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May 15, 2018

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May 15, 2018

How to decode a UN Report on Global Finance (and find an important disagreement with the World Bank on private v public)

May 15, 2018
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A giant coalition of UN-affiliated aid organizations (3 pages of logos!) recently published Financing for DevelopmentIATF report: Progress and Prospects 2018. These big tent reports are a nightmare to write, and not much easier to read. Anything contentious is fought over by the participants, and the result tends to be pretty bland. I’m not sure how many people read them, tbh.

But on this occasion< I got the assistance of a helpful elf from deep inside the UN system to decode a significant disagreement within the ‘Inter-Agency Task Force’. You may not be surprised to hear that it’s basically the World Bank/IMF v the rest of the UN. Oh, go on then.

What does the World Bank say?

To put it crudely the Bank’s “Cascade” approach is ‘privatize everything first; if you can’t successfully privatize, then run a Public-Private Partnership (PPP) or blended finance operation or provide some guarantees for the private sector, and only if all the above fails should you go for public sector projects. Basically the Bank is returning to the 1990s under the rubric of “Maximizing Development Finance”. If you don’t believe me, here’s what the Bank tells its Development Committee (see page 2, Box 1 in this World Bank document).

“When a project is presented, ask: “Is there a sustainable private sector solution that limits public debt and contingent liabilities?”

  • If the answer is “Yes” – promote such private solutions.
  • If the answer is “No” – ask whether it is because of:

o Policy or regulatory gaps or weaknesses? If so, provide WBG support for policy and regulatory reforms.

o Risks? If so, assess the risks and see whether WBG instruments can address them.

If you conclude that the project requires public funding, pursue that option.”

To be fair, the Bank strategy does go on to say: “In assessing the potential of private solutions, the WBG will work with clients ensuring that the costs and benefits of private versus public solutions are properly assessed, and that equity and affordability concerns for consumers are properly addressed. More generally, private solutions will be promoted where they are economically viable, fiscally and commercially sustainable, transparent regarding the allocation of risks, provide value for money and ensure environmental and social sustainability.”

public private partnershipHow does the UN report respond?

The report manages to sneak a few digs at this approach through sign off, talking about the importance of considering public goods, and emphasizing the risks from PPPs and blended finance. And of course. that Governments should have choice to match financing to their national strategies and, especially, preferences. Imagine the political uproar of the World Bank telling the UK that because UK public finance is limited and scarce, the NHS should be privatized by default regardless of political preferences simply because it is possible… yet that is one way the Cascade could be implemented.

Of course, there is nothing in the report outright saying the Cascade approach is a disaster – not surprising, since the World Bank is a partner on the report. But the implications of the analysis are that the Cascade is too crude a tool.

From the overview (page 2): “Public, private and blended financing contribute to financing SDG investments. … Private finance and investment, public and blended financing all remain indispensable. Project and country characteristics and national policy priorities will determine which financing model is best suited for specific investments, and which actors are best positioned to manage investment risks and provide services equitably and cost-effectively; Public policies and actions are at the heart of the 2030 Agenda for Sustainable Development.”

From Chapter II (page 15): “a key question underlying many of the international debates is what roles public, private and blended financing should play. The Addis Agenda stresses that all sources of financing are needed and that they are complementary, with different objectives and characteristics making them more or less suitable in different contexts and sectors. The Addis Agenda also underlines the potential of blended finance instruments, while calling for careful consideration of their appropriate structure and use.”

One way to characterize all of this is to ask whether the international community is saying (a) investment needs are

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huge, public finance is limited, and because of this the only solution is to leverage private finance; or is it saying (b) investment needs are huge, public finance is limited, and so we really need to raise tax revenue as well as leverage private finance and use them both more intelligently? Again, the report delicately critiques the private good/ public bad mantra.

“Equity, social inclusion and other public good considerations provide a rationale for public engagement through direct financing, subsidies, guarantees, or other incentives and/or regulation. This underscores the need for boosting public financial resources, both domestically (largely through improved taxation) and internationally (through official development assistance (ODA)).” (page 16)

“Private financing is most likely to be appropriate in sectors where projects can generate sufficient returns, such as in the energy sector, although with public oversight and often public support. The use of private finance is more challenging in areas where equity considerations and large financing gaps reduce profit prospects—such as water.

When the perceived risk of project failure is high, the cost of private finance, in particular, is likely to be prohibitive. Financing strategies need to consider how to avoid locking in high financial costs that reflect domestic risks for the entire duration of infrastructure projects (often 20 years or more). This also underscores the importance of public finance, either through direct financing or blending strategies. However, blended strategies can also create contingent liabilities that need to be carefully managed.” (page 16-17)

The report sounds several warnings about jumping to PPPs and blended finance as a ‘softer’ alternative to outright privatization.

“Providers are increasingly focusing on the ability of development finance to mobilize additional private or commercial financing, often referred to as “blended finance,” with a view to maximizing the impact of scarce public concessional resources and mobilize funding that would otherwise not have been available for SDG investments. Providers should also engage with host countries at the strategic level, to ensure that priorities in their project portfolios align with national priorities and that blending arrangements are in the public interest.” (page 88)

And there are particular worries about donors/MDBs going off and financing things with the private sector that the government doesn’t want (see pages 104-105)

Very helpful thanks – and if any other moles want to help me decode such aidspeak documents in future, my door is always open!

9 comments

      1. The Bank, and especially the IMF, are doing lots of work on tax. Though it is correct that the World Bank Development Committee document on “Maximising Financing for Development” does not mention tax once. Neither does the op-ed written by Jim Kim to promote the strategy: https://www.devex.com/news/opinion-here-s-how-the-world-bank-is-maximizing-finance-for-development-92228

        Here is what Dr. Kim wrote that aligns with Duncan’s framing of the argument: “Today, official development assistance is about $140 billion a year worldwide. Philanthropists provide another $4 billion. But the reality is, we won’t come close to achieving the SDGs unless we work to attract private sector investment and make sure it works for the poor.”

  1. Incidentally this is the first time I’ve seen anyone suggest the cascade advocates privatising exisit assets, as oppose to how to finance new investment (this could merely demonstrate I’m out of touch)

  2. Duncan,

    “Private financing is most likely to be appropriate in sectors where projects can generate sufficient returns” implies that the profit motive is a sufficient condition for the success of a project. As anyone who has seen the private sector at work on the Southern Rail system can attest to – it is hogwash. Unsurprisingly, it is specialised foreign public sector companies that can do the job best.

    The paper does not address the issue of project failure and connected loss-taking. Just as foreign lenders of sovereign debt will not accept a haircut of their irresponsible lending, international lenders to the private infrastructure projects will insist on extraterritorial treatment.

  3. I don’t think promoting private financing is tne same as promoting privatisation. Governments can and do borrow from private capital markets to finance public sector spending, especially for capital projects. But financing gaps remain because private investors lack expertise and are unwilling to take risks. According to the World Bank, estimates of the gap in global infrastructure investment range from $3 – 5 trillion a year. Blended finance, “de-risking” of projects, and new products in bond markets can all help to attract private financing into this sector. In this context, the cascade approach does seem useful.

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