Obsessed: The Latest Chapter
in the World Bank's Privatization Plans
by Anna White and Robert
Multinational Monitor, September
It is hardly news that the World Bank
is a major proponent of privatization. But a new Private Sector
Development Strategy (PSDS) promises to intensify the Bank's support
for privatization, extend its privatization advocacy to sectors
still generally conceived of as quintessentially public, and introduce
novel approaches to create private markets where none now exist.
Drafted by Bank staff in 2000, the PSDS
faced immediate controversy. Non-governmental advocacy groups
worldwide objected to the rough proposal, urging it be ditched.
That recommendation was ignored. The Bank redrafted and refined
the PSDS, but its fundamental approach remained unchanged.
The World Bank Executive Board approved
the PSDS in February 2002. The World Bank will initiate the PSDS
in Africa, East Asia and South Asia in fiscal year 2002, and all
Bank regions will be included in the plan by the end of fiscal
The PSDS is an unusual document. It discusses
an overall plan without clearly marking out the details, or the
concrete policy implications of broad, overarching statements.
Thus the Bank can argue that the rising
concern among development advocates about the PSDS is misguided.
"Nothing in the strategy is incredibly novel," says
a spokesperson for the World Bank designated to answer questions
about the PSDS. "It is a continuation rather than anything
incredibly new or novel." The spokesperson requested anonymity.
But critics see a nefarious, ideologically-driven
plan to privatize much of the remaining government infrastructure
in developing countries, without regard to the impact on developing
country economies, and particularly on the poor.
Bank protestations to the contrary notwithstanding,
it seems clear that the PSDS is, at least, a far-reaching blueprint
that radically departs from the conventional wisdom that has governed
infrastructure and social sector management in the developed world.
"The PSDS is a recipe for transforming
the World Bank Group in a very fundamental way," says Nancy
C. Alexander, of the Citizens' Network on Essential Services.
"Under the PSDS, private sector operations would characterize
the main purpose of the World Bank Group."
INVESTMENT CLIMATE CHANGE
A key prong of the PSDS is to more systematically
attach conditions to future loans that are meant to "improve
the investment climate" in developing countries. These changes
are meant to facilitate the growth of the private sector. The
Bank also plans to incorporate surveys of "investment climate"
in future strategy papers, and to expand its business development
services and microfinancing schemes to small- and medium-sized
Almost no one disputes the importance
of some of the generic attributes of a sound investment climate-respect
for the rule of law, a functioning court system, streamlined rules
to establish new businesses, a well-functioning infrastructure
including transport and electricity, an educated workforce.
But the Bank's historical record suggests
it is concerned with another set of investment indicators.
The PSDS states, "A significant part
of the [World Bank Group's] existing work on policy reforms, such
as that on privatization, competition policy, deregulation and
strengthening of property rights, will help improve the investment
climate in client countries." In the past, these reforms
have translated into lower taxes on businesses that starve governments
of resources, labor law changes that weaken protections for workers,
destabilized social safety nets and lower wages [see "Against
the Workers," Multinational Monitor, September 2001].
An additional concern is that "improving
investment climate" is really code for "improving foreign
investment climate." "The standards that the Bank proposes
are heavily biased to the foreign private sector," says Alexander.
David Ellerman, economic adviser to the
chief economist of the World Bank, suggests there might be cause
for Alexander's c 0 n c e r n . "Making the investment climate
better for one group may well be at the cost of making it worse
for another group," he writes in a memo. "The Bank tends
to ignore these tradeoffs and to implicitly identify with one
group (usually external or foreign investors)."
The World Bank spokesperson counters that
the Bank is trying to spread "best practices" throughout
the entire economy. "We're trying to improve the investment
climate for everyone, not just foreign direct investors.... If
foreign investors just have their own enclaves, that's not good
for the community."
But the plan does suggest eliminating
rules that favor domestic industries or service providers. Alexander
argues that this will ultimately hurt developing economies. "Domestic
providers are by definition in most countries small and somewhat
non-competitive. So it's really a death sentence for these small-
and medium-sized enterprises to be subject to blasts of foreign
PRIVATIZED SERVICES AND INEQUALITY
The PSDS is heavily focused on the privatization
of social services and infrastructure. Among the elements of the
plan are "policy-based lending to promote privatization,"
"dealing" with labor retrenchment and environmental
aspects of privatization, and strengthening privatization agencies.
Key to the PSDS is an expansion of the activities of the International
Finance Corporation (IFC), the affiliate of the Bank that makes
loans in the private sector and is the Bank's most aggressive
and innovative privatization advocate. The IFC will give advice
to private companies, and will make investments in privatized
infrastructure enterprises and in private health and education
The PSDS describes a policy of "unbundling"
projects, whereby the IFC will fund private delivery of services
while the International Development Association (IDA), an affiliate
of the Bank that lends to governments at below-market rates, funds
subsidies to the poor who would otherwise not be able to afford
The idea is to turn public services over
to the private sector. Consumers with the ability to pay will
pay for service from the private providers. Those without the
ability to pay will either access services from the government,
or will be given subsidies to enable them to pay the private providers.
The rationale for the scheme is that private
providers will be more efficient, and able to derive more revenue
from those able to pay. The poor are expected to benefit either
from the more efficient privatized system that they can access
with subsidies, or because the government will be able to focus
efforts on them.
Critics challenge all of the assumptions
underlying the PSDS service privatization rationale. First, they
say the evidence to support claims of greater private sector efficiency
is flawed. "The empirical position is far from clear-cut,"
write Kate Bayliss and David Hall of Public Services International
Research Unit. "Several studies have found little impact
from privatization or have found that management and market structures
are more important than ownership." Those studies that find
privatization to be more efficient are marred by methodological
biases, they add. Nor has the public embraced privatization. A
survey of 17 Latin American countries in the spring of 2001 found
64 percent of respondents disagreeing or strongly disagreeing
with the statement, "The privatization of state companies
has been beneficial."
Second, critics say that moving to marketized
systems will give private providers incentives only to service
the better-off consumers who can afford to pay higher rates. Depending
on the kind of service, this discrimination may be applied geographically-for
example, by failure to extend or service water pipes or electric
lines in poor areas. Service discrimination may also be achieved
simply by pricing services out of reach of lower-income consumers.
Early drafts of the PSDS included references
to user fees for services, but these explicit references were
deleted in the final version. This may be because U.S. representatives
to international organizations are required to vote against such
fees for primary education and basic healthcare. Empirical evidence
is overwhelming that even small charges significantly deters access
to services by consumers.
The anonymous World Bank spokesperson
says that the PSDS is neutral as to whether user fees should be
used. "The debate on users fees is empty," he says.
"People are willing to starve themselves for water. So willingness
to pay is not an issue. "
The PSDS solution to the equity problems
of privatization is to provide subsidies to the lower-income groups.
The World Bank's own Development Report 2000/2001, however, points
out that subsidies often do not make it to their intended recipients
because of "leakage" or capture of the subsidies by
The World Bank spokesperson acknowledges
that failures have occurred, but insists that subsidies have been
implemented successfully in some cases. "We know how to do
this, but whether we can is another question."
The challenges of subsidy provision vary
by market. In Latin American countries, a high proportion of the
population may qualify for subsidies, posing extremely difficult
problems of administration: How are subsidies distributed? What
do the qualifiers have to do to prove eligibility? Is this realistic?
Might public, or even more worrisomely, private bureaucratic administrators
siphon off subsidies? How are better-off consumers kept from receiving
subsidies that are intended to be targeted to the poor? Where
are subsidy lines drawn to ensure everyone-including the near-poor
or middle-income groups-is able to obtain decent access to services?
(Consider how in the United States this last problem leaves 45
million people who do not qualify for Medicaid but are otherwise
unable to afford health insurance without coverage.)
In African and poorer country markets,
the challenges are more difficult still, and perhaps insurmountable.
In these countries, the vast majority live on less than $2 a day,
and a majority or near-majority may earn less than a dollar a
day. In these nations, most people may need subsidies to access
privatized services, making each administrative problem that much
more burdensome, costly and serious if not addressed, and raising
obvious questions about the efficacy of a privatization/subsidy
"The evidence is now unequivocal:
both cost recovery and the privatization of essential basic services
inevitably lead to deeper inequity, and safety nets fail to prevent
this," concludes Save the Children UK in a recent report.
The World Bank spokesperson agrees that
"there is no doubt that companies will serve better off customers
first," but holds that there are ways to make up the difference.
"You can design a privatization that puts the focus on poor
customers.... [I]t is possible to do this equitably."
Any prospect of overcoming these hurdles
depends on a nimble, sophisticated and powerful regulatory system
that an prevent opportunistic exploitation of markets by private
The PSDS asserts that "in a number
of countries private firms may be easier to regulate than public
ones due to the arms-length relationship between them and the
authorities, they may also have stronger incentives to conform
to regulations as the impact of penalties and economic incentives
affects the personal wealth of investors."
Critics, however, scoff at this notion,
saying the regulatory regimes arc far too weak in most developing
countries to match the influence of the ,multinationals likely
to take over the privatized services. In many countries, regulatory
agencies are tiny and underequipped precisely because it was expected
that public services would work to serve public, rather than private
profit, interests. As one example of overwhelmed regulators, Kate
Bayliss and David Hall point to Guinea, where regulators were
unable to control the private company operating the country's
water supply. As a result, the operator received more than double
the compensation originally anticipated.
"The implications of privatizing
into an unregulated environment arc scandalous. We've seen what
the results can be from what happened in Russia and Eastern Europe.
And that didn't strike at the heart of a society, the way that
privatizations into an unregulated environment would in the health,
education and water sectors," says Alexander.
The anonymous World Bank spokesperson
says it's true that "institutional [regulatory] capacity
is weaker, so we have to adapt regulatory tools to a weaker environment....
You don't get around the regulatory problem by having [basic services]
in public hands. You still have to regulate." He argues that
regulation in developing countries is relatively easier because
it mostly involves monitoring access, whereas n industrialized
countries regulation involves the much more complex task of measuring
and preventing monopoly power.
It is not clear to critics why measuring
and ensuring access in countries with large informal settlements
is considered a simple task, nor why the Bank might believe monopoly
power is a problem confined to industrialized countries, where
national markets generally work far more competitively than in
The Bank ,has also set up training programs
for regulators in developing countries, but some complain these
programs, more than anything else, are designed to convert regulators
into advocates of privatization.
SEARCHING FOR MAGGIE THATCHER
The controversy that surrounded development
of the PSDS did generate some changes in the final document.
The final version of the PSDS responds
to concerns about overzealous advocacy of privatization, for example,
by asserting that the "PSD is about a good balance between
the complementary functions of the state and the private sector.
It is about judicious refocusing of the role of the state, not
about indiscriminate privatization."
But critics says that while the PSDS now
rhetorically talks about balancing the state and private sector
and the need to apply privatization projects on a case-by-case
basis, the logic of the final document continues to suggest privatization
in all places, in all cases.
Where references to user fees were deleted,
for example, expansion of user fees is implicit in the strategy,
Or, as Kate Bayliss and David Hall wrote
of one of the intermediate drafts, "The latest PSDS draft
makes a number of concessions on the previous strong line in favor
of private participation in basic services, and refers repeatedly
to the need for a case-by-case approach. In the summary it goes
so far as to suggest that the public sector has a fundamental
role in some service.... However, the policy conclusions of the
paper appear to be regrettably insulated from the reasoning contained
in these statements."
At the end of the day, critics say the
PSDS foretells another round of cookie-cutter extremist policies
imposed on poor countries by the Bank.
Developing country citizens' ability to
affect these policies are constrained by the power dynamic between
the Bank and borrowing countries-with poor countries willing to
accept Bank-imposed conditions as a quid pro quo for Bank approval
to obtain new loans to pay off old debts and maintain a credit
The Bank may have even more influence
in particular "investment climate" matters, because
its IFC-which supports foreign investment in developing countries,
and also directly invests in projects in Third World countries-can
promise investment in exchange for policy changes.
"Development institutions such as
the IFC have special relationships with governments," explains
the PSDS. "This allows them to reduce political risks (mainly
expropriation risks including currency transfer and breach of
contract) associated with investing in a country-given a particular
policy environment. Private co-financiers benefit from such risk
mitigation ability of development institutions. IFC may also help
improve the policy environment itself. The government may be willing
to adjust policies, when the IFC is involved as an investor in
a particular project."
And in language critics say suggests the
policy blackmail to come, the PSDS continues: "In this case
policy reform can be shown to translate immediately into additional
Citizens are further limited in their
ability to influence policy by the secrecy surrounding policy
development and approval.
Most of the terms and conditions relating
to World Bank Group-financed sector restructuring are contained
in sectoral or structural adjustment loan documents which are
not publicly disclosed, even after Board approval," notes
a report from the organization now known as the Citizens' Network
on Essential Services.
The Bank spokesperson responds to these
criticisms by acknowledging that more information, such as who
is responsible for price regulation, and when prices should be
expected to rise, should be publicly available. But he does not
suggest this should include information on policy formulation,
saying, "I don't think economic policy is democratic or not
by its nature.... When done well, it advances democracy, when
not, it can advance private interests."
In any case, the Bank says that although
it plans to support civic institutions, it can only do so much
when it comes to democratic processes. "A lot of this is
about the countries themselves. We can put in systems that help,
but ultimately it's up to them." Although the Bank favors
involvement in policy formation by organized labor and other citizen
groups, "that's up to the countries," says the spokesperson.
"One person's civil society is another person's terrorist
group. In some countries, dealing with labor unions may be anathema,
but listening to consumer groups may be appropriate."
The Bank says it works hard to win popular
support for privatization programs, conducting "public information
campaigns" to explain the benefits of privatization in developing
Critics says the public information campaigns
are a sorry substitute for democratic debate. Alexander calls
them "a propaganda effort without any chance of public debate
"Privatization hasn't been explained
to people, how they benefit," replies the Bank spokesperson.
"Ms. Thatcher made sure everyone knew how they benefited."
David Tannenbaum is a researcher with
International Monetary Fund (IMF) & World Bank