World Bank’s ‘Mobilizing Finance for Development’ not financing development

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY, KUALA LUMPUR: The World Bank leadership must urgently abandon its ‘Maximizing Finance for Development’ (MFD) hoax. Instead, it should resume its traditional multilateral development bank role of mobilizing funds at minimal cost to finance developing countries.

Funding is urgently needed for Covid-19 containment, relief and recovery efforts, to prevent recessions becoming protracted depressions and to achieve the Sustainable Development Goals (SDGs).

Mobilizing funds, maximizing finance

The World Bank’s MFD – a reheated version of its 2015 Billions to Trillions: Transforming Development Finance (B2T) campaign – promised to leverage billions of ODA into trillions of development finance. However, MFD has failed to achieve its purported objective to fill the estimated US$4~5 trillion annual SDGs funding gap.

Blended finance and public private partnerships (PPPs) are its two main instruments for such leveraging without offering evidence that either can and will deliver development projects much better than traditional public procurement.

Both benefit private finance at the expense of the public interest, particularly by increasing the risks of government contingent liabilities. Increasing such exposure is presented as an unavoidable cost of raising additional finance.

The Bank has long claimed that private finance offers the best solution to pressing development and welfare concerns. Its MFD strategy urges using public money to leverage private finance, and capital markets to transform bankable projects into liquid securities.

It presumes that most developing countries cannot achieve the SDGs’ Agenda 2030 with their own limited fiscal resources, especially as overseas development assistance (ODA) becomes increasingly scarce.

The strategy envisages multilateral development banks (MDBs) and development finance institutions increasing financial leverage through securitization to attract private investment, particularly by institutions.

It would deploy scarce public resources to ‘de-risk’ such financing arrangements by transforming ‘bankable’ development projects into tradable assets. Thus, governments bear more of the risks and costs of greater financial fragility.

The MFD approach had mobilized only US$0.37 of additional private capital for every US$1 of public money invested in low-income countries (LICs), according to an April 2019 study. Leverage ratios were generally low across sectors, and lowest for LIC and middle-income country (MIC) infrastructure.

Blended finance no magic bullet

The study also revealed that blended finance has effectively transferred risk from the private to the public sector. The public sector had borne 57% of the cost of blended finance investments on average, but 73% in LICs. Despite ever more public subsidies to incentivize private investment in LICs, leverage ratios may have declined.

Thus, “the big push for blended finance risks skewing ODA away from its core agenda of helping eradicate poverty in the poorest countries”. Others fear that blended finance “will crowd out ODA rather than crowd in private finance”.

Blended finance – “a heady cocktail of public, private and charitable money”, according to The Economist – came into vogue following the 2015 UN Conference on Financing for Development in Addis Ababa.

The Economist called it a “honey trap”, noting that blended finance was “floated at all manner of gatherings, from the recent meetings of the IMF and the World Bank to the World Economic Forum (WEF) in Davos”. The WEF claimed that every dollar of public money invested typically attracted US$1~20 in private investment.

However, as The Economist recently found, “blended finance has struggled to grow. Since 2014 the flow of public and private capital into blended projects and funds has stayed flat at about US$20bn a year…far off the goal of US$100bn set by the UN in 2015” for climate investments by 2020. On average, MDBs mobilize less than US$1 of private capital for every public dollar.

The Economist concluded, “merging public and private money will always be hard, and early hopes may simply have been too starry-eyed. A trillion-dollar market seems well out of reach. Even making it to the hundreds of billions a year

may be a stretch”.

Public finance, private profits

An early 2018 World Bank review of regulatory frameworks for procuring PPP infrastructure projectscame up with a long list of shortcomings in both developed and developing countries.

It found poor “government capabilities to prepare, procure, and manage such projects constitutes an important barrier to attracting private sector investments”. Thus, authorities often failed to consider PPPs’ fiscal implications, risks of opportunistic renegotiations and lack of transparency.

A 2018 European Court of Auditors report recommended that the EU and member states “should not promote a more intensive and widespread use of PPPs until the issues identified in this report are addressed”.

It had found “widespread shortcomings and limited benefits, resulting in €1.5 billion of inefficient and ineffective spending. In addition, value for money and transparency were widely undermined, particularly by unclear policy and strategy, inadequate analysis, off-balance-sheet recording of PPPs and unbalanced risk-sharing arrangements.”

Likewise, a 2018 UK National Audit Office report noted that it has “been unable to identify a robust evaluation of the actual performance of private finance at a project or programme level.” It also found the costs of one group of PPP projects in education around 40% higher than for a project financed by government borrowing.

Similarly, the Australian Auditor-General’s report on private health sector involvements concluded, “It appears governments have embarked on the path of increased privatisation without the benefit of rigorous analysis of the benefits and costs. Individual examples of privatisation have highlighted many problems which have resulted in costs rather than savings to the public purse”.

A more recent study concluded, “The mixed public-private funding and provision has had a deleterious effect on the Australian hospital system”. Clearly, PPPs have been much abused, even in developed countries with presumably better regulatory, governance and oversight capacities and capabilities than in most developing countries.

Mobilizing finance for private partners

In October 2017, ahead of the World Bank Group annual meeting, 152 organizations from 45 countries issued a manifesto opposing “the dangerous rush to promote expensive and high-risk public-private partnerships (PPPs)”. It pointed out that the “experience of PPPs has been overwhelmingly negative and very few PPPs have delivered results in the public interest”.

The World Bank’s Public Private Partnership in Infrastructure Resource Center (PPPIRC) has identified ten important risks of PPPs, such as “development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes”.

The PPPIRC warned that “the cost has to be borne either by the customers or the government through subsidies”, and that the “private sector will do what it is paid to do and no more than that”.

Thus, there are serious doubts about the extent to which governments can count on the private sector to support sustainable development. Yet, the Bank claims unambiguously, “PPPs are increasingly recognized as a valuable development tool by governments, firms, donors, civil society, and the public”.

With the current World Bank leadership trying to reduce developing countries’ debt, it may well abandon the former Obama-appointed World Bank President’s MFD. But it also seems to be eschewing banks’ financial intermediation role of raising and lending funds at low cost to developing countries.

Related IPS readings:

1. “World Bank Financializing Development”

2. “Blending Finance Not SDG Financing Silver Bullet”

3. “World Bank Financialization Strategy Serves Big Finance”

4. “Hospital PPPs Undermine Healthcare”

5. “PPPs Likely to Undermine Public Health Commitments”

Former UN official calls out failing African Green Revolution: Replacing Hunger with Malnutrition

by Tim Wise

It’s been nearly fifty years since Frances Moore Lappé reminded us in her seminal work, Diet for a Small Planet, that hunger is not caused by a scarcity of food, it is caused by a scarcity of power. Economist Amartya Sen won a Nobel Prize more than twenty years ago for showing that famine was rarely caused by a lack of food.

Yet, here in 2020, with the world well aware of the twin dangers of hunger and malnutrition, there was Agnes Kalibata, the leader of the Alliance for a Green Revolution in Africa (AGRA), telling an online audience that poor, hungry countries can’t think about diet diversity, “it’s a luxury.”

The comments earned a sharp response from Jomo Kwame Sundaram, the Malaysian economist whose most recent post was Assistant Director General at the UN Food and Agriculture Organization.

“A popular and persistent misconception is that it is necessary to first overcome dietary energy undernourishment before addressing malnutrition,” he wrote in his column for InterPress Service.

Read the rest of Tim Wise's article here: https://www.iatp.org/blog/202008/replacing-hunger-malnutrition-former-un-official-calls-out-failing-african-green

ISDS enables making more money from losses

Jomo Kwame Sundaram

KUALA LUMPUR: With the Covid-19 contagion from late 2019 spreading internationally this year, governments have responded, often desperately. Meanwhile, predatory international law firms are encouraging multimillion-dollar investor-state dispute settlement (ISDS) lawsuits citing Covid-19 containment, relief and recovery measures.

Sharing the pain

Most governments failed to introduce sufficient precautionary measures early enough to prevent Covid-19 contagions from spreading. And when they did act, they often believed they had little choice but to impose nationwide ‘stay in shelter’ lockdowns to enforce preventive physical distancing.

To enable businesses and households to survive the adverse effects of such lockdowns, governments have provided relief measures, for at least some of those believed to have been adversely affected, especially for businesses better able to lobby effectively. 

Meanwhile, there are already thousands of mainly bilateral investment treaties as well as bilateral and plurilateral trade agreements worldwide, enabling foreign investors to sue governments before private arbitration tribunals to profit from their wide-ranging treaty rights.

Transnational corporations (TNCs) can claim staggering sums in damages for alleged investment losses, for either alleged expropriation, or more typically, indirect ‘damage’ caused by regulatory changes, in this case, Covid-19 government response measures. 

As some such measures try to share the burden of the crisis, e.g., with asset owners and other contracting parties, the international law firm Shearman & Sterling advises financial firms, “While helping debtors, these measures would inevitably impact creditors by causing loss of income”, referring to debt relief and restructuring efforts among others. Foreign registered real estate or property companies can also sue governments that protect lessees or tenants who cannot make their lease or rent payments as contractually scheduled after their operations are shut down or disrupted by emergency regulations imposed. 

Pharmaceutical and medical supplies companies can also appeal to such arbitration tribunals to claim losses due to price controls and ‘violated’ intellectual property rights for Covid-19 tests, treatments, medical and protective equipment as well as vaccines.  Lucrative ISDS lawsuits

In recent months, international law firms have been encouraging ISDS lawsuits citing government measures to check contagion and mitigate their economic consequences, urging clients to invoke investment and trade agreements to claim for allegedly lost income or additional losses or costs due to new government policy measures.

Another firm Ropes & Gray advises: “Governments have responded to COVID-19 with a panoply of measures, including…limitations on business operations, and tax benefits. Notwithstanding their legitimacy, these measures can negatively impact businesses by reducing profitability, delaying operations or being excluded from government benefits…For companies with foreign investments, investment agreements could be a powerful tool to recover or prevent loss resulting from COVID-19 related government actions.” [my italics] 

Shearman & Sterling advises, “Some interventions will be protectionist—they will seek to support or benefit domestic enterprises (strategic or otherwise) but not foreign investors”, without mentioning their generally far lower tax contributions and generous investment incentives enjoyed. Profiting from the pandemic 

After advising clients to look out for discriminatory measures which could become the bases for such claims, law firm Sidley warns governments that proceedings can be very costly as “it is not only the actually invested amounts that can be considered recoverable damages, but also lost future profits”. 

Such law firms remind their clientele that many of the more than thousand ISDS lawsuits filed worldwide have arisen during political or economic crises. Covid-19 pandemic response measures are now being widely studied as possible pretexts for another round of lawsuits. 

These corporate lawsuits can impose massive fiscal burdens on governments. As Pia Eberhardtshows, legal costs average well over US$6 million per party, but can be much higher. Hence, such suits can drain government fiscal resources. 

Although it becomes much more expensive if governments lose, they still have to cover their own legal expenses even if they do not lose. As of 2018, governments had been ordered to pay US$88 billion for settlements made public.  There is considerable scope for such cases given the still growing, broad range of government Covid-19 measures, e.g., foreign-owned water supply companies can sue governments for insisting that more public water supply sources be provided, or household water supplies remain uninterrupted, even if water bills are not settled, to enable more regular hand washing.  ISDS undemocratic, illegitimate

International investment law is generally independent of national legislatures and biased toward TNC interests. Investment agreements prescribe foreign investor rights and privileges very broadly, but their duties and obligations, usually rather minimally. 

Sovereign national societies, parliaments and governments have considerable scope for discretion in addressing complex political issues involving diverse social and economic interests. Also, national courts generally do not award damages for lost future profits as these are considered completely conjectural. 

But ISDS provides much more favourable treatment to powerful TNCs. Also, international arbitration tribunals ignore and undermine the legitimate scope for national courts, law-making and democratic government decision-making.  The typically transnational arbitration tribunals that interpret such law generally ignore recent legal developments, which take more account of the rights and responsibilities of various other stakeholders in national societies. Thus, arbitration awards tend to be much more lucrative, for both TNCs and their lawyers, than ordinary national court decisions.

A South Centre Southview urges considering various measures in response to the threat such as terminating or suspending investment treaties, withdrawing consent to arbitration, statutorily prohibiting recourse to arbitration and appealing to TNCs’ corporate moral responsibility

Already, there are growing appeals for an immediate moratorium on ISDS lawsuits and to end ISDS proceedings involving Covid-19 emergency measures, while some countries, e.g., India, South Africa and Indonesia, had scrapped some of their bilateral investment treaties even before the crisis. 

The Southview opinion also chides the United Nations Commission on International Trade Law (UNCITRAL) for trifling with marginal reforms, instead of radically reconsidering the very illegitimacy of international investment arbitration itself.