This article provides a brief critique of the final report of the G20 Eminent Persons Group (EPG) on Global Financial Governance, which is being submitted to the meeting of the G20 Finance Ministers and Central Bank Governors to be held in Bali, Indonesia during the annual meetings of the IMF and World Bank (October 12-14). The report will also be submitted to the G20 Summit, to be held in Buenos Aires, Argentina (November 30-December 1).
The report, “Making the Global Financial System Work for All,” (hereafter “G20 EPG Report”), lists 22 proposals across three broad areas for increasing the firepower of the current development finance system.
Among the key proposals is one which would create a coordinated system of development finance institutions (DFIs), including multilateral development banks (MDBs) and bilateral donor agencies. This system would work through the establishment of new country and regional platforms, guided by a new set of core standards for project preparation, procurement, transparency, etc.
Creating such a system would establish divisions of labor among these actors as well as greater economies of scale through collective lending operations. In this division of labor, it appears as though the United Nations could be subordinated to more powerful actors and confined to roles in fragile and conflict affected states. Another concern is that the combined firepower of these actors could diminish country ownership and repress civil society.
As discussed below, it is concerning that the G20 EPG Report provides as a positive example of a country platform the Indonesian Slum Upgrading Project financed by the Asian Infrastructure Investment Bank (AIIB), the World Bank Group and the Government of Indonesia.
Most striking is the G20 EPG Report’s call for each MDB to undertake fundamental governance reforms in order to streamline decision-making within the system. Specifically, it proposes that the MDBs abolish the traditional role for their executive boards in voting on individual loan operations and devolve such operational responsibilities to Management. [This resembles the governance model of the China-led Asian Infrastructure Investment Bank (AIIB)]. This could diminish the accountability of the MDBs.
Other key proposals call for expanding the system wherein public resources (e.g., taxes, pensions, user fees, aid) would be used to leverage far greater sums of new private investment in not only in individual development projects, but also for portfolios of projects. In the latter instance, financiers securitize the future revenue streams from portfolios or “pipelines” of projects by bundling them into financial instruments for trading in the global capital markets. A goal of securitization is to provide an attractive revenue stream for institutional investors, such as pension funds, life insurance and sovereign wealth funds, which control over $100 trillion.2
Securitization is not possible without “de-risking” development projects, but this can involve transferring unsustainable risks from the private to the public sector. For instance, efforts to “de-risk” investments can undermine sustainable development by accelerating (or failing to curb) global warming; saddling governments and citizens with too much debt; raising the costs of basic services; and exacerbating levels of inequality (if gains are privatized and losses nationalized).
Another concern relates to accountability. As the revenue flows from project portfolios are securitized, it is unclear whether or how norms – such as the MDB’s environmental and social safeguards – would apply. How would governments and their citizens be assured that new holders of the debt and equity will be responsible for enforcing environmental and social safeguards associated with the underlying projects?
With a system of development finance institutions working with added financial firepower from private capital markets, the Western-led development finance system could reinvent itself as both a collaborator with and a competitor to the growing alternative China-led system. Infrastructure competition between the systems is seeking to help secure or expand access to natural resources and markets.
These, and other concerns about democratic accountability and the role of civil society, are detailed below.