The World Bank Reboots - Economic Governance

Sweeping Investment Lending Reforms in the Works

To read the publication click here (13 pages, pdf, 400KB)

To view the presentation click here (24 slides, ppt, 320KB)

Executive Summary

The World Bank’s Investment Lending Reforms (ILR) could significantly shift the way in which the institution operates. In mid-2010, the World Bank will begin holding worldwide public consultations on its proposed design of investment lending reforms, even though many of the reforms are already being implemented. This paper raises questions about the nature and the implications of the Bank’s investment lending reforms as a prelude to this consultation process.

At present, even after decentralization of staff to country offices, the Bank’s headquarters in Washington generally calls the shots. In the future, the Bank will have regional hubs (in addition to country offices) that will administer all projects deemed "low risk." In the past, the Bank’s portfolio consisted primarily of what it calls "ring-fenced" project operations in a particular sector (energy, agriculture, or health). In 2009, such projects comprised about half the Bank’s portfolio. The other half was comprised of programs that financed national budgets (i.e., "development policy loans"). In the future, lending for traditional "ring-fenced" projects will continue to decline as the Bank introduces a "Results-Based Investment Loan" (RBIL).

Introducing…the RBIL. While still under design, it is expected that the RBIL will finance on-going or new government expenditure programs for particular sectors. The loans will disburse in tranches after results (outputs/outcomes) are achieved. Bank management intends to employ RBILs in order to scale up local community projects in a particular sector (e.g., education, forestry) on a national or even international scale. As with budget support loans, the RBIL provides a platform for "pooled funds" – that is, funds to which many donors and creditors contribute. As discussed below (Part 4), the day is coming when sovereign wealth funds and, possibly, private corporations will also contribute to these funds, initially, in energy, infrastructure, and real estate sectors.

Principles of the Paris Declaration. The "old" World Bank that financed mainly specific projects—as required by the Bank’s Articles of Agreement—is much different than the "new" Bank which will increasingly provide a platform for "pooled funds" for injection into national or sector budgets. In theory, the "new" Bank would operate in accord with some of the principles set forth in the 2005 Paris Declaration and the 2008 Accra Agenda for Action. The Declaration called for all donors and creditors to provide two-thirds of their financing in the form of flexible budget or sector support by 2010.

The intentions of the Paris Declarations sound appealing. However, even though the intention of the Declaration is to increase country ownership, the country-level administration of pooled funds by finance ministries significantly centralizes power and authority over the development process, often tothe detriment of local communities and particularly the poor, whose political voice to command resources remains weak in many countries. In some countries the "new" World Bank could undermine, rather than strengthen, fundamental building blocks of democratic development.

Power Shift Impacts Policy. The power shift underway at the Bank provides greater voice above all to finance ministries in developing countries. And, many developing country governments are reiterating a decades-old demand, that the Bank attach fewer "strings" to its operations. But the "pooled fund" is not only a mechanism for pooling financial resources, it also pools a myriad of donor and creditor policy conditions in ways that can sometimes cripple real ownership of development investments by the very people and clients the Bank purports to serve—the poor.

Skewed Vision of Safeguards. The "strings" to which some governments object also include some basic fiduciary and environmental and social safeguard requirements. The Paris Declaration calls donors and creditors to harmonize their requirements and align their financial resources with the national or sector strategy of the recipient country. Though some borrowing governments may object to such requirements, weakening them would critically undermine the likelihood that loans will support sustainable development and the kind of fiduciary responsibility that taxpayers of donor countries expect to see when they provide financial support for the Bank.

The Bank and recipient countries emphasize the costs of implementing safeguards rather than the costs of NOT implementing safeguards, e.g., cleaning up environmental disasters or dealing with aggrieved populations. One generally recognizes the value of regulatory safeguards after the “cow has left the barn” – after the oil spill, after the decimation of an indigenous population or after a critical tropical forest is destroyed. Yet those in the Bank who support the application of the full suite of safeguards are sometimes derided as "fundamentalists."

Even now, the Bank’s full suite of safeguard policies and its gender policy only apply to half of Bank operations – the "ring-fenced" projects. They do not apply to national budget support. The World Bank has yet to decide which social and environmental safeguards will apply to RBILs, but it is important that the "full suite" of safeguards apply.

When asked about the relative value of safeguard policies, many World Bank staff reply, "If we apply all of these policies, we will never be able to compete with China." However, the World Bank is a public institution and its job is not to compete with some of its member countries, but rather to be a trend-setter in responsible lending.

The World Bank claims its authority to manage pooled funds – including Climate Investment Funds – based upon its role as, among other things, a standard-setter. However, to make good on such claims, the World Bank’s standards must be "world class." To be "world class," the Bank should work with its public and private partners to harmonize social and environmental standards "upward" and ensure that such standards are applied to its entire portfolio. To transfer more responsibility and accountability to borrowing governments for performance and development results is a positive, needed step. But the prerequisite for future Bank lending has to be strengthened fiduciary controls to ensure that significant percentages of its loans are no longer stolen and that basic environmental and social safeguards are better implemented to ensure that investments do not irreversibly destroy critical ecosystems nor harm vulnerable communities.