A new report from the U.S. Government Accountability Office (GAO) lays bare what was painfully obvious to me when I represented the U.S. on the board of directors at the World Bank: the People’s Republic of China (PRC) and its state-owned enterprises win the biggest slice of procurement for economic development projects, securing almost 30 percent of all funds.
The U.S., the bank’s largest shareholder thanks to generous taxpayer funding since the bank’s founding in 1945, is on the losing end of the ledger. Our firms garner less than 1 percent of all funds (and that includes large purchases of U.S. COVID-19 vaccines). In other words, China is using the World Bank system to further its goals, with U.S. taxpayers and other democracies footing the bill.
Are Chinese firms really that much better than American ones, or is there an unfair playing field? China has the largest number of state-owned enterprises in the world at over 150,000 firms, accounting for 60 percent of China’s market capitalization. Although the World Bank rightly does not allow state-owned enterprises to win contracts in their home countries (this would be anti-competitive), it does allow them to win contracts in other countries. Given China’s army of state-owned enterprises, it is no wonder Chinese firms have been so successful, winning 41 percent of all civil works projects even as U.S. firms win only 0.3 percent, according to the GAO analysis.
Why would China be willing to underbid and lose money on projects? It is playing a long game, building capacity and relationships through these contracts to further enmesh itself in the economies of developing countries. It is using the World Bank to create new client states, complementing the work of its Belt and Road Initiative to sink tentacles into countries with no-questions-asked loans.
Worse, Chinese firms often import workers from China, limiting the local development impact while often generating other negative cultural consequences. Chinese contractors on World Bank projects have even raped local girls. These firms can also embed sanctions-listed Huawei ($10 million in World Bank procurement over the GAO study period) and other equipment in systems that have allowed repressive regimes to spy on their opposition or on minorities. This is all being subsidized by American taxpayers.
Given all the negative effects, how can this be happening? Once the World Bank board approves funds, managers work with sovereigns to implement the projects, among other things selecting the contractors for procurement. Aware that Chinese firms routinely underbid thanks to generous government subsidies, the bank amended its procurement policies to help level its focus on finding value for money. However, the revised guidelines apparently have done little to dent China’s bidding success in the years since they were implemented.
On the other side of the ledger, U.S. firms I spoke with, which once dominated these large construction projects around the world, have little interest in bidding, because they cannot compete against Chinese state-owned companies. The GAO report bears that out: When U.S. businesses bid, they won about 70 percent of the time. But few bother to bid, believing the fix is in.
A good example was an undersea cable project for the Federated States of Micronesia, to help better connect its developing economy to the rest of the world. Unfortunately, what was meant to be a strong, positive development project was procured using Huawei Marine, a Chinese state-owned enterprise that is on the Commerce Department’s Entity List for activities contrary to U.S. national security or foreign policy interests. And this project was especially grave in its security implications, as the cable was to be plugged into a U.S. defense contractor’s cable extending to the Marshall Islands’ Ronald Reagan Ballistic Missile Defense Test Site. Had we not been able to block the project, China would have been handed the keys to sensitive Defense Department information — with U.S. taxpayers’ help.
The bank does not restrict contracts based on the Entity List. And although GAO notes that only a “small fraction” of procurement has been given to firms on those lists, it would have only taken one breach, as in that case, to do plenty of damage to U.S. security. Furthermore, the bank does not track subcontractors, so the number of Huawei and other sanctioned entities eating from the World Bank trough is surely substantially higher.
One of the contracts GAO flagged went to a Xinjiang firm that had been sanctioned for human rights abuses against the Uyghur ethnic minority, which China’s regime has forced into labor camps and “re-education” programs. The World Bank claims to screen for money laundering, terrorism and some sanctions lists, and will tell borrowers to make “alternative arrangements to pay the contract awardee” if they find that problematic companies have won a procurement. But money is fungible, such that a sovereign can simply move funds around to continue to contract with the listed entity from a separate pot of money.
The World Bank’s new president, Ajay Banga, comes into the role with a strong managerial background in the private sector. When he starts work on June 2, one of his top priorities should be to reform procurement practices, devising an objective standard that relies on unsubsidized costs, as the current standard clearly is not cutting it.
He should also take a hard look at China’s broader role at the World Bank. Not only does it win far more procurement than any other country, it also continues to take about $2 billion per year in World Bank loans to its government and private firms. It does so even as it lends to developing countries at non-concessional interest rates, on a bilateral basis through its own development banks. By some measures, China is the world’s largest source of development funding, despite remaining a significant recipient of World Bank funds and one of the top 10 debtors to the bank.
China has, in short, clearly met the conditions for graduation from its status as a developing country. This is even more evident given China’s claim to have eradicated domestic poverty.
In the interest of freeing up resources for countries actually in need, China should no longer be allowed to avail itself of World Bank loans. Given China’s economic success, do continued loans to the PRC fit the bank’s mission?
DJ Nordquist served as the U.S. executive director of the World Bank (2019-2021). She is a senior adviser at the Center for Strategic and International Studies.