World Bank Reform: Windows, Windows Everywhere, and We Have Views

As new World Bank President Ajay Banga settles into 1818 H Street, he will face a sharply divided group of shareholders on the mandate of the Bank, as evidenced by the contentious debate over its role on climate and other global public goods (GPGs). Most shareholders have weighed into this debate, some (including G7 members) arguing for a new climate and global public goods window or new, earmarked funding for GPGs on the balance sheet of IBRD, the Bank’s middle-income country-focused arm. Other shareholders, especially developing countries, view this supply-side effort as anathema to the World Bank’s demand-driven model and worry that an expanded climate focus could imperil the Bank’s poverty alleviation and shared prosperity goals.

In this blog, we lay out five major options put forward by stakeholders in favor of a scaled-up GPG agenda. Many of these options do not constitute “windows” in the technical sense but represent pathways for generating additional funding that would be earmarked for climate and other GPGs. Each has some merit, but none addresses what we see as a fundamental challenge: how to give the World Bank the requisite financial power to support a robust climate agenda for all borrowers without diverting funding from the poorest and most vulnerable countries.

State of Play

The debate at the World Bank reflects the politics of the moment. Major donors, including the G7, have called for reforms to enable the Bank to more effectively meet major global challenges, especially climate. But developing countries are wary. These reforms come with a steep price tag, and the risk of an unfunded mandate is high, especially for countries eligible for the Bank’s concessional financing arm IDA, and are facing extraordinary funding needs linked to the lingering effects of COVID-19, tightening global financing conditions, and increasingly extreme weather events.

The World Bank estimates that it can generate an additional $50 billion over ten years in non-concessional financing from reforms to its capital adequacy framework, but this represents only a fraction of what would be needed to meet a scaled-up agenda. This financing would also only benefit middle-income countries (MICs).

A related flash point is the debate over whether the IBRD should offer cheaper loan pricing for climate projects as an inducement to borrow, creating direct competition between IBRD and IDA countries for the same pool of scarce grant resources. With ODA already being diverted away from the poorest countries to fund climate mitigation in MICs and to support Ukraine, providing concessional climate loans for MICs would be another claim on donor resources. Resolving the current debate will require that shareholders take these issues head on. Unfortunately, what has emerged from the current debate is that G7 support for a bold GPG agenda is high but their appetite for new financial commitments is low.

Options in the mix

Enter the windows. Below we summarize the broad contours of five key pathways under debate, each designed to bolster the Bank’s GPG agenda. Table 1 provides a side-by-side comparison of their characteristics, pros, and cons.

Table 1. Addressing the GPG challenge: Five options

Option 1: A new World Group entity

This 2016 CGD proposal—recently re-upped by CGD’s founding president Nancy Birdsall—makes the case for a new institution nestled between the World Bank’s IBRD and IDA. If it attracted sufficient financing, a new facility could have real impact, especially if there was a serious “one World Bank” approach and if it had a mechanism for working with other multilateral development banks (MDBs), as proposed. But regardless of the merits, building a new institution would require unified political vision, seamless cooperation, and major funding, all of which are in short supply in today’s polarized international system.

Option 2: A green capital increase

Colleagues Scott Morris and Charles Kenny propose a more traditional route—expanding lending capacity through a general capital increase. In their proposal, all new resources would be dedicated to climate projects at the IBRD and IFC. A key benefit is the substantial leveraging capacity: the authors estimate that a $32 billion capital increase to the World Bank and IFC would allow for $100 billion in additional lending through 2030. The US would be on the hook for $6 billion, but the amount actually paid to the World Bank would be a small fraction of this. The balance would be in the form of callable capital—essentially a donor commitment to meet World Bank obligations in the event of a major default.

Both options face the same major obstacle: securing a general capital increase. Negotiating a general capital increase is a heavy slog in the best of circumstances, and in today’s environment would be an especially heavy lift.

Options 3: Buttress the GPG Fund

At the other extreme is IBRD’s GPG Fund, a small facility funded through net income (e.g., IBRD profits), which the World Bank has suggested scaling up. In theory this should appeal: it is already set up and has a GPG mandate. It does not have a separate administrative structure and aims to integrate GPGs into IBRD projects. But the fund has failed to gain real traction. It has barely committed $100 million since 2019, a paltry sum compared to IBRD’s net income levels of $5 billion over the same period. The financing structure would also have to be overhauled, as currently the GPG fund provides grants only.

Option 4: Merge the climate FIFs

This option addresses head on one of the biggest challenges in climate finance: the plethora of climate funds (which now total 81), creating major operational and financial inefficiencies. Donors have committed over $50 billion to the three largest funds alone (including the Green Climate Fund, the Climate Investment Funds and the Global Environment Facility). But unlike the IBRD, they lack leverage and have only provided $4 billion a year in financing. This is because two of the three major funds largely provide grants (the CIFs are the exception) which are financially inefficient.

A mega FIF could work with the entire MDB system to target the best projects, and operate as a standard setter across the system. If it incorporated a more rational pricing structure and employed a wider range of financing structures (like guarantees), funding levels could increase without a significant increase in donor resources. But consolidating existing institutions with distinct governance and operating structures would pose major practical and political obstacles.

Option 5: A climate guarantee facility

Finally, the World Bank could duplicate the climate/GPG guarantee facility at the Asian Development Bank (ADB), launched last month. The Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP) is a donor-backed initiative where financing partners take risk off the ADB’s balance sheet by guaranteeing backstop repayments for a subset of its loans. By guaranteeing repayments on a portion of the ADB’s portfolio, capital that would be used for loan provisioning can instead be leveraged. Over an initial 5-year investment period, the ADB hopes to raise $3 billion in guarantees, which could enable as much as $15 billion in lending for climate projects across the region. Another advantage is that IF-CAP takes a portfolio rather than transactional approach, which climate trust funds and the FIFs use. This is likely to yield faster and more consistent results.

This funding is all additional, which means that borrowers do not have to trade off climate funding against other priorities like health or education. But this model only applies to middle-income countries. In order to support IDA countries, it would require grant funding.

A short political window for change

For shareholders to reach a consensus around how the World Bank can best support a GPG agenda, there will have to be greater clarity around sources of funding and assurances that the final proposal will not come at a cost to IDA countries. When US Vice President Kamala Harris met with Banga last week, she seemed to acknowledge this reality, announcing plans to work together with Banga and the G20 to deliver “significant new concessional financing through a new window or other innovative mechanisms…. across all borrower countries.” The statement also included a reference to enhanced support for IDA’s crisis response capability just weeks after IDA management launched a special $4 billion appeal for its crisis window. While this is welcome acknowledgement that a MIC-focused agenda is simply untenable, there was no clear financial commitment from the U.S.

In another nod to developing country concerns, Harris stressed that addressing global challenges will be “interlinked and indivisible from the Bank’s work to eliminate extreme poverty and promote shared prosperity.”

The challenge remains how to arrive at a unified vision that emerging markets—including China—and low-income countries support. But time is short to zero in on a plan that is both politically feasible and financially ambitious, especially considering the US electoral calendar. Ideally, the Harris-Banga meeting will translate into advocacy for a more ambitious agenda that the U.S. is prepared to help fund. Otherwise, momentum is likely to founder.

While the policy windows are many, the windows of opportunity are few are far between.

Note: This blog post was updated on June 15 to add a row that had initially been omitted from the table.