THE WORLD BANK GROUP'S PRIVATE SECTOR DEVELOPMENT (PSD) STRATEGY

This Action Alert contains an overview of the PSD Strategy, plus key messages to send to decision-makers, especially the World Bank's Board of Executive Directors. We urge you to communicate with Board members before January 25, 2002 to influence their final decisions on the PSD I.

OVERVIEW OF THE PSD STRATEGY.
The PSD Strategy would expand four types of operations financed by the World Bank Group: structural adjustment, privatization of infrastructure and services, social funds, and microfinance.

Two arms of the World Bank Group would partner to privatize infrastructure and service provision, especially in low-income countries: the World Bank's private sector affiliate, the International Finance Corporation (IFC) and the World Bank's soft loan arm, the
International Development Association (IDA). The IFC will increasingly take the lead in expanding private provision of services, while IDA will work with governments to design subsidy and other schemes to offset the costs of private provision to low-income consumers.

In the past several months, the Bank's Board of Executive Directors considered, debated, and rejected successive drafts of the PSD Strategy.

Some officials said that they had never seen the U.S. -- the main proponent of the Strategy -- in such an isolated position. The Board has postponed decisions on the PSD Strategy for several weeks. In a related decision, the IDA Deputies also postponed action on a U.S. proposal to convert half of IDA's resources from loans to grants.)

The three prongs of the PSD Strategy would:

A. Launch a new and expanded generation of structural adjustment programs (SAPs) with policy conditions intended to induce borrowers to adopt "minimum investment standards." The launch of this investment initiative comes just after the announcement by the World Trade Organization in November of a new round of negotiations on investment rules (which will revive the Multilateral Agreement on Investment). Bank promotion of output-based aid (see "B," below) depends, among other things, up on easier private sector entry into markets of low-income countries.

B. Accelerate the privatization of infrastructure and basic services (e.g., health, education, water) on a commercial basis- that is, with
cost-covering user fees. The International Finance Corporation (IFC) would help spearhead this process by, among other things, urging governments to employ more output-based aid (OBA) schemes. OBA schemes delegate basic service provision to private firms (and NGOs) under contracts that tie provision of financial support to the outputs or services delivered.

These schemes can be risky, especially in poorly regulated environments.

Also, because OBA schemes provide back-loaded finance, they often favor international actors with "deep pockets" rather than domestic enterprises. The U.S. is pressuring the shareholders of the World Bank to convert IDA resources from loans to grants so that, among other things, grant financing can subsidize private provision of services, including OBA schemes.

C. Launch more aggressive efforts to expand the reach of markets by supporting small and medium-sized enterprises, mainly
through expanded business development services and microfinance schemes.

The Bank plans to revise its operational policies to ensure that finance is provided on unsubsidized terms. Some loan operations contain microfinance schemes to enable low-income consumers to borrow at market rates in order to purchase basic services,
such as water.

II. Key Messages

1. Undermining Democratic Processes. The World Bank and other creditors and donors should not use pressure tactics to induce recipient governments to privatise basic services. Examples of pressure tactics include: failing to involve the public and affected unions in privatization decisions, failing to publicly disclose information about privatization plans; withholding aid until recipient governments agree to privatize; running "public information" campaigns to persuade publics to privatize; and supporting biased cost-benefit analyses of policy options. Important political decisions about modes of service delivery should be made by domestic groups, including poor and vulnerable groups, without outside interference.

2. Privatizing Social Services. The World Bank Group poses as a "knowledge bank," but the PSD Strategy states that there has been no evaluation of operations that privatize social services. Yet, new loans show expanded support for such privatization!

3. Imposing User Fees. People may be deprived of basic services because (a) exemptions and subsidizes for private primary education and basic health care may fail to reach the people who need them; (b) low-income groups may not be able to afford fees, especially for non-compulsory levels of education and secondary/tertiary health care; and (c) the PSD Strategy practically overlooks the necessity for regulation of social sectors.

4. Privatizing into Poorly Regulated Environments. The World Bank Group is "harmonizing" regulatory standards with those of other development institutions. In this process, World Bank safeguard (and other) policies are being weakened with adverse implications for poor and vulnerable groups and the environment. (Ultimately, this process may be guided by the WTO's ambiguous emphasis on "least burdensome" regulation.)

5. Sidelining Domestic Actors. Output-based aid (OBA) schemes compensate service providers AFTER services have been delivered. Back-loaded finance will favor international actors with "deep pockets" over domestic service providers. Domestic actors should not be sidelined, especially in service sectors.

6. Providing Grants rather than Loans. The Bank has not disclosed the uses to which grants might be put and, in particular, whether grants would subsidize OBA schemes. Many groups feel that grants are inappropriate in certain circumstances. [For instance,
according to Bank publications ("Note on IDA13 and PSD," November 2001), the Bank envisions subsidizing corporations that have not recouped costs through tariffs.]

7. Increasing Fiscal Burdens. The PSD Strategy overlooks off-budget fiscal risks implicit in privatization schemes (e.g., the failed
Enron project in Maharastra). Acknowledgement of risks would undermine claims that the PSD Strategy would shift performance
risk to private actors and Northern taxpayers

8. Deepening World Bank - WTO Collaboration. The World Bank Group has not disclosed the ways in which the PSD Strategy will pave the way for a new WTO agreements on investment and services, which are currently in the works.

9. Expanding Ineffective Operations. The World Bank's own evaluators have demonstrated the ineffectiveness of PSD operations in low-income countries. The Bank should not expand ineffective operations.

For further information,and ANALYSIS OF THE PSD STRATEGY see "News & Notices for IMF and World Bank Watchers," Winter 2002. The Overview and Conclusion are attached (below). The entire issue can be viewed at:
http://www.challengeglobalization.org/html/news_notices/winter2002/Winter02N&N.pdf

A list of board members and their adresses can be accessed at:
http://www.challengeglobalization.org/html/ta_menu6.shtml