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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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.