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II. Sector Strategies – Water, Health, Education, etc.

Vulnerability of Public Services. The PSD Strategy requires the reshaping of the Bank’s Strategies for each sector – including the service sectors – in ways that introduce competition and commercial pricing.

WTO leaders dismiss, and even ridicule, claims that GATS will lead to the privatization of government services. They support their assertion by pointing to a provision stating that GATS does not apply to services “supplied in the exercise of governmental authority,” as well as GATS language that protects governments’ right to regulate. But such language provides “cold comfort” to those concerned about the potential for limiting government regulation and policy.

The reason is that, according to the GATS, a service is “supplied in the exercise of governmental authority” only when it is “supplied neither on a commercial basis, nor in competition with one or more service suppliers.” As noted above, the donor and creditor communities, often led by the World Bank, are promoting competition for provision at commercial rates in each sector. Hence, the donor and creditor communities are laying the foundation for subjecting each service sector to the GATS disciplines. Indeed, the GATS already applies to many essential service sectors.

Furthermore, the GATS recognizes the “right to regulate” only to the extent that regulations are not inconsistent with GATS, a judgment that will be made not by governments, but by appointed WTO dispute panelists. Thus any assurances that GATS protects public services must be greeted with skepticism, if not disbelief. It is critical that governments retain the policy flexibility to ensure that the public has access to safe and affordable services and that the natural environment is protected. However, when the GATS applies to a particular sector, it “locks in” liberalization and privatization. Thus, a government loses policy flexibility. For instance, it can become nearly impossible for a government to renationalize services. [TOP]

Although the WTO has said that it does not seek jurisdiction over water, the EU is proposing that the GATS apply to drinking water.

Water. Concurrently with its promotion of the PSD Strategy, the World Bank has promoted a new Water Resources Sector Strategy (WRSS), which creates a new blueprint for private sector participation in the water sector. This blueprint includes a significant campaign to re-enter the business of financing big infrastructure, such as construction of hydro-electric dams; privatization of water supply, including irrigation; use of market mechanisms to allocate water from “low value” users (subsistence farmers) to "high value" users (agribusiness and industry); and cost recovery schemes. Yet even as it finances increasingly risky projects, the Bank is taking steps to reduce its accountability for outcomes. If, as suggested in Box 2, the Bank shifts responsibility for compliance with its safeguard policies to borrowers, then it would become exempt from responsibilities enumerated by the World Commission on Dams. All accountability and responsibility would fall on borrowing countries.

Meanwhile, the Bank's Director of Water and Power, Jamal Saghir , is tailoring output-based aid (OBA) schemes which would provide subsidies to corporations when they deliver services or meet certain performance benchmarks: e.g., connecting poor people to water system or meeting certain pollution requirements. (See Attachment, Box 2 for description of OBA.)

Saghir has also stated publicly that he considers water loans to African governments "out of the question" unless such loans contain private sector components. Such statements, echoed by others in the G-7, raise the possibility that cash-strapped governments could be driven into the arms of the private sector if they are denied external or domestic financing. (The IMF sometimes severs domestic credit to loss-making public utilities.)

The reality is that poor people are neither profitable for corporations nor “revenue neutral” for governments. The question is: which financing mechanisms will be used to provide them with basic services. The one pushed by the World Bank is based on a combination of guaranteed profit-maximization and streams of external aid. The one preferred by citizens demanding accountability from their government is based on progressive taxation, pro-poor budget allocation and public cross-subsidy mechanisms. Unfortunately, a near monopoly on information and aid resources has enabled the major shareholders of these institutions to deny public sector solutions for the world’s poor, even though public sector solutions are common in industrialized countries. [TOP]

III. Trade Research and Capacity-Building and the Integrated Framework (IF)

The World Bank created a Trade Department, directed by Uri Dadush, which strengthens collaboration among Bank vice presidencies on the WTO’s trade agenda. The new Department, created in July 2002, combines policy and analytic work and capacity building on trade under one budget, which also includes resources from trust funds and other initiatives, such as the Integrated Framework (see below). Dadush is aligning research with operational priorities. For instance, research will focus on identifying trade barriers8 and quantifying gains from reform. It will use data from household surveys to conduct ex-ante simulation of impacts of trade liberalization on vulnerable groups as well as ex-post assessments of trade liberalization on the welfare of the poor.9

The Bank is a major player in a capacity-building initiative called “the Integrated Framework” (IF), launched in February 2001.10 The IF is intended to build the capacity of low-income countries to “mainstream” trade into their poverty reduction strategies through, among other things, planning processes (e.g., preparation of Poverty Reduction Strategy Papers) and establishing a country environment that is conducive to strengthening trading systems. However, the IF system is being extended to middle-income countries as well. The WTO is planning to coordinate its Trade Policy Reviews for developing countries closely with IF studies, including the “Diagnostic Trade Integration Studies” (DTIS).

The Bank coordinates the DTIS, which includes a description and assessment of the macroeconomic environment, the country’s investment climate, specific constraints that exports from each country face in international markets and an action plan. For instance, the action plan in Mauritania’s DTIS makes the claim that it would improve competition and facilitate trade, especially in the areas of fishing, livestock, agriculture and tourism.11 By the end of 2002, the Bank coordinated preparation of about 19 DTISs.

This work makes an end-run around democratic processes and multilateral WTO negotiations by inserting trade reforms into national strategies (e.g., Poverty Reduction Strategy Papers). [TOP]

“Capacity-Building” in FTAA countries
Capacity-building related to the FTAA negotiations are being linked together in a Hemispheric Cooperation Program (HCP) run by the World Bank, IMF, Organization of American States and US AID, among others. This program, launched at the FTAA ministerial in Quito, is intended to be a model for work in the WTO. With funding from the Bush Administration ($140 million in 2003), the program is intended to help governments participate in FTAA negotiations, strengthen capacity for implementation of FTAA commitments, and carry out structural adjustments.

Capacity-building for Meeting “Market Access” Requirements.
“Market Access” is key to the private sector being able to provide essential services. In the GATS, market access rules include prohibition of any limitations on the participation of foreign capital. They also forbid any measures that “restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service.” Under GATS, countries can decide what service sectors they want subjected to market access rules.

To promote countries taking commitments on market access for their essential services, the World Bank is providing $300,000 for the exploration of a new Standards and Trade Development Facility to be run in collaboration with WTO, FAO, and WHO. The work may entail mobilizing bilateral funding, creating an inter-agency clearinghouse on technical assistance; and running pilot projects with grant aid to strengthen the capacity of countries to meet market access requirements. [TOP]

IV. From Policy Conditionality to Triage

The World Bank and the regional banks are notorious for their adjustment loans which, through policy conditionality, attempt to mandate liberalization and privatization. Between 1990 and 1998, 68% of all World Bank adjustment loans supported exchange rate and trade policy reforms. In addition, 26% of the Bank’s total lending (1993-99) supported trade-related activities, such as telecommunications, ports, export corridors, institutional reforms (e.g., customs) or private enterprise development.

Gradually, donors and creditors are adopting a development paradigm wherein a developing country government’s eligibility for external assistance is determined by its performance on specific eligibility criteria, including trade liberalization. (See Attachment A.) The U.S. and the Group of 8 have embraced this notion.12

The U.S. is leading the parade of donors and creditors who are adopting this new, highly coercive system. Beginning in 2003, a new foreign policy corporation would administer the U.S.’s Millennium Challenge Account (MCA) – a new bilateral grant program that will require that eligible governments embrace some of the MCA principles, including “economic freedom” (e.g., removal of barriers to trade; cutting the number of days to start a business, deregulation).13 Attachment A details the U.S. approach to the MCA, including its eligibility criteria. (The right-wing Heritage Foundation together with the Wall Street Journal determined the trade criterion.) [TOP]

Governments that are deemed “winners” will gain access to MCA and other sources of assistance, including aid from the G-8. What will happen to “losers,” or the governments that fail? The World Bank coordinates the Low-Income Countries Under Stress (LICUS) program for thirty countries with weak (or non-existent) governments wherein Independent Service Authorities (ISAs) assume responsibility for provision of primary health, nutrition, education, and related infrastructure services (water supply, sanitation services, roads). ISAs supplant the government’s role in service provision. The World Bank says that the governments of LICUS countries are too weak to perform their ordinary functions. The LICUS program is one of several channels that donors and creditors are developing to bypass governments and provide corporations with a stable environment in which to conduct business.14

The LICUS Initiative turns the idea of improving governance on its head. Rather than build capacity for governance and service provision, an external institution — the ISA — simply replaces its essential functions. ISAs are largely autonomous from government, and, ironically, from citizens. Rather, they are most directly accountable to donors. ISAs are wholesalers, contracting with multiple channels for retail provision of services – private, NGO, local government – with performance at the retail level properly monitored so that cost-effectiveness can be compared.

Imposition of ISAs represents a remarkable assault on national sovereignty. But, there is a danger that donor and creditor concern with corruption could eventually lead to the establishment of ISAs (or their equivalent) in other countries that are less stressed. Indeed, ISAs (or their equivalent) may increasingly be seen as the answer to the prayers of multinational corporations and creditors. Creditors and corporations are considering mechanisms that could mitigate risks, including ISA-like mechanisms, offshore trust funds, political risk insurance, and partial risk guarantees and ensure debt servicing.15 [TOP]

V. Subsidies

National treatment, according to GATS, obligates WTO-member nations to treat foreign service providers no less favorably than they treat their domestic providers. This means that, for any service sector where a country has made a commitment on national treatment, subsidies such as grants, can no longer be channeled exclusively to domestic firms.16 Developing countries thereby may lose a powerful tool to promote local employment and production and foreign corporations may stand to profit from the grants.

Under the output-based aid (OBA) system, which the World Bank is scaling up (at the behest of the U.S.), corporations could receive grant support for serving environmental or social goals, such as providing services at less than full cost. Alternatively, if corporations charge full costs for services, e.g., water, grant support may finance a system of water stamps for the poor.
Through providing grant support for foreign direct investment (FDI), the donor and creditor communities expect to help corner the market in developing countries that is expected to grow by perhaps another 3 billion people by the year 2050. At present, corporations lack the incentive to take risks in these markets, so the provision of grant support would help overcome that problem. [TOP]

It is in this context that the U.S. is pressing the multilateral development banks to convert their concessional loans to grants and that the U.S. is launching a new Corporation to provide bilateral grants to U.S. corporations and NGOs as well as cooperating governments.

Such grants would supplement the foreign direct investment by corporations, but corporations could also benefit directly from the grants. This is because the “national treatment” provision in GATS requires that a WTO member country treat foreign service providers no less favorably than its own domestic service providers.” This provision includes government subsidies.

While WTO member countries can decide which service sectors they want subjected to national treatment, in reality developing countries are at a distinct disadvantage in the current bilateral negotiations to open up more service sectors to foreign competition. This is because in the framework laid out above, it is very easy for the U.S. and other developed countries to tie aid to acquiescence by developing countries to have their essential services covered by the national treatment rule. Already the USTR is putting US AID Funds on the table in these negotiations as an inducement for developing countries to liberalize. [TOP]

VI. Manufacturing “Knowledge” — The Forthcoming World Development Report

World Bank’s World Development Report (2004), “Making Services Work for the Poor,” scheduled for release at the 2003 Annual Meeting of the IMF and World Bank, may turn out to be an ideological manifesto calling for privatization (or “contracting out”) of essential services.17 As noted above, privatizing (or “contracting out”) essential public services is a radical idea that lacks support in most industrialized countries. Yet, some Bank economists question whether the public sector should offer any services. For instance, the World Bank’s Philip Gray– the author of one of the Bank’s main research papers justifying the need for the PSD strategy -- prefers that there be a “residual role for the public sector in services…like the vanishing smile of the Cheshire cat.”18

The Bank asserts (in its WDR concept paper) that the Millennium Development Goals (MDGs) cannot be achieved through donor and creditor support for current patterns of public expenditure in developing countries. It concludes that contracting out (CO) to services is more effective than public services. It also suggests that the poor often want to pay market rates (user fees) for quality services.

In conclusion, one might say that the “new development paradigm” sharpens the frontier between the winners and losers and raises the costs for losers. As history professor Charles Maier said in his recent article, “An American Empire?”19

Attachment

The Millennium Challenge Account (MCA):
Corporate Subsidies through Output-Based Aid (OBA) Schemes?

In March 2002, President Bush announced a major initiative – the Millennium Challenge Account (MCA) – heralding a “new development paradigm.”20 Former Treasury Secretary Paul O’Neill, when he returned from his celebrated African tour with rock star Bono, set forth the contours of the plan on June 5 – 55 years to the day from the launch of Truman’s Marshall Plan. The US characterizes the MCA as the third great development initiative since World War II, following the Marshall Plan and Kennedy's Alliance for Progress. MCA legislation, which will be introduced on Capitol Hill in February 2003, may be the most hotly contested foreign aid legislation in 2003-2004.

The MCA initiative, which could boost U.S. development aid by as much as $10 billion from 2004-06 and $5 billion per annum subsequently, aims to increase the delivery of water, health and education services through public-private partnerships, among other things.

Bush asserted that, even before its launch, the free market principles of the MCA should transform the principles for financing and operations of members of the G-8, World Bank and the regional development banks.21

The U.S. National Security Council (NSC) is taking a lead in designing the MCA. Indeed, the MCA is part of the September 2002 U.S. National Security Strategy. The Strategy is widely known for its stunning embrace of a doctrine of preemptive military action. However, in addition, the Strategy proclaims that the U.S.’s new approach to trade, finance, and aid will “double the size of the world’s poorest economies within a decade.” [TOP]

The U.S. is establishing a federal corporation to administer the MCA. The Corporation will be headed by a CEO reporting to a Board comprised of cabinet-level people, including the Secretary of State, who will act as Chair of the Board. The new corporation will be staffed with about 100 employees – most of whom would be drawn from other agencies, NGOs, the private sector and academia.

In Year 1, the MCA would be targeted to IDA countries with annual income below $1435 per capital (a pool of 79 countries). In Year 2, it would be opened to all countries under that per capital income level (90 countries). In Year 3, it will include countries in the $2975 per capita range (a total pool of 116 countries). [TOP]

MCA funds would be awarded to countries that qualify with respect to 16 performance indicators in 3 categories.22 For each indicator, there would be a median level established:

In order to qualify or receive funding, countries would need to be at or above the median level in over half of the indicators in each category. However, all qualifying countries must be at or above the median on the corruption index in the governance category.

Qualifying countries would submit proposals which would be reviewed by the staff of the new corporation but decisions would be made by the Board. The proposals would be decided through a competitive process between/among qualifying countries.

The U.S. is considering output-based aid (OBA) mechanisms for disbursement of aid. (See Box 2.)

Box 2 How Performance-Based, or Output-Based, Aid (OBA) Subsidizes Foreign Direct Investment (FDI) What is OBA? Traditionally, aid has been “front-loaded” – that is delivered to recipients at the outset of a development project for the purchase of inputs – pipes and construction materials. But OBA provides “back-loaded” finance – that is, it compensates providers for services that have already been delivered. As Adam Lerrick and Alan Meltzer of Carnegie Mellon University23 describe:…grants are paid after audited delivery of service. No results; no funds expended. Payments would be based upon number of children vaccinated, kilowatts delivered, cubic meters of water treated, students passing literacy tests, miles of functioning roads…Since payment is ensured directly to the concessionaire, the private sector will generate the necessary [up front] funding.24 In pilot countries, the Bank is instituting a procedure whereby “third parties” certify, or attest, to the delivery of contract-specified results. Upon certification, service providers are compensated. Furthermore, the Bank is shifting responsibility for compliance with its internal social and environmental guidelines (i.e. operational policies) to the host country government, thus, washing its hands of responsibility for compliance. Under such a scheme, the rationale for accountability mechanisms, such as an Inspection Panel, could virtually disappear. Critique. In principle, the concern for results seems laudable. However, there are three major problems with OBA: 1) Research shows that OBA seldom succeeds in the water or social sectors where outcomes are determined by complex socially-mediated factors.25 2) The only firms or NGOs that can bid for OBA contracts are those with “deep pockets,” who can postpone returns on investment. Most developing country firms and NGOs may be disqualified from the get-go. Yet the champions of this scheme say that domestic actors can stay in business as subcontractors to international firms and NGOs! 3) When OBA projects extend water services to poor populations at below cost, the private provider will be reimbursed with grant assistance. If OBA becomes the model for most international water and energy projects, then official development assistance (ODA) could be mobilized on a grand scale to subsidize foreign direct investment (FDI) in these sectors. This model could transform the World Bank and the regional development banks into little more than an export credit agency for water and other services. The U.S. asserts that the World Bank and the Asian Development Bank should convert loans to grants in order to finance development in ways that reduce the debt burden of poor countries. (On September 20, Treasury official John Taylor announced to the Asian Development Bank that it must convert loans to grants in order for the U.S. to sustain its contributions to the institution.) However, if the U.S. overcomes the objections of Europeans, the grants could be channeled to private and NGO service providers as compensation for extending services to poor people. Currently, the Bank is mobilizing bilateral grant money to fuel its OBA schemes. [TOP]

 

End Notes [TOP]

1) The author gratefully acknowledges the assistance of Tim Kessler and, especially, Ruth Caplan who provided invaluable expertise and encouragement. She invites comments to ncalexander@igc.org. [RETURN]
2) The World Bank is comprised of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), which offer market-rate and concessional finance, respectively. The World Bank Group includes not only the IBRD and IDA, but also its two private sector affiliates: the International Finance Corporation (IFC) and (MIGA). [RETURN]
3) Uganda must 1) create procurement units in relevant institutions, 2) carry out independent audits of procurement, 3) establish an Appeals board to handle complains, and 4) hire procurement agents to provide support to weak entities. [RETURN]
4) The World Bank’s strategy for Indonesia establishes a “trigger” condition that the government of Indonesia must achieve in order to significantly raise the level of Bank resources it can borrow. This condition requires the government to establish a legal and regulatory framework for public procurement consistent with WTO standards. [RETURN]
5) The requirement is stated in the IMF’s Staff Report for the 2002 Article IV Consultation and Request for Stand-By Arrangement for Colombia in its discussion of Law 80. [RETURN]
6) The Bank’s other private sector affiliate, the Multilateral Investment Guarantee Agency (MIGA) is stipulating that it should receive any benefits that governments accord through Bilateral Investment Treaties (BITs) to corporations. Such rights include not only national treatment – but also MFN treatment, compensation for expropriation, and fair and equitable treatment. [RETURN]
7) For instance, the IFC is promoting private health care provision in target countries: India, Pakistan, the Philippines, China, Poland, Russia, Turkey, Romania, Kazakhstan, Cote d’Ivoire, Kenya, Nigeria, South Africa, Egypt, Mexico, Colombia, and Brazil. In education, the World Bank is collaborating closely with the IFC making investments in tertiary, technology-based and distance education, technical and vocational training, ancillary services, and student financing. Other investments will be made in early childhood schooling and primary/secondary education. [RETURN]
8) Traditional barriers, e.g., tariff peaks; preferential access; and behind the border barriers, e.g., technical standards. [RETURN]
9) In the Southern African Development Community (SADC), questionnaires on services liberalization prepared by the Bank were provided to about 25 research teams. Findings were presented in June to the SADC trade officials, World Bank, WTO, UNCTAD, UNECA, and EU. [RETURN]
10) The first IF initiative, which was launched in December 1996 at the WTO Singapore Ministerial , failed to get support from developing countries or donors. [RETURN]
11) Mauritania: Integrated Framework, Diagnostic Trade Integration Study: A Poverty-Focused Trade Strategy, December 10, 2001. [RETURN]
12) The World Bank’s aid allocation formula has 20 criteria. The trade criterion requires that governments have “low (10% of less) average tariffs (weighted by global trade flows) with low dispersion and insignificant or no quantitative restrictions or export taxes. There are no trading monopolies. Indirect taxes (e.g., sales, excise, surcharges) do not discriminate against imports. The customs administration is efficient and rule-bound. There are few, if any, foreign exchange restrictions on long-term investment capital inflows.” [RETURN]
13) In response to NEPAD, the U.S. also persuaded the G-8 to adopt an Africa Action Program that embraces the idea of “enhanced partnership” with African governments that abandon barriers to trade and investment. [RETURN]
14) Other donor/creditor channels that bypass governments include Social Funds, post-conflict funds, multidonor trust funds, UNDP area-based schemes and independent revenue authorities. Independent revenue authorities are responsible not only for the collection of new taxes, but also the entire revenue system. [RETURN]
15) Social Funds are comparable to ISAs. Although Social Funds do not circumvent government to the extent that ISAs do, they are community-based mechanisms that decentralize and contract out service provision. Indeed, the Bank channels $3.7 billion to Social Funds in 57 countries – primarily to finance health, education, and water infrastructure and services. [RETURN]
16) GATS defines treatment as less favorable if it “modifies the conditions of competition” in a way that favor domestic service suppliers in comparison with foreign service suppliers. GATS art. XVII:3. A subsidy clearly changes the conditions of competition if it is not available to all competitors. For example, a subsidy that is available only to public service providers and not to private service providers could be challenged as a violation of national treatment. (See Stumberg Q & As.) [RETURN]
17) For a thorough review of the draft WDR2004 concept paper and outline, see “Sunset for Public Services?” by Tim Kessler, Citizens’ Network on Essential Services at www.servicesforall.org. [RETURN]
18) Power point presentation by Gray at the World Bank’s “Poverty Day,” October 17, 2002. [RETURN]
19) Harvard Magazine, November-December 2002, p. 29. [RETURN]
20) With few exceptions, the paradigm is described in the recommendations of the Meltzer Commission, which were presented to Congress in March 2000. Although U.S. government officials tend to deny the paternity of the MCA initiative and its origin in the controversial Meltzer Commission, the “family resemblance” is undeniable. [RETURN]
21) In February 2002, the U.S. Treasury Department announced that these banks should imitate the European Bank for Reconstruction and Development (EBRD) that explicitly seeks to promote the private sector development. [RETURN]
22) Per InterAction notes of briefing by Departments of State, Treasury and OMB. [RETURN]
23) Alan Meltzer chaired the International Financial Institutions Advisory Commission, which produced its report to Congress on the future of the IFIs in March 2000. For the most part, this report contains the blueprint for IFI reform which the U.S. government is following. [RETURN]
24) Lerrick and Meltzer, “Grants: A Better Way to Deliver Aid,” Quarterly International Economics Report, Carnegie Mellon Gailliot Center for Public Policy, January 2002. [RETURN]
25) See Elliott Sclar. 2000. You Don’t Always Get What You Pay For: The Economics of Privatization. Cornell University Press. [RETURN]