Development finance in times of Covid-19: Time for a rethink at the World Bank
Before Covid-19 most discussions on development finance were focused on using public money and institutions to ‘leverage’ private finance. The World Bank’s ‘Maximising Finance for Development’ (MFD) approach is perhaps the most widely known illustration of this drive. The pandemic has, however, exposed the consequences of decades of austerity policies and privatisation strategies that have undermined public health systems and stifled progress on universal social protection. With calls to rethink the prevailing development model, under the imperatives of ‘building back better’ economies and societies, it is critical to learn lessons and consider a change of course.
MFD and the financialisation of development finance
Maria José Romero, Eurodad
The MFD approach has structured the Bank’s operations since 2017. The objective is to attract the trillions of dollars managed by private institutional investors to help finance the Sustainable Development Goals (SDGs). ‘De-risking’ private finance is central to this approach and implies changing the investment climate and using financing instruments like guarantees and public-private partnerships (PPPs).
The financialisation of development lending refers to the creation of financial products out of bundled loans, ostensibly to diversify risk, which can then be traded. Recent announcements from JP Morgan and BlackRock suggest the financial sector is increasingly warming to the investment prospects being offered. This brings opportunities - but also challenges - to the fulfilment of SDG commitments and accountability. A 2018 open letter - signed by over 100 academics - detailed MFD’s many structural flaws, stressing that its focus on the financial sector to create investable opportunities in essential services such as water, health and infrastructure can have long-term negative consequences for equity in service provision.
The MFD is being increasingly integrated into country-level planning, with the support of various diagnostic tools, such as the World Bank’s Country Private Sector Diagnostic (CPSD). The CPSD ‘takes an investor perspective in reviewing all economic sectors’ to identify investment opportunities. Eurodad’s report, ‘Repeat Prescription’, exposes the role of the CPSD in shaping the domestic policies in target countries. For instance, in the case of Ghana, policy recommendations included measures for the commercialisation of public services, including education, while in the case of Kenya, the government was encouraged to pursue health PPPs.
Lessons to draw from PPPs
The economic downturn in the wake of the pandemic risks deepening fiscal austerity and intensifying the turn to private investment, as soon as fiscal stimulus in response to lockdowns are over. However, there is a growing body of evidence about problematic PPPs in both developed and developing countries. It shows, firstly, that PPP projects tend to be more expensive than publicly financed projects, due to the high cost of private finance, profit margins and the transaction costs associated with the negotiation of complex PPP contracts. In developing countries the returns required by investors are higher, due to higher perceived risks.
Secondly, PPPs effectively delay budget expenditures and do not lower the fiscal impact of projects. The true cost of PPPs is often unknown as operations are recorded off-balance sheet and they frequently lack transparency and scrutiny - in part due to commercial confidentiality.
Thirdly, PPPs are usually a risky business for the public sector, and hence for citizens. Non-transparent contingent liabilities are a great risk. These are financial obligations, the timing and magnitude of which depend on the occurrence of some uncertain future event outside the control of the government. For example, if the demand for the requested service or facility falls below a specified level. PPP projects can therefore be the source of debt in countries that are already at high risk of debt distress.
For instance, a flagship PPP project in Ghana, the Sankofa offshore gas project – backed by the World Bank – is an increasing fiscal burden for the public purse. In 2019, the country’s bill for ‘unused gas’ primarily due to a ‘take or pay’ clause in the contract amounted to $250 million. This was due to a lack of demand and delays in building associated infrastructure.
On the other hand, the Lesotho PPP hospital – also supported by the World Bank – swallows up almost a third of the nation’s health budget. As a result, last year the Deputy Ministry of Health called on citizens to ‘only go’ to the PPP hospital ‘when there is a serious need’, as the government’s bill to the private company is now reaching unaffordable levels.
The IMF Fiscal Affairs Department has already pointed to the fiscal risks of PPPs, and analysis post-Covid-19 argues that ‘major PPP contracts should be reviewed to identify likely materialization of contingent obligations’.
Fourthly, PPPs can shift public sector investment priorities, which can have detrimental effects on women and the most vulnerable. The strong focus on identifying profitable projects limits the extent to which PPP projects can proceed in areas which are at first not profitable. There are concerns that PPPs could become a mechanism for securing revenue streams for private investors rather than reducing poverty and inequalities.
Business as usual or building back better?
The financialisation inherent in MFD has already had significant consequences, contributing to increasing inequalities and financial instability, as developing countries have been left vulnerable to external shocks. The implementation of the MFD, therefore, greatly contributes to the underlying conditions that make the economic crisis triggered by Covid-19 significantly worse.
As the economic downturn deepens and countries deal with acute difficulties to deliver on the SDGs, the fight against inequalities and climate change, it is vital that the World Bank embraces the imperatives of ‘building back better’. This means a people-centred approach to development finance that builds resilience and strengthens public systems. Given the problematic track-record of the MFD, the World Bank should seriously re-evaluate this approach. Its promotion can only mean ‘business as usual’.