October 31, 2003
As we implement this Strategic Initiative, the [International Finance Corporation's] footprint in Africa will be significantly expanded…private investment and management are still crucial in achieving efficiency gains, in extending access, in realizing lower costs, and in avoiding the poor governance characteristic of most parastatal utilities. However, new instruments and approaches will be needed to attract this private participation, and it is unlikely to come without some public or donor-provided support. The outcome will still be clearly superior to continued government ownership and management. — IFC Strategic Initiative for Sub-Saharan Africa (August 6, 2003). (Emphasis added.)
The World Bank's Board of Executive Directors has approved a number of strategies that describe the institution's approach to expanding its infrastructure business in the next 2-3 years.1 The overall emphasis of the strategies underscores the World Bank's unsubstantiated and easily contestable claim of private sector superiority expressed in the opening quotation. Given numerous and well-documented failures of private infrastructure provision, as well as growing understanding of how to make government services more efficient and accountable, the World Bank's infrastructure initiatives appear to be based on neoliberal ideology and an anti-state bias, rather than sober analysis and country-specific evidence.
A clear example of this bias is seen in the statement that private management is crucial for "avoiding the poor governance characteristic of most parastatal utilities." Such confidence in private provision is mystifying, given the virtual consensus on the need for the state to regulate natural monopolies like infrastructure services. Yet the same weak government that failed to deliver such services must now regulate private firms, creating and ensuring compliance with laws that protect the public interest.
The spate of initiatives supporting private provision is not alarming because private sector participation can't work. Under the right conditions, the private sector can make an important contribution to infrastructure services. Rather, the new initiatives are alarming because their underlying assumption is that the main obstacles to private sector provision are financial and political. The World Bank seldom questions the wisdom of private utility management. In contrast, the UNDP's 2003 Human Development Report (HDR) urges a larger role for government in the direct provision of services and is circumspect about private provision:
"Not all privatizations of water and sanitation have been failures...Success...largely depends on government regulation, investor interest and the initial state of the enterprise. Countries with decent services before privatization often continue to do well after." (p. 116)
In spite of tremendous evidence about how and why private provision fails, the World Bank appears to embracing the priority of "moving the money." The difference is that today, the emphasis is on channeling resources to private firms, rather than sovereign governments.
The World Bank Group is increasingly pro-active in its efforts to expand private participation in infrastructure by, among other things, mobilizing:
Grant subsidies for corporations and/or poor consumers. When private providers extend services to poor populations, they can receive "output-based" aid, or subsidies, when delivery of services is verified. However, there are serious administrative costs and constraints to such schemes, especially in very poor countries and those with weak governance.
Commercial or political guarantees to private lenders and investors. Guarantees, which are provided by multilateral lenders, export credit agencies and private insurers generally shift risk from the private sector to domestic taxpayers. For instance, guarantees may promise a private firm compensation for certain losses if, under specified conditions, the host government does not meet its obligations. New guarantees may protect investors against currency fluctuations. (The decline in the value of the Filipino peso during the 1997 Asian financial crisis caused a ballooning of the dollar-denominated debt of Suez's water concession in Manila, which contributed to its collapse in 2003.)
The proactive approach will involve: identifying opportunities for private sector investment; assessing obstacles to investment (e.g., public opposition or regulatory issues); structuring concessions; preparing feasibility studies; and mobilizing financing.
While the World Bank is shifting greater resources toward private provision, it is not abandoning investment in the public sector. For example, the Infrastructure Action Plan notes that private finance has contributed less than ten percent of total water and sanitation investment. It calls on the Bank "to more strongly promote sustainable public sector investment" and suggests the need for greater flexibility in the time horizon for achieving full cost recovery. The dual approach (to the public as well as private sector) illustrates the dominant role of governments in infrastructure provision throughout the developing world and the impossibility of private firms taking over that role.
Overall, an acceleration of recent trends can be expected. In recent years, the World Bank Group – especially its private sector affiliates – the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) -- have massively increased their support for infrastructure investments. During fiscal years 1995 to 2001, IFC investments were up by 88%; MIGA guarantees increased by a factor of 30; and infrastructure components of adjustment rose by 104%, even while lending for infrastructure in middle-income (IBRD) countries plummeted by 50%.2
In low-income (IDA) countries, infrastructure constitutes and will remain the Bank's largest lending area. IDA has doubled its commitments in infrastructure, which are now at a level of $1.5 billion annually, or almost half of IDA's allocation to Africa. The Bank proposes that this level be sustained or increased through the use of guarantees and other mechanisms that encourage private-public partnerships. There will be at least one major physical and regulatory infrastructure project per subregion as well.
Addressing challenges to private provision. An expanded Bank role in infrastructure investment responds to a political mandate to advance progress toward the Millennium Development Goals (MDGs)3 and to help overcome the following obstacles:
The reluctance of private sector investors in infrastructure. Private investment in infrastructure in developing countries declined from a peak of $128 billion in 1997 to $58 billion in 2002. The Bank's new incentives, such as concessional financing, targeted subsidies, and guarantees, are expected to help overcome risks and limited returns.4
Political resistance (especially in water, power and rural infrastructure). The IFC's Strategic Initiative for Sub-Saharan Africa (SSA) states the need to "overcome the political resistance, which has focused on the higher tariffs required in some cases to ensure sustainability."
The legacy of failed privatizations, e.g., Manila and Atlanta water, Ghana Telecom, Senelec, Kenya Telkom and NITEL.
The perception of borrowers that the "cost of doing business" with the Bank is too high due to requirements to comply with an array of policies, including safeguard policies."5 There are ten safeguard policies intended to ensure that Bank-financed projects "do no harm" to people and ecosystems.6 (See "The cost of doing business with the Bank," below.)
One way that the Bank expects to overcome these obstacles is by working more with local and state (i.e., subsovereign), rather than central, governments. For this purpose, the IFC has established a Municipal Fund or Municipal Finance Group (modeled on a private equity fund) and has worked with bilateral donors to develop a subsovereign partial risk facility (GuarantCo) to address the constraints in financing subsovereign entities.7
Pushing the private sector through CAS and PRSP. Currently, the World Bank Group is programming sizeable increases in infrastructure financing in its Country Assistance Strategies, which lay out the general lending plan over the medium-term (about 3 years) for each borrowing country. Significant resources may be forthcoming for those borrowers who give a prominent place to infrastructure-related goals in their Poverty Reduction Strategy Papers.
Increasingly, these strategies will call for the Bank's standardized infrastructure assessment, the "REDI" (Recent Economic Developments in Infrastructure) in order to expand the institution's infrastructure business. The Bank will use REDIs to develop Project Concept Notes (PCNs) in fiscal year 2004 for several countries in order to get projects in the pipeline by fiscal year 2005 (which begins in July 2004).8
In association with the REDIs, the Bank, including the IFC, is promoting increased numbers of impact assessments. That is, the institution will be conducting ex ante Poverty and Social Impact Analyses (PSIAs) of the likely impacts of infrastructure investments. To date, such assessments have been used to mitigate adverse impacts rather than redesign projects.
The prominence of private infrastructure investment in PRSPs will be ensured by, among other things, high-level consultative processes between government and the private sector in the PRSP process. (SFIA, p. 44) To this end, IDA and the IMF have supported the establishment of Investment Councils, bringing together governments with local and foreign investors in Ghana, Tanzania and Senegal. Several IDA projects support the establishment or strengthening of national level apex entities representing the private sector.
Through the New Partnership for Africa's Development (NEPAD), African countries plan to set up a water supply and sanitation (WSS) unit to promote and monitor investment in WSS, particularly public-private partnerships (PPPs). In addition, a steering group of regional sector leaders is being established that will act as key interlocutors with the Bank and other donors.
Strong (ex ante) conditions. As infrastructure is increasingly featured in PRSPs, infrastructure financing is being featured in more adjustment and project loans, grant programs, guarantees, and country-level analytical work.9 Many loans and grants will have stronger conditionality. For instance, the Poverty Reduction Support Credit (PRSC) is a single, annual loan or "credit" embedded in a rolling framework.10 From one credit to the next, the level of support will vary depending upon performance. In contrast to "old style" adjustment lending, the PRSCs are based on ex-ante (or "a priori") performance and implementation, not on expected policy changes.11 This means that governments will not receive loan or grant resources until they have already taken policy actions stipulated in the loan. Such conditionality is more coercive than traditional conditionality.
CDD. Fully half of IDA lending to Africa may be in the form of credits for Community-Driven Development (CDD) that would finance investments by local communities in infrastructure and social sector services.12 Throughout the developing world, donors and creditors are avidly promoting CDD approaches (including Social Funds). In Indonesia, one in every three rural villages is now covered by a Bank-assisted CDD project. In rural Ethiopia, 40 percent of rural water is supplied through CDD mechanisms.
Although the Bank avowedly promotes CDD projects to empower communities, the quality and sustainability of service provision depends largely upon the capacity of local governments.13 Their capacity is undercut when CDD projects channel financing through communities instead of local governments, hence weakening the capacity of governments to regulate or manage development efforts.14 In an extreme case, 24% of CDD water projects (among a sample of projects) were likely to be sustainable according to the Bank's internal evaluators.
Low sustainability can also result from:
Financing conditions that require communities to outsource service provision rather than to elect public service provision;
Project governance by single-issue "user committees" that often short-circuit representative, local decision-making and cater to vested interests. An internal Bank evaluation revealed that that non-poor groups are frequently the main beneficiaries of CDD projects;
Excessive cost recovery requirements; and
Ill-conceived contracts that trap communities into honoring financial obligations to poorly performing private service providers.
Such problems were pervasive in a rural water infrastructure project (65% donor/creditor financed) in Uganda where, according to Water Aid, community-led implementation resulted in: isolated communities were not served (they required more expensive drilling techniques); construction work was shoddy, breakdowns were common and not repaired in a timely matter; and water infrastructure investments were not accompanied by "soft" investments in community awareness about public health and hygiene.15
*Source, World Bank OED, "Rural Water Projects: Lessons Learned," Precis No. 215, Winter 2002. The Bank employs the term "Demand-Responsive Approach" (DRA) as well as the term "CDD." |
The "Cost of Doing Business" with the Bank. The institution's 2001 "Cost of Doing Business" study concluded that an important part of the decline in its lending for infrastructure during the last decade is attributable to client distaste for Bank's safeguard policies. Safeguard policies apply to three-quarters of water projects, including dams, which are environmentally sensitive. According to Bank evaluators:
The Bank's safeguard policies to prevent or mitigate against environmental harm from its projects – while sound in concept – were not accompanied by clear standards and consistently effective implementation. This has resulted in increased reputational risks and diversion of attention to damage control.16
Because of such problematic implementation, dam projects will be set aside as "corporate projects" with extra resources to address risks including displacement of populations and damage the natural environment.17 The Infrastructure Action Plan is standardizing the interpretation of safeguards across regions and financing instruments. It is also offering incentives to staff that are willing to take on these "corporate projects."
The right mix of service providers – whether for large-scale urban infrastructure services or CDD projects – should be determined by democratic and open processes. Creditors should not preempt indigenous decision-making processes by designating the acceptable variants of private provision. The economic, environmental and social risks of different modes of service provision should be set forth and openly debated. Public officials and creditors should disclose financing arrangements for each mode of service provision, including any contingent liabilities assumed by the governments (e.g., through take-or-pay contracts or guarantees). In addition, creditors should not finance variants of private provision in the absence of an independent and autonomous regulator.
Endnotes
1) Aspects of this Plan are elaborated in the Infrastructure Action Plan (July 2003); "Strategic Framework for IDA's Assistance to Africa (SFIA): The Emerging Partnership Model" (July 2003); "IFC Strategic Initiative for Sub-Saharan Africa" (August 2003); "World Development Report 2004: Making Services Work for Poor People" (September 2003); and "Water Resources Sector Strategy" (February 2003).
2)Energy Sector decline of 65%; Transport, 28%; Urban, 25%.
3) IDA's entire water supply and sanitation portfolio totals $900 million. A least-cost estimate of reaching MDG's Water Supply and Sanitation (WSS) goals by 2015 is $30 billion. (SFIA, p. 35)
4) Although the Bank's Private Sector Advisory Service (PSAS) has a success rate of 70% in closing privatization transactions in Africa, which is higher than their average for all emerging markets. See, IFC, "IFC Strategic Initiative for Sub-Saharan Africa, August 6, 2003, p. 6.
5) World Bank, "Cost of Doing Business: Fiduciary and Safeguard Policies and Compliance," SecM2001-0469, July 17, 2001.
6) The Safeguard Policies are: Environmental Assessment; Forestry; Involuntary resettlement; Indigenous Peoples; International Waterways; Dam Safety; Natural Habitats; Pest Management; Cultural Resources; Projects in Disputed Areas.
7) Much of this work responds to the Camdessus High Level Panel on water infrastructure financing.
8) Key countries are: AFR: Ethiopia, Kenya, Madagascar, Senegal, Tanzania; East Asia/Pacific: China, Indonesia, Laos, Vietnam; East/Central Asia: Bosnia, Kazakhstan, Moldova, Turkey; Latin America/Caribbean: Argentina, Brazil, Honduras, Nicaragua; Middle East/North Africa: Morocco, Yemen; South Asia: India, Sri Lanka.
9) To oversee this work, the Bank has created a new Department on Private Participation and Finance, which combines the current guarantees department (PFG) and the Private Participation in Infrastructure (PPI) unit. But it will have a broader agenda looking at prospects for PPPs, advising on regulation, competition, and risk instruments as well as subsidy schemes for output-based aid (OBA).
10) Countries will only qualify for PRSCs if they have higher ratings on Country Policy and Institutional Assessments (CPIAs), a desire for programmatic lending, and a full set of "core diagnostic" work, including, Poverty Assessment, Country Economic Memorandum/Development Policy Review, Public Expenditure Review, Financial Sector Assessment Program, and Country Procurement Assessment Review.
11) J See "Strategic Framework for IDA's Assistance to Africa: The Emerging Partnership Model," p. 64.
12) A common type CDD is the Social Fund, through which the Bank has channeled $3.7 billion in 57 countries, with donor and government co-financing brining the total to about $9 billion. Social Fund resources are distributed directly to communities, rather than local governments, and often contain thousands of sub-projects, which are bid out to private and non-profit contractors. In light of concerns over weak local level governance, some have expressed concerns about how effectively CDD approaches prepare local governments to facilitate transparent privatization, or manage financial resources.
13) World Bank OED, "Social Funds: A Review of World Bank Experience," Report No. 23668, February 12, 2002, p. 37.
14) An array of loan instruments, such as adaptable program loans (APLs) and Community-Driven Development (CDD) loans [including Social Funds (SFs)] almost always channel resources in ways that bypass governments.
15) Adela Barungi, "Contracts and Commerce in Water Services: The Impact of Private Sector Participation on the Rural Poor in Uganda" in New Rules, New Roles: Does PSP Benefit the Poor? Water Aid, 2003.
16) World Bank OED, "Review of the Bank's Performance on the Environment," July 3, 2001, p. 25.
17) Such projects are 64 times more likely to go to the Inspection Panel than other projects. The Inspection Panel, established in 1993, accepts complaints submitted by aggrieved parties in borrowing countries who contend that harm has resulted due to the Bank's violation of its own operational policies.
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