Project pressure: World Bank defends standards

The appearance of new rivals such as the AIIB is cranking up the pressure on the World Bank to weaken the very standards it has been debating for the last five years

  • By Phil Thornton
  • 06 Oct 2015
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When people reach the ripe old age of 70 they can rightfully expect to receive some presents from their nearest and dearest. Yet when the World Bank became a septuagenarian last year it could only watch on, downcast, as some of its most important member countries rushed to offer contributions to the newly-minted Asian Infrastructure Investment Bank (AIIB).

By the time its founding members had signed the articles of agreement in June this year, World Bank president Jim Yong Kim graciously hailed the launch of the AIIB, which he said would deliver more infrastructure to help the poor.

“The developing world’s infrastructure investment needs are too huge for any single institution,” he said.

He has also taken an open stance on the $50bn New Development Bank (NDB) launched in July by the Brics (Brazil, Russia, India, China, South Africa) economies.

He is clearly right that the needs are huge. Emerging markets and low-income countries face an annual gap of $1tr-$1.5tr in infrastructure spending. The world spends about $1tr a year on infrastructure but the vast majority of that goes to developed countries.

According to a report from consultant McKinsey & Co, an estimated $57tr will be needed to finance infrastructure development around the world through to 2030.

While much of the focus is on attracting private sector investors to fund much-needed projects in developed countries, meeting the needs in developing and frontier economies is more of a challenge.

And the demand for new and improved infrastructure will only grow: around 2.5 billion people do not have access to basic sanitation; 748 million cannot access improved water, and nearly a billion people in rural areas lack access to all-weather roads.

Against that background it is no surprise that the World Bank is seeking to fill that gap. Infrastructure represents the bank’s single largest business line. Its 2014 annual report shows that infrastructure including environmental financing represented almost half (48%) of its funding in the year to June 2014. Its record includes some 12,000 projects in 170 countries over its life.

From the outset of his presidency Kim has committed to the idea of “big development” and “transformational projects” rather than smaller developments as being the best route towards achieving his two goals of ending extreme poverty and bringing shared prosperity.

These are tough targets. The poverty goal commits the bank to reduce the percentage of the world population living on less than $1.25 (€1.08) a day to no more than 3% within 15 years. Shared prosperity aims to boost income growth among the bottom 40% of the world’s population.

As Kim said earlier this year, the bank now looks at each project it approves to see whether it is going to reduce inequality and lift people out of poverty or if it is going to make inequality worse. He admitted that was not the “lens” through which the bank had examined investments in the past.


PROJECT SAFEGUARDS

Certainly critics of the bank who were active in the 1990s can point to controversial projects such as environmentally and socially destabilising land resettlement schemes in the Amazon and Indonesia, and large dams, notable among which were the Arun III in Nepal and the Sardar Sarover in India.

But non-governmental organisations (NGOs) can still highlight projects they say are doing more harm than good such as the Inga dams in the Democratic Republic of Congo to which the bank lent $75m for technical assistance despite the abstention of the US. The bank said it would give new electricity access for seven million people although NGOs have said the project would not benefit the local population.

The World Bank has just launched the third consultation phase over its environmental and social framework which is part of a review of its safeguard standards that has been going since 2012. With typical understatement the bank refers to this as “the next stage of a long journey”.

The first draft took a year from mid-2014 to mid-2015 while it took two years from July 2012 to July 2014 to finalise an “approach paper” to that first draft. The final document is billed to be completed by the end of this year but has already run into opposition.

According to a report by a coalition of 19 NGOs published by Human Right International the consultation “pointedly contradicts” Kim’s commitment to ensure the bank’s new rules will not weaken or “dilute” existing mandatory environmental and social protection measures.

Petra Kjell, programme manager for environment, human rights and social impacts at the Bretton Woods Project (BWP), one of the 19 NGOs, says there is a wide range of concerns over issues such as human rights, due diligence, labour rights and climate change.

“There is again a concern about the race to the bottom as it is putting more ownership on a country level and there are less checks and balances,” she says.

Borrower countries are concerned. In an official response Subhash Chandra Garg, executive director for key Asian borrowers Bangladesh, Bhutan, India and Sri Lanka, said the safeguards were a “disappointment”. “The proposed standards make doing business with the bank more and more difficult and costly for the borrowers,” he wrote.

Those concerns are even shared by donor countries. In its submission the US’s executive director Matthew McGuire said the US shared borrower countries’ concerns that the framework could place greater implementation burdens and costs on them.


MAINTAINING STANDARDS

Another controversial impact of the bank’s traditional infrastructure projects is on local people. In March the bank had to admit to “serious shortcomings” in the way it handled the number of people forced to relocate from their homes as a result of projects it funds.

Around 3.4 million people in developing countries are directly affected by active World Bank-funded projects, with almost 500,000 of those forced to relocate their homes.

At the time Kim warned this number would rise even further as the bank sought to meet a “dramatic increase” in requests for help to fund dams and other infrastructure projects in developing countries.

NGOs are concerned the arrival of new rivals such as the AIIB will put pressure on the bank to weaken the very standards it has been debating for the last five years.

“For the past decade the bank has been trying to find its space in the increasingly complex international environment and find a competitive niche, and I don’t think the AIIB has made that any easier for them,” says Kjell at BWP.

She had hoped that the bank would aim for a niche that embraces tougher due diligence and higher standards. “But what we are seeing so far is the opposite, which is a focus on the financial point of view rather than the environmental and social point of view.”

Jacob Kirkegaard, a senior fellow at the Peterson Institute of International Economics, says he recognises that modern-day NGOs concerned about threats to environmental standards would face a “trickier time” in the new world.

“It was easier when you just had to lobby the World Bank and the governments of the OECD that controlled the bank to mount a campaign to get them to talk to you rather than the governments of the Brics bank.”

However, he disagrees that a race to the bottom is inevitable. Since China has indicated the AIIB would operate as a commercial entity, it will be expected to issue bonds to supplement its initial $50bn of capital.

“It will be harder for them to engage in environmental, human rights or other types of social dumping as they would find international private investors highly unlikely to lend them money,” he says. “That offers an enormous opportunity for NGOs of various persuasions to target their lobbying efforts.”

The AIIB itself sets out a strategy that could have been lifted from the World Bank’s website, claiming it was both clean as it was an “ethical” organisation with zero tolerance for corruption and green as it was built on respect for the environment.

“The AIIB will put in place strong policies on governance, accountability, financial, procurement and environmental and social frameworks,” it says.

It has attracted 57 prospective members including OECD countries such as the UK, Germany and Australia that defied pleas by the US not to join the body. The US’s official reason is that it does not believe the new bank will abide by international standards although some believe the real reason is a fear China will use the body to extend its political influence.

Kirkegaard says signatories have taken the more responsible approach. “It is better by and large that these countries are responsible stakeholders from the inside rather than adopt the approach taken by the US and Japan governments — for fairly obvious political reasons.”


CHINESE CONTROL

Kim is clearly looking to foreign governments to hold the AIIB to account, pointedly describing its environmental, labour and procurement standards as “strong”.

Yet some independent experts have voiced concerns that allocation decisions taken by the new Chinese-controlled lenders may not be as transparent as those taken by the World Bank. They fear that even if the awarding of contracts was conducted on objective standards and competitive bidding they are likely to employ Chinese builders, which will often emerge as the legitimate lowest bidders.

However, as Peter Garber, a US-based analyst at Deutsche Bank, told Emerging Markets during the annual meetings of the Asia Development Bank (another multilateral that is looking to facilitate infrastructure projects), there were concerns over governance.

“China will still face the same problems of placing capital in poor countries,” he said. “So far China has managed to export capital to problematic sovereign states by ignoring the ideological concerns about, say, the environment and corruption that have handcuffed the existing multilaterals.”

New research carried out through the AidData research and innovation lab and published at the European Economic Association’s conference in August, shows that China’s official policy of non-interference in the domestic affairs of its partner countries makes its assistance attractive to leaders in the developing world but may also make its aid more vulnerable to political misuse.

It found that China’s development finance is similar to the World Bank in that both institutions allocated funding to wealthier rather than poorer regions within African countries. But, it also found that on average, African leaders’ birth regions received nearly three times as much financial support from China than other regions during the period of time when they were in power. The same pattern does not hold true for World Bank development finance.

Andreas Fuchs, a research scholar at Heidelberg University and the lead author, says that unlike the World Bank China granted leaders in partner countries very high levels of autonomy in determining how external resources would be allocated on the ground.

“Careful scrutiny of sub-national resource allocation patterns and China’s on-demand approach to international development finance will become even more important in future years as China assumes a leadership position in the AIIB and NDB,” he says.

Assuming that there is no race to the bottom in terms of standards, the entry of two new banks providing infrastructure finance could lead to a larger infrastructure investment sector even if the World Bank ends up with a smaller percentage of the pie than it now has.

The Chinese contend that there is vast unmet demand for productive economic infrastructure, especially in the emerging economies of Asia. In other words they say the AIIB and NDB will succeed by funding projects that would not otherwise have been financed.


PRIVATE CAPITAL

If the new banks need to obtain financing for their investment projects they will find themselves competing to attract investors with the World Bank in the same way that they will compete to secure shovel-ready projects.

The focus of the World Bank’s drive to invest in new projects will be the Global Infrastructure Facility (GIF), which it launched in July and which aims to attract capital from pension funds, sovereign wealth funds and other private sources.

Kim and other senior bank officials have directly ruled out capital increases in public statements. As he told the Council on Foreign Relations a year ago: “We are not getting a capital increase. In other words, we’re stretching our balance sheet as much as we possibly can.”

The bank has set out a focus to fund projects in four key sectors: energy including electricity and gas generation, transmission and distribution; water and sanitation; transport such as airports, ports, railways, mass transit and highways; and telecommunications infrastructure.

While there is a vast amount of investable money held by institutions such as pension funds looking for long term investments, the bank’s greater reliance on private capital raises questions.

“It is important to recognise the limitations of seeking growth solely by stretching existing financial resources or seeking growth through non-traditional sources of financing,” says Scott Morris, a senior associate at the Center for Global Development in Washington.

“Funding from somewhere other than shareholders’ own domestic budgets may hold considerable appeal, but it can also come at some cost to institutional governance and good policy.”

The World Bank is also a member of the G20’s Global Infrastructure Hub (GIH), a knowledge sharing network that aims to help unlock an additional $2tr in global infrastructure capacity to 2030 and which is billed to start operations sometime this year.

Despite the forecasts of hundreds of billions of dollars of unmet need it is clear there are not enough shovel-ready projects for all these new institutions, whether Western or Chinese led, to provide funding for.

A recent report by Moody’s, the ratings agency, said that although there was substantial debt capacity available from banks and institutional investors to finance infrastructure developments in creditworthy, stable economies, there is a shortage of investment opportunities.

“Access to long term finance remains constrained where projects are located in less creditworthy countries, or face significant or speculative risks that are difficult for the private sector to quantify and mitigate,” says Andrew Davison, senior vice-president at Moody’s infrastructure finance group.

Although Bertrand Badre, the World Bank’s chief financial officer, said at the July launch that the GIF was “open for business”, neither it nor the GIH has been established long enough to have delivered any concrete results.

Kirkegaard says it is no surprise as the World Bank is “trying to design the house” while the global marketplace is changing with new entrants and new sources of finance.

Kim, whose first term as president ends in June 2017, will be looking to infrastructure to provide him with a legacy that overshadows the controversy over his reorganisation of the World Bank Group.

“It’s work in progress but Kim needs to show that this facility works. I would go as far as to say that if things haven’t changed by the time of his re-election then he shouldn’t be re-elected,” says Kirkegaard. “If he does not succeed in this what has he done other than the infamous reshuffling of the deckchairs on the Titanic?”

  • By Phil Thornton
  • 06 Oct 2015

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