund

COP confirmed their resolve to mobilize $100 billion a year by 2020 for the mitigation and adaption needs of developing countries. Possibly up to 10% allocated to GCF Size will dwarf all other climate-related funds Funding from a variety of sources

Paradigms of Organizational Structures

Paradigms of Organizational Structures Multilateral Financial Development Institutions (MFDIs) FIFs without legal personality (e.g. GEF) FIFs with legal personality under municipal law (e.g. Global Fund)

Multilateral Financial Development Institutions (MFDIs)

MFDIs: Status under International Law

Established by treaty and possess legal personality under international and municipal law Privileges and immunities under the constituent agreement, under multilateral conventions and/or bilateral headquarters/host country agreements Global organizations (IFM, World Bank, IFAD) specialized UN organizations and enjoy privileges under their Charter and in countries which have signed Convention on Privileges and Immunities of Special Agencies (CPISA). Regional organizations (e.g. ADB) not covered by CPISA, enjoy privileges and immunities under Charter only in member countries and in other countries only on the basis of bilateral agreements (e.g NDF for projects in non-member countries)

MFDIs: Different Arrangements for Provision of Concessional Financing

MFDIs established specifically to provide concessional financing (IFAD) Concessional arms of groups (e.g. IDA, AfDF, NDF) Organizations administering concessional and nonconcessional resources

MFDIs: Different Arrangements for Provision of Concessional Financing

Organizations administering concessional and non-concessional resources under one juridical personality
Incorporated concessional windows (e.g. IADB, Special Development Fund of CDB) General provision on special funds (e.g. ADB, other special funds of CDB, IsDB)

Concessional financing through trust funds or other external resources (e.g. IMF)

Hard and Soft Windows

Most MFDIs offer financing through hard windows on preferential market-based terms and through soft windows on concessional terms
Hard windows mobilize financing through shareholder capital and borrowings on capital markets guaranteed by shareholders. Level of leverage depends on risk bearing capacity of each institution Soft windows designed as revolving funds which pass on resources received to recipients at a rate of 1:1

Concessional Windows with Proper Legal Personality

MFDIs - Concessional Arms of Groups

Organizations in their own right with legal personality under international and municipal law Constituent agreement defines governance structure which may differ from other organizations of the group

Coordinated Governance Structures

Membership differs but membership requirements may be linked:
1. IMF/IBRD membership a condition for IDA membership 2. AfDF membership a condition for AfDB membership 3. NDF no membership requirement relating to NIB
Examples: World Bank and the AfDB Group

 Same president
IBRD and IDA AfDB and AfDF

IBRD and IDA has the same governors and executive directors AfDB AfDF governance structure coordinated thorough AfDB membership in AfDF Different decision-making procedures, qualified majorities and voting rights may apply

Separate Governance Structures

Coordinated governance structures have not been adopted in all cases has different President and separate Board of Directors from the Nordic Development Bank different membership and voting rights NDF Statutes allow delegation of all powers to NIB, but NDF has not used this in practice even in 2005 when Nordic Council of Ministers decided to wind up operations of NDF

Policy Implications
Separate legal personality of affiliated organizations:
no longer required to isolate risk of concessional operations emphasizes separation between concessional and nonconcessional windows, but close cooperation is warranted but potential advantage if MFDIs change their funding structure and commence leveraging funds from capital markets

Organizations with Incorporated Special Funds

Constituent Agreement May allocate funding (e.g. IADB) Regulates subscriptions and withdrawals May provide for qualified majorities (e.g. IADB) May contain constraints regarding modalities of concessional financing (e.g. IADB) Examples:
1. IADB (Fund for Special Operations) 2. CDB (Special Development Fund)

General provisions for special funds in Charter

ADB and CDB charters (for CDBs Other Special Funds) contain a general provision for the establishment of special funds (for concessional or nonconcessional operations) No funding allocated but only basis for future resource mobilization Governing bodies determine modalities of concessional financing May define qualified majorities but not special voting rights.

No provision for special funds in the Charter

Charters of some organizations contain no provision allowing establishment of special funds CABEI established special fund even though there was no provision in the Charter allowing it Special funds resources do not form part of CABEIs resources Separate equity covered by different financial statements

Special Funds Administered by MFDIs

Generally: (a) no separate voting rights (b) administered by the staff of MFDI But it is not intrinsically impossible to allocate special voting rights (e.g. IsDB) In certain cases, staff may be specially appointed for concessional windows IsDB Islamic Solidarity Fund AfDB Water Facility Special Fund

Concessional Financing through Trust Funds or External Resources

Trust funds administered and executed by MFDIs Most organizations use trust funds to leverage their activities Some organizations provide concessional financing exclusively through trust funds (e.g. IMF) or from external resources (e.g. EIB under EU mandate)

Types of trust funds

Trust funds administered and executed by MFDIs Recipient-executed trust funds Resources are passed on to government (post-conflict situations) Financial intermediary funds Support wide range of facilities, alliances and programs Mostly established for provision of grants World Bank alone administers 70 grant-giving programs Substitute for the establishment of new organizations

Current Funding Structures of MFDIs

Concessional windows conceived as channels of financing from OECD/DAC countries to developing countries
Most have not attempted to mobilize resources from private sector and foundations.

Funding structures no longer in accord with: many new emerging donors, including the private sector and philanthropy developments in financial industry

Possible Solutions
1.Explore innovative financing mechanisms 2.Mobilize additional resources by leveraging resources on capital markets 3.Consider alternative uses of concessional resources (e.g. as risk buffers instead for subsidizing the cost of financing)

Financial Intermediary Funds without Juridical Personality

Global Environment Fund (1991)

Financial intermediary fund without legal personality

Lack of legal personality seen as a constraint to development effectiveness (quest for legal independence has not yet succeeded so far).

Not traditional three-tier structure of Bretton Woods institutions.

Assembly with limited functions Governing Council mail decision-making body NGOs and other shareholders do not participate in formal decision-making procedures

 Complex coordination framework and fragmented implementation arrangements Equal representation of developing and developed Double voting procedure Participants of GEF Assembly not covered by privileges and immunities

Financial Intermediary Funds with Legal Personality Under Municipal Law

Global Fund to Fight AIDS, Tuberculosis and Malaria (2002)

Legal personality under municipal law Move away from three-tier Bretton Woods system Partnership Forum only a discussion forum;

does not take decisions

different from plenary body of MFDIs Multi-actor fund

 Representation in Board and allocation of resources not based on membership Relies on recipient country level governance structures in addition to global governance structures Decision-making inspired by GEF and reflects the trend toward softer decision-making procedures

Way Forward

Assessment
Proposals for a grand redesign of aid architecture most likely cannot be implemented within a short or even medium-term perspective The current situation, which is characterized by proliferation and fragmentation of channels of concessional financing and earmarking of development aid, is likely to continue for a long period.

In parallel with the attempts to reform the current aid architecture, discussion should focus on matters that can be achieved within a medium-term range, based on the current legal frameworks of concessional windows.

Possible Solutions
Transform international organizations into similarly structured multi-donor platforms and umbrella operational arrangements comprising in addition to their own resources a variety of trust funds and other co-financing arrangements which are administered on the same terms and conditions for a defined purpose Create supplementary governance structures for umbrella financing arrangements for certain countries or sectors Actions can be taken as a matter of policy

 With negative implications at various levels as they can lead to duplication and wasting scarce resources and create high transaction costs However, they are also an expression of the vitality of the development of the current aid architecture

Implications of Proliferation and fragmentation

Polycentric aid architecture

Opportunity to experiment with new and innovative solutions and find new and better ways to respond to the needs of their clients. Thus far, that potential advantage has not been sufficiently exploited.

Paradigm Shift
Paradigm shift in the relationship of MFDIs and other development institutions from Centralized decision-making to decentralization Consensus to cooptition (i.e., cooperative competition)

Decentralization
Federalism has served states well Partially decentralized decision-making should be the guiding principle to relations between multilateral financial development organizations

Kawai, Petri, and Sisli-Ciamarra illustrate this in relation to MDBs Global organizations (e.g. WB) should focus on project lending to address broad, global objectives alleviate negative global externalities, such as climate change, global energy and food shortages, and global epidemics and activities with great economies-of-scale Serve as a knowledge bank to collect and disseminate research findings

 Regional development banks should focus on: - sub-global development challenges provision of regional public goods to be shared by countries with common interests - investments for regional infrastructure or regional financial markets
Kawai, Petri, and Sisli-Ciamarra

Cooptition
Relationship of organizations should be covered by cooptition (i.e. cooperative competition) Brandenburger and Nalebuff (1996) coined the term coopetition cooperation may enhance competition and businesses should cooperate to be competitive Companies cooperate to create a market and compete to divide it Cooptition is common between messaging services, cargo operators, and especially airlines.

Cooptition
Organizations should harmonize administrative terms and conditions to reduce transaction costs not compete over administrative arrangements or terms and conditions of financing (as they are channels of ODA) cooperate at the country level wherever feasible to minimize costs and increase the efficiency of their services

However, cooperation and harmonization do not implyand should not lead touniformity.

Competition between different providers of concessional financing may enhance their development impact as long as it is focused on innovation and development outcomes.

Airline Alliances
Airline alliances offer a paradigm for a future relationship of development organizations. They have: Harmonized their administrative/operational procedures to transport passengers and freight Cooperate in certain areas (e.g. check-in, lounges) to reduce costs But each airline maintains its own character and competes in providing the best standards of service and in selecting its areas of operations

Cooptition
Similarly, MDFIs should try to find new and innovative solutions Respond to the needs of their targets Enhance development impact Develop new instruments Provide excellent service Remain faithful to the purpose for which they were established Such cooperation facilitates institutional reform at a later stage

For More Information

Gerd Droesse
http://www.adb.org/documents/books/funds-fordevelopment/default.asp