PHM-Exch> World Bank’s ‘Mobilizing Finance for Development’ is Not Financing Development

[Claudio Schuftan]

From: Jomo <jomoks at yahoo.com>

World Bank’s ‘Mobilizing Finance for Development’ Not Financing Development

By Anis Chowdhury and Jomo Kwame Sundaram

*SYDNEY and KUALA LUMPUR, Aug 25 2020 (IPS) *- 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 projects came 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.
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