Last week, Chairwoman of the US House Committee on Financial Services Maxine Waters called for reform of the Private Sector Window (PSW) mechanism, which uses World Bank International Development Association (IDA) resources to subsidize private firms investing in low income countries. Waters called for an approach which was competitively based and fully transparent.
Her intervention provides an opportunity for the Bank Group to rethink the Private Sector Window to better align with the International Finance Corporation’s 3.0 reform process, which was designed to increase the Corporation’s development impact, move toward making markets, and improve standards. At the same time, reform could allow the PSW to live up to the Multilateral Development Bank Principles to support sustainable private sector operations.
An immediate if partial fix for transparency concerns would be for the IFC to publish either the financing terms or the subsidy estimate at the deal level for all IDA PSW operations. The Mid-Term Review of the PSW provided an estimate on the overall level of subsidy in the use of PSW resources combined: so far, 23 percent of committed resources. But it does not publish that information at the project level.
Taxpayers as well as supposed beneficiaries have the right to know how PSW aid is being used, and the IFC should live up to aid transparency standards in this regard. As I’ve argued before, reporting on the estimated grant element of a financing package provides competitors with little insight into a firm’s cost of capital from the market (which might be commercially sensitive), while it might provide competing firms with an idea of how much subsidy they could expect were they to develop a similar project.
But Chairwoman Waters’ statement, as well as the principles of effective aid delivery and private sector operations that the World Bank Group has signed up to, demand more than somewhat greater transparency. They require fully embracing the IFC 3.0 agenda of making markets and maximizing development impact through pro-active, competitive approaches to meet public policy priorities through private sector investment.
The World Bank Group has considerable experience in such approaches—the Global Partnership on Output-Based Aid (now GPRBA), housed at the Bank, has backed 49 projects across infrastructure, education, and health that involve open, competitive subsidy allocation to private sector investors. There is also the possibility of open offers of subsidized or guaranteed loans on standard, public terms on the model of Title XVII open solicitations for innovative clean energy projects in the United States, or implementing Service Performance Guarantees.
An additional example of the type of market-creating activity that incorporates competition and transparency that the IFC could prioritize under a new model PSW is the World Bank Group’s Scaling Solar project—designed to ramp up large scale solar generation in client countries. Scaling Solar provides templates and documents to enable rapid preparation, tendering, and financial close of solar projects, packages IFC investment terms with project preparation support and MIGA financing, includes commitments offered to bidders on a non-negotiable basis with the comfort of pre-approved financing available to all suitable bidders, and uses a clear and transparent award process allowing developers and investors to compete on the basis of lowest tariffs and long-term commitment. Zambia, for example, has developed two large-scale solar projects with the IFC through Scaling Solar. The competitive auction organized through the program attracted seven final proposals and the lowest solar power tariffs in Africa to date.
The World Bank Group could expand and replicate the Scaling Solar model to other sectors. It could use the existing range of project preparation facilities within the Group and beyond to build up a pipeline of investments. And it should work with client countries to develop projects which meet their priorities for additional private investment, potentially utilizing PSW subsidies as part of the package offered to winning bidders.
In switching to an aid-subsidized model, the IFC is now involved in activities where the primary client should be the developing country which the aid is meant to support—not the firm receiving the funds. Its approach should adapt accordingly. Existing World Bank Group initiatives including GPRBA and Scaling Solar demonstrate there is the capacity within the institution to deliver on public policy-led, competitive, and transparent approaches to financing that can have significant development impact. Hopefully, US congressional attention will provide the spur for the PSW to adopt them.