Fighting crony capitalism at the World Bank

Earlier this month, House Committee on Financial Services Chairwoman Maxine Waters (D-Calif.) threatened to hold up a capital increase for the International Finance Corporation (IFC), the private sector arm of the World Bank Group. At issue was $2 billion in financing provided through the IFC ‘Private Sector Window’—a facility that diverts World Bank funding for low-interest loans provided to governments in the world’s poorest countries and uses it to support private firms in those countries instead. Beneficiary firms were “selected without competition on the basis of unsolicited proposals,” argued Waters. She demanded a subsidy model that was “transparent, competitively based, focused on impact, and guarded against rent-seeking opportunities.” 

The Bank Group has offered clear, consistent and compelling advice on government subsidies to the private sector. It emphasizes transparency, a level playing field for firms and the need to focus subsidies where they will maximize public good. For example, the World Bank has signed up to multilateral development bank principles that call for identification of “a clear market or institutional failure or public policy goal that is best addressed through a subsidy,” before selecting that instrument. They also suggest subsidies should be transparent and that there should be an “equal opportunity for funding to qualified companies on a non-discriminatory basis.” Again, the Bank Group issued guidance suggesting transparency in terms of financing structure, including guarantees and grants, in public-private partnerships.

{mosads}But the World Bank’s private sector arm is ignoring all of that advice with regard to its use of aid-subsidized finance. The IFC’s mechanism provides undisclosed levels of subsidy to firms selected on opaque, non-competitive grounds, involving no input from beneficiary countries. The most recent review of the Private Sector Window reports on the average estimated grant element of all projects to date, but no investment-level data. Why particular firms were selected for a subsidy as opposed to others is not reported. And the system for prioritizing and screening projects is completely internal to the institution.

The immediate concern with the subsidy model is not about the honesty or probity of IFC staff and systems. Less than 1 percent of the World Bank Group Integrity department (INT) investigations launched in FY 2018 regarding fraud, corruption or abuse in the Group as a whole involved the IFC —indeed there was only one case. This is about the efficient use of resources within the Bank Group.

But concerns with the model also involve spillover effects. When the Bank Group designs financing mechanisms, it sets a precedent often followed by other aid agencies and by developing country governments. For example, many of the procurement regulations routinely used by developing countries to buy goods and services from the private sector are modeled on the World Bank’s own guidelines. The IFC subsidy mechanism would make a poor blueprint for government subsidy operations.  

The World Bank has often highlighted the costs of crony capitalism where a few favored firms benefit from secretive government support. Its research has illuminated the extent of former Tunisian President Zine El Abidine Ben Ali’s use of the levers of state power to enrich family and friends, for example. Nearing the end of his rule of in 2010, 220 firms controlled by Ben Ali’s relatives and confidants accounted for less than 1 percent of jobs in the economy but were capturing 21 percent of all private sector profits, thanks on large part to government manipulation in their favor.

The IFC subsidy model would have considerable appeal to political leaders like Ben Ali. And if the World Bank Group sends the signal that secret, bespoke deals are an acceptable way to subsidize, the model is likely to spread. The Bank’s broader efforts to encourage mechanisms that align with the open, level and public-policy led approach it has championed will be considerably compromised. Congresswoman Waters’ concerns should be addressed for that reason above all.

Charles Kenny is a fellow at the Center for Global Development.