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PSDS: The Latest Chapter in the World Bank's Privatization Plans

By David Tannenbaum

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 year 2004.

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 firms.

Almost no one disputes the importance of some of the generic attributes of a sound investment climate ó 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 concern. "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. Ö 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 competition."

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 facilities.

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 privatized services.

The idea is to turn public services over to the private sector. Consumers with the ability to pay will pay for services 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 ó 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 richer groups.

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 ó including the near-poor or middle-income groups ó 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 scheme altogether.

"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 can prevent opportunistic exploitation of markets by private service providers.

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 are 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 are 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. Ö 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 in 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 developing nations.

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, says Alexander.

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 ó 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 rating.

The Bank may have even more influence in particular "investment climate" matters, because its IFC ó which supports foreign investment in developing countries, and also directly invests in projects in Third World countries ó 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 ó 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 investments."

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 countries.

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 or dialogue."

"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 Multinational Monitor.