World Bank to “lead the way” on infrastructure investment

4 October 2013

As the G20 countries met in Russia in early September, World Bank president Jim Yong Kim declared that the Bank is pushing ahead with the development of a global infrastructure facility (see Update 86), to be discussed at the World Bank annual meetings in mid October. The statement followed the Bank’s push for more funding for “regional transformational projects” in the IDA 17 (International Development Association, the Bank’s low income arm) replenishment process (see Update 85) and continued engagement in the G20 study group on “financing for investment”, focusing on infrastructure. Furthermore, an August declaration by African finance ministers representing 50 countries called on the World Bank to: “Partner with other donors, in particular the African Development Bank (AfDB), to establish a single infrastructure project preparation facility for Africa to support large-scale transformational infrastructure projects; contribute and mobilise sufficient resources, including IDA contributions, to adequately fund it.”

Kim stated that the global infrastructure facility will represent “a huge, huge piece of our business going forward”, channelling funds from member states and the private sector to infrastructure projects with the Bank acting as a “matchmaker” and “risk mitigator”. While the structure is still under discussion, the Bank is working on raising funds, in particular from middle-income countries, that can as a catalyst for private sector investments.  According to Kim, the Bank expects “win-win situations … where private-sector investors will make money, where governments will be successful in building the kind of infrastructure they need to grow, and the creation of jobs will lift people out of poverty.” However, an executive director at the Bank cautioned that plans for the facility are far less advanced than portrayed, and require further discussion and sign off from shareholders before progressing. Progress on the regional transformational projects within the replenishment process of IDA has also proved controversial with funders.

The G20 accountability report launched at the summit noted progress on the infrastructure agenda, but that some “uncompleted commitments are progressing slowly”. This included the G20 2010 Multi-year action plan on development (see Update 77) commitment to “assess how best to integrate environmental safeguards in an effective cost-efficient manner”, due to be completed by November 2011, which has “stalled”: “No specific actions appear to address this”. The report noted that “continuation of efforts and follow-up on these commitments are strongly needed”, however, this was not reflected in the G20 outcome documents. Instead the infrastructure related commitments included giving “particular attention” to public-private partnerships (PPPs). According to the G20 “financing for investment” study group, drawing on expertise from international organisations such as the Bank and the Fund, this includes attention to “how to improve PPP projects to create an attractive asset class” for investors (see Update 81). As part of the process the Bank is developing a PPP sourcebook with the Inter-American Development Bank (IDB) and the Asian Development Bank (ADB).

Involvement of the private sector means there is a greater risk of poor service, high prices, or bothSunita Dubey, Groundwork

Private sector push

The Bank’s private sector arm, the International Finance Corporation (IFC), has increased its investments in infrastructure, reaching $2.2 billion in financial year 2013 now representing 12 per cent of the IFC’s portfolio. In a June interview then IFC vice president and chief operating officer Rashad Kaldany told the Infrastructure Journal that the IFC plays “a risk mitigation role” and “can lead the way” on infrastructure investment. Much of the focus is on Sub-Saharan Africa, with close to $1 billion invested in the latest financial year, including a big push for PPPs. This includes the controversial Bujagali hydropower project in Uganda, subject to six complaints to the IFC’s accountability mechanism the Compliance/Advisor Ombudsman since 2000 (see Update 86, 80, 62). According to Kaldany, the project has made a “huge impact” and is “fabulous”, since it brought together the Bank, IFC and the Bank’s Multilateral Investment Guarantee Agency. Recognising that “there are a number of people who just don’t have the purchasing power to pay”, the IFC focusses on “output based aid”, meaning combining major buyers of the supply, “like mining companies … and then finding schemes to supplement the poor people’s incomes so that they can afford to buy these essential services.”

Sunita Dubey of South African NGO Groundwork commented “PPP has become a buzzword for solving any problem these days.  Over the decades, we have seen a poor implementation record of the Bank, especially in infrastructure projects. However, involvement of the private sector means there is a greater risk of poor service, high prices, or both, because of its incentives to maximise profit.”

Furthermore, a June paper by UK-based Public Services International Research Unit (PSIRU) argued that privatisation in the energy sector has been problematic, including the Inga 3 hydropower project in the Democratic Republic of Congo (DRC), which was highlighted in the Bank’s March IDA paper on “regional transformational projects” (see Update 86, 85, 81). The paper described how the development of Inga 3 was initially planned as an intergovernmental project, funded by the World Bank, European Investment Bank and African Development Bank, but was cancelled in 2010 in favour of a private sector scheme with mining multinational BHP Billiton. The intention was for BHP Billiton to develop Inga 3 to provide energy for a planned aluminium smelter in DRC, however, two years later the company abandoned the smelter plans due to high construction costs, and thereby also Inga 3. This forced DRC back to the drawing board, resulting in renewed engagement with multilateral development banks and a treaty with the South African government’s public sector utility Eskom to buy half of the output from the hydropower plant. David Hall of PSIRU said: “The private sector has to prioritise according to short-term profitability. Instead of waiting and hoping for commercial decisions, public sector investment should be going ahead – with the extra benefit that borrowing is cheaper with the process subject to democratic control, and a focus on positive social impacts and environmental sustainability”.