Foreign aid has been a part of the African landscape for as long as most of us can remember. While these donor funds have saved lives during and after crises and funded critical infrastructure, many would argue that aid has also skewed incentives and created a crutch of dependence. But this seemingly entrenched paradigm has begun a slow shift.This change can in part be linked to the Paris Declaration on Aid Effectiveness (2005), which called for national ownership of policies and programs supported through aid, and better coordination of the jumbled maze of external assistance. Supporting this, the United Nations Development Programme recommended aligning donor programs with national priorities and strengthening local implementation capacity. Better donor coordination seems to have followed, led by the creation of various multi-donor facilities.
In addition to better coordination, new approaches in aid are emerging. Donors are increasingly responding to the growth of the private sector by offering programs to enhance the private sector business environment, and also through more innovative funding mechanisms such as:
- the provision of seed funding for early-stage private sector companies;
- direct lending or equity investment to infrastructure projects; and
- leveraging local financial institution participation by taking first loss positions in guarantee structures.
The change in the role of traditional donors is also a result of China’s emergence as a significant player in Africa.
As a result of drastically increased bilateral funding, Chinese companies are now involved in infrastructure projects across the continent that until recently were the preserve of Western countries and companies. But Western countries, recognizing the need to stay agile to safeguard their long-term interests and share of trade in Africa, are now offering more tailored and innovative funding mechanisms and focusing on somewhat neglected areas such as climate change and gender reform.
In 2010, China committed $9 billion to Africa’s infrastructure growth (up from $7 billion in 2006). This includes:
- non-concessional development finance from China Development Bank;
- equity finance to ventures launched or backed by Chinese enterprises from the China-Africa Development Fund; and
- export credits, concessional loans, and guarantees from China Exim Bank.
As the donor paradigm evolves to fit the times, foreign aid—and trade—will reshape itself accordingly. With the desire to affect change comes the certainty that approaches, too, will continue to change.
Donor case study: DFID
Like the unique countries that make up Africa, views vary on where Africa is headed, what is changing, and what is driving change. But we agree on one thing: Africa is changing, and with it, what we do as development partners needs to change too. The U.K.’s Department for International Development, or DFID, is looking at a renewed focus on economic development, refocusing its development program to help create more jobs and strengthen governance and international institutions, while working with new partners and in new ways.
DFID is also rebalancing its investments toward inclusive economic development, strengthening institutions and governance, unlocking the potential of girls and women, and mainstreaming climate and conflict programming. It is looking at what its offering to developing countries should be, and how best it can reflect countries’ ability to self-finance out of poverty. It will also look at instruments to unlock U.K. expertise and continue to invest in the multilateral system—with a strong link to performance. DFID will continue to strengthen its commercial expertise—and use innovative delivery mechanisms such as results-based financing and public-private partnerships. Working in new ways includes continued work to improve the transparency of aid spending and a focus on impact.
The emergence of the African middle class is becoming a force for positive social and economic change. Many of the world’s poor no longer live in the poorest countries. China and India have already shown us how difficult it can be to eradicate poverty despite economic growth—Ghana and Nigeria face the same challenge.
By 2030 more Africans will live in urban than in rural areas, and in the next 30 years there will be an unprecedented level of working age people. The spread of mobile phones has revolutionized information access and is transforming what people know, who they know, what they do, and how they do it. Accompanying these demographic changes, new stakeholders, such as private investors, foundations, philanthropists, and most importantly emerging donors like Brazil, China, and India, have changed the map of Africa’s development relationships.
There are also new threats. Climate change is perhaps the biggest one, and threatens to reverse the development gains in many countries by making infrastructure unusable, established agriculture unsuitable, and exposing populations to increased threats of droughts and famines.
Traditional partners, such as DFID, must take account of the new demographics and new threats. This will allow the development community to make a lasting difference in Africa.
In response to the new landscape, DFID has an increased focus on Africa’s “development frontier”—the less developed and fragile countries as well as the poorer populations in more developed countries. We are also scaling up work on economic development for poverty reduction. This is built around supporting labor-intensive activities and sectors that will generate the most productive jobs, promoting diversification of economies to create inclusive growth, and strengthening export sectors to create deep and durable long-term markets.
DFID also supports the institutional and political arrangements that facilitate growth. A continued focus on transparency, rule of law, and a political settlement that can deliver long-term growth will help ensure that African citizens benefit from growth and the country’s wealth is not appropriated by a few.
Plus ça change
It is important to stress that a new role doesn’t mean everything changes. Many donor interventions have been fantastically successful at reducing poverty and saving lives and much of this work will continue. This includes humanitarian interventions in conflict and natural disasters. But here too, we are stepping up our game: new innovation and technology is helping us target, manage, and deliver assistance better. There is an increased focus on building resilience to shocks, consolidating peace, and supporting recovery to reduce the likelihood of slipping back into conflict.
Traditional development partners have many decades of development efforts to learn from as we tailor our offerings in response to the changing needs of Africa. We will continue to learn from the past, even as the new role for donors in Africa changes with the times.
Donor case study: KfW in Uganda
KfW, a German government-owned development bank, is active throughout the power sector in Uganda, focusing mostly on putting together a renewable energy fit in tariff program. As part of this program, KfW has made funding available to potential private sector players to top up the tariff at which they sell power to UETCL, Uganda’s national transmission company and the buyer of all power in the country. Depending on technology, this amounts to about $0.02 per kilowatt hour (KWh) in addition to what it receives from UETCL, which is supposed to incentivize private sector power players to come and develop renewable energy projects in Uganda.
KfW is undertaking additional activities in the sector—some with the potential to change the paradigm for donor support throughout the region. In one case, KfW is providing assistance to one of the isolated power grids in the West Nile Region and helping UEGCL, the national power generation company, launch several other projects in remote areas. IFC and KfW are working together to meet this goal. Specifically, KfW has provided funding to buy down the capital cost of a mini hydro scheme in the West Nile region; with KfW funds, UEGCL hired IFC to advise on how to structure the mini hydro transaction and attract private sector partners. Given that the hydro power scheme is located in an area that is not served by the national grid, the commercial aspects of the project on its own would not be likely to attract private sector financing. However, the capital buy down makes the opportunity viable and serves as a way to incentivize the private sector to address the critical power situation in an underserved area of the country.
Ultimately, the Government of Uganda, the Electricity Regulatory Agency, KfW, and Deutsche Bank developed GET FiT to support 15 new generation projects with a total installed capacity of roughly 125 megawatts. The GET FiT initiative will increase generation capacity in Uganda by 20 percent, giving an additional 1.2 million people access to electric power.
Donor case study: Norad in Liberia
The Liberian conflict, which lasted nearly 14 years and ended in 2003, left the country in economic ruin and its infrastructure devastated. The country’s prior generation capacity of approximately 180 megawatts (MW) and accompanying distribution network were totally lost, and as a result commercial electricity services in the country were non-existent. LEC, the state power company, had no infrastructure, no fuel source, and no customers.
In July 2006, an international donor group formulated an Emergency Power Program to restore power to some parts of Monrovia. In 2007, with 2 MW of imported generators, LEC was revived and started commercial operation with 450 customers and a row of street lights for the first time since the war. Since then, the generation capacity has been increased to 10 MW and the transmission and distribution network has been expanded. But differing donor objectives and procurement procedures were hampering progress. The government was becoming increasingly eager to speed up the process by introducing private sector investment and expertise.
Led by the Government of Norway, donors used a highly innovative approach to support this project. By pooling funds, and tying their use to performance parameters already established in the management contract, donors gave the flexibility to the management contract operator to use the funds when and how it felt most effective.
This contrasts with a typical bilateral approach, whereby donors engage in discrete investments (usually purchasing equipment or construction), without coordination or integration with other donors. This approach often leads to suboptimal investments, since decisions are taken absent of considerations related to performance outcomes.