Vijaya Ramachandran, Ben Leo, Jared Karlow and I have just published two papers looking at where and in what capacity the IFC, OPIC, and selected European development finance institutions (DFIs) are investing their money. The core of the papers is a dataset that Jared painstakingly put together by scraping public documentation about DFI projects. It wasn’t easy because DFIs are considerably behind many aid agencies in releasing usable data on their portfolios. And that lack of transparency presents a significant problem if those same DFIs spend aid money on subsidizing the private sector.
Aid transparency and the Private Sector Window at IDA
I’ve written before about the somewhat confusing new $2.5 billion Private Sector Window (PSW) that IDA (the bit of the World Bank Group which normally gives very low interest loans and grants to poor countries) has set up to subsidize IFC (the bit of the World Bank that invests in private sector projects in developing countries) to do more work in the world’s poorest economies. Nancy Lee has provided an overview of how it will work and some questions of her own, as well as a broader discussion of private sector windows and subsidies. Here I want to highlight one concern: the PSW takes (comparatively) transparent aid money and turns it into (almost completely) opaque private finance.
As Stefan Koeberle, the World Bank Director for Strategy, Risk and Results was happy to report in 2016, IDA is among the top 10 rankings when it comes to aid transparency. “The World Bank joined [the International Aid Transparency Initiative] when it was launched in 2008, and we published our first IATI data in 2011, but publication of IATI data is just a small part of our efforts to be an open institution,” he noted. “Detailed information on Bank supported projects, including procurement data, is available from the projects and operations database.” When it comes to IDA-financed projects we know the financial terms of the credits and grants, we have detailed and specific data on what the finance will be used for and where, and we know how much contractors were paid to deliver precisely what goods and services where.
The World Bank on how governments should finance the private sector
And the World Bank Group also gives out a lot of advice on how governments that provide finance to the private sector should operate. There are the detailed procurement rules governing goods and services purchased using World Bank finance, based on fundamental principles including that “all eligible bidders” should have “the same information and equal opportunity to compete” and “the importance of transparency.” Regarding public-private partnerships to deliver services, amongst a long list, the World Bank says the financing structure, estimates, and actual revenues, forecast and actual equity return, guarantees, and grants involved in all such deals should all be published.
When it comes to unsolicited proposals, Philippe Neves, senior infrastructure specialist at the Public-Private Infrastructure Advisory Facility (PPIAF) suggests:
Ultimately, publicly-originated well-structured projects remain the best way to attract competition and ensure value-for-money. For those public authorities that are willing to consider [unsolicited proposals], they need to put themselves in a good position to be able to attract serious private sector bidders. Committing to competitively tendering its projects within a transparent and clear policy framework with balanced incentive mechanisms is an efficient way to do so.
This all seems very sensible. Government funds, including and perhaps aid in particular, that go to the private sector should do so in a manner that is competitive and highly transparent—and the less competitive, the more transparency matters.
How IDA finances the private sector
But compare the World Bank Group’s words with its actions when it comes to using IDA (government cash) to subsidize IFC projects (private firms). IFC is largely in the business of unsolicited bids: client firms come to it to with a project idea. That will not change with regard to projects that utilize the new IDA funding, and suggests the increased importance of transparency. But following standard IFC practice, the process of awarding subsidy will be non-competitive and ultimately based on unsolicited interest by client companies. And following standard IFC practice, none of the financing structure, estimates, and actual revenues, forecast and actual equity return, guarantees and grants involved will be released. In its defense and to its credit, IFC does now publish to IATI, so you can find brief details on which firms got how much money from the IFC to do what, where—but none of the above information has been released.
The IFC might say its clients (firms) simply wouldn’t accept competitive approaches nor would they accept the level of transparency that the rest of the World Bank thinks is appropriate. There are three responses to those concerns: (1) they are testable hypotheses; (2) there are approaches that would allow transparency about the use of aid-financed subsidies while keeping secret details including equity return: standard public offers of subsidy packages to be awarded to all IFC client companies operating in a particular country or sector, for example. And third, if IFC really can’t do subsidies the right way, maybe it shouldn’t be doing subsidies at all. The same applies to other DFIs, and is an urgent issue if aid financing is going to be used this way.
The bottom line
Transparency matters. It helps ensure that government money is being used fairly and efficiently, not for private gain at public expense. And it reassures citizens and the private sector alike that this is the case. Aid is too scarce and too valuable to be distributed in the dark.