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Public Risk, Private Profit
The World Bank and the Private Sector

by Nicholas Hildyard

first published 1 July 1996

Summary

For years, bilateral and multilateral aid agencies have provided a multi-billion dollar source of subsidies to commercial enterprises in both the North and the South. Until recently, the vast majority of these subsidies came through national governments in the form of contracts for development projects. Increasingly, however, the multilateral development banks, instead of funding projects through the state, are funding private companies to undertake projects, underwriting the investments through guarantees or providing loans direct to the companies involved. Development is effectively being “privatised”. For companies, a raft of new “corporate welfare” programmes are on offer.

Contents

Introduction

For years, bilateral and multilateral aid agencies have provided a multi-billion dollar source of subsidies to commercial enterprises in both the North and the South. Until recently, the vast majority of these subsidies came through national governments in the form of contracts for development projects. Increasingly, however, the multilateral development banks are "moving to the private sector": instead of funding projects through the state, the MDBs are funding private companies to undertake projects, underwriting the investments through guarantees or providing loans direct to the companies involved. Development is effectively being "privatised". For companies, a raft of new "corporate welfare" programmes are now on offer.

In late 1995, the World Bank -- an institution whose mandate is the relief of poverty in the Third World -- embarked on a bizarre promotional campaign. It placed full page advertisements in the major Washington newspapers, informing readers of the vast subsidies that the Bank gives to some of the biggest and most profitable companies in the US. "How to Get More Bang for your Bucks", read the headline. "The World Bank is just what it says it is -- a Bank that invests in the world", ran the copy:

"It doesn't just lend money, it helps developing countries become tomorrow's markets. Just ask McDermott International Inc. of New Orleans, Lousiana. Thanks to a smart World Bank investment in Africa five years ago, McDermott brought home a $255 million contract for offshore oil and gas construction that produced work for over 1,000 Americans. And that's just one success story. Developing countries now purchase almost $200 billion in US exports, creating nearly 4 million American jobs."

The advertisements -- signed "The World Bank: A Good Investment" -- were prompted by threats from the US Congress to cut the US contribution to the International Development Association (IDA), the arm of the Bank which provides concessional loans to the world's poorest countries.

Nor was the Bank the only agency battling "on behalf of IDA". The US Treasury joined the fray, bringing out a 200-page report detailing the contracts awarded to US companies for projects funded by the World Bank and other multilateral development banks (MDBs). In just two years (1993 to 1995), according to the report, the MDBs had channelled nearly $5 billion to US firms. Major beneficiaries included such household names as General Electric, General Motors, Motorola, IBM, AT&T, Allied Signal, Cargill and Westinghouse. Caterpillar alone was estimated to rake in $250 million a year in export sales of construction equipment as a result of MDB projects. All told, according to the US Treasury, the MDBs provide "one of the largest and most important sources of finance now available for US firms doing business internationally."

Such figures confirm what critics of the development industry have long maintained: namely, that official aid functions largely as an export subsidy for companies in the Northern industrialised countries. However, globalization and market liberalisation are rapidly changing both the form and the means by which the MDBs now subsidise the powerful.

Traditionally, Northern companies have benefited from the MDBs through contracts awarded for public sector projects such as roads, airports and irrigation schemes. Although governments still provide 90 per cent of the money spent on infrastructure projects worldwide, however, the trend is increasingly for projects to be undertaken by the private sector with governments acting as "facilitators rather than financiers". One reason is that many of the state enterprises which previously operated public projects have been privatised; another is that governments do not have the money to undertake the work.

In India, for example, IMF-imposed public spending cuts have led the government to turn to the private sector to construct and manage 10,000 kilometres (kms) of new superhighways, linking all the country's major cities. Twenty-two companies -- many from the US and UK -- have been invited to submit feasibility studies for the programme. Meanwhile, the National Highways Act has been amended to allow private companies to maintain and operate national highways and to permit the introduction of toll charges on public roads. China is also planning many privately-financed roads, including the ambitious 123 km Guengzhou-Shozen superhighway, and Mexico has over 4,500 kms of private toll roads already in operation. By the year 2000, Chile hopes to have nearly 3,000 kms of toll roads under concession to commercial firms.

BOOT Me Up

Typically, such private sector projects are undertaken by international firms operating in association with local companies. Most projects are undertaken on a Build, Own, Operate, Transfer (BOOT) basis. The company or consortium finances the project; constructs, operates and maintains it; and finally, after an agreed period, transfers ownership to the state. In return, it collects fees on behalf of the government.

Inevitably, the subsidies which such companies seek from the MDBs are very different to those sought by business which are simply bidding for work on MDB-funded projects. Rather than hoping to win contracts, private sector developers are looking for MDB "support" to minimise the financial and political risks involved in undertaking projects.

Direct equity investments by the MDB is a particularly welcome form of subsidy, since the MDBs "are content with a lower rate of return than private investors." MDB influence over national governments is also of critical importance in ensuring "an appropriate policy environment" for the private sector, which the World Bank specifically equates with "multinational corporations". Likewise, MDB contacts within government can be useful in ensuring that investments are "protected" against competition. In the case of road schemes, for example, consortia have been known to demand government guarantees that no road improvements will be undertaken anywhere near privatised road networks, thus maximising the traffic that will use the privatised roads. In Mexico and Chile, the government guarantees companies operating toll roads a minimum level of traffic. If the traffic does not reach the minimum level, the government pays the concessionaire for the shortfall.

Going Private

For the World Bank and other MDBs, the shift towards private sector financing of projects is thus necessitating "new ways of doing business".

Firstly, the Bank is beginning to move from project lending to "policy" lending in the form of loans for removing trade barriers, privatizing government-owned companies and restructuring whole sectors of the economy -- such as mining and banking -- in order to allow the entry of multinationals. Since 1981, $35 billion worth of such policy loans have been made by the World Bank's two principal lending institutions, the International Bank for Reconstruction and Development (IBRD) and IDA. The benefits for business in the North are clear. As the World Bank points out, "US exports to countries receiving policy-based loans increased by 12 per cent [between 1981 and 1995], compared to 3.7 per cent for non-recipient countries." Imports of US goods to India alone rose from $1.9 billion in 1992 to $2.8 billion in 1993 after the Bank insisted that tariff barriers be reduced.

Secondly, the World Bank is undertaking internal reforms to make itself more "private sector friendly". As William Ryrie, a former head of the International Finance Corporation, the private-sector arm of the World Bank, acknowledges, "free advice" constitutes one of the major forms of subsidy that the World Bank and other MDBs offer the corporate sector. Efforts are thus underway to expand the services the Bank is able to provide to private firms through the newly created Private Sector Development (PSD) group. According to Bernard Pasquier, a Bank official who works for the PSD, "We are creating a front gate so that we can help companies better. The idea is ... to, shall we say, put a little oil in the machine to make it go more smoothly. Our objective is to help multinational and home grown companies in the developing countries to build up a thriving private sector."

Thirdly, the World Bank is boosting the amount of money it lends directly to the private sector. Of the four institutions that make up the World Bank group, only two -- the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) -- have traditionally supported private companies directly. Now the two other arms of the World Bank (the IBRD and IDA) are "moving to the market".

Bending the Rules

For the IBRD and IDA, this shift in orientation initially required some delicate manoeuvring, since their founding charter explicitly debars them from directly financing private enterprises. All their loans must go to governments. Innovative financial deals were therefore agreed in order to make the loans whilst sticking within the letter of the Bank's charter. The IBRD's first public sector loan for the Hub power project in Pakistan, for example, involved a "back-to-back" deal whereby the Pakistan government received the money but loaned it straight to the private company "financing" the project.

Since then, the Bank's Board of Executive Directors has set aside concerns over the charter restrictions and agreed to guarantees and loans for private investments being made a normal part of the IBRD's operations. IDA too is expected to introduce a private sector lending window even though the finance ministers of contributing countries rejected the proposal in 1995. A major beneficiary of the new guarantee facilities has been the Westinghouse Corporation of Pittsburgh, Pennsylvania, which has won a $155 million contract to supply turbines for a power project in China guaranteed by the Bank.

Other MDBs are also introducing co-financing and guarantee programmes for the private sector. Indeed, the recently-formed European Bank for Reconstruction and Development (EBRD), which loans to Eastern Europe and the former Soviet Union, is required to allocate 60 per cent of its lending to the private sector. In 1994, more than 73 per cent of EBRD loans went direct to the private sector -- some $1.7 billion in total.

Heir to the Bank

Meanwhile, both the IFC and MIGA are assuming an increasingly important role within the World Bank group.

Set up in 1956 -- but for years a minor organization on the fringes of the Bank -- the IFC is now seen by many as the "heir to much of the Bank's mission". MIGA's star is also rising: although only founded in October 1985, it is now the fastest-growing institution in the World Bank group.

Despite its mandate to act as a "development" institution, the pattern of IFC has always revealed a consistent bias towards the interests of large corporate investors. Between 1990 and 1994, for example, 73 per cent of IFC's lending went to just 15 countries -- almost all strong middle-income economies, including two of the East Asian "miracle" countries. In Argentina, the IFC has been heavily involved in oil exploration, taking a 15 per cent stake in exploration joint ventures in the Chirete-Morillo-Olleros blocks, one with a local company and one with a foreign investor. It has also backed Aguas Argentinas, an international consortium, which was awarded a 30 year concession to operate the greater Buenos Aires water and sewerage network. Likewise, in Swaziland, the IFC is helping to finance an expansion of paper and pulp production through a loan to Swazi Paper Mills. The project will lead to increased emissions of greenhouse gases, dioxins and organochlorines.

Free Market?

For its co-investors, IFC loans bring substantial benefits, not only because of the influence that the agency can bring to bear on governments but also because the IFC's involvement lends credibility to projects that might otherwise be considered too risky. As Friends of the Earth note: "Thanks to its triple A credit rating and status as a multinational institution, IFC investment in a project is seen as a security by the private investor ... The IFC can therefore act as a catalyst to encourage investment in a project by private banks. In 1992/3, other sources provided $7 in project financing for every dollar approved by the IFC."

MIGA, too, offers the private sector major benefits. In many cases, the guarantees it provides against political risks (such as nationalisation, losses on currency transfers, war and civil disturbances) would not be available at an affordable price on the open market. Having MIGA covering risks that the market would not bear, or would price prohibitively high, lowers the cost of financing and thus represents a major subsidy to companies.

Recently, for example, MIGA guaranteed a new gold mine on Lihir Island, 700 kilometres north-east of mainland Papua New Guinea (PNG). The mine is to be operated by a joint venture led by Rio Tinto Zinc, which plans to start extracting gold from an extinct volcano in January 1998. Following a recent popular uprising which led to the closure of the giant Bougainville copper mine, however, bankers have found it "virtually impossible to raise project finance for schemes [in PNG]" without public insurance against political risks. Without MIGA's backing through a $66.6 million guarantee, the project, which is likely to prove hugely destructive of the environment, would in all probability not have gone ahead.

Lack of accountability

Companies are not only benefiting from the direct funding and guarantees which they are now receiving from the World Bank group. They also benefit indirectly from the IFC and MIGA having weaker information and disclosure policies, less accountability and less stringent environmental policies than even the IBRD. As Peter Bosshard of the Berne Declaration, a Swiss NGO, notes,

"The guidelines on the environmental analysis of IFC and MIGA projects are less strict and comprehensive than the World Bank's respective Operational Directive. The assessments can be done later in the project cycle, when critical decisions about the project have been taken and the analysis of alternative options does not make sense."

Many documents which are publicly available in the case of IBRD operations are not made available by the IFC. MIGA is even more secretive. "Using a vague omnibus clause in its constitution, the Agency shrouds itself in complete secrecy about its ongoing operations", comments Bosshard. "It does not even provide information about project approvals by its Board, as long as the guarantee contracts have not been finalized with its clients." This secrecy prevents any input by affected peoples or NGOs into the planning phase of MIGA-supported projects.

Redefining Development

With the growing involvement of the private sector in the financing and implementation of projects, a new discourse is emerging within the MDBs. The market is being cast as the best judge of what constitutes sound "development": and private enterprise as the best means of ensuring social welfare. Whilst the public is subjected to "market discipline", however, multinationals continue to enjoy the largesse of the Bank. Corporate welfare, not social welfare, provides the real agenda.