What the World Bank Needs More than Cash
Bright Simons argues that the absorption channel for development finance, rather than fundraising, is the main bottleneck the Bank's new President must address.
This week, the newswires went abuzz with hints that the World Bank Board and Management may succumb to calls by development experts and seek to prioritise new fund-raising as the main plank of its big reform agenda.
Coming on the back of the nomination of Ajay Banga, the former Chairman of global payments giant, Mastercard, as the Bank’s new President by its largest shareholder, the United States, the Bank appears to be taking steps to settle on a few clear choices out of the list of hazy options laid out in its “evolution roadmap”.
The two main halves of the World Bank are the IBRD and the IDA, two legally distinct entities tied at the hip. The IBRD lends money to the middle income and more credit-worthy low-income countries, which despite being wealthier than the average Global South country still host the majority of the world’s poor. The IDA, on the other hand, focuses on the poorest of the poor countries, and doles out both grants (free money) and loans. A decade ago, grants made up just about 13% of the IDA’s giving, but that number has climbed to around 25%.
Whilst the IDA initially got all its money from rich, mostly Western, governments, it has increasingly followed the IBRD to borrow in the private markets, where the World Bank’s top-notch credit rating allows it perform one of the miracles of development finance: borrow at very low rates to on-lend to countries considered very risky.
At the heart of this miracle is the idea of “callable capital”, a kind of guarantee given the Bank by rich countries against which it borrows from private markets, and the notion of “preferred creditor status” which more or less assures private investors that the high-risk countries the Bank lends to will nonetheless pay the World Bank even when on the brink of defaulting on their other debt.
Despite these clever financial devices, the top 14 Multilateral Development Banks (MDBs), of which the World Bank is the most prominent, provide less than $170 billion annually in development financing (with a little over a third coming from the World Bank group). To put this into perspective, experts estimate that between now and 2025, the world ought to be spending $2.6 trillion per year to transition the global economy to a post-carbon era.
Presently, the world spends less than a trillion on development, with the vast majority of the resources coming from the private sector. As already indicated, even the MDBs get roughly 95% to 98% of their funds from the private sector.
These dynamics are behind the push for the World Bank to prioritise fresh fund-raising to close the massive development finance gap. Except that the World Bank has been following the same playbook for some time now: embarking on so-called “general capital increases” on the basis of expanding its lending to poor countries.
In 2011, for instance, the IBRD boosted its capital by 31%. In 2018, the Bank went to market for another $60 billion ($7.5 billion in cash and $52.6 billion in rich country guarantees). Development folks often credits this fund-raise for growing lending from about $30.5 billion in 2017 to about $50 billion (60% of which went to Sub-Saharan Africa). But the situation is more complex than that.
The data doesn’t actually show that fund-raising by the Bank is the main driver of increased lending.
For example, the five-year average growth in IBRD commitments before the 1988 capital increase was 61%. After a near 16% jump in the year after the capital increase, growth for the subsequent 5 years averaged just 3.1% over the entire period. In a similar vein, average IBRD commitments grew by a cumulative 250% in the 4 years before the 2011 general capital increase and actually saw a drop of 12% in the four years thereafter.
A similar picture can be seen before and after the last capital increase in 2018. From a pre-capital increase high of $64 billion in 2016, commitments have grown to just a little over $70 billion today.
Another vital point is that disbursements (actual cash flowing to borrowing countries) have thus remained stagnant at ~71% between 2017 and 2022.
So, in fact, actual disbursements between 2016, before the last capital increase (fund-raising), and 2022 has actually stayed flat: from $49 billion to $50 billion.
This author was invited to help the World Bank rethink its strategy in 2011. He continues to be active in activism and policy advocacy in matters of development in Ghana and elsewhere. From that standpoint, it has been clear for a while now that it is weak capacity in various poor countries to prepare projects to exacting standards of integrity rather than the sheer availability or otherwise of funds that constrain the flow of money. In fact, that is why the World Bank is in the business of intermediating between private lenders and poor countries anyway. The World Bank’s utility is to ensure that borrowing countries don’t waste the money thereby lowering the risk of default and allowing funds to flow. To the extent that this is not easy to do, the flow (“disbursements”) continues to be constrained.
Elsewhere, we provide more case studies and arguments in defence of this position but for the purposes of this essay, we shall focus on South Africa.
The latest reported disbursement ratio of the World Bank’s portfolio in that country is a paltry 16.89%. Yet, South Africa needs tons of money to fix a debilitating power crisis that its President calls a “state of disaster”.
The World bank did offer $3.75 billion in 2011 for the country’s main power utility to develop a power project, after nearly two years of preparation. The first year and half went well and nearly half of the committed funds were disbursed. Then the ill-fated second phase of the Zuma presidency started to bear down on government operations. The project, Medupi, became trapped in a loop of project management chaos and confusion. Despite five restructurings, full disbursement could not be achieved.
Nearly 13 years after the project was initially mulled, it had to wrap up with nearly $600 million undisbursed, of which $408 million were for clean energy interventions, including a critical grid-scale energy storage solution. Those funds have been rolled over into a new scheme but reports indicate that problems persist. $100 million slated for capacity reforms had to be cancelled outright.
Despite taking more than double the estimated time to complete, project challenges were never fully resolved. The Medupi plant’s throughput (or “availability factor”) hovers below 58% compared to the international standard of 92% for equivalent installations. The World Bank dragged the project as long as it could to maintain standards but still failed to ensure the best outcome.
In short, more fundraising by the World Bank won’t make it any easier for needy countries to absorb more money unless they also fix compliance and capacity issues that constrains current disbursements.
Tragic though it may seem, the ongoing shutout of several African countries from private bond markets offers a compelling opportunity to fix this perennial compliance standards and capacity deficit issue.
There are tons of money in private markets looking to flow into emerging markets. Investors that try to overlook the risk and lend directly get accused of reckless lending and are told to cancel the debt when defaults loom. The only reason these same investors will channel money through MDBs like the World Bank is to transform that risk equation so they don’t rely solely on on risk premia. Thus, unless the World Bank can be more effective in ensuring that funds are better applied (and not wasted or stolen), it won’t be able to transfer more money without losing the standing that allows it to borrow without a risk premium. As things stand now, the absorption channel for development finance is, simply stated, clogged.
This author had the pleasure of working with Ajay Banga as part of the Performance Theatre curated by Xynteo. He has an uncanny ability to cut through clutter and get to the meat. The question is whether he has the risk appetite to take on the technocratic consensus pushing the fund-raising angle without tackling the absorption channel issues.
Bright Simons is an analyst at IMANI, a think tank based in Accra.
Photo by Luca Nardone