Reforms Are Needed for Multilateral Project Financing
When the World Bank Needs to Lie
The World Bank seeks to help the poorest countries with cheap project credits. There is much pressure to lend and disburse. This negatively affects the efficiency of investments and their sustainability, particularly for countries where corruption is high and absorptive capacities weak.
The former President of the World Bank, Jim Yong Kim, decided just a few days after the New Year to resign from his position, i.e. three years before the end of his second term. Soon afterwards, US President Donald Trump nominated David Malpass to become the next World Bank President. It is likely but not yet certain that he will be elected sometime during the next month. Malpass has stated that the Bank is part of a large, unaccountable bureaucracy which „creates mountains of debt without really solving the problems.” His concerns are valid. If elected he will need to undertake some needed reforms.
My assessment is based on many years with the Bank. I worked there from 1977 to 2006 and since then occasionally as a consultant. Good results from projects are important to me. If one can, one should help developing countries and the poor people there sustainably. However, the pressures to lend at the World Bank are high, followed later by similar pressures to disburse. The sustainability of multilateral projects, especially in Africa, is limited.
Because I had been working on the first phase of the Lake Victoria Project, and since I was the main consultant for preparing the second phase, I was contracted in 2017 to do the evaluation for the second phase (2009-‐2017). In the first draft, my assessment of the project was “unsatisfactory," but I was told that, regardless of the facts, “the assessment must be positive,” because the Environmental Unit for Africa wanted to fund a third project phase with US$ 250 million. It is seriously wrong if the International Development Association (IDA) needs such dishonesty about past achievements to justify additional lending! While it is not possible to generalize, I have seen and experienced many things in different countries, and this experience with some very rough facts was a red line for me that had been crossed.
As a taxpayer, I do not want multilateral funds to be wasted or used ineffectively and find that development results are assessed dishonestly. The International Development Association (IDA) is one of the "windows" of the World Bank. It provides the 77 poorest countries in the world with loans and some grants. The loans are interest-‐free, or almost interest-‐free, and have a long maturity. Nonetheless, ineffective use will not be beneficial in the long term for recipient countries, as they will sooner or later have to repay the loans, and some countries are already now having difficulty making debt payments.
For IDA17 (from July 1, 2014 to June 30, 2017), developed countries provided IDA funds amounting to US$ 52 billion. For IDA18 (July 1, 2017 to June 30, 2020), these increased significantly to US$ 75 billion, an increase of 44 percent. The increased pressure to lend more for projects was not only beneficial, as more quantity does not necessarily mean better results. To the contrary, in developing countries, there are often limited project management capacities, indicating also that absorptive capacities for quality investments are limited. This also means that a well-‐meant expansion of funding commitments for projects, along with their subsequent pressures for disbursements, can increase the risk of waste in general and particularly in fragile and conflict-‐affected countries.
This commentary suggests that IDA19's 3-‐year replenishment should not be increased from the high IDA18 level but instead be cut to US$ 40 or 50 billion, that the IDA delegates should emphasize quality and sustainability much more than quantity, and that the pressure to lend be reduced. US$ fifty billionwould still imply about US$ 650 million on average for each of the 77 poorest countries; this is more than enough if one knows their limited absorptive capacities for the implementation of quality projects within the context of often serious corruption. Negotiations for IDA19 will be held throughout 2019, and the new funds will be available for lending on July 1, 2020.
A major problem is that, for every three-‐year IDA cycle, every cent allocated to a country must be committed for project financing by June 30 of the third year in question (such as by June 30, 2020). Internal lending targets also exist for the first and second year of the three-‐year allocations, thereby creating the well-‐known bunching toward the end of each fiscal year. This pattern, involving significant pressures to lend, weakens the World Bank in the project negotiations to achieve improvements in recipient countries, and it also weakens reform-‐oriented people in those countries that wish to make serious changes to achieve better, more sustainable project outcomes. Governments in recipient countries have learned to wait until they must undertake almost no reforms or project-‐oriented efforts to get loans from IDA because of the pressure for 100 percent lending from the side of the World Bank. But this also weakens the efficiency, the incentive systems, and dynamics of developing economies. That should change, and both donor and recipient countries should actively engage in a reform of this, notably that allocated credits to the next 3-‐year cycle are carried over into the next period, instead of pushing for funding for projects that are not ready for quality implementation or where the economic environment and the incentive system are inadequate.
Another major weakness is the sustainability of projects: At the end of a project, the project office closes, and one can often see few sustainable project results three or five years later. For example, in Niger, education and agricultural projects have been carried out for a long time, but the vast majority of women (and also men) still cannot read or write, and agricultural yields have been stagnant for decades. Or the Bank just focuses on the economic sphere and ignores what else is going on. One example is Burundi, where one simply looked away and continued to support the government with IDA, despite the government's massive crackdown on citizens since 2015, generating new poverty, killing more than 1,000 people, and forcing over 400,000 to flee. In addition, Burundi is one of the 25 most corrupt countries in the world. These and other possible examples weaken the IDA. Although the World Bank is doing a lot of quality work, reforms are needed to make IDA a more effective program for stronger, longer-‐term development results.
The World Bank has been developing a Performance-‐Based Allocation System (PBAS) for some time, trying to assess the quality of government work and allocating IDA credits accordingly. But the well-‐ intentioned incentives for better governance are far from enough. On average, corruption has not been reduced, and even very corrupt countries (for example, those with rankings higher than 100 on the scale by which Transparency International rates 180 countries each year) still receive large IDA allocations. Therefore, in addition to a needed overall reduction of IDA, one should also reduce guaranteed allocations to countries without performance improvements that have not taken significant action to (a) reduce corruption [as measured by the Transparency International corruption index], and (b) remove business barriers [measured by the Doing Business Indicator of the World Bank]. In addition, IDA Deputies should consider how, when determining the allocation of concessional funds, one could qualitatively consider the past 3 years of project implementation performance of all projects under a country's total investment program, and how to reduce IDA allocations for countries with poor project implementations. The reason: limiting oneself to IDA projects works poorly from a holistic point of view, since other government projects often do not conform to the higher World Bank project standards. Thus, there are sometimes a significant number of failed, government-‐funded projects, where corruption can often flourish uncontrollably, and efficiency goals are often not achievedAdvocates of continually increasing IDA replenishments mean well and also claim that higher IDA volumes will help fight poverty. In principle, I am also in favor of helping the poor. But I think IDA is a partnership between donor and recipient countries. In order to make real progress in combating poverty, governments should be given interest-‐free loans that are prepared to seriously address corruption and business barriers, as well as seriously conduct and honestly evaluate projects, with an emphasis on longer-‐term, sustainable results.
Ernst Lutz obtained an agricultural degree from the Swiss Federal Institute of Technology and a PhD in agricultural and resource economics from the University of California at Berkeley. He is a former Senior Economist at the World Bank.
Letter to the Editor
The assertions of Ernst Lutz concerning the work of the World Bank’s International Development Association (IDA), are not grounded in fact.
IDA focuses on improving the lives of people in the world’s 75 poorest countries. Between 2011-2018, IDA support provided essential health services to 657 million people; improved access to better water services for 86 million people; immunized 274 million children; and recruited or provided training to 8.5 million teachers, among other results.
IDA is highly regarded as a transparent and cost-effective platform, as determined in independent assessments in 2018 by the Center for Global Development on the Quality of Official Development Assistance, as well as in the Aid Transparency Index.
Moreover, the claims regarding the Lake Victoria project are not accurate. The final project evaluation, available publicly online since December 2018, was completed after Mr. Lutz finished working on the project. The project helped to reduce environmental degradation in the Lake Victoria Basin, as the evaluation demonstrates.
No decision has been taken about a third phase of the project, but any further work would incorporate lessons learned from previous experience. It would also require approval from the World Bank Board.
The World Bank always aims to ensure that programs are designed to be effective, and we monitor and evaluate progress in an open and accountable manner.
Development Finance Vice President, Worldbank