Private Sector

Analysis

The World Bank and the Private Sector

14 June 2000 | Briefings

Overview

Responding to claims that public sector aid is becoming irrelevant or harmful in an era of huge private capital flows to the South, and a dominant economic philosophy that emphasises the efficiency of private operators, the World Bank is reorienting itself to facilitate and back private projects. Privatisation of state sector enterprises has for many years been at the centre of the Bank’s policy advice and loan conditionalities, following which the Bank has moved on to the reform of legal and financial institutions and now to rapidly expand its direct support for private companies. Many of these transformations have taken place without widespread debate about how the World Bank, a publicly funded and owned institution, selects and manages its work. NGOs believe such a debate is overdue and that the Bank should discuss with interested outside parties what new roles it is seeking to play and what guidelines and mechanisms it will put in place to safeguard and prioritise the interests of poorer people and environmental protection in its private sector operations.

The World Bank Group’s continued importance in the era of private capital flows

The World Bank’s $21.4 billion lending in Fiscal Year (FY)1995 was dwarfed by private capital flows of $170 billion to the South in the same year. Yet such headline statistics are misleading and the Bank Group is still very influential in a variety of ways:

  • Eighty percent of private investment flows are going to just 12 countries favoured by the markets (such as Chile, Malaysia, Mexico, Thailand, China and India), so many countries still rely on official flows;
  • Some of the private flows are speculative and not invested in productive sectors, so the Bank’s role in industrial and infrastructure sector investments is greater than the figures suggest;
  • IFC was the biggest single source of direct investment for developing countries in 1995. The total cost of projects in which IFC was involved in FY 1996 was $19.6 billion;
  • World Bank Group is seen by other investors/banks as social and environmental standard-setter;
  • The Bank influences governments through its research, policy dialogue and sectoral and structural adjustment loans;
  • The Bank informs companies about investment opportunities and facilitates meetings between governments and companies to discuss obstacles to investment and revisions to legal codes/regulation;

How the World Bank Group supports private sector investment

The World Bank is best-known as a provider of loans and advice to governments, but the Bank Group’s private sector arms are growing rapidly and the Bank supports the private sector in a range of ways:

  • Finance: Loans (IBRD and IFC), syndicated loans (IFC) and equity investments (IFC) for private projects;
  • Guarantees: MIGA provides guarantees against risks, including political risks like expropriation of assets, civil disturbance, currency transferability and breach of contract. The IBRD guarantees against non-political risks such as currency fluctuations, long-term servicing of commercial debt and performance of state sector contractors;
  • Policy conditions/advice: Structural and sectoral adjustment loans requiring governments to privatise or permit private sector entry;
  • Technical assistance to support infrastructure privatisation, strategies to encourage new private investment, or how to structure bidding for independent power projects;
  • Advice on regulation/regulatory regimes, ie through the periodical Public Policy for the Private Sector, and conferences and exchanges organised by the Bank-hosted International Forum for Utility Regulation;
  • Other Initiatives: Ad hoc initiatives, for example discussing voluntary social and environmental standards for industry and ways to showcase industry “best practice”.

Key World Bank arguments for emphasising privatisation/private sector infrastructure

Many World Bank research papers, policies, and public statements make the case for increasing private infrastructure provision. Among the key arguments deployed are that:

  • Developing countries need a projected $200 billion per year of investment to build infrastructure that is essential for their economic development. As many governments are severely indebted and cannot easily raise money, private capital will be required;
  • If infrastructure investment is done privately, governments will have “fiscal space” to channel public finances into social services;
  • Commercial risks will be borne by private companies rather than governments;
  • Service provision will be more efficient and reliable;
  • Domestic capital markets may develop as a spin-off of private investment.

Recent Changes in the Bank Group’s Private Sector Operations

There have been a number of changes in the Bank’s private sector work in the last 18 months. Some are probably due to criticisms from shareholder governments, NGOs, and businesses. They include:

  • Appointment of Richard Frank to coordinate the World Bank Group (WBG) approach to promoting the private sector;
  • Commitment to harmonise social and environmental policies across private and public sector World Bank Group activities;
  • Mainstreaming of the IBRD‘s guarantees programme;
  • Introduction of a “one stop shop” liaison office to facilitate company awareness of and access to the Bank Group’s private sector services;
  • Consultations with NGOs and businesses about whether and how the Bank should extend an inspection function to its private sector arms;
  • Launch of IFC‘s “Extending the Reach” initiative – establishing IFC offices to actively seek possible projects in 16 countries where the IFC has so far made little investment;
  • IFC investment in new types of projects, for example a private school network in Pakistan and a microcredit facility in the Latin America and the Caribbean region.

Main issues and concerns

NGOs are concerned that increasing private investment in the South is seen by the World Bank and others as an end in itself and almost automatically a contribution to development, poverty alleviation and environmental protection. Large private flows are not necessarily positive: it depends on their destination, terms and durability and whether an enforceable regulatory framework is in place to protect the public interest. If aid agencies are to use public money for private deals, clear criteria must be drawn up on how to select projects that maximise benefits for poorer people and the environment and to ensure an open public process is followed to ensure that alternatives can be debated and negative impacts minimised.

The Multilateral Development Bank (MDB) Taskforce (of officials from 18 countries) recommended in its 1996 report:

“An MDB presence should ensure that a private sector investment is economically sound, that the distribution of its benefits is socially acceptable, that it is environmentally benign, and that the choice of technology or location is advantageous to society.” “[MDBs] enjoy privileged access to finance, regulatory authorities, and government decision-makers; and they need to exercise care not to extend these privileges to particular private parties. The need to balance these concerns requires clear and transparent criteria for governing the MDBs’ operations in this area. Organizational arrangements also need to reflect these concerns.”

NGOs share these concerns and have others including:

  • The Bank often appears to view privatisation/private sector infrastructure provision as a purely economic and technical question. It is not frank enough about the continued role for governments as regulators of private companies and as investors in strategic sectors or as providers of subsidies where it is hard to attract the private sector on reasonable terms;
  • The Bank downplays or ignores issues of distribution and equity;
  • The World Bank’s privatisation studies are limited in scope and often interpreted as having broad and universally applicable lessons in different country situations;
  • The Bank uses conditionalities to press governments to privatise, and fails to ensure broad political and civil society consultation/consensus about whether, what, when and how to privatise;
  • The promised harmonisation of policies across the World Bank Group is proving slow and limited;
  • The Bank does not base its private sector work on consultative country development strategies;
  • The World Bank is too focussed on deal volume rather than using its position to back innovative private projects which will most benefit poorer people and prove environmentally sustainable;
  • IFC-supported projects average $79 million and MIGA-supported projects average $55 million. Smaller/domestic companies are at a disadvantage in such large projects and get a comparatively low volume of IFC/MIGA finance.
  • There is a need for clearer guidelines for assessing development impact beyond financial/economic analysis. The IFC and MIGA Boards should give clearer guidance on how profitability/lower-risk returns should be balanced against specified development objectives.
  • The Bank does not sufficiently assess whether it is boosting or displacing local markets or local capacity to design and build projects. As a provider of foreign exchange the Bank Group is not in a good position to support enterprises selling to local markets;
  • The IFC is supporting many extractive industries in Africa and other regions, although such projects have few linkages with the rest of the economy;
  • The development goals of Bank guarantees have not been sufficiently clarified or publicly discussed.
  • Risks to governments not sufficiently clarified, for example foreign exchange costs of hiring international contractors and repaying equity and debt financing;
  • The Bank is insensitive to the gender impacts of its privatisation/private sector development paradigm and to concerns about undermining communal management of land and resources.

The World Bank and privatisation

The World Bank is involved in privatisation in many sectors and countries; through policy and programme loans, transaction advice and research. Divestiture of state enterprises was the most important condition of structural adjustment loans between 1989-91, applying to 59% of programmes. The Bank tends to emphasize economic efficiency, correct pricing and volume of supply at the expense of public policy goals such as prioritising access for poorer consumers or promoting environmentally efficient technologies. The Bank is not sufficiently sensitive to fragile political situations when giving economic advice (for example in Haiti, Burma, Mozambique), yet the IFC prides itself on having an advantage in complex and politically sensitive areas and on promoting the privatisation of sectors such as infrastructure and health care. The Bank’s argument that privatisation will give governments “fiscal space” to invest in social services is over-stated and should be balanced by an assessment of the revenue that some state-owned enterprises, such as Chile’s copper mines, do or could generate for governments, and a recognition that the beneficiaries of any fiscal space may be higher rate taxpayers or foreign creditors, not social services. The Bank has published many studies supporting privatisation. One of the most influential, Welfare Consequences of Selling Public Enterprises (WB, 1992), concluded that:

“privatisation improved domestic welfare in eleven of the twelve cases analyzed … Labor as a whole was not worse off, even taking into account all layoffs and forced retirements. Consumers were better off or were unaffected by the sale in a majority of cases. Buyers of the firms made money, but in the main the other stakeholders – labor, consumers, and government gained as well.”

This study, however, was based on a sample that it admits was “small and self-selecting” and downplayed analysis of distributional and environmental effects. Privatisation/public sector reform analyst Brendan Martin criticises the study’s econometric approach:

“the values assigned and the concept of trade-off are seen as something that can be decided by some objective formula rather than by consultation with the people involved. What we have here is technocrats not only deciding the value of this gain by a shareholder against that sacrifice by a worker, as if these can be objectively calculated from outside through a formula that holds good for all places at all times. They are also declaring, having arbitrarily assigned those values, that society as a whole is better off if, in effect, the gains to the rich are greater in volume than the losses of the poor.”

In spite of such criticisms, and evidence that many privatisations have led to a concentration of wealth, other Bank studies are also narrow and limited in their analysis of the distributional/poverty impacts of privatisation. An internal World Bank study recently made severe criticisms of the Bank’s privatisation lending. Review of Public Enterprise Reform and Privatisation Operation (Private Sector Development department, August 1996) – found that 38 per cent of current operations supporting public enterprise reform and privatisation have been rated “unsatisfactory”, and concluded that “the causes of poor performance lie as much with Bank incentives, procedures and culture as with conditions within the recipient country”. Although this study also shows a limited view of project impact, focussing mainly on technical points such as loan disbursement schedules and counterpart funding, it concludes that projects were overambitious and poorly designed, partly due to pressure on Bank staff to lend large quantities of money and their prejudice that they should try to push forward state sector reform as rapidly as possible.

Key Concerns About the World Bank and Privatisation:

  • NGOs’ key concerns about the World Bank’s support for privatisation are that:
  • World Bank research studies and advice to governments have been too narrow, have not been participatory and have not adequately examined the impact of privatisation on all stakeholders. Two forthcoming studies on privatisation and labour and privatisation in Africa appear to suffer from similar shortcomings;
  • Bank studies have been interpreted too generally and simplistically when giving policy advice and making loan conditionalities;
  • There should be further studies of privatisations which command wider confidence and will help build greater consensus about how people should decide whether, what, when and how to privatise. The Bank should support further studies which are participatory and conducted by multi-disciplinary teams involving NGOs and trade unions.
  • The World Bank has recently introduced an option of explicitly funding staff layoffs due to privatisation, but does not mandate that such funding should be granted only if the workforce has been adequately consulted;
  • Especially where projects are subsequently used as models to be replicated in other places, the Bank should fund broad and participatory studies of their impacts, ie. the Buenos Aires water privatisation, Orissa power sector reforms.

The UK Record

The World Bank has used the UK as a positive precedent for privatisation without properly interpreting the UK record. Whilst many people accept, with the Bank, that there have been some benefits from UK privatisation, ie. price reductions, efficiency gains and investments in environmental protection, more controversial aspects have been overlooked or downplayed. These include:

  • popular resentment of selling public assets at a discount and of huge salaries and bonuses commanded by privatised utility directors;
  • some poorer people have been disadvantaged by”hidden disconnections”, due to introduction of advance payment meters and other new payment methods for essential services (see below);
  • failure of regulators to prevent monopoly abuses or sharp practice, ie. predatory pricing by bus operators designed to obtain market dominance by forcing competitors to give up routes;
  • loss of UK research and development capacity;
  • consolidation within the utility and transport sectors, failure to ensure real competition;
  • many “efficiency savings” preceded privatisation or merely resulted from job reductions,
  • hasty assumptions that effective modernisation/reform within the public sector, was not possible, in the way that has since been shown by the National Health Service and Post Office.

Power to the People?

A number of recent studies and articles have presented strong evidence that poorer people are losing out because of new payment methods introduced by privatised UK utility companies. A study by Professor Catherine Waddams of Warwick Business School for the House of Commons Trade and Industry Committee warned that competition is leading to cost increases for many poorer people, who now often have to pay cash in advance to obtain gas or electricity. By contrast electricity consumers in richer districts, considered more reliable payers, obtain discounts if they settle their bills via quarterly direct debits from their bank accounts. There is evidence that the poorest fifth of the population spends, on average, 25 percent of their income on energy, and one survey showed that more than half of households using pre-payment meters had not been able to maintain their supply of gas or electricity, often for a weekend or longer. Such “self-disconnections” do not appear in official statistics which claim to show that disconnections are no longer a serious problem.

Sustainable and Effective Regulation

In the UK utility sector, as in for example the mining and forestry sectors of many developing countries, regulatory bodies established to oversee private industry have proved to be unpredictable and often weak when subjected to sustained industry pressure. UK utilities have, for example skilfully deployed their large labour and information and public relations resources in marshalling statistics to support their case and applying pressure on the regulator. It is essential to assess whether the regulator will have sufficient resources, for example funded by an industry levy, and capacity to guarantee its effectiveness in maintaining independence from industry influence. That regulation is a political as much as an economic/technical question has been amply shown by the Labour party’s pledge to levy a “windfall tax” on private utilities if it wins the election in May 1997.

Fuller Debate Before Privatisation

NGOs believe that privatisation itself is not the main issue but that, before privatisations occur, the Bank and other analysts should engage in public debate about how privatisation may further or hinder public policy goals, and how it can best be managed. The Bank should work with interested outside parties to develop a checklist of the areas that should be discussed publicly before reform goes ahead. This should include analysis of the likely:

  1. results for poorer regions and people, both overall and specifically for recipients of subsidised services or amenities such as housing or child care provided by state-owned enterprises;
  2. impacts on employment and labour relations, including allocation of responsibility and funding for retraining and re-employment;
  3. effects on environmental management and enforcement of environmental laws;
  4. transaction costs of preparing and executing privatisation;
  5. foreign exchange burden on the economy;
  6. obstacles to effective regulation, for example whether representative bodies such as municipalities or states will be able to deploy sufficient human and financial resources to match those of private service providers;
  7. impact on regulation of current and likely company concentration within the sector;
  8. the feasibility of introducing and maintaining real competition especially where there are dangers of natural or area monopolies;
  9. effects on industrial policy, for example on research and development capacity or on training;
  10. effects on government spending patterns, including on social services;
  11. alternative options, for example state sector restructuring which mobilises and motivates employees.

Sectoral Privatisation Emphases

As well as the Bank’s overall approach to privatisation, NGOs are concerned that the Bank’s advice and funding for privatisations in particular sectors has concentrated too much on aspects such as economic efficiency, pricing and supply at the expense of social and environmental goals. For example:

Power

The Bank has yet to consider using or advising governments to use all-source bidding for its power projects, so companies offering least-cost, integrated approaches which include demand side management and renewables are not being given a fair chance against companies offering only power supply. Energy companies operating in developing countries claim that they would be happy with stricter environmental/demand side bid components as long as the regulations are explicit and apply to all bidders. The Bank has also failed properly to acknowledge the foreign exchange risks of relying on foreign-owned power plants.

Pakistan is used by the World Bank and IFC as a case study of how they have encouraged private investment in power. The Bank and IFC advised the Government on its strategy and helped finance 6 of the 10 independent power projects which have been approved since 1994. Now, however, serious drawbacks are being pointed out by, among others, Pakistani entrepreneurs and financial analysts. Criticisms aired in a recent article in trade publication Euromoney include:

  • government incentives were only available for power projects greater than 100MW, so most Pakistani entrepreneurs were effectively ruled out from bidding and all the contracts went to foreign companies;
  • the government of Pakistan will have to find large amounts of foreign exchange to cover the costs of importing capital equipment, fuel and of paying the foreign debt and equity holders. Khalid Nazir, director of AKD Securities in Karachi, calculates that by 1998-9 fuel imports will cost $414 million and the annual debt service for the power plants $439m, with a further $239m required to pay dividends to equity holders.
  • the government is gambling on a huge and unlikely surge in exports to generate the foreign exchange;
  • consumer electricity prices are predicted to rise about 15% by the end of 1996 and up to 50% subsequently.

Water

The IFC provided advice and finance for the privatisation of the Buenos Aires water supply and sanitation system, which is now run by a consortium including the French-based multinational Lyonnaise des Eaux. The privatisation is portrayed as a major success, with a pledged investment programme of $130m per year, extensive repairs to the network, improved sewerage, a 26% increase in water supply and polls showing rising customer satisfaction. The Bank is looking to replicate this privatisation in other cities, for example Metro Manila, The Philippines. A recent article concluded, however, that whilst: “labour productivity has almost tripled, service coverage has increased, reliability and responsiveness have improved and the price of service has fallen … there are also some problems, especially in regulation”. Concerns include:

  • tariff levels: after an initial price fall of 27% immediately after privatisation prices recently rose by 13.5% and it appears the company will soon apply for larger increases;
  • a major renegotiation of the contract may soon be requested by the company which is complaining that it cannot provide the service extensions it promised without more money;
  • whilst much of the 26% increase in water supply to Buenos Aires residents has come from leakage repairs, it may also have negatively affected river ecosystems and water availability in rural areas.

Transport

Transport is an area where it is recognised that optimal private, individual solutions (often increased car use) may cause mobility, environmental and health problems for society at large. The Institute for Transport and Development Policy (ITDP) finds that the Bank is striking the wrong balance in its policy advice: “the World Bank is pushing very hard for a reduction in railroad and public transit subsidies, while much less pressure is being applied to reduce subsidies for roads, parking facilities etc, for example in Hungary”. The ITDP and others argue that, when advocating the removal of transport subsidies or privatisation, the Bank should discuss:

  • the aggregate level of investment into different transport modes, and the relative subsidies and comparative prices of using each mode. While in the short term the subsidies/prices are more important to ridership levels, in the long term the level of investment into the mode is more important.
  • employment, fares and accessibility of transport options for low-income people.
  • the accountability of infrastructure planning to environmental impact assessment and public participation.
  • political will to undertake and enforce measures such as exclusive bus or cycle lanes.

World Bank Group support for private companies

The World Bank Group, which has traditionally lent the vast majority of its funds to governments, is now rapidly increasing its direct support for private companies. This is provided by the Bank Groups’ two dedicated private sector arms, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), and through the guarantee program of the International Bank for Reconstruction and Development (IBRD). Bank management is now also seeking Board approval for the use of IBRD funds to guarantee private investments in poorer countries which are only eligible for International Development Association (IDA) lending. In the next few years donor governments may be asked to consider further-reaching proposals, for example whether the IBRD should transfer staff and capital to the IFC or whether the IBRD‘s Charter should be rewritten so that IBRD guarantees do not need a host government counter-guarantee. The World Bank Group’s public and private arms, which have historically mistrusted each other, are now trying to plan joint strategies and co-fund more projects.

International Finance Corporation Strategy

Overview of IFC Operations

The IFC provides loans, debt and equity financing for private sector ventures in developing countries, as well as advice to governments and private clients, and other services such as mobilising private finance for projects. It has grown by 15-20% per annum in recent years. In fiscal year 1996 the IFC committed $3.2 billion and mobilized a further $4.8 billion from private institutions participating in its loans towards projects worth a total $19.6 billion. Infrastructure projects account for over a quarter of 1996 project approvals by volume, with capital markets/ development finance/financial services and chemicals/petrochemicals/fertilizers the next largest. The average size of IFC-backed projects was $74 million with an average IFC contribution of $12.3 million. The IFC has three main principles which guide its investments:

  • the catalytic principle: IFC takes only minority roles in projects, normally 25% of their equity, so that risks and management responsibilities are borne primarily by genuinely private parties;

  • the business principle: the IFC cannot accept government guarantees of repayment and must make a profit based on risk taken by IFC. As well as financial analysis to determine profitability, the IFC also undertakes an economic analysis to ensure that profits do not result from protection, subsidies or other market distortions. Some new work is being done on development impact analysis but it appears that the IFC still takes a minimalist view of this – arguing that any profitable enterprise is developmental. “The Corporation’s primary goal is development, not profits, but the aim of profit-making should be seen as consistent with the development objective, not in conflict … it has sometimes been suggested that IFC should adopt a ‘dual strategy’ which would recognize that some projects will make money for the Corporation and others will probably not do so but should be undertaken for ‘developmental’ reasons. Such a strategy, however, would be a deviation from the principles on which IFC operates. The essence of IFC‘s role is to combine the object of profitability with that of development.”

  • the principle of special contribution: IFC investments should not displace private capital but should attract capital to areas in which it would not otherwise invest.

Just another merchant bank?

The IFC has been criticised for not sufficiently clarifying how it defines its special role and assesses what countries and projects it can most usefully support. A large proportion of IFC investments have been in countries and sectors where private investors are active: there has been little drive to invest in poorer countries and more innovative projects. The current regional distribution of the IFC‘s investment is Sub-Saharan Africa 9%; Asia 25%; Europe 15%; Latin America 38%; and Central Asia, Middle East and North Africa 11%.

In response the IFC claims that it invests a greater proportion of its portfolio in riskier regions than do private companies and that its investments in poorer countries are significant as a proportion of countries’ GDP per capita. It also points to a new initiative to station staff in 16 countries where it has so far made few investments. Staff are to learn about countries’ needs and identify local enterprises which the IFC could support.

The IFC has also been criticised for supporting too many larger companies and providing insufficient investment to small and medium enterprises (SMEs). The Corporation is unapologetic for supporting large transnational corporations – “in considering investments in developing countries, large companies face the same risks as smaller companies … yet the large size of investments makes them important for the recipient countries” – yet Richard Richardson (former Director of IFC‘s Development Department) and Jonas Haralz (former Nordic Executive Director to the Bank) comment that “larger firms are generally the stronger ones, and broadly speaking they are not the first or most in need of IFC support. But it is precisely these firms that IFC seeks out for their economic size and – equally important – lower commercial risk, because they are financially stronger, often can provide internal cash generation for equity, and are more experienced technically and managerially”.

Whilst company risk profiles and lower transaction costs will keep many large projects in the IFC portfolio, it has also initiated a number of intermediary funds designed to support smaller companies. Intermediaries include locally-managed leasing companies, banks and some specialist small and medium enterprise investment vehicles. The latter include the Africa Project Development Facility, the Enterprise Support Service for Africa, the Business Advisory Service for the Caribbean and Central America, the Polish Business Advisory Service, the South Pacific Project Facility and the Mekong Project Development Facility. These units are designed to actively seek smaller entrepreneurs and help them develop or improve business plans and obtain financing. In its 1996 annual report the IFC stated that staff are “exploring ways to make microfinance a viable business and have made several ground-breaking investments in this area”. The most prominent is that to Profund S.A., a specialized investment fund providing risk capital to commercially viable financial institutions serving micro and small enterprises in Latin America and the Caribbean. The IFC‘s promotion of its work with such funds conceals the facts that its contribution is tiny compared to its overall portfolio ($3 million to Profund, for example), and that many of these initiatives are co-financed by grants from donors such as the UK.

Broadening development impact analysis

The Bank affirms frequently that “all the institutions of the Bank Group – IBRD, IDA, IFC and MIGA – share the mission of alleviating poverty in our client countries and promoting economic development that is environmentally and socially responsible”, the IFC and MIGA do not have clear criteria for selecting socially and environmentally optimal projects. The1992 IFC report Contributing to Development claimed that “IFC‘s special developmental role” was illustrated by figures showing that it had exceeded private sector investment in poorer regions of the world, and that “promoting efficiency and genuine competitiveness [is] the essence of IFC‘s developmental role”.

Realising that such definitions of development impact are inadequate, the IFC‘s Board in 1995 requested IFC management to provide more detail. This program now involves: an annual review of five or six IFC projects to determine their development contributions, a database of information collected from questionnaires on 30-35 projects per year, and stronger focus on development effectiveness when the IFC‘s Operations Evaluation Unit reviews five year-old projects.

Such data collection is a welcome step forward, but it is still unclear how development impact is defined or what indicators IFC staff must be satisfied about before they accept it as worthy of IFC support. In a letter to NGOs Bank President Wolfensohn explained that the IFC‘s project appraisal procedures look at financial viability but also consistency with Bank Group strategy for the country, the country’s priorities, and the project’s likely development impact. The latter includes “inter alia a project’s contribution to: employment creation; technology/skills transfer; capital markets development; private ownership expansion; and small- and medium- enterprise development, environmental performance and worker health and safety”, as well as the probability of catalysing other investors and introducing greater competition.

Recent reports reveal, however, that its approach to the above issues is very unsystematic and does not go nearly far enough to satisfy NGOs. The Private Sector and Development: Five Case Studies (IFC, 1997) describes the impacts of five IFC-supported projects: banks in Bolivia and Benin; water infrastructure in Argentina; a textile mill in Indonesia; and an aquaculture project in Madagascar. The analysis goes beyond traditional economic rate of return calculations, but the five IFC authors appear to have had no clear brief on what they should cover, and the report often appears more narrative than analytical; optimistic and selective rather than rigorous and thorough. A number of questions are begged including: how were the projects selected? What lessons has the IFC learned from problems with the projects? Could the IFC have done more to prioritise environmental protection or benefits for poorer people? What risk analysis did the IFC use and what contingency planning was done to gauge whether project objectives were likely to be reached and sustained? What data from what sources is the IFC using?

Accounting for the Environment

In a recent case study the IFC recognises that it lacks a comprehensive approach to environmental analysis and is considering changes. Cost Benefit Analysis of Private Sector Environmental Investments, A Case Study of the Kunda Cement Factory (IFC, September 1996) admits that the IFC does not perform a full analysis of who gains and loses from the environmental impacts of its investments. The study shows that it is thus unable to assess who will benefit from environmental mitigation measures or whether a higher standard of mitigation or alternative project design would be justified. The study proposes improvements to the IFC‘s environmental analysis, but the proposals are limited by their emphasis on market pricing and ability to pay which will discriminate against poorer people. The IFC also shows little inclination to consider using further-reaching calculations, such as counting the consumption of irreplaceable natural resources as capital costs or assessing the global environmental damage caused by greenhouse gas emissions.

An independent report into the IFC-financed Pangue dam on the Bio-Bio river, Chile, will give further insights into the IFC‘s approach to social and environmental issues. The report, commissioned by Bank President James Wolfensohn to examine complaints by a Chilean NGO relating to resettlement and environmental issues, has been written by Dr. Jay Hair, a prominent US conservationist. It is understood to be very critical of the IFC‘s social and environmental planning and project supervision both on the Pangue dam and in other projects. NGOs are concerned that the Chilean power utility ENDESA or the Bank may block publication of the report and are pressing the IFC to release the publication in full and to change its operations in the light of the findings.

New Initiatives: Country Strategies and Environmental Investments

The Bank’s private sector arms have, until now, planned their country investment strategies separately from the IBRD and IDA Country Assistance Strategy (CAS) process. The Bank Group has, however, recently announced 8 pilot joint CAS/private sector strategies (in Brazil, Cote d’Ivoire, Egypt, India, Indonesia, Kazakhstan, Mexico and Poland). It is not clear, however, whether the country strategies will be produced in consultation with NGOs, small businesses, trade unions and other interested parties and if they will be publicly available when completed, or how quickly such joint work will be extended to all countries.

In collaboration with the Global Environment Facility (GEF), the IFC is building up a biodiversity fund, has created a pilot Small and Medium Scale Enterprise Programme and is preparing a programme of investments in environmental areas. The latter include the Photovoltaic Markets Transformation Initiative (a $60m financial incentive scheme managed by the IFC and funded by the GEF under which grants worth $5-20m dollars will be awarded to private sector proposals which hasten commercialization of photovoltaic systems); India: Solar Thermal (using $45m of GEF financing to build a 35 megawatt solar thermal plant in Rajasthan state at a total cost of $244m); and the Renewable Energy and Energy Efficiency Fund (a $100-200m venture capital investment fund designed to mobilize up to $800m in total project investments).

These projects are, however, not representative of the IFC‘s work, because they are small in number and rely on the use of donor grant funds, particularly from the Global Environment Facility. To show real commitment to the environment, the IFC will have to risk more of its own resources on developing new initiatives in this area – the Board only allocated $4.3m for innovative projects in 1995 although it made a net income of $346m. Rather than just establishing dedicated projects for environmental innovation the IFC should also expand the market for renewable energy and energy efficiency companies by introducing progressive energy standards for all projects it supports. The European Bank for Reconstruction and Development already has a unit which assesses the energy impact of all its projects.

Main Concerns About the IFC‘s strategy:

  • No clear criteria for selecting projects that will maximise poverty reduction;
  • The IFC does little strategic work or project initiation except in financial services – more could be done to assess the best areas to back and on how to improve the social and environmental aspects of companies’ plans, for example by developing social audit or energy audit procedures;
  • There is an unresolved tension between large size, lower risk projects and the IFC‘s mandated pioneering role. The IFC‘s conservative attitude to risk/innovation is surprising, given the IFC‘s links to the Bank Group and therefore host governments, which make it likely that IFC-backed projects will receive good treatment;
  • The IFC does not appear to have a clear strategy, including target volumes of financing, for increasing its support for SMEs. The IFC‘s support for small, locally-owned businesses is constrained by its provision of hard currency loans which are ill-suited to businesses which want to use locally-produced plant and raw materials and serve local or regional markets;
  • The harmonisation and implementation of World Bank policies and best practices by the IFC has been slow and opaque. The IFC has not produced a full list of policies which apply to its operations.
  • Consultations on extending the Inspection Panel to cover IFC and MIGA operations are proving very slow;
  • IFC has only 14 environmental staff and one social scientist to oversee 200-250 new IFC and MIGA projects a year and supervise 1000 ongoing projects;
  • The IFC should unambiguously state that it will not finance projects unless people in the area have given their informed consent and been able to discuss alternatives, including the no project option. The IFC should also state what particular standards will apply to projects which may affect indigenous peoples;
  • While the IFC‘s information policy has recently been improved, there is still tension between private project sponsors’ wish for confidentiality and quick project approval and local NGOs’ demands for sufficient consultation. The IFC has not publicly stated what standard of consultation it requires from project sponsors, or produced guidelines on what sorts of groups project sponsors should contact and how representative consultation can best be structured. By contrast the European Bank for Reconstruction and Development, which deals primarily with private sector projects, has published a Manual on Public Participation;
  • The IFC has not shown sufficient willingness to learn from the ethical/environmental private investment community, for example to assess how it could screen projects and companies. The IFC commented in a 1995 report, “by exercising the latitude to say no, IFC can influence governments to change policies that impede capital market developments”: the same attitude could be taken to change company practices towards social equity and environmental sustainability. As companies value the comfort of IFC backing, this gives leverage to select and improve projects. The IFC could adopt an investment screen, and include questions about social and environmental performance in pre-qualification for granting companies support;
  • The World Bank Group frequently hires staff from mining, financial services and other companies, and Bank Group staff leave to take up positions in such companies. The Bank has put in place limited mechanisms to prevent conflicts of interest but it is not clear to outsiders that these are sufficient;
  • Whilst the IFC‘s Africa portfolio contains a greater proportion of smaller projects than its portfolio in other regions, and the IFC has some mechanisms to target small and medium enterprises, it continues to channel large volumes of finance into the extractive sector. Mining, oil and gas projects earn foreign exchange, lower transaction costs and risks for IFC, but provide relatively little benefit in terms of employment or added value, and often cause serious social and environmental problems.

IFC Projects

NGOs are concerned about a number of IFC-supported projects, either because it is unclear that they should have been selected as meriting IFC support or because it appears that the social and environmental standards being followed are not sufficiently high. Examples include:

  • Emerging Markets Gold Fund – an NM Rothschilds investment fund based in Bermuda, presumably to attract tax exiles. Development impact justified on grounds that “investors from developed countries lack mechanisms through which they can invest in the securities of developing country gold mines. The Fund would provide international portfolio investors with such an investment mechanism and, thus, play an important developmental role by bringing new sources of financing to gold mine projects and companies” (IFC Summary of Project Information, 1996).
  • Sadiola mining project, Mali – inadequate work on participation and on environmental and social assessment, for example on the displacement of small-scale miners.
  • Zimbabwe Sabi Gold Project – given IFC environmental assessment category B in spite of its large water requirement, and liquid effluent and tailings disposal considerations.
  • Ecuador-Alborada Rose Project – assessed as Category B in spite of pesticide use, fertilizer use, water use (including opportunity costs of intensive watering), and worker safety concerns.
  • Argentina: Timber Pulp and Paper – local NGO concerns include possible conversion of more subtropical humid forests to plantations, impacts on indigenous peoples, and river pollution.
  • Pakistan Power Projects – AES Lal Pir plant and Kohinoor Energy plants are cheap, supply-side solutions using oil – no attempt to properly internalise environmental costs or identify best sectoral investment.
  • Transport Projects – the IFC has backed many automotive sector loans, for example in Hungary, the Czech Republic. The IFC has not properly assessed the best way to meet poorer peoples’ transport needs in a cost-effective and environmentally-beneficial manner.
  • Hotel/Tourism Projects – the IFC has invested in many luxury/business hotels, for example in Vietnam, Kenya and Ghana. The project selection is partly based on the argument that countries require international, business class accomodation if they are to attract foreign investment. It is not clear that the IFC fully analyses resource use, employment and environmental issues in this sector.

World Bank Guarantees

In 1994 the World Bank announced that it would increase its use of guarantees, a form of investment support which the Bank was empowered to use under its original Articles of Agreement, but has rarely deployed. In 1994 and 1995 projects such as Uch Power, Pakistan, and Rockfort Power, Jamaica were completed with guarantees, but the Bank confessed that it was disappointed with the business response. In September 1996, however, it announced that it was considering a further 43 guarantee operations.

The IBRD arm of the World Bank Group provides two forms of guarantees:

  • Under partial risk guarantees the Bank will “cover debt service default resulting from nonperformance of contractual obligations undertaken by governments or their agencies in private sector projects”. For example a state-owned enterprise might fail to provide promised inputs, such as fuel for a power station, or might not purchase a product or service, such as power, that it had agreed to buy. The Bank can also guarantee against certain types of political instability or difficulties in converting profits into hard currency.
  • Under partial credit guarantees the Bank provides comfort to banks or other financial institutions which are doubtful about providing the long-term loans which many infrastructure projects require. The World Bank might, for example, guarantee that creditors would be repaid in years 10-15 of the loan, thus giving sufficient credibility for investors to buy a fifteen year, not just a ten year bond. This form of guarantee is required because ever more projects are financed on a non-recourse basis – where equity and debt finance are provided solely on calculations of the individual project’s projected income, with no back-up from the sponsoring company’s balance sheet if problems occur.

The Bank is currently carrying out a Review of Risk Mitigation Activities, due to be completed this summer, which will assess past experience and may recommend changes to the Bank’s approach.

Key concerns:
  • The Bank gives the impression of taking market-style risk, but its liability is all counter-guaranteed by host governments.
  • Governments and taxpayers may take on longterm liabilities without adequate debate before agreeing a counter-guarantee.
  • When the guarantees programme was mainstreamed in 1994, the Bank’s Board did not clarify how the developmental role of guarantees was to be defined and assessed.
  • The Bank is unwilling to release for public discussion and debate its forthcoming Operational Policy Memo 14.25 on guarantees which will provide instruction for staff on how to implement the programme agreed in the Board-approved guarantees mainstreaming paper.
  • Prior to clearer publication of what development objectives Bank guarantees are supposed to serve, people outside the Bank will have difficulty in understanding why the Bank is supporting projects such as the Ukraine-Commercial Space Launch Guarantee Project, an international joint-venture between Boeing (USA), Energia (Russia), Kvaerner (Norway) and Yuzhnoye (Ukraine).
  • The Bank is considering using IDA or IBRD money to guarantee private sector investments in IDA (very poor) countries. Before any decisions are taken, the Bank needs to consult critics who are concerned that such guarantees may crowd out funding from more priority areas, tie up bank and government personnel in complex negotiations, burden governments in weak negotiating positions with risks that are very difficult to calculate, and encourage the development of megaprojects which are not appropriate to countries’ social and environmental conditions.

Multilateral Investment Guarantee Agency

The Multilateral Investment Guarantee Agency (MIGA) was established in 1988 as a response to the 1980s debt crisis as a way “to help developing countries attract productive foreign investment.” It provides long-term non-commercial risk insurance to foreign investors to protect them against expropriation, civil disturbance, currency transfer and breach of contract. In FY 96 MIGA provided insurance worth $862 million, taking its total liabilities to $2.3 billion. This insurance coverage has helped catalyse foreign direct investments totalling $15 billion. MIGA also sponsors investment missions and trains policy makers and investment promotion agency staff. MIGA will be approaching donor governments for a capital increase in 1997. MIGA also runs an online network, IPAnet, to inform registered companies about investment opportunities in emerging markets.

Concerns:

  • No clear strategy how to prioritise countries, sectors or projects to maximise development or environment goals. Insurance such as $24 million for commercial bank ING to expand its banking operations in Hungary seems, for example, to be a questionable use of public funds.
  • Average project size $55 million, so smaller projects excluded.
  • MIGA relies on IFC‘s environmental and social assessment monitoring capacity.
  • Relies on company self-assessment and company-paid consultants’ reports, and conducts or sponsors little consultative or participatory planning.
  • the MIGA-supported Freeport McMoran copper mine, West Papua, Indonesia caused serious environmental and social impacts which led to significant local opposition. MIGA showed itself slow and unwilling to respond to local concerns, except when put under concerted international pressure.
  • the MIGA-supported Lihir Island gold mine, Papua New Guinea, will result in the disposal of millions of tons of cyanide-rich tailings being dumped directly into the sea – feasible alternatives have not been adequately considered.

Ad Hoc Initiatives

Voluntary social and environmental standards for industry

Led by Maurice Strong, senior adviser to the Bank’s President, the World Bank has begun consultations about establishing voluntary social and environmental guidelines which could be taken up by any business investing in developing countries, not only those working with the Bank. The Bank intends to provide a forum where industries and key stakeholders can discuss issues of common interest and agree on sector specific guidelines. The Bank would then use its reputation and leverage to persuade companies and governments to adopt them. A first meeting was held in July – involving 12 organisations including IUCN, Conservation International, UNEP, the Prince of Wales Business Leaders Forum, Dupont, and the International Council for Metals and the Environment (a mining industry body). The next stage of this initiative has yet to be clarified but the Bank is seeking comments and indications of which NGOs might want to be involved in further meetings or discussions and on whether forestry and mining would be suitable sectors to work on initially.

A number of NGOs have written a joint letter to the Bank complaining about the very limited composition of the initial meeting and failure to communicate more broadly thereafter. No Southern NGOs were present, nor were NGOs with a direct focus on corporate accountability, indigenous peoples’ concerns or with a strong development/social expertise. The Bank has since made very little effort to broaden out the dialogue, sending the meeting conclusions only to a handful of large environmental groups. The NGOs asserted that they will be hesitant to get involved in substantive discussions unless they are reassured that the Bank intends to pursue an open, global process.

Corporate citizenship initiative

The World Bank Group is holding discussions with some multinational companies and non-governmental organisations about how the Bank, NGOs and companies can learn from each other about community-based development initatives. The Bank may then publicise “best practice” and offer technical assistance and finance for companies to adopt them. Little information is publicly available about this initiative, but UK organisations involved include Action Aid and the Prince of Wales Business Leaders Forum, and one company known to be interested is British Petroleum (BP) which faces criticism of its alleged use of para-military operatives in suppressing local opposition to its oil drilling operations in Colombia.

International forum on utility regulation

The International Forum on Utility Regulation (IFUR) was established by the Bank in 1996 to bring together regulators from different countries to share best practice. The Forum secretariat comprises three Bank staff and its initiatives include meetings and publications. The IFUR recognises that dealing with “special interest groups” is an important part of a regulator’s job, yet it has not yet taken steps to inform and involve such groups, for example environmental groups, consumer groups, trade unions and others which have a stake in privatisation and are important for the political sustainability of regulatory regimes.

Private infrastructure project database

The Bank’s Private Sector Development Department has established a database to track private infrastructure activity in gas, power, telecommunications, transport, waste and water. This contains information on privatisation and management deals, new investment projects and projects under consideration, a total of 3,394 projects.

Questioning the model

Criticisms of the World Bank’s privatisation/private sector agenda do not imply unquestioning support for state ownership and management of industry and services. On the contrary, NGOs have been vocal for many years in querying or opposing state run projects and institutions and pressing for increased democratisation of state sector development. Many NGOs are concerned, however, that public aid money is being used to support policies and projects which harm the environment and do not maximise the interests of poorer people.

In the current climate of concern about levels of official aid, the Bank must attempt to prove that its growing private sector arms can make serious and visible efforts put this into practice. It is also important for NGOs and others to respond to the emerging official claims that private investment in the South can directly substitute for official aid and, further, that concessional or grant aid should be phased out because it crowds out private investment and thus stifles economic development.

The benefits of privatisation/private sector service delivery are being overstated in policy debates and more honesty is required about the limitations of this approach both in terms of economic effects and, more broadly in terms of social and environmental goals. Many groups have critiqued the “myth of the market” as the main, or sometimes the only, solution to development problems, and emphasized the need to retain social and political direction and safeguards. It is not possible to rehearse all the arguments here, but issues raised include:

Concerns:

  • Aggregate national investment and consumption figures do not reveal who is benefitting or whether benefits will be long-term. For example, the Mexican economy, praised in the early 1990s as a major success partly because of its huge inward investment levels, collapsed in 1994 because much investment was in the form of short-term portfolio flows, not invested in productive sectors and able to be rapdily withdrawn. Whilst national economic indicators now appear postive, many poorer people are still suffering.
  • Private projects are not inevitably cheaper and more efficient than public ones, only under certain circumstances. It is also not certain that any efficiency gains will be passed on to poorer people, or to consumers in general. There is a danger that governments, with World Bank advice, are guaranteeing too many aspects of projects, so there may be medium or long-term problems eg. with hard currency required to pay equity and debt if export growth does not materialise, or with voters demanding lower electricity/road toll prices than have been guaranteed. The Bank does not focus on how service provision for poorer people might be guaranteed as part of agreements.
  • The World Bank’s 1994 World Development Report on Infrastructure recognised that poorer people cannot “exercise effective demand through the market”, yet the Bank continues to make broad claims such as “private sector development contributes to poverty reduction”.
  • The pure model of free-market economics is simplistic and based on an inaccurate, uniform and controversial view of human behaviour. Consumption/GNP and technical and numerical targets such as efficiency, productivity and growth are not sufficient measurements of progress. Better numerical indicators include income disparities within and between countries and the number of people in absolute poverty and without access to basic services, but qualitative assessments, based on peoples’ own perceptions, are also vital.
  • There are double standards in application of the free market model: for example large subsidies continue for EU and US agriculture, little is done to promote perfect competition or broad information access, pre-requisites for the model to work.
  • The Bank and governments espousing free-market principles do little to promote equality of opportunity or access to markets or to prioritise the promotion of access to credit, land, water and services for poorer people.
  • The organising principles of privatisation, commercialisation and individualism are controversial to many peoples, particularly because they undermine communal support systems and community management of land and resources.
  • The core neo-liberal model ignores many costs to women, or is at best gender blind (see eg. Sparr, P., Mortgaging Women’s Lives, Zed Books, 1994). Privatisations and public spending cutbacks have led to increased burdens on women, for example in childcare.
  • There is a tension between the Bank’s claimed support for “labour-intensive growth” and its frequent advice and lending for restructuring and job downsizing. The Bank reports such as The World Bank and Poverty Reduction, Issues and Challenges, (World Bank, May 1996), contain very little on labour. Bank has apparently not addressed problems such as jobless growth, or real wage declines for unskilled workers in the US and UK (The Economist, 9 March 1996, Ormerod, P., The Death of Economics, Faber and Faber, 1994).
  • The balance of political forces is swinging away from representative institutions and in favour of multinational companies. No international institutions or fora are likely to be able to monitor or regulate such companies.

Conclusion

It is welcome that the World Bank Group has begun limited consultations with outside organisations on its strategy for privatisation and private sector development, but this should be taken much further, especially in developing countries. Such consultation, if followed by changes, is partly in the Bank’s own interest as it may help prevent controversies and convince governments to continue submitting scarce aid resources to the Bank Group. It remains to be seen, however, whether the Bank is really willing to listen and change its approach to these issues, or whether such transformation is impossible given the ideological bent of many Bank staff and the institutional momentum that has been built up over many years.

As well as pressing the Bank to change its approach to privatisation and support for private sector projects, and not to get involved in new areas where it does not have expertise and legitimacy, NGOs will continue to work directly with companies and governments to press for high standards in international investments, to try to stop or mitigate controversial projects, and to back more positive ones.

UK-based NGOs met World Bank Group representatives in London in November 1996 and raised many of the points in this briefing. Whilst the Bank responded on some of the issues and questions raised, many of them were not covered and NGOs have since written to the Bank asking for clarification of all the key points contained herein.

Among the key steps which NGOs believe the Bank Group could and should take in the immediate future are to:

  • Clarify how the Bank Group will select the projects and companies to support and how the IFC will resolve the tension between higher and safer returns and more pioneering and demonstration projects.
  • Support participatory studies to reveal costs as well as benefits of privatisation and whether/how privatisation regulation can be structured to effectively champion the interests of poorer consumers and the environment;
  • Phase out privatisation as major conditionality of structural adjustment lending, and foster broad consultations within countries about whether, when and how to privatise;
  • Harmonise upwards the Bank’s public and private sector standards based on public consultations involving NGOs;
  • Publish and disseminate the full policies which apply to World Bank Group private sector projects, including those relating to the right for local people to be consulted about projects;
  • Extend an effective inspection mechanism to cover IFC and MIGA operations to increase staff accountability to social and environmental standards and a transparent development strategy;
  • Ensure that NGOs and other interested parties in the North and South are fully included in debates about key strategic shifts in the World Bank Group, for example: whether and on what terms:
  • donors should award MIGA a capital increase (negotiations due in 1997), and
  • the Bank should approve the use of guarantees for private sector projects in poor, IDA-only countries.
  • the Bank should get involved in voluntary standards for industry or corporate citizenship.