Bank plans private sector shake-up

17 January 2002

In February the World Bank’s Board will consider a new Private Sector Development Strategy. Long-time Bank-watcher Robert Wade, a professor at the London School of Economics, warns that this is the Bank’s “biggest refocusing in a decade”. He says it is not based on analysis of what will work best for poorer people but “owes everything to intense US pressure”.

The strategy has also been strongly criticised by NGOs, trade unions and Bank researchers and is struggling to attract sufficient support from the Bank’s Board.

The Bank’s strategy plans to expand private sector provision of services such as health and education, and work to improve the “investment climate”. It is a continuation of previous Bank policies to reduce the the state to a coordination and regulation role, leaving private companies to organise production and service delivery. Until now the Bank has sought to achieve this through structural adjustment programmes combined with private sector investment and guarantees from its IFC and MIGA arms. Major new elements include the move to support infrastructure and service provision through “output-based aid” and to conduct “investment climate assessments” for Bank client countries.

In sectors such as transport, telecoms and energy the Bank argues that pure private sector service provision can be arranged, with service users paying the full costs of what they use. In others, such as water, health and education, subsidies “may be justified to address affordability or public good concerns”. Subsidies should not, however, support inputs (such as building schools, hospitals or water pipes) but outputs (the delivery of actual services to target groups). The Bank would be able to provide subsidies from its IDA arm, to accompany private sector investment through the IFC. David Ellerman, a senior World Bank researcher, comments that output-based contracts “don’t work too well”. Attempts to measure public service “outputs” can distort service provision, as where teachers are rewarded on the basis of pupils’ test results. The Bank’s planned approach may damage the goals of universal and equitable service coverage. There is major controversy about private sector service delivery in the US and Europe where there are highly developed markets, so it will be even harder to apply this approach in developing countries.

The proposed World Bank investment climate assessments would involve surveying companies on their views of what obstructs their activities in a particular country. These assessments would inform the Bank’s policy advice and conditionality. A recent Bank paper states that “policy-based lending would be a major vehicle for advancing investment climate reforms”. Ellerman comments, however, that: “improving the investment climate for one group may make it worse for some other groups.” The assessment of foreign investors’ needs is often “dangerously narrow”. The Bank tends to favour labour market flexibility over job stability and human capital investment, and stock market liquidity over long-term, predictable investment flows. The Bank’s record is poor. Advice to the Czech Republic and Bosnia to introduce voucher privatization funds, for example, resulted in asset stripping by foreign “vulture funds”, not sustained investment.

The Bank’s proposed private sector strategy contains a number of interesting and innovative ideas. For example it seeks to transfer more risks to private companies to prevent governments taking on too much sovereign debt. However, the current cases of water privatisation in Ghana and Railtrack renationalisation in the UK demonstrate that companies are often very reluctant to take full responsibility for providing affordable public services and rely on implicit or explicit government guarantees. It is possible that some of the proposed reforms, such as making the IFC justify its activities according to commercial norms, may be motivated mainly by a desire to bring Bank activities in line with the General Agreement on Trade in Services, currently being negotiated at the World Trade Organisation.

Concerns on this strategy may be sent to your country’s Executive Director at the Bank. List of Executive Directors

World Bank private sector site | Globalisation Challenge Initiative PSD documents

David Ellerman paper | Public Services International Research Unit papers

International Herald Tribune Article | FT Article