The nomination of Ajay Banga, the former Chairman of global payments giant, Mastercard, as the new President of the World Bank by the organisation’s largest shareholder, the United States, has coincided with a big debate about how to reform the Bank to strengthen its delivery as the world’s number one development champion.
The Bank’s own “evolution roadmap” sketches the contours of a new vision to tackle the urgent issues of persistent poverty, skewed prosperity & the globalisation of the planet’s biggest threats.
A major prospect outlined in the document is the injection of “additional financing” into the Bank through: “further optimizing the balance sheet, increasing the IBRD equity through various options, and increasing mechanisms for concessional funds for WBG activities to address GPGs.”
The IBRD, cited in the quote from the roadmap above, and the IDA are the two main, legally separate, public-sector entities within the World Bank Group. Broadly speaking, the IBRD caters to the higher borrowing needs of 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.
To do this, the IBRD borrows from the private markets on the back of its solid credit rating (AAA) to get funds at reasonable rates. The IDA, on the other hand, uses money it gets from rich governments, as well as the capital markets, to lend primarily to the poorest countries in the world, usually in the form of soft (lower-interest) loans complemented with a generous padding of grants.
In recent months, boosting the capital of the World Bank for increased lending has gotten all the attention. All the 14 largest Multilateral Development Banks (MDBs) in the world – the World Bank plus others such as the African Development Bank (AfDB), Asian Development Bank (ADB) and the European Investment Bank (EIB) –provide less than $170 billion annually in development financing. A little over a third of this money comes from the World Bank group. Many feel that this is far from enough.
To put the numbers into perspective, experts estimate that between now and 2025, the world ought to be spending $2.6 trillion per year, and $4.5 trillion from 2026 to 2030, just on the Net-Zero climate transition effort alone (i.e. getting the world to zero net carbon emissions). Currently, the world is on course to spend less than a trillion US dollars a year leaving a gap of more than $1.7 trillion per year between now and 2025. The private sector already outspends the MDBs by nearly 50% in sustainable development financing.
At any rate, even the modest amount spent by the MDBs is heavily dependent on borrowing in the market. Roughly 95% to 98% of the monies invested in the MDBs by rich governments operate more like guarantees for borrowing done in the world’s bond markets rather than actual cash.
On the premise that more capital injections will increase lending capacity, the MDBs regularly undertake “general capital increases”. In 2011, for instance, the principal institutions boosted their spending power between 31% (World Bank’s IBRD) and 200% (AfDB), mostly through raising bonds. In 2018, the World Bank secured another significant capital increase of $7.5 billion in cash and $52.6 billion in guarantees from the major shareholders for the IBRD. On the back of the capital increase, the IBRD and IDA are able to disburse about $50 billion jointly these days (60% of which went to Sub-Saharan Africa) compared with $30.5 billion in 2017, before the capital increase.
The question however is whether capital increases are the most critical factor in shaping the capacity of the World Bank to respond to the economic development needs of its poorest members.
The first point to note in answering that question is that historically general capital increases have not been the main driver of an increase in the quality or quantity of development 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.
The second vital point is that disbursements (actual cash flowing to borrowing countries) have thus remained stagnant at ~71% between 2017 and 2022.
The combined effect of these two trends is that actual disbursements between 2016, before the capital increase, and 2022 has actually stayed flat: from $49 billion to $50 billion. If an increase in guarantees and cash of ~$60 billion did not transform IBRD lending from 2018 onwards then plans to loosen capital adequacy rules by the World Bank management, which will generate just about $4 billion extra, are unlikely to make a difference.
The technocratic consensus for the World Bank to implement another capital increase therefore ignores a serious challenge in getting funds to drive development in poor countries: increasing quality disbursements.
This author is part of a network of civil society organisations (CSOs) that frequently analyse government projects for their integrity and ESG compliance. Two decades ago, we were highly critical of the Bank’s role in a development aid system that, in our view, often permitted waste and corruption. After participating in the Bank’s Africa strategy review in 2011, CSO networks like ours began to see how domestic factors often overwhelm the bank’s systems and seriously slow disbursements.
In several African countries, the Bank’s exacting standards, including its tendency to blacklist noncompliant private contractors and alert other development banks to do the same, have led to a tendency of government officials to drag their feet and, where possible, even look for alternative sources of finance, even if more expensive.
Recently, researchers analysed more than 400000 contracts awarded under MDB projects between 2000 and 2019 to the tune of over $850 billion in nearly a 180 countries. World Bank projects scored much higher than regional MDBs for their use of controls to avoid corruption and collusion.
Our own experience in Ghana and elsewhere in Africa testifies to this. Attempts to access documentation on a recent $750 million facility from Afreximbank to Ghana have been blocked at all levels by both the Finance Ministry and the Parliament for six months now and counting. Such a thing would be unthinkable for a World Bank facility.
The high transparency requirements, strict procurement rules, and elaborate monitoring and evaluation yardsticks grate against unresponsive bureaucratic and governance cultures bolstered by the recent expansion of African sovereign access to the “ask no questions” private bond markets.
In Ghana, recent reviews of major World Bank public sector reform projects expose strong barriers in transcending this disbursement challenge. What is more, little has changed over the many decades of World Bank lending to the country suggesting a metaphor of state dyslexia.
A much more interesting case study to drive home the point comes, however, from South Africa. Experts frequently argue that the low interest rates charged on IBRD loans make the World Bank a potentially powerful mediator between African countries with massive capital needs, like South Africa, and the open markets. Yet, the disbursement rate for the entire South African IBRD portfolio is a paltry 16.89%.
This is despite very strong alignment between the IBRD’s strategy and South Africa’s most pressing infrastructure needs. The country’s power crisis has been described by its President as a “state of disaster”. The power shortfall was long anticipated and problems unlocking private capital were exactly of the sort designed to be fixed by the IBRD’s financial intermediation.
So, a project to lend $3.75 billion to the main state-owned energy utility, Eskom, for a power plant at Medupi was put on the table in 2009. After nearly two years of preparation, the project launched. 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. Medupi became trapped in a loop of project management chaos and confusion. Despite five restructurings, full disbursement could not be achieved.
More tellingly, it is the green/climate financing component of the project, with its greater need for management sophistication, that suffered the most. 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. Not surprisingly, as project risks escalated, the Bank’s risk aversion followed suit, hobbling delivery of ancillary projects.
In short, more cash for the World Bank through yet another general capital increase would do little to address the serious blocks at country level preventing the effective absorption of already committed funds. What is urgently needed is a frank conversation about policy integrity followed by a concerted effort to unify the standards regime for accessing money across different sources so that countries are more incentivised to comply with strong rules.
Whilst the World Bank touts a recent improvement in ratings of its projects, its independent evaluation group notes that Completion & Learning Reviews, the gold-standard monitoring instruments, have fallen to a record low. In fact, in 2021, only two were conducted, versus 99 in 2011.
Through this limited evaluation aperture, historically challenged African regions continue to record very low performance: only 49% of World Bank projects were rated as moderately satisfactory or higher.
Tragic though it may seem, the ongoing shutout of several African countries from private bond markets forcing a reversion to the MDBs also offers a narrow but compelling opportunity to think through and agree on a unified standards regime, especially because private lenders are better attuned to the need for fiscal discipline at country level now more than ever.
Given the MDB’s heavy reliance on private lenders for their resources, the fact that the latter have been competing for the same loan opportunities in the same attractive developing countries, and in some ways driving down standards, makes harmonisation to close the ESG arbitrage gap in development finance markets even more imperative. Especially now that debt relief campaigners are accusing private lenders of reckless lending and insisting on punitive debt cancellations; it is amply clear that relying solely on risk premia in debt pricing in private markets won’t cut it. Capacity building to boost project performance standards at country level is critical.
It is good to highlight the urgent need for more development capital overall but such calls ring hollow when they don’t also address all the cash being left on the table, because of the Disbursement Crisis, or wasted because of weak absorption capacity and a compromised ability to manage project integrity in some of the world’s neediest countries.
This author’s personal acquaintance with Ajay Banga’s commitment to strong execution over rhetoric suggests that he is well equipped to tackle this challenge. It is unclear though whether he has the risk appetite to go against the technocratic consensus on capital increases.