At its founding, a primary function of World Bank was to help developing countries develop the energy, transport and water infrastructure essential for economic development. Half a century later, as the World Bank Country Director for Brazil I saw the products of this – the World Bank funded one major hydropower plant in each of the first ten years that the Bank operated in Brazil, thus helping Brazil build a low-cost energy platform for economic growth in Brazil for the next 50 years.
While most such projects in Brazil and elsewhere played a fundamental role in sustained growth, over time it became clear that greater attention had to be paid to the environmental and social implications of large infrastructure projects. The response of the rich countries (which dominated the governance of the international financial institutions) was to impose a rigid, zero-tolerance (“Volvo standards” in the words of Sebastian Mallaby in his history of Wolfensohn’s World Bank) set of “safeguards”. The consequence was that investments in infrastructure by the IFIs fell dramatically and that enormous time and other resources went into the few projects which went forward. By the turn of the last century, World Bank investments in infrastructure had fallen to just 5% of all Bank-financed investments.
This de facto withdrawal made no sense to developing countries. China, India, Brazil and other middle-income countries went ahead and funded their major infrastructure with their own resources. In the early 2000s these countries also became assertive on the Board of the World Bank, demanding that the Bank again start financing infrastructure in poor countries. Equally important, the emerging economies became large bilateral financers of major infrastructure in the developing world. This competition posed, and poses, an existential threat to the World Bank. The World Bank has responded to this challenge. Ten years ago (in a process I was involved in) the Bank’s Board strongly re-affirmed the importance of “high-risk/high-reward” infrastructure. Infrastructure lending (much of it admittedly low-risk) now accounts for almost 50% of Bank lending.
Fast forward to the situation today. As documented by the CGD’s Ben Leo, Africans view infrastructure as the most important sectoral investment to be made in improving their lives. To their great credit the President of the World Bank and the CEO of the IFC have made strong public statements of the importance of “transformational projects” such as the Inga Dam in the Democratic Republic of the Congo, and of the commitment of the World Bank Group to engage with such projects.
For a project the size and complexity of Inga (twice the size of Three Gorges), there are relatively few companies in the world which have the experience and capacity to undertake either the civil works or electrical and mechanical works. In this regard, I learned two relevant lessons in working with the Government of Brazil on two of the largest hydropower projects in the world. First, the pool of companies which have the experience to undertake these projects is small, and, second, the benefits from competition for contracts is very high (reducing costs by about 40% in the case of these projects in Brazil). Which brings to front- and center-stage another one of those “Volvo standards” which sound good but which make it very difficult for the World Bank Group to be an effective partner for a project like Inga.
In 2001 the World Bank established a Vice Presidency for Integrity (INT), with the laudable objective of “zero tolerance for corruption” in Bank-financed projects. I had seen the impact of this concern with any corruption (even minute and non-distortionary) in the medium-sized Bujagali hydropower project in Uganda. One of the many causes of the decades-long delay was an allegation that a Norwegian firm had paid a $10,000 (sic) bribe to get a contract which it did not win! Anti-dam NGOs used this and the many other opportunities offered by zero-tolerance anti-corruption and safeguard measures to delay the project again and again. In 2002 President Museveni railed "I am not happy because a project that should have taken two years has taken seven years to start. All this hullabaloo has been a waste of time and a lack of seriousness... this was a circus" (Reuters 2002). The project took another 7 years before construction was started. As described recently by the CEO of the IFC, a project this size would take two years to build in China. Uganda paid dearly because of escalating costs and benefits foregone.
The INT modus operandi is to bar companies who have been found to pay bribes in Bank-funded contracts. The present list of de-barred firms includes two major companies who would be potential participants in a project like Inga (a Canadian construction company and a French company that is one of the few large providers of large hydropower turbines in the world). INT also temporarily suspends (until the investigation is complete) companies against whom there are credible accusations. These suspensions are not announced publicly, but do find their way into the public domain. Chinese companies are now the biggest in the world in the hydropower business. Of the five Chinese hydropower companies which operate abroad, the two largest are currently on the INT suspension list.
The consequences of Volvo standards on corruption are clear. By the time allegations (major and trivial) are dealt with by INT, few if any of the limited number of capable companies will be eligible to participate in a World Bank-funded “transformational” project like Inga. The massive new emerging financing institutions (including the Chinese-financed Asian Infrastructure Finance Bank and the BRICS-financed, and tellingly-named, New Development Bank) should and will pay attention to social and environmental issues and corruption. But it is (happily) unlikely that these new banks will fall for the fantasy of “perfect, zero-tolerance standards” and so will not throw the transformational baby out with the Volvo bathwater!