House of Commons - International Development

Select Committee on International Development Sixth Report

6 TOWARDS A NEW WORLD BANK

89. The international climate in which the World Bank operates as a lending institution has altered in recent decades. Alternative sources of assistance and credit have opened up to developing countries. For example, China has become an important funder of infrastructure projects in Africa, and commodity prices have created new options for some resource-rich countries. Moreover the tasks the Bank faces have evolved as the global economy and the challenges facing developing countries have changed. It is with these factors in mind that we look in this chapter at the World Bank's future remit and business model, focusing on its role as a 'knowledge bank' and its work on climate change.

THE WORLD BANK AS A 'KNOWLEDGE BANK'

90. During our visit to Washington, we heard the view that some countries, particularly middle-income countries like China and emerging economies such as India, valued the World Bank's expertise and advice more than its lending function. President Zoellick told us that the Bank's model for engagement with these countries was evolving and that in these circumstances loans were a way of compensating the Bank for its expertise as a 'knowledge bank' and of tying the Bank closely to loan outcomes.[120] This analysis chimes with our experience of seeing the Bank's work in action around the world and the high premium put on Bank advice and analysis by both donor and borrower governments. In many cases, it is the advice and analysis which informs the broader development community's effort in-country and significantly influences other donors' decisions.

ADVICE VERSUS LENDING

91. The then World Bank President James Wolfensohn first articulated the concept of the Bank as a 'knowledge bank' in 1996. This centred on the Bank's role in creating, sharing, and applying knowledge to assist countries to speed up and ensure high standards in their own development. The principle was later set out in the Bank's Strategic Compact in 1997, which noted the need to strengthen the management of best practice and create a "first class knowledge management system".[121] In his introduction to DFID's most recent report on the UK and the World Bank, the Secretary of State writes:

"The Bank continues to provide world class intellectual and analytical work that many other development partners rely upon for their own work. And the Bank remains a forum for all countries to work together on development issues on a daily basis. Money, knowledge and partnership—three essential ingredients for poverty reduction."[122]

92. Some of the evidence we received in this inquiry raised concerns about the evolution in the Bank's role from lending institution to 'knowledge bank'. These concerns were related to both the quality of the knowledge and the dominance of the Bank's analysis. Drawing on a 2007 independent evaluation of the World Bank's record on research, Bretton Woods Project told us:[123]

"The World Bank has been increasingly set up as a 'knowledge bank'. There are mixed incentives at play, however, if the same institution that disburses a significant proportion of multilateral lending also has responsibility for defining and disseminating best practice in economic, social and political development. This was clearly seen in the highly critical evaluation of the World Bank research [… which asserted that the research] is used to support Bank policy rather than used to reflect and potentially challenge Bank policy".[124]

A study for the Swedish Ministry of Foreign Affairs, prepared by the Institute of Development Studies at the University of Sussex, commented on the Bank's 'knowledge role' and analytical approach:

"The World Bank continues to be the main purveyor of development ideas. In addition and although its policies change significantly over time, 'the Bank can never be wrong' mentality still prevails in much of the institution's thoughts and actions."[125]

Bretton Woods Project's evidence goes on to recommend that DFID "break the Bank's monopoly on knowledge" by supporting other organisations' capacity to conduct research and provide advice for developing countries.

93. The World Bank has come to occupy the role of foremost source of international development knowledge, advice and analysis. Development will not succeed through lending alone and we support the Bank's efforts to ensure that it provides intellectual added value to its lending. The Bank's analysis influences decisions across the development community, including DFID's own decisions. DFID must, therefore, be confident that the Bank's knowledge is credible in the way it is both created and shared. We recommend that DFID work closely with the Bank to ensure that its role as a 'knowledge bank' is demonstrably neutral and flexible, providing well-argued menus of best practice options for effective development. This is long-term work and we look forward to a detailed explanation of it in DFID's next and subsequent annual reports on the UK and the World Bank.

94. Another way of reconciling what the Bretton Woods Project calls the Bank's "mixed incentives" as both lender and adviser is to separate those functions in certain circumstances—often referred to as 'unbundling' loans and advice. United States officials told us that the US supported unbundling in principle but questioned what alternative model of funding could enable the Bank to operate as a consultancy. The Minister's comments to us echoed this concern:

"There are some extreme views that they [the World Bank] should not be bothering with the lending at all, but we do not accept that. […] When you unbundle it, of course, it becomes an issue of who is paying for the advice and, interestingly, what we have found is that countries would like the advice but they do not particularly want to pay for it […] the lending actually gives you the source of income that pays for it." [126]

In contrast, the Centre for Global Development, a Washington-based think-tank, sees merit in allowing what might be seen as a more market-based approach to Bank services. It is supportive of the principle of unbundling on the grounds that this would enable the Bank to consolidate its areas of comparative advantage:

"Given the Bank's widely acknowledged culture of over-lending and its relatively weak mechanisms of evaluation, its shareholders as a group need some mechanisms, however imperfect and rudimentary, to help determine the 'value' of its various services […] and to help push its management and staff toward those services in which it has a comparative advantage as a global institution."[127]

The Centre suggests an unbundling model whereby the price of services would be discounted for various countries dependent on their income group, so that some would pay 80% of the cost price for Bank services and others 50% or even 20%.

95. The World Bank's historical financing model whereby interest on loans is a means of compensating the Bank for its advice is sustainable as long as developing countries are willing to accept the arrangement. We see some merit, however, in the World Bank assessing other, more flexible options for financing its services as a knowledge bank. Separating loans from advice might be a more practical way forward than reliance on an old financing model. We believe a plan which allows different income groups to pay for services according to a sliding scale of discounts is one which deserves further feasibility study and we urge DFID to pursue with the Bank's management strategic work on this and other alternatives for unbundling loans and advice.

DFID AND THE WORLD BANK IN MIDDLE-INCOME COUNTRIES

96. The 'knowledge bank' role of the World Bank has a particularly strong function in middle-income countries. DFID has set a target of spending 90% of its bilateral aid in low-income countries and 10% in middle-income countries. This so-called '90/10 split' is now an established tenet of DFID policy. Consequently, DFID's ability to assist in reducing poverty in middle-income countries is linked almost exclusively to its support for multilateral organisations, including the World Bank. This was borne out in a recent Written Statement announcing that DFID would increase its financial support to Latin America by 15% to almost £100 million by 2010-11, where the Secretary of State said that "our finance and influence over the Bank […] will continue to be central to our support to the region".[128]

97. DFID's capacity to have an impact in middle-income countries, where it has little or no bilateral reach, has been an issue during this inquiry. We have also discussed more broadly the influence on national poverty reduction strategies that Official Development Assistance (ODA) and other grants to middle-income countries afford. ActionAid told us that "most Non-Governmental Organisations think that the 90/10 split is appropriate for DFID".[129] While we broadly agree that the 90/10 split is appropriate, significant inequality and poverty persists in middle-income countries. We therefore sought to establish what influence DFID had on World Bank policy and action in such countries.

98. The case of Latin America could be held to be representative of the sort of middle-income countries that have seen a decrease in DFID attention as a consequence of the 90/10 split. DFID's 2004-2007 Regional Assistance Plan for Latin America says:

"As our own resources are limited, our overall impact will be maximised if we use our resources to support change and enhance the effectiveness of these much larger organisations [the World Bank and the Inter-American Development Bank] in specific areas."[130]

The Written Statement on 24 January adds:

"We will maintain our office in Brazil, with a focus on climate change and Brazil's role in global development. At the same time, we will close our offices in Nicaragua and Bolivia, which will not be needed to deliver our new regional programme. We will continue to strengthen and monitor the operations of the World Bank [… and other multilaterals] in Latin America through our representatives in Washington and Brussels and staff in the UK."[131]

99. During 2007, CARE International conducted research with civil society organisations in Latin America on the implications of DFID co-operation with the World Bank and other multilaterals in the region, the results of which have been published.[132] This report says that there was little evidence on the ground of DFID influence over the World Bank:

"Based on what little knowledge [local partner organisations have, they] believed the influence that DFID had managed to exert on these huge institutions was minimal. […] In Brazil, even DFID personnel had difficulty in identifying any impact DFID had had on these institutions there."[133]

CARE goes on to recommend that DFID,

"bases its decision to continue with its strategy of contributing funds to the World Bank and the Inter-American Development Bank on demonstrable evidence that it is managing to influence these institutions."[134]

100. During our visit to Washington and throughout this inquiry, it was clear to us that the UK's interaction with the World Bank is focused to a very significant degree on Africa and other areas in which the UK has a strong presence. On this point, the Minister said:

"We have a depth of expertise and experience and operations in low income countries that makes us a more natural partner in low income countries with the World Bank and we do not have, for example, huge operations in certain parts of the world, in Latin America, for example, that would make us a natural partner, and that might give us some disadvantage.[135]

101. DFID has little or no bilateral reach in middle-income countries. It relies almost entirely on multilateral organisations, including to a large degree the World Bank, to extend its reach into these regions. We believe that it is important, therefore, that DFID and the Executive Director's office are fully engaged with World Bank policy in these regions as well as where the UK is a natural partner, such as Africa. This will become even more crucial as the Bank's relationship with these countries continues to evolve away from traditional lending. We recommend that, in allocating the new adviser portfolios that we have recommended should be taken up, DFID ensure that sufficient resources are available in Washington to make good on its promises to influence and monitor as well as finance Bank operations in middle-income countries.

THE WORLD BANK AS A "BANK FOR THE ENVIRONMENT"

102. Climate change is by definition a global challenge but it is a particularly acute one for developing countries. The United Nations Human Development Report 2007-08 warns about the effects of climate change, calling it "the defining human development issue of our generation" and that it is "a massive threat to human development and in some places it is already undermining the international community's efforts to reduce extreme poverty".[136] The report goes on to say:

"Development progress is increasingly going to be hindered by climate change. So we must see the fight against poverty and the fight against the effects of climate change as interrelated efforts. They must reinforce each other and success must be achieved on both fronts jointly."[137]

A recent World Bank report on climate change says: "The poorest countries and communities are likely to suffer the most because of their geographical location, low incomes, and low institutional capacity, as well as their greater reliance on climate-sensitive sectors like agriculture."[138] In its evidence to us, Christian Aid spoke about an environmental "triple crisis" for developing countries in terms of: the poverty they face; their front-line vulnerability to the impact of climate change; and the threat to their development posed by the likely solutions.[139] It is against this backdrop that we examine in this section of the Report the role of the World Bank in global action on climate change.

THE WORLD BANK AND CLIMATE CHANGE TODAY

103. In his Mansion House speech on 12 November 2007, the Prime Minister said: "while we strengthen the World Bank's focus on poverty reduction, it must also become a bank for the environment."[140] This is a view he has promoted in each of his major interventions on the future of the Bank, including most recently in India and at the World Economic Forum in Davos.[141] At Davos, he is reported as saying: "I cannot see why we do not move immediately for the World Bank to become a world environment bank".[142]

104. DFID evidence in this inquiry says:

"On climate change the Bank has a key role to play in terms of financing, analytical work and its convening power […]. The Bank is uniquely placed to challenge the richer countries to act […] and to help developing countries to play their part".[143]

However, other evidence received in this inquiry queries whether the World Bank is, in fact, the appropriate institution for the role of a 'bank for the environment' and whether Bank policies in this area are consistent with DFID priorities. A joint submission by a number of non-governmental organisations says, for example, in connection with Bank work in the energy sector:[144]

"Despite assertions in its white paper Eliminating world poverty: making governance work for the poor that "the UK is working for international agreement on urgent action to prevent dangerous climate change", the UK Government [… through its support for some Bank energy programmes] is undermining its own efforts to reduce greenhouse gas emissions."[145]

We pursue the specific sensitivities linked to the Bank's energy work later in this chapter.

105. We were keen to establish what impact a reorientation along the lines supported by the Prime Minister would have on the Bank's work on poverty and growth. During our visit to Washington, President Zoellick recognised the potential tension between maintaining the Bank's focus on overcoming poverty and its emerging remit in climate change.[146] In the course of the negotiations on the replenishment of the International Development Association (IDA), the World Bank produced a report on IDA and climate change which concludes that:

"In the face of climate change, IDA's core mandate must continue to be growth and poverty reduction. Growth and poverty reduction allow more diversified economies which are inherently less vulnerable to climate change. But there will be climate investments that are compatible with this core mandate."[147]

Commenting on the balance between a focus on poverty and on climate change, the Minister told us:

"Development is about the environment. I really cannot see any way that they are not about the same thing. […] At the end of it we need a bank, we need a financing institution; because it is a global problem we need a financing institution that has a global reach [… and] that does development."[148]

106. Climate change is a global challenge but there is convincing evidence that it is a particularly acute one for developing countries. We believe that it is right that the World Bank, a leader in international development, integrates action on climate change into its overall programme of work. However, we would caution against too literal an interpretation of the Prime Minister's assertion that the Bank should become an 'environment bank' as this could compromise its overriding poverty reduction objectives. The urgency of climate change does not lessen the blight of poverty. The Bank is central to international efforts to meet the Millennium Development Goals. This becomes increasingly urgent as the 2015 deadline for the Goals approaches and the Bank and its current resources which were provided for combating poverty must not be diverted from that task. Moreover, fulfilment of this development remit would have a positive impact on environmental objectives because developed countries are less vulnerable to climate change. We recommend that the UK ensure that the World Bank Board monitor and, where necessary, correct the Bank's strategic direction to ensure that its core development and poverty mandate is not overshadowed. If the Bank is to adopt an additional role as an environment bank it must raise additional funds for this purpose.

FUNDING FOR ADAPTATION AND MITIGATION

107. During our visit to Washington, we heard from both President Zoellick and the Vice-President for Sustainable Development, Katherine Sierra, that the Bank's focus had been predominantly on mitigation rather than adaptation work and that adaptation would need greater attention going forward.[149] Adaptation to climate change refers to attempts to lessen the vulnerabilities of the earth and its population to the negative effects of global warming. This is in contrast to mitigation which involves actions meant to reduce emissions or the causes of climate change. The United Nations Framework Convention on Climate Change (UNFCCC) estimates that the additional flows of investment and finance that may be needed by 2030 to enable developing countries to adapt to the impact of climate change is in the region of tens of billions of dollars annually but could be more than $100 billion a year.[150] The Government's review of the economic impact of climate change concluded that the costs incurred through action on climate change now would be less than the costs associated with carrying on with 'business as usual'.[151] So although the sums involved in acting are large, they are the better investment in the long term.

108. The funding mechanisms and structures for adaptation to climate change are still maturing. During our meeting, Mr Zoellick told us that it was important to establish the right international financing arrangements for climate change. He said that he was co-ordinating with the senior management of the Global Environment Facility (GEF) on the need for an approach which could integrate or co-ordinate the various funds in this area.

109. The Global Environment Facility (GEF) operates under the aegis of the World Bank, the United Nations Development Programme, and the United Nations Environment Programme. It is a central component of the international financing arrangements in place to tackle climate change. Based on guidance from the UNFCCC, the GEF operates three funds which are financed through donor commitments: the GEF Trust Fund; the Special Climate Change Fund; and the Least Developed Country Fund. A further fund, the Adaptation Fund, is yet to be made operational. It will be raised as a 2% levy on proceeds from Clean Development Mechanism projects and is projected by the World Bank to raise $100-500 million by 2012.[152] As well as these funds, there are also new multilateral environmental agreements and new bilateral and multilateral funding from governments and multilateral organisations.

110. A report by the UNFCCC commented on the existing funding arrangements:

"Financial ways and means must be found to enable developing countries to enhance their efforts to adapt. […] Accessing the funds which are available at present [is] complex and lengthy. Even if this process was streamlined, a lot more funding would still be required for adaptation."[153]

The Bank's report on IDA and climate change notes that there are "multiple stakeholders" in the current "climate change aid architecture", including GEF, UN agencies, the private sector and other multilateral development banks.[154] The report goes on to say that "harmonising adaptation efforts" and "a clear division of labour" will be crucial going forward.[155] It sets out in some detail the 12 existing Bank-managed Trust Funds for climate change. WWF told us that around nine new bilateral funds on climate change had been launched in the past year.[156]

111. At the 2005 Gleneagles Group of Eight (G8) Summit, the World Bank and the regional development banks agreed to work together on a new framework for accelerating investment in cleaner energy in developing countries. The Bank's Vice-President for Sustainable Development told us that most of the analytical work had been done or was in train for the Clean Energy Investment Framework (CEIF).[157] The Minister told us about UK plans for providing financing for the Framework:

"Something that I think could be really very major […] is the creation of, I am sorry to say, a Trust Fund around climate change. As you know, we have committed money for an international window of the Environmental Transformation Fund, which is £800 million and we think that it would be a very good idea to work with the Bank and through the Bank because it would leverage other donors. [… The Fund] would focus on issues around adaptation and forestry as well as energy and low carbon energy growth."[158]

We understand that the Bank would act as a trustee rather than as policy lead for this Fund, but we have not been provided with any detail about how the Fund might operate or how it will ensure a clear division of labour in relation to other funds. WWF UK commented on the proposed new Fund:

"We are concerned that this potentially could set up mechanisms which conflict with internationally agreed mechanisms to deal with environment, such as the GEF, for example, which is agreed by international treaties and conventions. So, there are quite a number of concerns in terms of coherence and co-ordination and so far we have not seen evidence that this has been appropriately addressed yet."[159]

112. The International Finance Facility (IFF) is a UK initiative to frontload aid by issuing bonds on global capital markets against future aid flows. On the applicability of such a principle to the proposed new Fund to support the CEIF, the Minister told us:

"Climate change is the classic case for frontloading. I think this has been influenced by the success of the International Finance Facility for Immunisationand the concept of the International Finance Facility. The climate change fund […] actually has some of these principles in it […] What we need to do is to find a mechanism where we are working, using the public finance bit to subsidise, if needed, to leverage some of the private sector. […] It may not look quite like the IFF for climate change but it will have a lot of those leverage principles."[160]

Commenting on the possibility of an IFF initiative to finance climate change work, Rainforest Foundation UK said that such frontloading of aid raised problems of absorption capacity in developing countries.[161] Christian Aid told us that they had a concern that debt built up would have to be repaid at some point, so constraining future aid decisions.[162]

113. Funding for climate change work introduces two key problems: raising the huge sums of money needed; and ensuring that mechanisms are streamlined and funding is well-coordinated. The World Bank has a role to play in developing solutions to both problems. As a bank, it should help to leverage the money needed and, as a leader in development, it should help to marshal funds and stakeholders. The urgency of the challenge of climate change has triggered a proliferation of bilateral and multilateral funds. We believe that building on the mechanisms already in place is crucial, particularly the Global Environment Facility which operates under the joint aegis of the World Bank and the UN. We would urge the Bank to make this a priority to ensure effective and efficient co-ordinated action.

114. We welcome the UK's commitment of £800 million to international work on climate change through the Environmental Transformation Fund. Although preparatory work is well-advanced, we are sceptical that creating a new Trust Fund in addition to the dozen or so that already exist within the Bank for such work is the best way forward for this money. It may be that new arrangements are needed but we have not seen evidence which makes explicit the case for them. We recommend that DFID conduct an audit of the current bilateral and multilateral funds available for international climate change work and share this with us before final decisions are taken.

THE WORLD BANK AND THE ENERGY SECTOR

115. One of the most contentious areas of World Bank work, in terms of environmental impact, is its work in the energy sector and other extractives, where the Bank has a large investment programme. A joint submission to us from a number of NGOs says that the Bank's investment in the energy sector increased from $2.8 billion in 2005 to $4.4 billion in 2006 (a 60% increase) and that, of this total, "oil, gas and power sector commitments account for 77% of the total energy sector programme while 'new renewables' account for only 5%."[163]World Bank figures, as set out by DFID, suggest a more positive picture:

"A recent Bank report showed that in 2006 financing of renewable energy and energy efficiency projects rose by 45%, to a total of £359 million, far exceeding the 20% annual increase target set in 2004."[164]

The joint submission queries this increase and argues that the Bank reaches this figure by including within its definition of "new renewables" programmes and projects which are environmentally damaging, such as large hydropower projects.[165] WWF UK said:

"Only just over a third of the financing defined [by the Bank] as 'low-carbon' in 2005 and 2006 was on new renewable energy and energy efficiency. The renewable energy options are zero carbon emitters, but receive far less investment."[166]

116. During our visit to Washington, the World Bank told us that 70% of current investment in the energy sector through the International Finance Corporation was spent on gas, as opposed to oil or coal, and the majority of that energy was used for domestic consumption. In our evidence session specifically on climate change, we discussed the implications of this trend with relevant non-governmental organisations and whether renewable alternatives were viable in terms of cost and scale. Christian Aid argued that renewable energy initiatives which had so far been relatively small scale—such as composting and solar lighting—could be scaled up and offered considerable "co-benefits".[167] WWF UK said:

"The World Bank's funding of cheap loans is in effect a subsidy. What we really need to do is shift the subsidy systems in favour of new renewables and away from fossil fuels. […] It is a double whammy for poor people. They are being lined up for being the worst victims [of climate change] in 50 years' time and at the same time they are not getting the energy because the energy systems continue to be centralised […]. It is a difficult question but what we are arguing is that the World Bank should take a lead in helping to shift the global energy provision system and making it more financially viable to invest in new renewables."[168]

In the Bank's report on IDA and climate change, it notes that while IDA's focus going forward would be on adaptation work:

"For climate mitigation the question of IDA's role is more complex. Some projects (reforestation, or improving land management, for example) may yield competitive net benefits while simultaneously reducing greenhouse gas emissions. Other projects, such as 'clean' energy investments, may yield lower net benefits compared with 'traditional' energy projects—in these cases, however, a subsidy provided by carbon finance may make the clean project competitive with the traditional one."[169]

The Minister commented on some of the evidence we had received which argued against Bank support for extractive industries and in particular the suggestion:

"that somehow the Bank should not be funding any form of fossil energy for developing countries, which I think is not the most just way of conducting ourselves because, quite frankly, it is their choice; they will have their obligations under the international treaties and we cannot deny them this right. In certain countries, for example in Malawi, the market has been coal but 80% of people are without electricity; are we going to turn around to them and say, 'You cannot have this', or 'By the way, we can but you cannot'?"[170]

Emissions from extractive industries are major contributors to climate change which, as we have set out, has a disproportionate impact on developing countries. The Bank is right to take a pragmatic line, supporting energy investments which provide essential services to poor people. But, given the urgency of the climate change challenge, such investments should examine all viable options and favour where practicable the environmentally cleanest option. This will entail a greater weight of subsidies for clean, renewable energy and less for extractive industries and this rebalancing should be happening at a faster rate than is currently the case. We recommend DFID lead the Board towards using the Bank's substantial resources and leverage to make investment in renewables more financially viable.

120 Annex 1 Back

121 World Bank, The strategic compact: renewing the bank's effectiveness to fight poverty, 1997 Back

122 DFID, The UK and the World Bank 2006/2007, Introduction Back

123 Angus Deaton et al, An Evaluation of World Bank Research 1998-2005, January 2007 Back

124 Ev 83 Back

125 Keith Bezanson et al, A Foresight and Policy Study of the Multilateral Development Banks, 2000 Back

126 Q 183 [Baroness Vadera] Back

127 Centre for Global Development, From World Bank to World Development Cooperative, October 2007 Back

128 HC Deb, 24 January 2008, col 60WS Back

129 Q 96 [Ms Greenhill] Back

130 DFID, Latin America Regional Assistance Plan 2004-2007, 2004, paragraph D3 Back

131 HC Deb, 24 January 2008, col 60WS Back