Debt Traps in World Bank Maximizing Finance for Development Agenda

Not So Fast: The World Bank initiative to securitize infrastructure lending is fraught with peril, and deserves a broader public debate

Rick Rowden

Regarding the World Bank’s Maximizing Finance for Development (MFD) initiative and its “billions to trillions” agenda to bolster public aid for infrastructure loans in developing countries by attracting private investment from capital markets, a recent report published by the Heinrich Boell Foundation explored the initiative in detail, and raised many alarms. The report thoroughly explains the MFD initiative and how it seeks to promote public-private partnerships (PPPs) in new infrastructure lending by securitizing new foreign aid flows from the multilateral development banks, and then selling asset-backed securities on global capital markets as a way to increase the amount of investment financing for infrastructure.

Red Flags and Dangers

Building on the growing amount of research in these areas, the report explained how the MFD approach of using securitization markets raises a host of red flags and dangers – namely the danger of public sector debt build-up and the increased possibilities of having to pay out large “contingent liabilities” to private financiers whenever infrastructure projects get delayed or end up costing more than anticipated. In fact, strangely enough, the report notes that even the IMF fiscal affairs unit – which tracks levels of debt unsustainability in developing countries – has signaled alarms about using PPPs and the securitization approach for financing new infrastructure in developing countries, noting that the preference for off-balance sheet financing simply masks actual degree of higher levels of public sector debt liabilities if and when things go wrong. And with infrastructure projects, something almost always goes wrong.

The World Bank has coordinated with several other regional multilateral development banks and the Group of 20 (G20) countries to further promote the plan (widely viewed as a way to better compete against Chinese development banks in providing infrastructure lending to developing countries). The Norwegian authorities got behind this agenda largely without any public debate. Many no doubt hoped that by making such investments more attractive to global private capital markets, the donor countries could literally turn billions into trillions. Yet, a critical interrogation of the agenda is long overdue.

From the Washington Consensus to the Wall Street Consensus

Titled, “From the Washington Consensus to the Wall Street Consensus: The financialization initiative of the World Bank and multilateral development banks,” the report questions whether the dominant logic that "private finance first" is really always the best option, and describes seven key risks posed by the new initiative –

  • the use of the “shadow banking” system that is based on over-leveraged, high-risk investments that are largely unregulated and not backed by governments during financial crises;
  • the extensive use of public-private partnerships (PPPs), despite the poor track record of PPPs, many of which have ended up costing taxpayers as much if not more than if the investments had been undertaken with traditional public financing;
  • the degree of proposed deregulation reforms in the domestic financial sector required of developing countries would undermine the ability of “developmental states” to regulate finance in favor of national economic development;
  • the degree of financial deregulation required would also undermine sovereignty by making the national economy increasingly dependent on short-term flows from global private capital markets and thereby undermine the sovereign power of governments and their autonomous control of the domestic economy;
  • the uncertainty relating to governance and accountability for the environmental, social and governance (ESG) standards associated with development projects;
  • the deepening of the domestic financial sectors in developing countries, as required by the initiative, can create vulnerability as the size of the financial sector grows relative to that of the real sector within economies; and
  • the privatization and commercialization of public services, including infrastructure services, as called for by the initiative, has faced a growing backlash as reflected by the global trend of remunicipalizations.

The fact that the securitization initiative is being promoted in such a high profile way by the World Bank, other MDBs and the G20 despite all of these risks reflects an intensified contest between those supporting the public interest and those supporting the private interest.

In addition to calling for greater public debates on the efficacy of this approach, the report points to better ways that infrastructure could be financed, including through the scaled up use of traditional public financing mechanisms. It lists several of the important ways in which this can be done, including steps that could be taken by G20 countries, DFIs and governments.

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