IFI governance


Secret World Bank shake-up?

16 April 2010

Internal reforms with potentially far reaching consequences for how the World Bank is run are underway. The proposals were developed without public consultation, and over a timeframe that allowed limited discussion with shareholder governments and stakeholders.

In the run up to the spring meetings, the Bank produced two papers headlined New world, new World Bank Group detailing its strategy and plans for internal reform of its business model. The World Bank’s private sector lending arm, the International Finance Corporation (IFC) is also undergoing a “major strategic and operational reform initiative” called IFC 2013, though no information is publically available yet.

Strategy or sales pitch?

The Bank’s strategy paper does not set out new thinking, but reinforces existing Bank approaches, particularly a focus on infrastructure, the private sector, and an expanding role in the global public goods arena, including climate finance. It also emphasises the Bank’s knowledge role. There is no reflection on potential weaknesses, past errors or areas where the Bank does not have any comparative advantage. The question, “what would it mean the Bank would not do?” yields the answer: virtually nothing.

policy advice not consistent with analysis

The paper identifies five priorities, which are said to “build on and integrate the six broad strategic directions that president Zoellick presented in 2007” – though careful observers will note that the strategic direction on ‘the Arab world’ has fallen off the list (see Update 60). The priorities are: targeting the poor and vulnerable; creating opportunities for growth; providing cooperative models; strengthening governance; and preparing for crises. Under “creating opportunities for growth” two sectoral priorities are identified – agriculture and infrastructure – as well as several broad approaches including “fostering an investment climate and private sector that encourages innovation and competitiveness”, “public finance issues” and knowledge.

Despite being an institution always headed by an American, in which developed countries hold a majority of votes and board seats (see Update 70), the Bank repeats its claim that it can “communicate the perspective and interests of developing countries in international fora.”

Enclosing public goods

The Bank states clearly its controversial desire to take a “leadership role in the growing public goods agenda”, including climate finance. The strategy paper emphasises the Bank’s role in leveraging other funding, “including by mobilising funds from institutional investors, using its balance sheet to leverage scarce donor resources, and structuring creative mechanisms to frontload future financial pledges.” The possibility for the Bank’s finances to be mixed in with grant finance from a wide variety of other sources is highlighted, including: “specialised health funds, carbon finance, the Global Environment Facility (GEF), and grant funding from bilateral sources including from nonofficial sources.”

The Bank’s contentious tendency to view trust fund money and climate investment fund money as its own is to be cemented with “full integration of external resources across the results chain.”

There are sections on working more effectively with the IMF and other multilateral development banks, but little mention of other key international players such as UN agencies.

“Global thought leadership”

Both papers, and a companion knowledge strategy released in April, set out a controversial plan to expand the institution’s role as the self-styled ‘knowledge Bank’. In the strategy paper, the Bank sets out its “leading role in the knowledge arena” saying it “frequently serves as the convenor, as well as the standard-setter in areas such as sanctions, safeguards, transparency, research and procurement.” The Bank cannot be accused of lacking ambition – the IFC’s reforms in this area aim to “establish global thought leadership for greater development impact.”

However, the Bank’s theory of how knowledge contributes to development is unclear. On one hand it recognises that the utilisation of knowledge is essentially a bottom-up activity, emphasising the importance of policy makers in different countries working with each other and connecting “directly to the many sources and centres of knowledge and innovation now dispersed around the world.” However the Bank’s role is sometimes described in a more traditional top-down fashion, emphasising the importance of the Bank’s “global presence, wide-ranging research and operational activities”.

Ignoring stinging criticism from leading academics and an expert review (see Update 66, 54), the Bank continues to claim that “Bank knowledge products are well regarded for their technical quality.”

A study of knowledge creation by the Bank and other international financial institutions (IFIs) during the recent food price crisis from José Cuesta of the Inter-American Development Bank found that “despite [a] protracted escalation in the level of prices, neither the IFIs nor other authorised voices had given any unambiguous warning about the dire consequences of the simmering crisis before 2008,” with the Bank’s 2008 World development report on agriculture mentioning “potentially severe risks in only a two-page section. The report, however, displayed a great deal of optimism in the form of market forces overcoming these potentially dire effects.”

The paper concludes that although the IFIs rapidly expanded their research and analysis once the crisis became severe, generating knowledge that was “voluminous and wide in scope … but unsophisticated in terms of methodologies.” Cuesta also found that, “the IFIs’ mantra of national and local ownership does not seem to have dominated much of the knowledge generation process, either.” While recognising the contribution of this increase in attention by the IFIs on increasing the level of attention given to the crisis, he echoed a key critique made by the 2006 expert panel review of the Bank’s knowledge role (see Update 54), that research is “not translated into specific policy actions convincingly shown to fare better than other alternatives,” but “this does not prevent IFIs from advocating a series of policy instruments.”

In March, Sanjay Reddy, of the New School for Economic Research argued that the tendency of the Bank and rich country institutions to dominate debate and ideas about development is damaging to development itself. He pushed instead for the creation of “independent regional research funds with permanent endowments or with financing tied to transparent formulae which are independent of donor whims.”

Radical restructuring?

While the Bank strategy paper represents a codification of existing approaches, the companion paper covering the internal reform agenda is potentially more ambitious and far-reaching. Purportedly “the reform agenda emerges from a growing consensus of staff, management, member states and civil society” – though there have been no public consultations, and the documents setting out the future direction of the Bank have not yet been publically released.

A suite of reforms is already underway, including to development policy lending (see Update 66) and emergency lending. However, perhaps the most controversial element is changes to specific projects and programmes, known by the Bank as investment lending. These reforms were first discussed at the board in February 2009, with additional proposals for a new “risk framework” released at the end of last year. They entail a potentially radical shake up of how investment projects, which have for a long time constituted the majority of Bank loans, are selected, and the amount of scrutiny they will receive during implementation. Again there was no external consultation in developing this framework, though one is promised in the future.

The new framework has 38 types of risk, only two of which are social and environmental. Projects are to be categorised by the Bank task team and reviewed by an “independent” advisory risk team. Just how independent this new team will be is open to question given that it will be an internal team.

Under the new framework, “low-risk projects will follow an expedited process” and those at higher risk will follow the more regular processing used for [investment lending] today which is yet to be defined in detail, but it is proposed that the Board would approve these on an “absence of objection basis.” Board approval will only be required for changes to overall project objectives or major changes to safeguards, and then only if a new safeguard policy is triggered or an existing safeguard rating upgraded to category A. All other changes, including for example major restructuring that does not change the overall objectives, could be approved by the Bank’s country director.

The potential for projects to be wrongly classified, as some have argued is already the case on many occasions (see Update 67, 65), is barely covered in the document. It is noted only as a potential “cost” for the executive board, but interestingly not for the Bank itself. A new lending instrument is also proposed – the results based investment loan (RBIL), which will resemble sector loans such as the sector-wide approach (SWAp).

A shift in the Bank’s approach is proposed from a more hands-off ‘supervision’ model towards ‘implementation support’. It is hard to tell at this stage what the exact implications will be, but it would seem to entail the Bank becoming far more engaged, and potentially influential, with client governments at the implementation stage, from advising them on technical matters to helping shape the policy and institutional environment.

London School of Economics academic Robert Wade said that when considered with the increase in direct lending to governments through development policy loans, “the worry is that more and more of the Bank’s lending is being removed from the purview of the Bank’s safeguards on environmental and social sustainability.”

Roll out will begin in two regions in July this year, with all new investment projects following the new approach by mid 2011. At this late stage, public consultations have been promised by the Bank, but details are not yet available.