Dealing with the Trump squeeze: World Bank focuses on agility and innovation
Facing a squeeze on funding from the Trump administration for its work in middle income countries, the World Bank is looking at innovative ways to fulfil its mission to end poverty and inequality
It is one of the painful paradoxes for anyone working at the World Bank: the demand for help and assistance seems to be infinite while the supply of resources to tackle them is limited.
The last year has been a good example with the refugee crises in the Middle East and the Horn of Africa and the devastation of hurricanes Irma and Maria in the Caribbean coming as development agencies are still recovering from dealing with the Ebola outbreak.
“There’s a growing challenge of the Bank being drawn into headline situations and responding to refugee crises,” says Scott Morris, a senior fellow at the Center for Global Development (CGDev) think-tank.
At the same time estimates of the shortfall in infrastructure spending needed to deliver the services to deliver faster economic growth continue to rise.
Demands on development assistance have risen in recent years, especially for pandemics, refugee crises and regional conflicts. The World Bank has managed to ratchet up its spending via the International Development Agency (IDA), which works with the poorest countries, to $19.5bn in the year to June 2017 from $16.2bn in the previous 12 months — a 20% rise.
A year ago, Axel van Trotsenburg, the World Bank’s experienced vice-president who co-ordinates negotiations with donors, managed to secure pledges for a record $75bn of funding for IDA over the next three years, including planned bond issues on the back of the state funding.
He told GlobalMarkets at the time it was “the most ambitious replenishment possible” and the funding would enable IDA to quickly scale up development interventions to tackle conflict, fragility and violence, forced displacement, climate change and promote governance and institution building.
But, of course, even $75bn is a drop in the ocean. According to Swiss Re, natural catastrophes around the world caused $166bn of economic losses in 2016 while the infrastructure gap has been measured at $350bn a year. A detailed paper on the economic impact of conflicts by the International Monetary Fund found that after three years of conflict, MENA countries, on average, suffered GDP losses of between six and 15 percentage points. This equates to $190bn to $474bn.
But it is outside the work with the poorest countries under IDA that the funding drought really hits home, in particular the International Bank for Reconstruction and Development (IBRD), its arm that focuses on middle income countries and which depends on capital from its shareholders.
The World Bank has been pushing over the past few years for a general capital increase. However, it is growing increasingly clear that Donald Trump is unwilling to offer more money from the United States, which holds a 17.25% share in IBRD.
Morris at CGDev says that without a capital increase it will be hard for the Bank to move forward without what he calls “creative solutions in looking at the financial model that would allow them as an institution to do more to support the agenda”.
Speaking earlier this year Jim Yong Kim, the Bank’s president, said that in a world of squeezed public sector budgets the Bank needed to be an “honest broker” that helps “crowd in” the vast quantities of non-invested private sector capital.
At the heart of this agenda is the idea of de-risking long term infrastructure and humanitarian projects that investors such as pension funds shun. “We have to be much more adaptable and we have to face rapidly changing circumstances,” says Kristalina Georgieva, chief executive officer of the World Bank.
“We are concentrating on how we can get the private sector to overcome risks and be more present and active in vulnerable countries by giving them the certainty that they can invest — and by so doing can improve the lives of people.”
PPP OR NOT PPP
A key tool that the World Bank is relying on to bring in outside capital is the public private partnership (PPP), a contract between a government and a private sector organisation to provide infrastructure or service.
Research by Eurodad, an NGO that monitors the Bank, shows that a wave of money invested through PPPs began in 2004. Over an eight year period, investments increased sixfold: from $22.7bn in 2004 to $134.2bn in 2012 [see graph].
While the majority of the money went to rich country enthusiasts such as the UK, measured as a share of their economy the influx of cash was higher in low income than in high income countries [see graph].
Luiz Vieira, co-ordinator of the Bretton Woods Project (BWP), says research shows the evidence of the effectiveness of PPPs in terms of both cost and the quality of the outcome is “questionable at best”.
“We argue that the evidence is inconclusive and experience shows they tend to be more costly because private firms have higher borrowing costs and they can leave states with considerable contingent liabilities. We are pressing the Bank at the very least to stop pushing PPPs.”
He is also sceptical the World Bank can ever wholly de-risk a developing country project. “Ultimately who will be responsible for the risk if these projects will go under?” he asks. “Whatever the contract says, the government will have to step in particularly if it is for essential services. They have to take responsibility in the end.”
Georgieva says the World Bank is determined to use innovative financing that she says is key to restoring prosperity to countries that are vulnerable to natural disasters. “We are trying to bring insurance to work for poor people. For years, rich countries have been using insurance to bring down risk so why not make that available to poor countries and poor people?
A recent $320m pandemic insurance bond sold by the World Bank to support its Pandemic Emergency Financing Facility (PEF) shows how this should work.
The bonds will pay investors a regular coupon, in exchange for which they lose some income or capital if a catastrophic infectious disease takes hold. It covers outbreaks of infectious diseases most likely to cause major epidemics, including filoviruses, which include Ebola.
PEF financing for eligible countries will be triggered when an outbreak reaches predetermined levels of contagion, including number of deaths; the speed of the spread of the disease; and whether the disease crosses international borders.
Georgieva says the Ebola outbreak was the “most tragic” case where the scale of the problem mushroomed while donors worked to mobilise funding. “We were running after a problem that ended up costing a couple of billions of dollars.”
But some agencies are critical of insurance as a guaranteed method of delivering aid when it is needed. ActionAid highlights an insurance policy it says failed the people of Malawi during the 2016 El Niño drought. The policy, which cost Malawi nearly $5m, failed to deliver timely assistance to 6.5m people because of major defects in the model, data and process used to determine a pay-out.
Despite Malawi declaring a national emergency in April 2016, the insurers initially refused to pay out. An $8m payment was eventually made nine months later in January 2017 but ActionAid said total drought response costs were estimated at US$395m.
Speaking at a conference on global risk reduction in the summer, Jonathan Reeves, policy adviser on resilience and emergencies at ActionAid, said the research sent a clear message to the G7, World Bank and others agencies to stop their “headlong rush to push the false solution of insurance on poor and vulnerable countries” and re-consider the evidence. “World leaders should send a strong signal that insurance is not a quick fix for broken development, adaptation and humanitarian finance systems.”
Vieira at BWP says the Bank is responding to the squeeze on its income. “In terms of lending volume they are not as significant as they once were so they are trying to find their niche. What’s their niche? They want to become market makers. They were calling themselves a knowledge bank and now they are a solutions bank.”
Morris at CGDev said the idea of getting “trillions from billions” will still come down to securing the billions from shareholders to start with. He says that while the Bank can create instruments to make investment more attractive, it cannot control whether and when private investors will inject money.
“What they can control is conversations with their own shareholders about their own resources and that is where the pressing agenda is,” he says. “If they want to go from billions to trillions, they have to have the billions to hand and that’s where there’s some concern at the moment.”
Ultimately a lot will rest on the relationship that Kim can forge with Trump and his administration.
The decision by the US president to put forward a budget proposal reducing funding for multilateral development banks, including the World Bank, by around $650m over three years was seen as a sign that the White House had gone cool on its neighbour two blocks west on Pennsylvania Avenue.
However, the White House’s position may be more nuanced, Morris says. The US did support the replenishment of IDA but has shown hostility towards the Bank’s work in countries such as China, Mexico, India and Brazil.
“Inside this administration, there will be more assertive views than under [former president] Obama that the Bank does not have a compelling role to play in emerging markets that have deep access to capital markets,” he says.
The Bank therefore has had to find creative solutions as it did in Lebanon and Jordan — both middle income countries hit by the Syrian refugee crisis. It used its Global Concessional Financing Facility to attract £370m to improve the lives of Syrian refugees and host communities by expanding crucial public health services in both Jordan and Lebanon as well as strengthening critical wastewater infrastructure in Jordan.
“Creativity was called for because these countries were middle income countries so they would not qualify for the sort of assistance that would come from IDA,” Morris says. “Those are the challenges that increasingly arise. If you have the US staking out a more rigid position and saying, ‘no, the only thing we are supporting is your work in strictly defined low income countries’ then it will be that much harder for the Bank to show up and be responsive in these complex situations.”
However, there has been evidence of a change of heart within the Trump administration. In July Trump threw his support — and some money — behind the World Bank’s $1bn Women Entrepreneurs Finance Initiative to help women in developing countries start and grow a business.
The United States initiated the idea for the facility and will serve as a founding member along with other donor countries.
Significantly the move was championed by Ivanka Trump, America’s “first daughter”. “Whatever the merits of that fund there is no doubt that it did help to establish and build a relationship between the administration and the Bank in a positive sense,” Morris says. “We have to consider that as a channel between the president of the Bank and the White House, and [Kim] is doubtless using that to make a broader case.”
Whether it is working with the president’s daughter or seeking bespoke donations for the refugee crisis, these responses are part of the Bank’s vision for an “agile” Bank — something Georgieva is implementing.
She has already taken on the institution’s renowned bureaucracy by cutting in half the frequency of regular meetings, significantly reducing the length of project documents and shortening the comment process.
“Kristalina Georgieva has been put in charge of daily administration of the Bank to free up the president to do more strategic thinking,” Vieira says. “She will be very focused on value for money.”
Allied to this is its “multiphase programmatic approach”, which was unveiled in July and proposes to delegate some executive board project reviews and approvals, and therefore its oversight functions, to management.
This worries the NGOs more. Vieira says it creates a system where the board does not have to approve every project the Bank agrees to. “They will approve a multi-year packet for, say, Malawi composed of many parts but not all the programmes will necessarily require approval.
“Of course CSOs are in favour of streamlining processes etc. but we are worried about the impact in terms of due diligence. The Bank will be hammering the message home that they are being more responsive to borrower countries but we will be asking what that means in terms of incentives for staff.”
Speaking at the London School of Economics on the eve of the meetings, Georgieva says that the Bank is determined to invest in people and in education and health in countries that are most vulnerable. “We want to be able to show results you can get for your money.”