The Private Sector Window in World Bank’s IDA20: Where exactly is the development impact?
The proposed increase in the International Development Association's much criticised private sector window ignores civil society's concerns that it lacks adequate safeguards and reporting mechanisms to ensure that this is the best use of IDA resources. In this blog, we set out the case for redirecting these resources towards public investment
The 20th replenishment of the World Bank’s (WB) International Development Association (IDA) is reaching its final stages. As developing countries across the world grapple with a reversal in development trends due to Covid-19 and face an impending wave of austerity, it is essential to ensure that the design of the IDA package is in the interests of the most vulnerable populations. In mid-November, a draft report proposal on the terms of the development assistance package was opened for public consultation by the WB’s Executive Directors (EDs). That consultation is now closed and the document will be tabled for approval at the final meeting, to be held in Japan on 14-15 December.
Notably, this document indicated a potential increase in the size of the much criticised Private Sector Window (PSW). The current size of the window at US$ 2.5bn is thus projected to rise in-between US$ 2.65bn-US$ 3.35bn. While advocates of the PSW window have consistently highlighted the seemingly small scale of this instrument in comparison to the overall replenishment estimated at US$ 95bn, the fact remains that the PSW suffers from a transparency deficit; adequate safeguards; and continues to support large conglomerates and financial intermediaries, whose contribution to sustainable development outcomes is questionable.
As the pandemic continues to ravage the socio-economic base of developing countries and International Financial Institutions-imposed conditionalities deepen their burden of austerity, our analysis of the PSW-funded project finds a high risk that these projects will have no impact on poverty alleviation. Rather they will deepen inequalities and exacerbate the structural deficiencies of the global financial system.
Subsidising large companies and commercial financial intermediaries in the name of “development additionality”
A breakdown of PSW subsidies to World Bank Group’s (WBG) International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) -- the two arms that support the private sector -- shows that the majority of investments are concentrated in two kinds of businesses. The first includes large international companies that are investing in developing countries or forming joint ventures with local companies. The second includes domestic conglomerates originating in developing countries. In addition, major private commercial banks and financial intermediaries are also involved in funding Covid-19 efforts to support small and medium enterprises (SMEs).
The PSW offers a subsidy to the IFC and MIGA in supporting these companies. The development additionality of the PSW is linked to how its inclusion enhances or complements IFC and MIGA operations through a set of indicators established by the WB. This criterion is highly problematic as subsidising private sector activities in itself has no relation to ‘development’ impact. A concern aggravated by the fact that IFC’s own development additionality lacks evidence. Moreover, as the latest report by the WB’s own Independent Evaluation Group (IEG) shows, the PSW has failed to establish development additionality even within this definition; IFC commitments in PSW-eligible countries did not increase and while MIGA guarantees increased marginally after 2018, the PSW mobilised less private capital than other blended finance instruments.
A granular analysis of investments under PSW going to companies shows that large international companies investing in developing countries are based in key global financial hubs, including London, Brussels, Luxembourg, Singapore and Toronto. Similarly, investments that went to domestic companies also include domestic or transnational conglomerates originating in South Africa and Nigeria. The PSW is therefore subsiding the operations of very large companies with complex investment structures operating on a global and transnational scale without demonstrating development impact. It is not clear how projects and individual companies are chosen, nor how these projects are prioritised to align with national development goals of different countries. As previously documented by Eurodad, the PSW continues to repeat the pattern of financing companies that are listed in jurisdictions of concern with regards to international tax avoidance as well as funding luxury hotel chains. Similarly, the disbursement of Covid-19 loans to SMEs is being done overwhelmingly through private commercial banks and financial intermediaries, including private equity funds. The development impact of these projects, especially in value addition and socio-economic structural transformation, is highly suspect.
Table 1: Select examples of PSW projects that support large companies
Market creation but no productive investment
A major rationale for using private finance approaches in international development is based on market creation to accelerate productive investment. Under the special theme of Jobs and Economic Transformation, IDA20 has emphasised the need for enhancing job creation and engineering structural transformation. However, PSW support to projects focusing on domestic manufacturing are extremely limited. Financing has been going to already well established and strong companies and projects, for example Hamza Textiles —part of a Bangladeshi conglomerate and involved in the clothing production chain exporting to international retail brands— and the Korea-Myanmar Industrial Complex —joint venture between the Myanmar government and the Korea Land & Housing Corporation. It is not clear how the PSW contributes ‘additionality’ to these projects and inspects a developmental impact since they potentially would have remained commercial ventures even without such support.
Beyond these projects, the evidence of PSW’s strengthening of local manufacturing and value chains is limited. For all the rhetoric on building productive capabilities and empowering domestic production, contribution towards local vaccine manufacturing is missing. As shown by Wemos, PSW finances for vaccine manufacturing under the Africa Medical Equipment Facility (AMEF) project were focused on multinational companies, including Philips and General Electric, instead of domestic manufacturers.
Instead of funding productive industry, a concerning trend is the use of the PSW to support so-called investments in ‘affordable housing,',’ but which actually create markets for real estate investors. In practice, the lack of adequate housing in developing countries is being used as grounds for attracting private investors in real estate. As opposed to promoting and supporting public housing, the PSW is involved in supporting private mortgage refinancing projects around the world (Table 2). Residential homes become a source of profit for developers through private mortgage refinancing companies. The ‘affordability’ of these houses is highly contingent on fluctuations in the domestic and international financial markets. As a source of debt for individuals and households, these projects also transform housing into a financial asset, thereby engineering a trend that is one of the greatest sources of household indebtedness in developed countries. These investments not only create an artificial boom in the economy, as infrastructure expands opportunities for temporary and low-paid employment, they also do nothing to strengthen and enhance the productive base of countries. Value addition to the economy is in fact substituted through rent extraction from households by private companies.
Table 2: Examples of mortgage refinancing projects supported by PSW
Redirecting PSW resources for public investment
Even if it is supposed to serve low income countries, the PSW is an instrument to support commercial investments. This makes its relevance to international development assistance highly questionable. It currently lacks adequate safeguards and reporting mechanisms to ensure that it is a relevant use of IDA concessional financing. The ED’s draft report on IDA20 also failed to address these integral evaluation measures. This needs to change.
As the project breakdown shows, the funds are increasingly being used to support large companies, commercial banks and speculative projects which deepen financialisation in developing countries and have a negative impact on people. Countries battered by the pandemic face a wave of impending austerity. For their people, development assistance such as that provided by IDA can be a source of sustainable and long-term recovery if well designed, transparent and well-targeted. If IDA is to live up to its aspirations to work for the most vulnerable people, it must strengthen public investment to enhance high-quality, free and fully accessible public services.
The World Bank has so far chosen to ignore civil society’s calls to close the PSW and redirect resources towards public investments. It has also repeatedly failed to implement adequate and effective safeguards to ensure and measure the impact of PSW. This goes against the Bank’s own principles of good governance. If the Bank is serious about development outcomes, addressing the failures of the PSW and implementing effective safeguards should be a priority for their final meeting in December.