THE EFCA FORUM 2005 The European Commission s Funding Policies Contribution by Mr. Bruno Wenn, Senior Vice President of KfW Development Bank Ladies and Gentlemen, I welcome very much the opportunity to present today the views of a bilateral development finance institution. Before I address our position to the European Commission s Funding Policies and the issue how to create an effective and sustainable business environment for consulting companies let me shortly introduce to you the KfW banking group. I. As a public German bank we have by law the mandate: to promote the German and European economy as well as the developing countries through long term financing. Last year our total commitments reached 62.9 billion. KfW Development Bank finances investments and consulting services in developing countries on behalf of the German Government. Last year, together with our subsidiary DEG KfW Development Bank committed 2.5 billion for financial assistance. Within the German bilateral development assistance we provide - completely untied - grants, concessionary and non-concessionary loans and equity using funds from
- 2 - the German federal government and from the international capital market. 40% of our development financing is for Asia, 20% for East and Southeast Europe, 16% for Sub-Saharan Africa, 13% for North Africa and Near East and 13% for Latin America. 39% of our commitments are for investments in the economic infrastructure, 30% for social infrastructure like health and family planning, education, water and sanitation, 17% for the financial sector. We are currently financing 1,400 projects in 106 developing countries with a total commitment of 17 billion. Since more than ten years we have expanded our presence in developing countries. The network of our offices now comprises 47 locations in developing countries. With a portfolio of 400 million KfW Development Bank is one of the lead donors in the creation and assistance to micro banks. We are currently financing 82 micro banks in 36 developing countries. And with total commitments of 650 million in the last five years we are one of the largest financiers for renewable energy and energy efficiency. For consulting services we disburse roughly 130 million annually which is equivalent to 28% of our disbursements in foreign exchange.
- 3 - II. Ladies and gentlemen, what is KfW s position on the European Commission s Funding Policies? Currently, the European stakeholders of development cooperation are discussing the issue-paper on the future of European development policy which has been launched by the Commission therefore our discussion today on the EFCA-Forum is very timely. Since KfW Entwicklungsbank is working together very closely with the Commission and with other bilateral donors in Europe we are very interested in the discussion on how to enhance the efficiency and effectiveness of the Development Cooperation of the European Union as a whole. What is our point of view? The Eureopean Union is by far the world s largest group of donor. The Commission itselve as an individual donor is the world's third largest donor after the USA and Japan. We have a constellation of high funding volume of European assistance coupled with the comparative advantages of the several European Donors. This offers a unique potential for a major contribution of the EU as the whole to the international development agenda. But: What is missing to realize this unique potential? Why has the Development Assistance of the European Union not yet received the significance, which it deserves? What we need is a real joint EU development policy based on the partner countries strategies and an efficient and effective coordination and
- 4 - division of labor between the European Commission and the development finance institutions of the member states. We have to develop a framework of common policies and strategies, which, however, does not mean to replace Member States competences. Within this framework, the different European donors should coordinate their activities and concentrate on certain regions or countries and sectors according to their comparative advantages. Thus, by coordination, concentration and complementarity we can increase efficiency, effectiveness and visibility of European Development Assistance - for the benefit of our partner countries. In addition to an increased coordination and complementarity, European Donors have to develop a more harmonized approach of implementing European Aid. From a practical point of view, in special cases, where European Donors still operate in the same sector, it could be useful when one donor takes the lead on behalf of one or more other donors. The DAC task force on donor harmonisation emphasises this so-called "delegated cooperation" as an important contribution to donor harmonisation. Delegated cooperation among the European donors can raise efficiency and effectiveness of European assistance particularly in co-financing schemes. Offering "help from a single source" and applying standardised procedures reduces the transaction costs for all partner involved. KfW Entwicklungsbank and Agence Française de Développement (AfD) for example are successfully using the model of delegated cooperation. KfW Entwicklungsbank is administering a transport project for the AfD in
- 5 - Kenya. In return, KfW Entwicklungsbank has delegated the management of a school construction project in Mali to the AfD. And we do so with the Commission. An example is the co-financing scheme jointly developed by the European Investment Bank and Development Financing Institutions from the Member States like PROPARCO (France), FMO (Netherlands), DEG (Germany) and others under the Cotonou Investment Facility. And let me add one idea from a banker s perspective: Blending Commission grants with loans provided by Development Finance Institutions of the Member States (such as AfD or KfW) can lead to an important leverage effect in terms of increasing the volume of ODA. Therefore, it would be very desirable, if the current discussions between Commission and Member States about the future instruments of Community Aid would lead to a more open approach underlined by an enabling legal framework for closer cooperation between the Commission and the Development Finance Institutions of the Member States.
- 6 - III. Ladies and gentlemen, I would now like to address my third point: the question of how we can solve the problems of the consulting industry in development aid business. I agree with my World Bank colleagues that problems with the quality of consulting services are on the increase because many consultants still focus too heavily on engineering even though the issues today are more in the institutional, economic and socio-economic areas. I also agree that consulting firms do not focus enough on results, and that they have an ageing problem because they are finding it increasingly difficult to recruit young professionals. In the face of these problems it is no surprise that more and more consulting firms are retreating from the development aid business. The reasons for this unsatisfactory trend are easy to see: very low margins that hamper quality assurance and the recruitment of junior staff, and which provide little incentive to acquire the skills for new developmental demands, as well as excessive regulation of the market, which makes it impossible to operate in an entrepreneurial, creative and performance-oriented way. What do I mean by this? Consulting services are normally awarded in a two-stage bidding process. The purpose of this procedure is to ensure that only experienced, efficient and competent consulting firms get the job. At the same time the bidding process is designed to be a creativity contest for the best solution to the problem.
- 7 - Today, the reality is quite a different one: comprehensive terms of reference instead of functional tenders normally do not permit a creative contest for solutions, and the consultant becomes an arranger of personnel instead of a consultant. In many cases the price is the sole selection criterion and, although we know how important a consultant's work is for the sustainability of the measures financed, consulting services are paid less than those of the suppliers. Besides, the services are still not being measured by their results, that is, whether the desired developmental impacts actually occur once the services have been finished. I also believe that the continuing practice of emphasising the curricula vitae of the proposed experts in the award of consulting services, which has been already abandoned in IT and management consulting, needs to be reconsidered. This practice discriminates against junior staff and leaves consultants less scope for responsible and entrepreneurial action. I am well aware that the development finance institutions and the projectexecuting agencies in the developing countries are the causes for the problems I have mentioned. In the interest of securing a fair and transparent competition and in order to minimise opportunities for inefficiencies we have created a complicated, bureaucratic and sophisticated framework which I believe does not create the proper incentives for maintaining a strong and qualified consulting industry. What should the incentives look like? The market must be set up in a way that ensures sufficient margins which enable quality assurance, the promotion of junior staff and professional qualification. So the remuneration must be performance-based, competition must centre
- 8 - more on technical solutions, and the consultant must be allowed also in the development aid business to decide on his own with what personnel he will perform the assignment. Ultimately, unnecessary bureaucratic requirements for reporting and disbursements will also have to be dismantled. I hope we will succeed in making the incentive system more market and quality-based again - in the interest of an effective consulting industry, and to reduce the transaction costs. We at KfW Entwicklungsbank are certainly willing to embark on this path. For example, we have drastically simplified the disbursement procedure, limited advance payment guarantees to a maximum of 15% and reduced the reporting to only a few concise, decision-based reports. The next step will be to introduce performance-oriented contracts as we have discussed and agreed upon with the German Federations of consulting companies. We would welcome it if other development finance institutions were to join our initiative. Thank you for your attention.