tag:theconversation.com,2011:/fr/topics/development-finance-23180/articlesDevelopment finance – The Conversation2023-11-14T14:10:37Ztag:theconversation.com,2011:article/2174542023-11-14T14:10:37Z2023-11-14T14:10:37ZProjects funded by the World Bank Group’s private sector arm fuel violent conflict – it’s time to reform the system<p>To what extent does private investment help developing countries to reduce conflict and violence and to achieve the <a href="https://sdgs.un.org/#goal_section">Sustainable Development Goals</a>? </p>
<p>This is a hotly debated issue. Most international institutions such as the World Bank Group take the stance that the problem is <a href="https://documents1.worldbank.org/curated/en/738131573041414269/pdf/Closing-the-SDG-Financing-Gap-Trends-and-Data.pdf">not enough private investment</a>. So they mobilise public resources to subsidise and protect private sector actors with the goal of greatly increasing foreign direct investment. </p>
<p>Meanwhile, community, labour and human rights advocates – particularly in fragile and conflict-affected countries – tend instead to see the dominant patterns of foreign direct investment as part of a continuing history of <a href="https://www.oxfam.org/en/research/suffering-others">exploitation of the developing world</a>.</p>
<p>To help shed light on this debate, we undertook <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4540583">a comprehensive study</a> of thousands of projects of the <a href="https://www.ifc.org/en/home">International Finance Corporation</a> (IFC), the private sector arm of the World Bank Group. We focused on the period between 1994 and 2022. </p>
<p>We chose the IFC because it claims to invest with developmental purpose. It also purports to apply the highest standards of social and environmental performance. Additionally, many other private and public actors follow its lead in setting standards. If the IFC is getting it wrong it would be a good indicator of how things stand in the broader global system. We focused our study on the relationship between IFC projects and armed conflict, as violence has a clear and detrimental effect on human development. </p>
<p>The results establish that IFC projects cause significant increases in armed conflict around the world. A single project, on average, causes 7.6 additional armed conflict events in the year after it is introduced. These findings are consistent with <a href="https://www.jstor.org/stable/3877872">other large quantitative studies</a> that question the relationship between foreign direct investment and development. Foreign direct investment that <a href="https://www.tommasosonno.com/docs/GlobalizationConflict_TommasoSonno.pdf">increases violent conflict</a> and makes development nearly impossible appears the rule, not the exception.</p>
<p>We conclude that current approaches to foreign investment need urgent reconsideration, with particular focus on the risk of violent conflict.</p>
<h2>Our methodology</h2>
<p>Many factors influence violent conflict, including the history of intergroup and state-society relations. So the study used sophisticated econometric analyses to isolate the IFC’s impact. </p>
<p>We first geolocated IFC projects and noted the years in which they were approved. Then we tested whether armed conflict rose in the area proximate to the IFC project in the following year. We controlled for other factors – such as the presence of politically excluded groups, GDP, the regime type, or the population size – that affect conflict. </p>
<p>In the analysis, we were careful to match and compare an IFC project area with those areas without IFC projects to which it is most similar. Finally, we considered and controlled for the possibility that conflict was already rising before the IFC project arrived. By excluding these other explanations for conflict events, we were able to make reasonable causal attributions.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/three-priorities-africas-newbie-on-the-world-bank-board-should-focus-on-181521">Three priorities Africa's newbie on the World Bank board should focus on</a>
</strong>
</em>
</p>
<hr>
<p>Disturbingly, the study found that increases in armed conflict were concentrated in projects that the IFC told local and international stakeholders had potential limited adverse environmental or social risks. It claimed that these could be readily addressed through mitigation measures. These mitigation measures appear to be either ineffective or under-employed. Alternatively, the IFC is mis-classifying projects that carry more substantial conflict risk than it recognises or cares to make public.</p>
<p>One particularly disturbing example is the Ugandan government’s <a href="http://www.humanrightscolumbia.org/sites/default/files/SIPA%20Listening%20to%20community%20voices%20on%20effective%20remedy%20-%20final.pdf">campaign of terror against local citizens</a> to turn land over to an IFC client. The IFC also has yet to resolve activists’ complaints from 2019 of <a href="https://www.cao-ombudsman.org/cases/liberia-salala-rubber-corporation-src-01margibi-bong-counties">gender-based violence and threats of reprisals and intimidation</a> against one of its project partners, Salala Rubber Corporation in Liberia.</p>
<p>The study also demonstrated that capital-intensive projects (that is, agribusiness, oil, gas, mining and infrastructure) have a larger propensity for socio-political and socio-economic disruption. Areas that receive capital-intensive projects experience, on average, an additional death from armed conflict in the following year.</p>
<h2>Not above the rule of law</h2>
<p>These results should perhaps not be surprising. Civil society groups have long concluded that the IFC prioritises its own profits and business interests over the “<a href="https://www.oxfam.org/en/research/suffering-others">suffering of others</a>” in ways that contribute to “<a href="https://digitalcommons.csbsju.edu/cgi/viewcontent.cgi?article=1159&context=social_encounters">multiple paths of extraction, dispossession, and conflict</a>”. In 2020 Human Rights Watch characterised the IFC as “<a href="https://www.hrw.org/news/2020/08/24/world-bank-group-failing-remedies-project-abuses">failing at remedies for project abuses</a>”. This was based on the World Bank Group’s <a href="https://www.worldbank.org/en/about/leadership/brief/external-review-of-ifc-miga-es-accountability">own commissioned review</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/cautious-welcome-world-bank-and-imf-return-to-africa-but-questions-remain-214888">Cautious welcome: World Bank and IMF return to Africa, but questions remain</a>
</strong>
</em>
</p>
<hr>
<p>Yet, the IFC’s strategy has been to position itself above the rule of law. It continues to assert sovereign immunity. It claims that, as an international organisation, <a href="https://brill.com/view/journals/iolr/16/1/article-p105_105.xml">it should not be liable</a> in national courts – even to parties it admittedly harms. </p>
<p>It maintains this stance despite <a href="https://theintercept.com/2023/10/17/world-bank-whistleblower-bridge-international/">recent reports</a> of IFC complicity in covering up the sexual abuse of children to further its investment projects. </p>
<p>It appears beyond time for the 186 member governments that own the IFC to demand transparency, accountability and redress for harms done from the corporation and the private sector actors it funds. Others can also play a role. Governments that have perhaps naively relied on the World Bank halo should question the benefits they are told they can expect from IFC investments. The ratings agencies that classify IFC bonds as positive from an environmental, social, and governance perspective may want to question the bases on which such determinations are made.</p>
<p>At the same time, perhaps more credence can be given to recent <a href="https://www.un.org/en/desa/un-secretary-general-calls-radical-transformation-global-finan-cial-system-tackle-pressing">calls by the UN secretary general</a> to reform the global financial system to better support human security and human development. </p>
<p>This could include specialised intermediaries between the IFC and sensitive projects in difficult places. Independent and empowered local oversight appears necessary to ensure more inclusive and accountable forms of contextual analysis and risk mitigation planning, monitoring and evaluation of development impact, proactive conflict management, and accessible redress for harms done. This could <a href="https://issafrica.org/iss-today/conflict-environments-need-a-peacebuilding-approach-to-business-development">reduce violent conflict and open more developmental potential for private investment</a> in the developing world.</p><img src="https://counter.theconversation.com/content/217454/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This work is part of the project Peace Positive Private Sector Development in Africa (P3A), funded by the Research Council of Norway. Additional funding was received from the Peace Finance Initiative.</span></em></p>A single International Finance Corporation project, on average, causes 7.6 additional armed conflict events in the year after it is introduced.Brian Ganson, Professor and Head, Centre on Conflict & Collaboration, Stellenbosch UniversityAnne Spencer Jamison, Assistant Professor of International Economics, Government, and Business, Copenhagen Business SchoolWitold Jerzy Henisz, Vice Dean and Faculty Director, ESG Inititative; Deloitte & Touche Professor of Management, University of PennsylvaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2092412023-07-12T09:55:10Z2023-07-12T09:55:10ZSouth Africa’s Land Bank can be fixed: change the funding model and narrow the focus<figure><img src="https://images.theconversation.com/files/536607/original/file-20230710-21-nd4o45.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Land Bank played an influential role in the development of South African agriculture.</span> <span class="attribution"><span class="source">GettyImages</span></span></figcaption></figure><p>It is disheartening to see how many South Africans, including parliamentarians, have forgotten the simple and influential role the <a href="https://landbank.co.za/Pages/Home.aspx">Land and Agricultural Development Bank </a>(Land Bank) played in South African agriculture.</p>
<p>The former minister of agriculture, Derek Hanekom, summarised this role nicely in his foreword to the bank’s 1997 annual report: </p>
<blockquote>
<p>The Land Bank was a conduit for cheap money for mortgage finance for farmers, for production finance to co-operatives, and for the liquidity of the marketing boards.</p>
</blockquote>
<p>The Land Bank, established in 1912, had a narrow mandate for many decades. Its focus was on mortgages for white farmers to acquire farmland. It also provided wholesale finance to agricultural cooperatives and marketing boards who on-lend production (short-term) finance to individual farmers.</p>
<p>These loans were offered at below market rates. This was because the bank was well supported by the state through an initial capital endowment, annual parliamentary allocations and state guaranteed long-term debentures and bonds sold in the capital market.</p>
<p>Its funding model and its narrow mandate meant that, for decades, it was a stable institution. But critical mistakes have been made over the past 25 years that have compromised its critical role as a development finance institution in the agricultural sector. </p>
<p>Due to poor governance and wrong decisions in the early 2000s, Land Bank was virtually bankrupted and had to be resuscitated around 2008. Even after this, critical mistakes continued to be made. At the end of the 1997 financial year Land Bank had R1.7 billion (about US$368 million at an <a href="https://www.nedbank.co.za/content/dam/nedbank/site-assets/AboutUs/Economics_Unit/Forecast_and_data/Daily_Rates/Annual_Average_Exchange_Rates.pdf">annual average exchange rate</a> for that year) in reserves that was built up over many years from government capital endowments, annual appropriations and retained earnings. In today’s value it would be R6.5 billion (about US$346 million). It was all lost, either through irregular expenditure, or poor credit decisions and lending to activities outside the bank’s mandate. </p>
<p>The result has been that the bank no longer provides a service to the agricultural sector as a whole. This has compromised the success of land reform beneficiaries, aspiring black commercial farmers and the growth and food security outcomes of the agricultural sector at large.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/land-reform-in-south-africa-5-myths-about-farming-debunked-195045">Land reform in South Africa: 5 myths about farming debunked</a>
</strong>
</em>
</p>
<hr>
<p>We believe the problems can be solved and that the bank can play its role as a financier of land reform and provide the same preferential finance terms to aspirant black farmers as their white counterparts enjoyed between 1912 and 1996. Based on our experience in the sector, and drawing lessons from its early years of success, our proposed solution is simple: get back to basics. </p>
<p>There are two main parts to this. The first mistake that must be fixed is Land Bank’s funding model. It cannot be a “development finance institution” if the cost of funds is too high. Its funding sources need to be reorganised so that its cost of capital is reduced. </p>
<p>Secondly, the bank’s activities most be refocused to mortgage finance for land purchases and wholesale finance for production credit. </p>
<h2>Funding</h2>
<p>For most of its existence Land Bank was well supported by the state through an initial capital endowment, annual parliamentary allocations and state guaranteed long-term debentures and bonds sold in the capital market.</p>
<p>The table below depicts the bank’s long-term loan book in 1977-1980, expressed in 2022 values. The 1980 loan book of R26 billion was funded through R8 billion of government capital and Land Bank reserves (R3.4 billion), all at zero interest rates, with the balance obtained in the capital market at market-related interest rates. </p>
<iframe title="" aria-label="Table" id="datawrapper-chart-eCsGe" src="https://datawrapper.dwcdn.net/eCsGe/1/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="551" data-external="1" width="100%"></iframe>
<p>With this mix of funds, its cost of capital was far below the prime rate. Even adding an interest margin to cover operational costs, the bank was able to on-lend to farmers below commercial prime lending rate and at very favourable terms (25-40-year mortgages, for example). This was not something the commercial banks could do. </p>
<p>In essence, Land Bank, in a true sense, fulfilled its development mandate – it provided affordable finance.</p>
<p>But critical mistakes were made after 1996. Some of these changes increased the costs of lending to agriculture. As a result the bank has been unable to achieve its development mandate. </p>
<p>The government decided in 1999 to cancel its capital allocation to Land Bank. As a result, the bank had to borrow the money, increasingly from the capital markets. </p>
<p>Since 2010 the bank’s main source of funds has been the money market, with maturity within one year. These funds are expensive. It is also impossible for farmers to start a business with interest rates above the prime lending rate.</p>
<p>New leadership also changed the nature of the Land Bank to be more commercially focused and to compete with commercial banks.</p>
<p>That same year, 1999, the bank changed its policy on interest rates. It had always charged farmers a simple interest rate. But it began calculating interest rate payments using a compound interest rate. This meant that interest was estimated monthly not annually. </p>
<p>The sudden change led to an increase in non-performing loans as arrears accumulated. The bank was taken to court since credit contract terms were changed unilaterally without informing farmers. The bank <a href="http://www.saflii.org/za/cases/ZASCA/2013/105.html">lost the court case</a>.</p>
<p>The other big change involved Land Bank linking its lending rate to the prime rate. This had never been done before as the bank estimated its own interest rates irrespective of the decisions taken by the South African Reserve Bank. </p>
<p>Currently, all Land Bank’s pricing is linked to the commercial prime lending rate. </p>
<p>Other mistakes were made too. These included:</p>
<ul>
<li><p>lending to non-agricultural activities such as property development, soccer teams and cotton gins, which depleted capital reserves </p></li>
<li><p>engaging in non-traditional transactions such as structured finance deals </p></li>
<li><p>reducing the number of offices in the country and the number of field staff to manage and assist clients </p></li>
<li><p>using intermediaries to manage short-term production loans, resulting in poor credit controls and massive losses for the bank.</p></li>
</ul>
<h2>What needs to be done</h2>
<p>The bank’s cost of capital should be lower than the repo rate (rate at which the Reserve Bank lends to commercial banks). This implies that the source of funds should be reorganised. Here the state has an important role to play.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-to-narrow-the-big-divide-between-black-and-white-farmers-in-south-africa-172328">How to narrow the big divide between black and white farmers in South Africa</a>
</strong>
</em>
</p>
<hr>
<p>The bank’s balance sheet should consist of a mix of funds to ensure an appropriate funding cost that enables sustainable development finance. This could happen through a one-off parliamentary appropriation of R10 billion (about US$533 million). Then one can add annual funds from the agriculture department and the provinces earmarked for agricultural development and blended finance, contributions from retailers, food processors interested in growing the pool of commercial black farmers, and long-dated instruments in the capital market for the balance to get to a total book of R25 billion.</p>
<p>Lastly, the Land Bank book should be mainly focused on mortgage finance for land purchases and wholesale finance for production credit (but not via unfavourable service level agreements). It can thus become the financier of land reform.</p>
<p><em>Johann Kirsten and Wandile Sihlobo wrote this essay from notes they prepared for students at the department of agricultural economics at Stellenbosch University. The views expressed are in their capacity as academics at the university.</em></p><img src="https://counter.theconversation.com/content/209241/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Johann Kirsten is Professor in Agricultural Economics and the Director of the Bureau for Economic Research at Stellenbosch University. He is also a non-executive director of the Land Bank. He writes here in his academic and personal capacity. The views expressed here therefore are not necessary the views of the Board of the Land Bank and its executive and merely presents a summary of the historical records of the Bank. </span></em></p><p class="fine-print"><em><span>Wandile Sihlobo is the Chief Economist of the Agricultural Business Chamber of South Africa (Agbiz) and a member of the Presidential Economic Advisory Council (PEAC).</span></em></p>The Land Bank played a crucial role in the growth and development of South African agriculture. It can do the same for upcoming black farmers, but its business and funding model must be changed.Johann Kirsten, Director of the Bureau for Economic Research, Stellenbosch UniversityWandile Sihlobo, Senior Fellow, Department of Agricultural Economics, Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2082452023-06-21T15:11:19Z2023-06-21T15:11:19ZParis hosts summit to secure debt relief and climate cash for developing countries<figure><img src="https://images.theconversation.com/files/533214/original/file-20230621-14551-utzvta.jpeg?ixlib=rb-1.1.0&rect=2%2C0%2C1914%2C1302&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The rise in extreme weather events dent into developing countries' budget and raise their debt interest rates.</span> <span class="attribution"><a class="source" href="https://www.pexels.com/photo/various-currencies-from-several-different-countries-4695995/">Pexels/Karthikeyan Perumal</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>On 22 and 23 June, Paris is hosting a summit for a “New Global Financing Pact” at the Palais Brogniart. Heads of state, international organisations and representatives of civil society will be gathering to discuss ways to boost solidarity toward the Global South. The aim is also to contribute to the international agenda on <a href="https://theconversation.com/us/topics/climate-finance-23005">development and climate financing</a>, a few months after the UN climate summit, COP27, left a mixed record.</p>
<p>The summit comes at a time when the budgetary margins and debt sustainability in a number of countries have been undermined by a succession of crises: pandemics, Russia’s war on Ukraine, inflation, rising global interest rates, etc. Yet the need for funds that promote low-carbon development, as well as adaptation to increasing climate disruption, is as pressing as ever. Many developing countries are having to reckon with an ever-growing number of natural hazards, at a time of acute socio-economic vulnerability.</p>
<p>However, the financial situations of developing countries vary: some, such as Sri Lanka, Ghana and Suriname, already have unsustainable public debt that needs to be restructured. Others can still access cash without compromising their sustainability, such as Egypt.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/532883/original/file-20230620-23-veiebv.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Photo of the Palais Brogniart, in Paris" src="https://images.theconversation.com/files/532883/original/file-20230620-23-veiebv.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/532883/original/file-20230620-23-veiebv.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/532883/original/file-20230620-23-veiebv.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/532883/original/file-20230620-23-veiebv.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/532883/original/file-20230620-23-veiebv.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/532883/original/file-20230620-23-veiebv.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/532883/original/file-20230620-23-veiebv.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Paris’ Palais Brogniart is hosting the summit for a ‘New Global Financing Pact’ on 22 and 23 June 2023.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Ancienne_Bourse_%C3%A0_Paris.JPG">Wikimedia</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>A <a href="https://www.imf.org/en/Publications/WP/Issues/2022/08/11/Debt-for-Climate-Swaps-Analysis-Design-and-Implementation-522184">study</a> carried out by the International Monetary Fund (IMF) in 2022 on 128 low- and middle-income countries revealed a strong correlation between exposure to climate risks and limited budgetary capacity. The climate crisis and the budget crisis have a habit of feeding each other: coping with a crisis puts a strain on public finances, and new funding is needed to adapt to climate change. Taking on more debt also means taking on more debt at higher costs. Developing countries are therefore in danger of entering into a <a href="https://wedocs.unep.org/handle/20.500.11822/26007;jsessionid=B66C42EF4406FCFDC228C1BB61EBE218">vicious circle</a>.</p>
<h2>Increasingly complex debt restructuring</h2>
<p>On top of ad hoc restructuring for countries facing particular constraints, several debt restructuring or suspension initiatives were launched in 2000 in response to more widespread debt situations. The <a href="https://www.imf.org/en/About/Factsheets/Sheets/2023/Debt-relief-under-the-heavily-indebted-poor-countries-initiative-HIPC">Heavily Indebted Poor Countries</a> (HIPC) initiative, established in 1996 by the IMF and World Bank, and the 2005 <a href="https://www.imf.org/external/np/exr/mdri/eng/index.htm">Multilateral Debt Relief Initiative</a> (MDRI) are notable examples. Broadly speaking, these schemes aim to cancel a share of public debt in return for a commitment that the sums released will go toward beneficiaries’ development goals, in areas such as health, education and poverty reduction.</p>
<p>During the Covid-19 pandemic, the G20 countries also adopted the <a href="https://www.worldbank.org/en/topic/debt/brief/debt-service-suspension-initiative-qas">Debt Suspension Initiative</a> (DSI), which sets out to suspend the debt repayments of 73 of the world’s poorest countries.</p>
<p>At the origin of the HIPC initiative and the DSI was the <a href="https://clubdeparis.org/en/communications/page/who-are-the-members-of-the-paris-club">Paris Club</a> (CDP). Composed of 22 bilateral creditors, mainly from developed countries, the informal group worked with the IMF and World Bank to establish rules to renegotiate the external public debt of over-indebted countries. However, CDP creditors are no longer the most important players, dwarfed by “new”, non-member bilateral creditors, such as China and India.</p>
<p>Beyond budgetary capacity, it is developing countries’ <a href="https://www.afd.fr/fr/ressources/pays-emergents-et-en-developpement-letau-se-resserre">public debt structure that has gradually changed</a>. By doubling over the last decade, the debts of developing countries have also opened up to new creditors from the private sector and emerging countries such as China, India, Russia, Turkey and the countries of the Middle East. The restructuring process has thus become even more complex.</p>
<p>In response to this new international context, the G20 countries have set up a <a href="https://www.imf.org/en/Blogs/Articles/2021/12/02/blog120221the-g20-common-framework-for-debt-treatments-must-be-stepped-up">“Common Framework for Debt Treatment”</a>, enabling countries eligible for the DSI to request a restructuring of their debt in case of persistent financing deficits. This new body paves the way for better coordination between bilateral creditors who are members and non-members of the CDP.</p>
<p>However, the global framework for debt restructuring has so far had little impact on climate issues, with climate investment often an afterthought.</p>
<h2>Vulnerable countries in demand</h2>
<p>Innovative financial instruments for combining finance and climate change are on the rise. Debt-for-climate swaps (such as <a href="https://www.imf.org/en/Blogs/Articles/2022/12/14/swapping-debt-for-climate-or-nature-pledges-can-help-fund-resilience"><em>Debt for Climate Swap</em></a> have been back in the spotlight in recent years, focusing not only on the fight against global heating, but also on protecting nature. The idea is that the government of the debtor country undertakes to spend the equivalent of the cancelled debt on projects to fight climate change, under conditions agreed between the creditors and the debtor country. A growing number of research groups, civil society groups and, to a lesser extent, international institutions, are advocating similar solutions to combat both climate change and rising public debt.</p>
<p>Recent global shocks have led to a certain consensus that the international financial system may no longer be equipped to handle current global challenges. Many are unimpressed by efforts to finance the decarbonisation of the economy and climate adaptation. As a result, several countries called for <a href="https://www.eurodad.org/un_general_assembly_2021_debt_highlights">reform of this financial architecture</a> at the UN General Assembly in 2021, in particular by asking for debt restructuring to be linked to climate objectives.</p>
<p>This call was echoed at COP26 in Glasgow in November 2021, notably by the <a href="https://drgr.org/statement/v20/">V20 countries</a> (<em>vulnerable twenty group</em>). Now comprising <a href="https://www.v-20.org/members">58 nations</a>, the group accounts for 5% of global greenhouse gas emissions, and yet are at the receiving end of climate change. They have called for large-scale debt relief.</p>
<p>The prime minister of Barbados has also presented the <a href="https://www.foreign.gov.bb/the-2022-barbados-agenda/">Bridgetown Agenda for Reform of the Global Financial Architecture</a>, with a view to directing global funds toward low-carbon, climate-resilient development, in a way that would also tackle developing countries’ sovereign debt.</p>
<h2>Even more complexity?</h2>
<p>The richest countries have also proposed ideas. At the end of the <a href="https://live.worldbank.org/annual-meetings-2022">76th annual meetings of the World Bank and IMF</a> in October 2022, the G7, joined by Australia, the Netherlands and Switzerland, set out its proposals for reforming the World Bank.</p>
<p>Much indicates 2023 will be a year of reform for development finance, with many events slated to reflect on these issues.</p>
<p>Calls for reform of the global framework have been around since the globalisation of financial markets, however – no single institution is responsible for global financial movements. Institutions, both international (IMF, World Bank, World Trade Organisation, etc.) and regional (OECD, European Commission, Bank for International Settlements, etc.), are numerous, while the private sector is expanding.</p>
<p>Beyond the debate over the role these institutions should play and whether or not it is useful to introduce international standards and controls, it would be wise to bear in mind that any new development finance initiative will remain vulnerable to changes in the international financial architecture, which is forever subject to negotiation and regulation. The challenge is also to ensure that the introduction of new instruments does not add yet more complexity to the management of developing countries’ debts.</p><img src="https://counter.theconversation.com/content/208245/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>This week’s summit for a “New Global Financing Pact” will look to secure some much-needed climate cash for developing countries, while ensuring their debt remains manageable.Emmanuelle Mansart-Monat, Économiste risque pays, Agence française de développement (AFD)Djedjiga Kachenoura, Coordinatrice du projet de recherche sur la finance et le climat, Agence française de développement (AFD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2029002023-03-30T12:27:44Z2023-03-30T12:27:44ZCan this former CEO fix the World Bank and solve the world’s climate finance and debt crises as the institution’s next president?<figure><img src="https://images.theconversation.com/files/518289/original/file-20230329-28-7q3t3y.jpg?ixlib=rb-1.1.0&rect=0%2C21%2C4848%2C3193&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ajay Banga is expected to become the next World Bank president.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/candidate-to-head-the-world-bank-ajay-banga-gestures-as-he-news-photo/1247854109">Issouf Sanogo/AFP via Getty Images</a></span></figcaption></figure><p>Over the past two years, a drumbeat of calls for reforming the World Bank has pushed its way onto the front pages of major newspapers and the agenda of heads of state.</p>
<p>Many low- and middle-income countries – the population the World Bank is tasked with helping – are falling deeper into debt and facing growing costs as the impacts of climate change increase in severity. A chorus of critics accuse the World Bank of <a href="https://www.bmz.de/en/news/press-releases/schulze-world-bank-annual-meetings-2022-125264">failing to evolve</a> to <a href="https://home.treasury.gov/news/press-releases/jy1258">meet the crises</a>.</p>
<p>The job of leading that reform now falls to <a href="https://www.washingtonpost.com/climate-environment/2023/02/23/biden-world-bank-nomination/">Ajay Banga</a>, an Indian American businessman and former CEO of Mastercard who was nominated by President Joe Biden to replace resigning World Bank President <a href="https://www.nytimes.com/2023/02/15/climate/david-malpass-world-bank.html">David Malpass</a>. </p>
<p>Banga, <a href="https://www.worldbank.org/en/news/press-release/2023/03/30/closing-of-nominations-for-world-bank-group-president">the only candidate</a> for the job, <a href="https://www.worldbank.org/en/news/press-release/2023/05/03/ajay-banga-selected-14th-president-of-the-world-bank">was confirmed</a> by the World Bank’s <a href="https://www.worldbank.org/en/about/leadership/directors">executive directors</a> on May 3, 2023. His five-year term as president begins on June 2. </p>
<figure class="align-center ">
<img alt="Ajay Banga, wearing a traditional Sikh turban and business suit, gestures as he speaks in front of a photo of workers picking vegetables." src="https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Ajay Banga is a former Mastercard CEO, past chair of the International Chamber of Commerce and an American. The U.S. is the largest World Bank shareholder, and the institution’s president has historically been American.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/candidate-to-head-the-world-bank-ajay-banga-speaks-during-news-photo/1247898595">Tony Karumba/AFP via Getty Images</a></span>
</figcaption>
</figure>
<p>There is no shortage of advice for what Banga and the World Bank need to do.</p>
<p>The <a href="https://www.cfr.org/backgrounder/what-does-g20-do">G-20</a> recently <a href="https://www.dt.mef.gov.it/en/attivita_istituzionali/rapporti_finanziari_internazionali/banche_sviluppo/revisione_indipendente/">issued a report</a> urging the World Bank and the other multilateral development banks to loosen their lending restrictions to get more money flowing to countries in need. A commission led by economists <a href="https://www.lse.ac.uk/granthaminstitute/publication/finance-for-climate-action-scaling-up-investment-for-climate-and-development/">Nicholas Stern and Vera Songwe</a> called for a rapid, sustained investment push that prioritizes transitioning to cleaner energy, achieving the <a href="https://sdgs.un.org/goals">U.N. sustainable development goals</a> and meeting the needs of increasingly vulnerable countries. </p>
<p>African ministers of finance will soon come out with their own “to do” list for the World Bank, and India’s minister of finance just pulled together <a href="https://www.devdiscourse.com/article/business/2368216-india-has-been-talking-about-how-multilateral-institutions-need-reform-sitharaman">an expert group</a> to consider World Bank reform.</p>
<p>Banga will walk into the job with these and many other to-do lists. Yet he will inherit a corporate culture that makes the World Bank Group <a href="https://documents1.worldbank.org/curated/en/099845101112322078/pdf/SECBOS0f51975e0e809b7605d7b690ebd20.pdf">too inwardly focused</a> and <a href="https://www.csis.org/analysis/us-treasury-secretary-janet-l-yellen-addresses-evolution-development-finance-csis">too slow to respond</a>.</p>
<p>I have <a href="https://fletcher.tufts.edu/people/staff/rachel-kyte">worked for the World Bank Group</a> and with it from the outside. I see four key roles – four “C’s” – that Banga will need to master from the outset. From his <a href="https://www.washingtonpost.com/climate-environment/2023/02/23/biden-world-bank-nomination/">track record</a> and his reputation for deep thoughtfulness, I am confident that he can.</p>
<h2>1) Act as a CEO and get the entire World Bank Group house in order.</h2>
<p>The World Bank Group <a href="https://www.worldbank.org/en/who-we-are">is a conglomerate</a> with four balance sheets, three cultures and four executive boards, plus a dispute resolution arm.</p>
<p>Lending to low- and middle-income countries is just part of its role. The World Bank Group also <a href="https://www.worldbank.org/en/who-we-are/ibrd">provides technical assistance</a> across all areas of economic development and invests in and provides <a href="https://www.miga.org/">risk insurance</a> to <a href="https://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/about+ifc_new">encourage companies to invest</a> in projects and places they might otherwise consider too risky. Its ability to mobilize private-sector finance and stretch every dollar is crucial for meeting the world’s development and climate adaptation and mitigation needs.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/gKpTL8KVy1Q?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">How the World Bank operates.</span></figcaption>
</figure>
<p>Banga will need to set clear goals for each part of the World Bank Group and get them working more effectively to help the world achieve its goals.</p>
<h2>2) Assume the mantle of collaborator in chief to take on the debt and climate crises.</h2>
<p>Many of the World Bank Group’s <a href="https://www.worldbank.org/en/about/annual-report/our-work">client countries</a> are facing both mounting debt and rising costs from climate change. </p>
<p>The high <a href="https://developmentfinance.un.org/fsdr2022">cost of borrowing</a> can hamper developing countries’ ability to invest in needed infrastructure to grow and protect their economies, and they fear being locked out of global trade as the United States’ green subsidies in the <a href="https://theconversation.com/big-new-incentives-for-clean-energy-arent-enough-the-inflation-reduction-act-was-just-the-first-step-now-the-hard-work-begins-188693">Inflation Reduction Act</a> and Europe’s border carbon tax may make it <a href="https://theconversation.com/as-us-eu-trade-tensions-rise-conflicting-carbon-tariffs-could-undermine-climate-efforts-198072">more difficult for them to compete</a>.</p>
<p>The <a href="https://gisbarbados.gov.bb/download/the-2022-barbados-agenda/">solutions</a> to cascading problems like these cannot be managed by one institution. However, the current multilateral development bank system – the World Bank Group and the <a href="https://www.cgdev.org/publication/regional-development-banks-abcs-ifis-brief">regional development banks</a> – is disjointed at best <a href="https://www.adb.org/sites/default/files/publication/156240/adbi-wp385.pdf">and competitive</a> at worst.</p>
<p><iframe id="xbAni" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/xbAni/7/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>In the past, the leaders of the development banks, the International Monetary Fund and the World Trade Organization have cooperated, more or less, depending on crises and personalities, and can move fast when they need to.</p>
<p>During the global financial crisis of 2008 and 2009, for example, the then-heads of the World Bank and the WTO hurried to <a href="https://www.wto.org/english/res_e/reser_e/ersd200916_e.pdf">develop trade finance facilities</a> to support banks in developing countries as capital fled to the U.S. and Europe. It took intense diplomacy to push wealthy countries and institutions to get money out the door <a href="https://www.reuters.com/article/financial-trade/update-2-global-trade-finance-gap-widens-as-recession-bites-idUSLI4771620090318">to shore up businesses and trade</a>. Success was measured not in months but in days.</p>
<p>The new president of the World Bank will need to support more radical collaboration among development financial institutions, including pooling capital and talent, to help respond quickly to countries’ needs.</p>
<p>It won’t be easy. Institutional rivalries run deep. But with <a href="https://www.reuters.com/business/us-expects-bidens-nominee-ajay-banga-be-elected-world-bank-chief-2023-03-29">budgets tight</a>, there is growing clarity that there is no choice – <a href="https://theconversation.com/how-putins-war-and-small-islands-are-accelerating-the-global-shift-to-clean-energy-and-what-to-watch-for-in-2023-196925">the capital that is already in the system</a> is the closest at hand and can be deployed to better effect if the institutions are willing to adapt.</p>
<h2>3) Be a convener.</h2>
<p>Overhauling how international finance works will require everyone to be on board – development banks, central banks, regulators, investment banks, pension funds, insurance companies and private equity.</p>
<p>Banga and <a href="https://www.imf.org/en/About">International Monetary Fund</a> Managing Director <a href="https://commission.europa.eu/persons/kristalina-georgieva_en">Kristalina Georgieva</a> can settle institutional differences and present a coordinated face to private investors and the <a href="https://clubdeparis.org/en/communications/page/permanent-members">major lending countries</a>, including China – which has emerged as <a href="https://www.devex.com/news/china-is-owed-37-of-poor-countries-debt-payments-in-2022-world-bank-102463">the biggest holder</a> of developing country debt – to speed up support to struggling countries.</p>
<p>On other issues, such as <a href="https://www.iucn.org/our-work/nature-based-solutions">nature-based solutions to climate change</a>, building resilience and economic inclusion, the World Bank Group can bring its significant resources and skills, including data analysis, to global conversations that it has been painfully absent from for the past four years.</p>
<h2>4) Be a champion for the most vulnerable.</h2>
<p>The world’s most vulnerable people are the World Bank Group’s ultimate beneficiaries. For those living on the front line of biodiversity loss and climate impacts, such as extreme heat, drought and flooding, the current international financial system is proving inadequate.</p>
<p>The World Bank Group’s management incentives are still too oriented to lending approved by the board, not the outcomes of that lending, advice and assistance.</p>
<p>Throughout its history, World Bank leaders have been able to make <a href="https://www.wto.org/english/res_e/reser_e/ersd200916_e.pdf">rapid changes</a> to better help vulnerable countries when they stay close to the needs of their ultimate beneficiaries and the goals that the world has set.</p>
<p>The next president faces turbulent times. Banga’s careful listening on his campaign tour signals that he <a href="https://www.ft.com/content/7f1046cc-10fe-4a29-a92b-f0955761477b">understands the complexity</a>. It’s an extraordinary moment in the <a href="https://www.cfr.org/backgrounder/world-bank-groups-role-global-development">history of the institution</a>, with sky-high expectations of what one leader needs to do.</p>
<p><em>This article, originally published March 30, 2023, has been updated with Banga’s approval to become World Bank president.</em></p><img src="https://counter.theconversation.com/content/202900/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rachel Kyte served in several roles at the World Bank Group from 2000 to 2015.</span></em></p>It’s a crucial time for the World Bank, with growing calls for reform and sky-high expectations of what one leader needs to do. A former World Bank official explains the challenges ahead.Rachel Kyte, Dean of the Fletcher School, Tufts UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1955472022-12-08T13:33:58Z2022-12-08T13:33:58ZChina’s Belt and Road infrastructure projects could help or hurt oceans and coasts worldwide<figure><img src="https://images.theconversation.com/files/499597/original/file-20221207-4529-5h8xps.jpg?ixlib=rb-1.1.0&rect=14%2C0%2C4913%2C3155&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Construction in the Chinese-financed Port City complex in Colombo, Sri Lanka, Oct. 19, 2022. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/general-view-of-a-chinese-funded-project-for-the-port-city-news-photo/1244077947">Pradeep Dambarage/NurPhoto via Getty Images</a></span></figcaption></figure><p>More than <a href="https://www.un.org/sustainabledevelopment/wp-content/uploads/2017/05/Ocean-fact-sheet-package.pdf">one-third</a> of all people in the world live in cities, towns and villages on coasts. They rely on healthy oceans for many things, including food, income, a stable climate and ready connections to nature. </p>
<p>But as coastal populations <a href="https://doi.org/10.1371/journal.pone.0118571">continue to grow</a>, governments are under increasing pressure to ramp up development for transportation, power generation and economic growth. Projects like these can have heavy impacts on lands, waters and wildlife.</p>
<p>World leaders are gathering in Montreal this week for the long-awaited <a href="https://www.cbd.int/conferences/2021-2022">Conference of Parties</a> to the United Nations Convention on Biological Diversity, or COP15. This treaty, which was adopted at the 1992 Earth Summit in Rio de Janeiro, is designed to protect biodiversity – the variety of life on Earth, from genes to entire ecosystems. </p>
<p>At the two-week conference, nations are expected to officially adopt the <a href="https://www.cbd.int/doc/c/abb5/591f/2e46096d3f0330b08ce87a45/wg2020-03-03-en.pdf">Post-2020 Global Biodiversity Framework</a>, which will guide global conservation efforts over the next decade. China is this year’s COP president and chair, which will spotlight its own impacts on the environment.</p>
<p>We study <a href="https://scholar.google.com.au/citations?user=tAYhLjUAAAAJ&hl=en">natural resource management</a> and <a href="https://www.researchgate.net/scientific-contributions/Rebecca-Ray-2135726495">global development</a>, and have analyzed how China’s support for development around the world is affecting <a href="https://theconversation.com/china-is-financing-infrastructure-projects-around-the-world-many-could-harm-nature-and-indigenous-communities-168060">nature and Indigenous communities</a>. In a <a href="https://doi.org/10.1016/j.oneear.2022.11.002">newly published study</a>, we explore the risks that China’s development finance projects pose to coastal and marine ecosystems, and to Indigenous communities that depend on healthy oceans. </p>
<p>We find that the risks are low in some places but high in others, particularly West Africa and the Caribbean. As China presides over global conservation talks, we believe it is important to look at China’s own potential impacts on biodiversity through its lending for global development.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1008726099076046848"}"></div></p>
<h2>Belt and Road brings benefit and harm</h2>
<p>In 2013, China’s president, Xi Jinping, launched the <a href="https://www.theguardian.com/cities/ng-interactive/2018/jul/30/what-china-belt-road-initiative-silk-road-explainer">Belt and Road Initiative</a>, China’s ambitious push to coordinate hundreds of billions of dollars in finance, investment and trade to better connect its economic partners. </p>
<p>Today, China is the world’s <a href="https://www.bu.edu/gdp/2021/09/20/geolocated-dataset-of-chinese-overseas-development-finance/">largest bilateral creditor</a>. Since 2008, it has lent nearly half a trillion dollars to finance more than 800 overseas development projects. Its highlights include networks of roads, railways, ports and power plants across Latin America, Africa and Asia. Argentina’s massive <a href="https://chinadialogue.net/en/energy/11117-china-builds-latin-america-s-largest-solar-plant/">Cauchari solar farm</a>, Kenya’s <a href="https://theconversation.com/kenya-standard-gauge-railway-contracts-what-released-documents-say-and-what-they-dont-194354">single-gauge railway</a>, and the Central Asia-China <a href="https://multimedia.scmp.com/news/china/article/One-Belt-One-Road/gasPipeline.html">pipeline</a>, which is designed to carry natural gas from Turkmenistan, Uzbekistan and Kazakhstan into China, are examples. </p>
<p>Belt and Road projects are intended to help emerging economies grow, but they also can have negative impacts – including environmental damage that hurts local communities or livelihoods. In Mauritania, for example, a Chinese-financed port brought a fishing deal with a Chinese fishing fleet. The fleet <a href="https://reuters.screenocean.com/record/609279">out-competed</a> traditional small-scale fishermen, <a href="https://www.change.org/p/stop-the-china-fishing-deal-disaster-in-mauritania">raising alarm</a> amid allegations of <a href="https://www.asso-sherpa.org/mauritania-china-fisheries-agreement-civil-society-appeals-eu-mauritanian-government">unsustainable overfishing</a>. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/_JJSImnF03o?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">China has built 11 hydropower dams on Asia’s Mekong River as part of its Belt and Road Initiative. Critics say the dams are altering river flow and reducing fish catches.</span></figcaption>
</figure>
<h2>Mapping risks to biodiversity and people</h2>
<p>To analyze how the Belt and Road Initiative could affect oceans and coasts, we located 114 development projects across 39 low- and middle-income countries financed by China’s two most active development finance institutions – China Development Bank and Export-Import Bank of China. Collectively, these loans constitute nearly US$65 billion in financing commitments from Chinese development lenders between 2008 and 2019. The projects include many different types of coastal infrastructure, such as ports, roads, bridges, power plants and airports.</p>
<p>Different types of infrastructure projects pose varying risks to marine habitats and species. Ports create the most serious threats, including habitat destruction, pollution and the <a href="https://doi.org/10.1080/14634988.2015.1027129">spread of invasive species</a> from ships that pass through.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/499605/original/file-20221207-11795-dex00z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Two men wearing masks bump elbows on a pier" src="https://images.theconversation.com/files/499605/original/file-20221207-11795-dex00z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/499605/original/file-20221207-11795-dex00z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/499605/original/file-20221207-11795-dex00z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/499605/original/file-20221207-11795-dex00z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/499605/original/file-20221207-11795-dex00z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/499605/original/file-20221207-11795-dex00z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/499605/original/file-20221207-11795-dex00z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Kenyan President Uhuru Kenyatta, left, greets China’s Foreign Minister Wang Yi during an inspection tour of the New Kipevu Oil Terminal at Mombasa Port on Jan. 6, 2022.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/kenyan-president-uhuru-kenyatta-greets-chinas-foreign-news-photo/1237565793">AFP via Getty Images</a></span>
</figcaption>
</figure>
<p>Bridges, roads, power plants and other facilities also threaten nearby coastal waters. These projects can stress aquatic species and habitats with bright lights, loud noises or vibrations, and discharges of toxic heavy metals from <a href="https://www3.epa.gov/npdes/pubs/nps_urban-facts_final.pdf">urban runoff</a>. These risks are mostly concentrated in small areas around development sites.</p>
<p>In total, we identified 324 <a href="https://www.iucn.org/resources/conservation-tool/iucn-red-list-threatened-species">threatened species</a> of fish, marine mammals, marine reptiles, sea birds and sharks and rays that could be affected by Chinese coastal development projects. The size of the risk depends on exposure levels and different species’ vulnerabilities. For example, power lines present low risk to marine habitats – but if they are accompanied by bright lights, they threaten sea birds, which are <a href="https://doi.org/10.1890/130281">highly sensitive to light pollution</a>. </p>
<p>Overall, we found that Africa and the Caribbean constitute the greatest risk hot spots. Countries with the largest expanses of territorial waters at risk include Antigua and Barbuda, the Bahamas, Cameroon, Mozambique and Sri Lanka. </p>
<p>We estimate that risks may encroach upon important seas for at least 55 coastal Indigenous communities around the world, particularly in Western and Central Africa. For example, marine habitats adjacent to several Indigenous communities in Ivory Coast that <a href="https://doi.org/10.1371/journal.pone.0166681">consume more than 1,000 tons of seafood yearly</a> face relatively high risks from nearby development projects.</p>
<h2>Sustainable ‘blue’ development</h2>
<p>Experts widely agree that the Earth is <a href="https://www.unep.org/news-and-stories/news/spotlight-nature-and-biodiversity">losing species at an alarming rate</a> and that habitat loss and pollution from development are major drivers of this decline. If China is serious about <a href="https://theconversation.com/is-china-ready-to-lead-on-protecting-nature-at-the-upcoming-un-biodiversity-conference-it-will-preside-and-set-the-tone-193681">taking a leadership role in conservation efforts</a>, we believe the Belt and Road Initiative is the place to start.</p>
<p>Sustainable development will define the future of society and the environment, but planning models often struggle to address how development on land <a href="https://doi.org/10.1111/1365-2664.13331">affects the oceans</a>. The United Nations aims to bridge this gap by changing humans’ relationship with the ocean during what it has designated the <a href="https://www.oceandecade.org/">Decade of Ocean Science for Sustainable Development</a>. And we see reason for hope.</p>
<p>Our study shows that many development risks to coastal and marine ecosystems could be tackled at the local level if communities and governments work to prioritize their own development and investment needs and scrutinize how proposed projects will affect the environment. Even seemingly small changes in the siting of ports, coastal highways and other projects can protect ecosystems and the communities that depend on them.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/499608/original/file-20221207-16-1mfs67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Mangrove trees with roots extending into tropical seawater" src="https://images.theconversation.com/files/499608/original/file-20221207-16-1mfs67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/499608/original/file-20221207-16-1mfs67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/499608/original/file-20221207-16-1mfs67.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/499608/original/file-20221207-16-1mfs67.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/499608/original/file-20221207-16-1mfs67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/499608/original/file-20221207-16-1mfs67.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/499608/original/file-20221207-16-1mfs67.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Mangrove forests like this one in the Bahamas provide natural protection against tropical storms and flooding, but they often are destroyed for development projects.</span>
<span class="attribution"><a class="source" href="https://flic.kr/p/SZHorA">Sterling College/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>China is starting to address some of these concerns. In 2021, its Ministry of Commerce and Ministry of Ecology and Environment <a href="http://en.brigc.net/Media_Center/BRI_Green_Review/2021/202107/P020210729465376906569.pdf">issued joint guidance</a> urging Chinese investors and lenders to take a “whole lifecycle” approach to project management, beginning with early considerations such as where to site a project. </p>
<p>In 2022, the China Banking and Insurance Regulatory Commission instructed lenders to <a href="http://www.gov.cn/zhengce/zhengceku/2022-06/03/content_5693849.htm">develop complaint mechanisms</a> for addressing local environmental concerns and minimizing environmental risks. An important test will come in the next few years, as the World Trade Organization will begin <a href="https://news.mongabay.com/2022/06/wto-finally-nets-deal-curbing-fisheries-subsidies-but-tables-key-bits-for-later/">negotiating</a> specific rules to curb overfishing. If China <a href="https://www.wto.org/english/news_e/news22_e/fish_23nov22_e.htm">shows leadership</a> on this issue through transparency and knowledge sharing, it can limit environmental and economic damage from the development of future ports in countries like Mauritania. </p>
<p>As COP15 spotlights global biodiversity, we believe it is important to note that even the world’s largest bilateral creditor needs the cooperation of local governments in order to get projects approved and built. In our view, transparency and public participation can help make global investment both green and blue.</p><img src="https://counter.theconversation.com/content/195547/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rebecca Ray received funding for this work from the Charles Stewart Mott Foundation, the Climate and Land Use Alliance, the David and Lucile Packard Foundation, and the Rockefeller Brothers Fund.</span></em></p><p class="fine-print"><em><span>Blake Alexander Simmons does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>China’s international lending projects have big potential impacts on oceans and coasts. By cooperating more closely with host countries, Beijing can make those projects more sustainable.Blake Alexander Simmons, Postdoctoral Research Fellow in the Human Dimensions of Natural Resources, Colorado State UniversityRebecca Ray, Senior Academic Researcher in Global Development Policy, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1680602021-09-20T15:02:37Z2021-09-20T15:02:37ZChina is financing infrastructure projects around the world – many could harm nature and Indigenous communities<figure><img src="https://images.theconversation.com/files/421988/original/file-20210919-47336-xvl5i4.jpg?ixlib=rb-1.1.0&rect=3%2C0%2C2169%2C1446&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Chinese engineers pose after welding the first seamless rails for the China-Laos railway in Vientiane, Laos, June 18, 2020.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/june-18-2020-workers-from-china-railway-no-2-engineering-news-photo/1221809225">Kaikeo Saiyasane/Xinhua via Getty Images</a></span></figcaption></figure><p>China is shaping the future of economic development through its <a href="https://www.theguardian.com/cities/ng-interactive/2018/jul/30/what-china-belt-road-initiative-silk-road-explainer">Belt and Road Initiative</a>, an ambitious multi-billion-dollar international push to better connect itself to the rest of the world through trade and infrastructure. Through this venture, China is providing over 100 countries with funding they have long sought for roads, railways, power plants, ports and other infrastructure projects. </p>
<p>This mammoth effort could generate <a href="https://www.worldbank.org/en/topic/regional-integration/publication/belt-and-road-economics-opportunities-and-risks-of-transport-corridors">broad economic growth</a> for the countries involved and the global economy. The World Bank <a href="https://www.worldbank.org/en/topic/regional-integration/publication/belt-and-road-economics-opportunities-and-risks-of-transport-corridors">estimates</a> that recipient countries’ gross domestic product could rise by up to 3.4% thanks to Belt and Road financing.</p>
<p>But development often expands human movement and economic activity into new areas, which can promote <a href="http://dx.doi.org/10.1126/science.aao0312">deforestation</a>, illegal <a href="https://doi.org/10.1038/s41559-019-0963-6">wildlife trafficking</a> and the spread of <a href="https://doi.org/10.1016/j.cub.2018.12.036">invasive species</a>. Past initiatives have also sparked conflict by <a href="https://ejatlas.org/">infringing on Indigenous lands</a>. These projects were often approved without the <a href="https://doi.org/10.1080/14615517.2013.780373">recognition or consent</a> of local Indigenous communities.</p>
<p>In a <a href="https://doi.org/10.1038/s41559-021-01541-w">newly published study</a>, our team of <a href="https://www.researchgate.net/scientific-contributions/Rebecca-Ray-2135726495">development</a> <a href="https://scholar.google.com/citations?user=e3-sujUAAAAJ&hl=en">economists</a> and <a href="https://scholar.google.com.au/citations?user=tAYhLjUAAAAJ&hl=en">conservation scientists</a> mapped the risks Chinese overseas development finance projects pose for Indigenous lands, threatened species, protected areas and potential critical habitats for global biodiversity conservation. We found that more than 60% of China’s development projects present some risk to wildlife or Indigenous communities. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/j8zzL2aBo2M?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The Belt and Road Initiative is designed to connect China to the world.</span></figcaption>
</figure>
<h2>Diverse projects and risks</h2>
<p>Our study examines 594 development projects financed by the China Development Bank and the Export-Import Bank of China. We created a <a href="http://www.bu.edu/gdp/codf">database</a> to track the characteristics and locations of projects that these two “policy banks” supported between 2008 and 2019. During this period, the banks committed more than US$462 billion in development finance to 93 countries – roughly as much as the <a href="https://projects.worldbank.org/en/projects-operations/projects-home">World Bank</a>, the traditional global leader in development finance, committed in that time. </p>
<p>Nearly half of all projects financed by these two banks are located within potential <a href="https://www.fisheries.noaa.gov/national/endangered-species-conservation/critical-habitat">critical habitats</a>. These are areas that might be essential for conservation and require special protection considerations, <a href="https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/sustainability-at-ifc/policies-standards/performance-standards/ps6">according to the International Finance Corporation</a>, a unit of the World Bank that promotes private investment in developing countries. </p>
<p>One in three of the projects fall within existing protected areas, and nearly one in four overlaps with lands owned or managed by Indigenous peoples. In total, we calculate that China’s development finance portfolio could impact up to 24% of the world’s <a href="https://www.iucnredlist.org/">threatened amphibians, birds, mammals and reptiles</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/421883/original/file-20210917-13-1d700zh.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Global map of China-financed development risks" src="https://images.theconversation.com/files/421883/original/file-20210917-13-1d700zh.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/421883/original/file-20210917-13-1d700zh.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=263&fit=crop&dpr=1 600w, https://images.theconversation.com/files/421883/original/file-20210917-13-1d700zh.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=263&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/421883/original/file-20210917-13-1d700zh.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=263&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/421883/original/file-20210917-13-1d700zh.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=330&fit=crop&dpr=1 754w, https://images.theconversation.com/files/421883/original/file-20210917-13-1d700zh.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=330&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/421883/original/file-20210917-13-1d700zh.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=330&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Selected risks to biodiversity and Indigenous lands within countries receiving Chinese overseas development loans.</span>
<span class="attribution"><span class="source">Adapted from Yang, et al., 2021</span></span>
</figcaption>
</figure>
<p>The greatest risks lie in South America, Central Africa and Southeast Asia. All of the projects that China’s policy banks are financing in Benin, Bolivia and Mongolia overlap with existing protected areas or potential critical habitats. More than 65% of Chinese development projects in Ethiopia, Laos and Argentina are located within Indigenous lands. </p>
<p>On average, risks to Indigenous lands are greatest from extraction and transportation projects, such as mines, pipelines and roads. The greatest threats to nature are energy projects, including dams and coal-fired power plants. For example, a cascade of seven hydropower dams along the the Nam Ou River in Laos has <a href="https://www.ohchr.org/Documents/Issues/EPoverty/Lao/InternationalRivers.pdf">displaced Indigenous communities</a> that depended on local ecosystems for their livelihoods. </p>
<h2>How the World Bank addresses these risks</h2>
<p>China may be the world’s <a href="https://www.grips.ac.jp/forum/IzumiOhno/lectures/2018_Lectures_texts/S13_fp_20171109_china_development_finance.pdf">largest country-to-country development lender</a>, but it’s not the only funding source for emerging economies. The World Bank, an <a href="https://www.investopedia.com/articles/world-bank-definition/">international organization funded mostly by wealthy nations</a>, has been a <a href="https://worldbank.org/projects">leading source</a> of development finance over the last 40 years – but its approach is markedly different from China’s.</p>
<p>In the 20th century, critics <a href="https://islandpress.org/books/mortgaging-earth">assailed the World Bank</a> for funding projects that caused environmental damage and social conflict. But in the past 30 years it has enacted a series of <a href="https://www.worldbank.org/en/projects-operations/environmental-and-social-framework">environmental and social reforms</a> that are designed to steer lending toward more inclusive and sustainable development projects. Just this year, the bank <a href="https://www.reuters.com/article/us-climate-change-worldbank-exclusive/exclusive-world-bank-revises-climate-policy-but-stops-short-of-halting-fossil-fuel-funding-idUSKBN2BN3HC">committed</a> to aligning its lending with the <a href="https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement">Paris Agreement on climate change</a> by 2023.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1439280583415369736"}"></div></p>
<p>China’s rapid economic growth since the 1980s has made it <a href="https://phys.org/news/2021-04-china-environmental-world-biggest-polluter.html">one of the world’s top polluters</a>. Now its leaders are working to improve their country’s environmental performance.</p>
<p>China has <a href="https://doi.org/10.1038/d41586-019-01563-2">created a national system of protected areas</a> and has pledged to <a href="https://www.bloomberg.com/news/articles/2021-08-10/how-china-plans-to-become-carbon-neutral-by-2060-quicktake">make its domestic economy carbon-neutral</a> by 2060. But it has made no such reforms in its foreign lending. </p>
<p>Comparing projects financed by the World Bank from 2008-2019 with our list of Chinese loans, we found that on average China’s projects pose significantly greater risk to nature and Indigenous lands, primarily in the energy sector.</p>
<p>The World Bank also has a concerning proportion of loans in high-risk areas. Notably, the roads, railways and other transportation projects that it financed during this period pose risks to biodiversity that are nearly equivalent to those posed by similar projects financed by China. </p>
<p>For example, in 2016 the World Bank financed a major road project across the Democratic Republic of the Congo, including Indigenous peoples’ territory, opening them up to the loss of property and livelihoods, as well as violence. A formal internal <a href="https://www.inspectionpanel.org/panel-cases/high-priority-roads-reopening-and-maintenance-2nd-additional-financing-p153836">investigation</a> found that “serious harm” had occurred and directed the World Bank to manage future projects more carefully.</p>
<h2>Making development finance sustainable</h2>
<p>China has an opportunity with the Belt and Road Initiative to improve infrastructure networks around the world in a way that is both sustainable and inclusive. Recently it published the inter-ministerial “<a href="https://en.ndrc.gov.cn/news/mediarusources/202108/t20210810_1293453.html">Green Development Guidelines for Overseas Investment and Cooperation</a>,” a set of voluntary guidelines produced by Chinese experts from universities, governmental and non-government organizations and international experts, including two of us (Kevin Gallagher and Rebecca Ray). This report urges Chinese investors to respect host country environmental standards. When those standards are lower than China’s, the guidelines recommend using international environmental standards. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/422015/original/file-20210920-17-13xq9z5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Two diplomats hold portfolios." src="https://images.theconversation.com/files/422015/original/file-20210920-17-13xq9z5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/422015/original/file-20210920-17-13xq9z5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=412&fit=crop&dpr=1 600w, https://images.theconversation.com/files/422015/original/file-20210920-17-13xq9z5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=412&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/422015/original/file-20210920-17-13xq9z5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=412&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/422015/original/file-20210920-17-13xq9z5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=518&fit=crop&dpr=1 754w, https://images.theconversation.com/files/422015/original/file-20210920-17-13xq9z5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=518&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/422015/original/file-20210920-17-13xq9z5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=518&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Visiting Chinese State Councilor and Foreign Minister Wang Yi L and his counterpart Lemogang Kwape at a signing ceremony for cooperation on the Belt and Road Initiative in Gaborone, Botswana, Jan. 7, 2021.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/jan-7-2021-visiting-chinese-state-councilor-and-foreign-news-photo/1230474930">Xinhua/Tshekiso Tebalo via Getty Images)</a></span>
</figcaption>
</figure>
<p>In a promising step, President Xi Jinping announced on Sept. 21, 2021 at the U.N. that China <a href="https://www.nytimes.com/live/2021/09/21/world/un-general-assembly#china-coal-un-general-assembly">would not build new coal-fired power plants abroad</a>. Just as importantly, he announced that China will “step up support for other developing countries in developing green and low-carbon energy.” </p>
<p>Such a powerful shift can open renewable energy access across the developing world. However, our study shows that investments in low-impact sectors can still carry risks to vulnerable ecosystems and communities. We believe these climate commitments should be complemented with similar social and environmental performance standards that take into account local risks to biodiversity and Indigenous peoples.</p>
<p>[<em>Over 110,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p>
<p>Currently China is preparing to host the 15th meeting of the Conference of the Parties to the <a href="https://www.cbd.int/article/new-dates-cop15-october-2021">Convention on Biological Diversity</a> – the main global agreement that commits nations to protect species and ecosystems around the world. Sessions will take place online in October 2021 and in person in Kunming in the first half of 2022. This event is a unique opportunity for China to address social and environmental risks from its global development activities.</p>
<p>We believe that China would be wise to adopt <a href="https://cciced.eco/research/special-policy-study/green-bri-and-2030-agenda-for-sustainable-development-2/">new recommendations</a> set forth by its Ministry of Ecology and Environment, in collaboration with international experts, including two of us (Kevin Gallagher and Rebecca Ray), that would require compulsory environmental management systems for projects supported by public Chinese banks to prevent and mitigate risks. This would raise the bar for Western lenders, who also need to improve their standards but <a href="https://doi.org/10.1016/j.worlddev.2012.12.007">fear losing business to Chinese lenders</a>. </p>
<p>By minimizing harmful impacts from the projects it funds, we believe China could make the Belt and Road Initiative a win-win for itself, host countries and the global economy.</p>
<p><em>This article has been updated to include President Xi Jinping’s Sept. 21 announcement that China will stop building coal-fired power plants abroad.</em></p>
<p><em><a href="https://scholar.google.com/citations?user=Gn84xRsAAAAJ&hl=en">Hongbo Yang</a>, a former Postdoctoral Research Fellow at Boston University’s Global Development Policy Center, was joint lead author of the study described in this article.</em></p><img src="https://counter.theconversation.com/content/168060/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Gallagher serves as the International Co-Chair for the Green BRI and 2030 Agenda for Sustainable Development of the China Council for International Cooperation on Environment and Development, administered by the foreign cooperation office of the Chinese Ministry of Ecology and the Environment.</span></em></p><p class="fine-print"><em><span>Rebecca Ray was a member of the team of international experts that produced the report for the China Council for International Cooperation on Environment and Development discussed in this article.</span></em></p><p class="fine-print"><em><span>Blake Alexander Simmons does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Through its Belt and Road Initiative, China has become the world’s largest country-to-country lender. A new study shows that more than half of its loans threaten sensitive lands or Indigenous people.Blake Alexander Simmons, Postdoctoral Research Fellow, Boston UniversityKevin P. Gallagher, Professor of Global Development Policy and Director, Global Development Policy Center, Boston UniversityRebecca Ray, Senior Academic Researcher in Global Development Policy, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1416382020-07-12T08:32:15Z2020-07-12T08:32:15ZIndependence is at the heart of the African Development Bank’s ability to be effective<figure><img src="https://images.theconversation.com/files/346537/original/file-20200709-62-1gs5hgm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Akinwumi Adesina leads a bank that has the USA as its second largest shareholder</span> <span class="attribution"><span class="source">CGIAR/Wikimedia Commons</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Independence is a cardinal pillar for organisations that are set up to deliver a public good. Their success depends on it.</p>
<p>This is particularly true of development banks such as African Development Bank, <a href="https://www.afdb.org/en">AfDB </a> and <a href="https://www.iadb.org/en">Inter-American Development Bank</a>. Independence is even more important in these instances because these institutions are owned by – and are meant to cater for – numerous regional member states.</p>
<p>In my view their ability to deliver on the objective of assisting member states attain economic growth and sustainable development is inexorably dependent on their independence. By this I mean their capacity to focus productively on their goals and missions without external sway. </p>
<p>There are two aspects to this independence. The first is objective independence. This talks to how the institution is set up, who has shares in it and the like. Regional development banks typically get shareholder contributions of capital (which determines country shareholdings). They then go to capital markets to borrow multiples of their capital base (money from shareholders). Objective independence depends on shareholder contributions. </p>
<p>The second aspect of independence is implicit independence. This talks to the ability of the bank to borrow from capital markets. The reputation of the bank is key to its ability to mobilise capital to pursue bold development plans. </p>
<p>The AfDB is one of four main regional banks of the world. The other three are the <a href="https://www.adb.org/">Asia Development Bank</a>, <a href="https://www.iadb.org/en">Inter-American Development Bank</a> and <a href="https://www.ebrd.com/home">European Bank for Construction and Development</a>. </p>
<h2>Objective indepedence</h2>
<p>Objective independence is conventionally reflected in the distribution of capital contribution (ownership share subscription) of member states. This speaks to voting rights and associated board of governors’ and directors’ compositions. </p>
<p>This aspect of the bank independence gives details of the governance architecture around decision making and the day-to-day running of the bank. The bank president and board of directors – appointed by a board of governors – are mandated to implement decisions and run the daily affairs of the bank.</p>
<p>It is in this aspect of bank independence that non-regional member states are typically invited to foster transparency of governance, inject diversity, and enrich board decisions with global best practice. These are often governments or organisations invited from developed, well-performing or geographically representative countries. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/344522/original/file-20200629-155303-cl5r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/344522/original/file-20200629-155303-cl5r.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=284&fit=crop&dpr=1 600w, https://images.theconversation.com/files/344522/original/file-20200629-155303-cl5r.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=284&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/344522/original/file-20200629-155303-cl5r.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=284&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/344522/original/file-20200629-155303-cl5r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=357&fit=crop&dpr=1 754w, https://images.theconversation.com/files/344522/original/file-20200629-155303-cl5r.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=357&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/344522/original/file-20200629-155303-cl5r.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=357&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Screen Shot at AM.</span>
</figcaption>
</figure>
<p>All four of the world’s biggest regional development banks have explored the benefit of non-regional member states.</p>
<p>But the AfDB falls short on this score. This is because non-regional members dominate the top capital contributors of the bank’s capital base. This “league table” ranking typically reflects the voting rights accorded member states. And unlike the other regional banks, three of the top five capital contributors in AfDB are non-African states. And 50% or more of the top 10 contributors are also non-African states. </p>
<p>One, therefore, has to ask where are Kenya, Ghana, Morocco, Ethiopia, Cote-d’Ivoire, Tunisia, Senegal, Angola – and others – in response to the vital imperative of ensuring their regional bank’s independence? This list is of countries that could be, but are not, among the top capital contributors to AfDB’s ownership and capital base. </p>
<p>These kinds of skewed voting rights put a dangerously destabilising power in the hands of a non-regional member who at any time may get the itch for autocracy. This was <a href="https://www.bbc.com/news/world-africa-52831185">demonstrated</a> recently when the US brashly attempted to veto a corporate governance guided decision of the bank’s board, mainly by virtue of its relative voting right. </p>
<p>This kind of possibility clearly compromises the independence of the bank.</p>
<p>Sensibly, this should have been anticipated. A carefully nuanced structuring of board powers should have been put in place, with checks against such a likelihood. Such a balancing act would also have endeavoured to imbue regional member states with some “power of insistence” on determining their collective goals and mission. </p>
<p>That said, regional member states’ contribution heft, still remains the best path to ensuring robustness of this aspect of bank independence.</p>
<h2>Implicit independence</h2>
<p>Implicit independence is reflected in the capacity (reputation) of the bank to mobilise substantial capital, usually in multiples of its capital base, for prosecuting grand development agendas of the region that need huge capital outlay. </p>
<p>Until recently, this had evidently not been explored by the African Development Bank.</p>
<p>This capacity is usually flagged by two factors. Firstly, conceiving and articulating a well-thought out development agenda. Secondly, the extent of the bonding role provided by non-regional developed country member states, whose capital markets or partnering development organisations may be sources of this primary capital raising.</p>
<p>The record on this source of bank independence has been significantly brightened under the current leadership of the bank headed by Dr Akinwunmi Adesina. Starting in 2018, the bank set itself the ambitious goal of mobilising substantial capital to support development projects of its regional member states. </p>
<p>The bank embarked on a host of roadshows, securing for the first time, commitments of between <a href="https://pfbc-cbfp.org">$30 billion - $60 billion</a>.</p>
<p>This kind of substantial capital mobilisation is vital for the effectiveness of any development bank. Particularly, in light of the fledgling nature of Africa’s organised capital markets – with the exception of South Africa – it is an enormously important capacity for AfDB to build. </p>
<p>For instance, as Africa’s only premier development bank, AfDB was the first and only African development organisation <a href="https://www.afdb.org/en/news-and-events/african-development-bank-covid-19-response-moving-commitment-action-36188">to offer any meaningful support</a> to regional member countries’ effort at managing the devastating consequences of Covid-19. </p>
<p>Under Adesina’s leadership, a coherent and clearly articulated (and encouragingly ambitious) continental development agenda has been set down. Under the rubric of <a href="https://www.afdb.org/en/high5s">“High Fives” </a> it covers power, food, industrialisation, integration and improving the quality of life in and for Africa.</p>
<h2>Vital role</h2>
<p>The upside potentials of these projects are evidently great and promising. </p>
<p>But, for this promise to become a reality, the AfDB needs to be effective at its mission, via robust bank independence. </p>
<p>The bank’s leadership needs its hands strengthened by the cooperation and support of African countries. For a start, African countries must increase their ownership subscriptions in their only regional bank.</p><img src="https://counter.theconversation.com/content/141638/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kalu Ojah does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There is concern over the growing influence of non-regional players in decision making at the regional bank.Kalu Ojah, Professor of Finance & Deputy Head of School, Wits Business School, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/570372016-04-05T20:07:24Z2016-04-05T20:07:24ZDevelopment banks threaten to unleash an infrastructure tsunami on the environment<figure><img src="https://images.theconversation.com/files/117134/original/image-20160401-6801-ctee53.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Major development banks are funding logging, mining and infrastructure projects that are having enormous impacts on nature. Here, forests are being razed along a newly constructed road in central Amazonia.</span> <span class="attribution"><span class="source">William Laurance</span>, <span class="license">Author provided</span></span></figcaption></figure><p>We are living in the most explosive era of infrastructure expansion in human history. The G20 nations, when they met in Australia in 2014, argued for <a href="http://us.boell.org/sites/default/files/alexander_multi-polar_world_order_1.pdf">between US$60 trillion and US$70 trillion</a> in new infrastructure investments by 2030, which would more than double the global total value of infrastructure.</p>
<p>Some of the key players in this worldwide infrastructure boom are huge investors such as the World Bank. The past few years and decades have seen the rise of major new investment banks, such as the recently founded <a href="http://euweb.aiib.org/html/aboutus/AIIB/?show=0">Asian Infrastructure Investment Bank</a> (AIIB), and the dramatic growth of funds such as the <a href="https://en.wikipedia.org/wiki/Brazilian_Development_Bank">Brazilian Development Bank</a> (BNDES). </p>
<p>The new banks, along with traditional big lenders such as the World Bank, the International Monetary Fund, and the Asian, African, and Inter-American Development Banks, are very fond of funding big infrastructure such as roads, dams, gas lines, mining projects, and so on. </p>
<p>Some people had hoped that these banks would promote sustainable and socially equitable development, but it now seems that they could end up doing precisely the opposite.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/117128/original/image-20160401-6825-xwpmwq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/117128/original/image-20160401-6825-xwpmwq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=699&fit=crop&dpr=1 600w, https://images.theconversation.com/files/117128/original/image-20160401-6825-xwpmwq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=699&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/117128/original/image-20160401-6825-xwpmwq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=699&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/117128/original/image-20160401-6825-xwpmwq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=878&fit=crop&dpr=1 754w, https://images.theconversation.com/files/117128/original/image-20160401-6825-xwpmwq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=878&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/117128/original/image-20160401-6825-xwpmwq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=878&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The world’s rivers are imperilled by thousands of planned hydroelectric dams. Shown here is the Tapajós River in Brazil, for which a dozen mega-dams are currently planned.</span>
<span class="attribution"><span class="source">William Laurance</span></span>
</figcaption>
</figure>
<h2>The infrastructure tsunami</h2>
<p>The next few decades are expected to see some 25 million km of <a href="http://www.nature.com/nature/journal/v513/n7517/abs/nature13717.html">new paved roads</a>, thousands more <a href="http://link.springer.com/article/10.1007%2Fs00027-014-0377-0#/page-1">hydroelectric dams</a>, and hundreds of thousands of new <a href="http://www.theecologist.org/News/news_analysis/2449005/africas_ecosystems_imperilled_by_mining_frenzy.html">mining, oil and gas projects</a>. </p>
<p>The environmental impacts of the modern infrastructure tsunami could easily dwarf climate change and many other human pressures, as thousands of projects penetrate into the world’s last surviving wild areas. Roughly <a href="http://www.iea.org/publications/freepublications/publication/transportinfrastructureinsights_final_web.pdf">90%</a> of the new projects are in developing nations, often in the tropics or subtropics which harbour the planet’s biologically richest and environmentally most critical ecosystems. </p>
<p>In these contexts, new infrastructures such as roads can open a <a href="http://www.nytimes.com/2015/04/13/opinion/roads-to-ruin.html?_r=1">Pandora’s box</a> of environmental problems, by promoting widespread deforestation, habitat fragmentation, poaching, fires, illegal mining and land speculation. </p>
<p>For instance, <a href="http://eventos.gvces.com.br/arquivos/Barber-et-al-2014-Amazon-roads.pdf">our research</a> in the Brazilian Amazon has shown that 95% of all deforestation occurs within 5.5 km of a legal or illegal road.</p>
<p>In Brazil, 12 new dams planned for the Tapajós River (and their associated road networks) are expected to increase Amazon deforestation by <a href="https://theconversation.com/the-worlds-forests-will-collapse-if-we-dont-learn-to-say-no-53979">nearly a million hectares</a>. Across the Amazon, more than 330 dams are now planned or under construction.</p>
<p>In the Congo Basin, an avalanche of new logging roads has opened up vast areas of rainforest to poachers armed with rifles and cable snares. As a result, the past decade has seen <a href="http://www.theguardian.com/environment/2013/mar/05/two-thirds-forest-elephants-killed">two-thirds</a> of all Forest Elephants slaughtered for their valuable ivory tusks.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/117135/original/image-20160401-6809-112abt9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/117135/original/image-20160401-6809-112abt9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/117135/original/image-20160401-6809-112abt9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/117135/original/image-20160401-6809-112abt9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/117135/original/image-20160401-6809-112abt9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/117135/original/image-20160401-6809-112abt9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/117135/original/image-20160401-6809-112abt9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/117135/original/image-20160401-6809-112abt9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Because of massive road expansion, there has been an epic slaughter of Forest Elephants in the Congo Basin.</span>
<span class="attribution"><span class="source">Ralph Buij</span></span>
</figcaption>
</figure>
<h2>Fears of fast-tracking</h2>
<p>Brazil’s BNDES has been heavily criticised for funding scores of environmentally and socially harmful projects, such as <a href="http://news.mongabay.com/2016/03/bndes-a-bank-loans-billions-to-tame-south-americas-wild-waters/">mega-dams in the Amazon</a>. Fears were raised that China’s AIIB would <a href="http://bankwatch.org/bwmail/63/new-beijing-backed-asian-infrastructure-investment-bank-struggles-convince-environment">behave similarly</a>, especially when it announced that it would be using <a href="http://news.xinhuanet.com/english/2015-05/22/c_134262848.htm">“streamlined” procedures</a> for evaluating its projects. </p>
<p>Such fast-tracked procedures would differ from those used by other major lenders such as the World Bank, which after years of criticism have gradually implemented measures designed to limit the environmental and social impacts of its projects. Even these safeguards are often inadequate, as I and others argued in a <a href="http://www.cell.com/current-biology/abstract/S0960-9822%2815%2900219-5">recent article</a>, but at least they are a big improvement over past practices.</p>
<p>When China opened up its AIIB to other countries, 30 nations initially joined as founding members. Many of these are western economies, including the United Kingdom, Germany, France, Italy, Norway, Australia and New Zealand.</p>
<p>At the time, many observers hoped that the bank’s broader membership would encourage the AIIB to moderate its <a href="http://europe.chinadaily.com.cn/epaper/2016-01/22/content_23193634.htm">hard-charging stance</a> — perhaps fostering environmental and social safeguards more akin to those of the existing major lenders.</p>
<h2>Race to the bottom?</h2>
<p>But in fact the exact opposite appears to be happening. Rather than the AIIB raising its game, the World Bank recently concluded <a href="http://consultations.worldbank.org/consultation/review-and-update-world-bank-safeguard-policies">a review of its environmental standards</a> — a move that has been criticised as <a href="https://www.devex.com/news/the-controversy-over-safeguard-policies-87679">weakening its environmental and social safeguards</a>. </p>
<p>It is doing so, it says, in order to keep up with “<a href="http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/EXTPOLICIES/EXTSAFEPOL/0,,menuPK:584441%7EpagePK:64168427%7EpiPK:64168435%7EtheSitePK:584435,00.html">new and varied development demands</a>”. This is widely seen as a <a href="http://www.a-id.org/en/news/how-the-world-bank-is-relaxing-its-human-rights-standards/">response to increasing competition</a> with other investors such as the AIIB. </p>
<p>What will this mean? The global economy has slowed for the moment, giving environmental planners a tiny window of breathing space. But make no mistake, the infrastructure tsunami is <a href="https://theconversation.com/massive-road-and-rail-projects-could-be-africas-greatest-environmental-challenge-51188">still happening</a>. If the global economy rebounds to a degree, the feeding frenzy of projects seen in recent years could easily return. </p>
<p>This could be bad news for the global environment and <a href="http://www.forestpeoples.org/topics/safeguard-accountablility-issues/news/2014/07/press-release-world-bank-moves-undermine-rights">socially disempowered peoples</a>. For instance, a 2009 analysis found that many developing nations had become “pollution havens” for projects funded by <a href="http://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-3505">China or Chinese investors</a>, who were attracted to nations with weak environmental controls. Notably, other advanced (<a href="https://en.wikipedia.org/wiki/Organisation_for_Economic_Co-operation_and_Development">OECD</a>) economies showed no such tendency.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/117129/original/image-20160401-6816-9cu6jt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/117129/original/image-20160401-6816-9cu6jt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/117129/original/image-20160401-6816-9cu6jt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=598&fit=crop&dpr=1 600w, https://images.theconversation.com/files/117129/original/image-20160401-6816-9cu6jt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=598&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/117129/original/image-20160401-6816-9cu6jt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=598&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/117129/original/image-20160401-6816-9cu6jt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=752&fit=crop&dpr=1 754w, https://images.theconversation.com/files/117129/original/image-20160401-6816-9cu6jt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=752&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/117129/original/image-20160401-6816-9cu6jt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=752&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">How badly will the global avalanche of new infrastructure affect nature? With development pressures rapidly escalating in the tropics, species such as this Golden Dove, found only in Fiji, could be especially vulnerable.</span>
<span class="attribution"><span class="source">William Laurance</span></span>
</figcaption>
</figure>
<p>Will other major lenders follow suit? Will there simply be a “race to the bottom” among big lenders in order to remain competitive? Only time will tell. </p>
<p>The other key question revolves around the role of western nations that are parties to the AIIB, such as the EU members and Australia. Do they have enough influence and determination to make a difference? With China, India and Russia holding the biggest shares of the bank’s capitalisation, it’ll be an uphill battle.</p>
<p>Right now, for the environment and human rights, the signs are all pointing in the wrong direction.</p><img src="https://counter.theconversation.com/content/57037/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bill Laurance receives funding from the Australian Research Council and other scientific and philanthropic organisations. He is the director of the Centre for Tropical Environmental and Sustainability Science at James Cook University and founder and director of ALERT--the Alliance of Leading Environmental Researchers & Thinkers.
</span></em></p>Big new investors such as the Asian Infrastructure Development Bank are key players in a worldwide infrastructure, and that could be bad news for the environment.Bill Laurance, Distinguished Research Professor and Australian Laureate, James Cook UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/519642015-12-10T04:07:15Z2015-12-10T04:07:15ZQ&A: why credit rating agencies matter for developing countries<figure><img src="https://images.theconversation.com/files/104845/original/image-20151208-32402-qdxikn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Credit rating agencies often elicit criticism when they downgrade countries. </span> <span class="attribution"><span class="source">EPA/Justine Lane</span></span></figcaption></figure><p><em>Credit rating agencies have played a crucial role in international debt markets for more than 150 years. But they have often attracted controversy. Matthew Kofi Ocran, Professor of Economics at the University of the Western Cape, explains why rating agencies matter for developing countries.</em> </p>
<p><strong>What do credit rating agencies do?</strong></p>
<p>Credit ratings express an agency’s opinion about the ability and willingness of any issuer – governments, financial institutions, corporations, insurance companies and structured finance – to meet its financial obligations in full and on time. </p>
<p>There are more than 70 agencies around the world. But three dominate, controlling 91% of the <a href="http://www.esma.europa.eu/system/files/2014-1583_credit_rating_agencies_market_share_calculation_2014.pdf">global market</a>. They are Standard & Poor’s, Fitch and Moody’s.</p>
<p>Though there are slight differences in the rating scales that the big agencies use, all fall into two broad categories. These are investment and speculative grades. The investment grades range from AAA, very high credit quality, to BBB-, moderate credit risk. There are eight other notches between AAA and BBB-. </p>
<p>The speculative grade ratings start from BB+, which is associated with substantial risk. The bottom of the scale of the non-investment or speculative grade ratings is designated as C by Moody’s, and D by Standard & Poor’s and Fitch. The last rating on the scale suggests that the issuer is very close to default or already in default. When considered as numerical scales, there are 22 - from AAA to D ratings. </p>
<p><strong>Do ratings agencies matter for developing countries?</strong></p>
<p>Credit rating agencies are incredibly important for developing countries for a number of reasons.</p>
<p>First, the ratings act as a kind of moral suasion that compels developing countries to pursue more prudent and sensible monetary and fiscal policies. Sovereign ratings serve as an incentive for sound monetary and fiscal policies because performance on these policies forms an integral part of the rating methodologies.</p>
<p>Second, a favourable rating enables governments and companies to raise capital in the international financial market. </p>
<p>Institutional investors in both the developed and developing world rely heavily on rating agencies in making investment decisions.</p>
<p>This is because credit ratings are essentially opinions about credit risk. Ratings provide insight into the credit quality of an individual debt issue and the relative likelihood that the issuer may default. </p>
<p>Fund managers often don’t know enough about the risk associated with parties they’re interested in. Credit rating agencies provide an opinion about the credit quality of borrowers such as governments, corporates, financial institutions, and their related debt instruments such as bonds. </p>
<p>This means that to attract investors with deep pockets you can’t avoid having a credit rating. And a good one at that.</p>
<p><strong>Why are they controversial?</strong></p>
<p>The key point here is that credit ratings are opinions. That means they are bound to be disputed or elicit criticism. </p>
<p>The credibility of credit rating agencies took a knock during the <a href="http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article">financial crisis</a>. They were criticised for failing to do a diligent job in evaluating the credit worthiness of bonds in the lead up to the crisis. Some had punitive fines <a href="http://www.economist.com/news/business-and-finance/21642130-justice-departments-treatment-sp-raises-some-serious-questions-fine-too-far">imposed on them</a> by US financial regulators. </p>
<p>That said, their role has by no means diminished. The international financial industry still relies heavily on their opinions.</p>
<p>Even though the agencies use their own unique rating methodologies, they usually arrive at comparable conclusions. Very often an analyst may form an assessment based on a number of quantitative and qualitative measures which is then presented to a committee for review. Standard & Poor’s follows this process. In some cases assessments may be based on a quantitative model. </p>
<p><strong>What impact do they have on economies?</strong></p>
<p>The opinions by the rating agencies tend to have an important effect on the cost of financing for governments and companies. For example, the benchmark 10-year Government Bond issued by countries with high investment grade <a href="http://www.bloomberg.com/markets/rates-bonds">ratings</a> attract very low interest rates. This is usually less than 2.50%. For instance, Canada with its AAA rating borrows at 1.58%; Germany (AAA) 0.58% and France (AA+), 0.90%. </p>
<p>For low rated <a href="http://www.tradingeconomics.com/country-list/rating">countries</a> such as Greece (CCC), the rate is as high as 8.33%. </p>
<p>But more importantly downgrades from investment grade to non-investment grade can elicit unfavourable, and costly, market reactions. For example, South Africa is just a notch above investment grade rating by both Standard & Poor’s and Fitch. Any further downgrade would cause a significant escalation in the cost of raising finances. That’s why countries pay a lot of attention to their credit ratings.</p>
<p><strong>How objective are they?</strong></p>
<p>Like any human institution, the rating agencies cannot be said to be perfect. The recent global financial crisis demonstrated this. That said, by and large, the credit rating agencies have been found credible and <a href="http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/G-RatingAgencies&TheirMethodologies-LauraFeinlandKatz.pdf">transparent</a> in the methodologies used in their assessments. </p>
<p>The critical variables that go into the assessment and rating of sovereigns for instance, include information on:</p>
<ul>
<li><p>macroeconomic outcomes such as economic growth;</p></li>
<li><p>the state of public finances;</p></li>
<li><p>the external finance situation including exchange rate management;</p></li>
<li><p>political risk; and </p></li>
<li><p>the performance of state institutions. </p></li>
</ul>
<p>Naturally, when countries, municipalities and companies are downgraded the rating agencies are heavily criticised. But a review of the rating performances often suggests a strong correlation between the ratings countries get and their propensity to default. For example, historically triple A issuers and issues have defaulted less frequently as compared with those with lower credit ratings. Indeed, lower-rate issues and issuers have usually correlated with defaults across all the leading <a href="https://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/chap3.pdf">rating agencies</a>.</p>
<p>Each of the three leading rating agencies has a well-defined methodology for assigning ratings. In most instances, ratings committees vote on the rating outcomes before they are published. In most cases these committees are made up of a lead analyst, managing directors or supervisors as well as a number of junior analytical staff. Decisions are made by a simple majority of the committee. The agency’s reports are also made available to the issuer for factual verification. </p>
<p><strong>How accurate are they?</strong></p>
<p>Governments have from time to time questioned the opinions of the credit rating agencies. Developed world countries such as the US and France have strongly criticised major agencies because of a <a href="http://www.nytimes.com/2011/08/07/business/a-rush-to-assess-standard-and-poors-downgrade-of-united-states-credit-rating.html?_r=0%5D">downgrade</a>.</p>
<p>But this has not stopped agencies from sticking to their guns. An International Monetary Fund <a href="https://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/chap3.pdf">review</a> suggests that since 1975 all the sovereigns that have defaulted were rated as non-investment grade at least one year before they defaulted. Between 1983 and 2009 no country with investment grade rating defaulted. </p>
<p>And just about 1% of the corporations rated as investment grade risk defaulted over the period in question. These statistic speaks volumes about the credibility of the risk assessment opinions of the top three agencies.</p><img src="https://counter.theconversation.com/content/51964/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Kofi Ocran receives funding from the NRF. He is affiliated with the African Economic Research Consortium, Nairobi. </span></em></p>Credit rating agencies have come in for a lot of flack. But the bottom line is that to attract investors with deep pockets countries can’t avoid having a credit rating. And a good one at that.Matthew Kofi Ocran, Professor of Economics, University of the Western CapeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/507822015-12-07T04:24:11Z2015-12-07T04:24:11ZWhy Africa should turn to capital markets to fund its infrastructure deficit<figure><img src="https://images.theconversation.com/files/103893/original/image-20151201-26568-197j7bg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Viana, near Luanda, Angola. China has played a major role in funding infrastructure projects in Africa but the deficit remains huge. </span> <span class="attribution"><span class="source">Reuters/Siphiwe Sibeko</span></span></figcaption></figure><p>Improving infrastructure is not only critical for economic growth in Africa but essential for ensuring the improved wellbeing of its people. This is backed by empirical research, which shows a strong link between infrastructure development and economic <a href="http://siteresources.worldbank.org/INTAFRICA/Resources/aicd_overview_english_no-embargo.pdf">growth on the continent</a>. </p>
<p>The African Development Bank reports that road access in Africa is only 34% as compared to the 50% in other developing <a href="http://www.afdb.org/fileadmin/uploads/afdb/Documents/Generic-Documents/PIDA%20brief%20closing%20gap.pdflink">regions</a>. Just about 5% of agriculture in the region is under <a href="http://www.afdb.org/fileadmin/uploads/afdb/Documents/Generic-Documents/PIDA%20brief%20closing%20gap.pdf">irrigation</a>. In Asia, however, 37% of the agricultural land area is under <a href="http://www.eu-africa-infrastructure-tf.net/attachments/library/aicd-background-paper-9-irrig-invest-summary-en.pdf">irrigation</a> and the figure for Latin America is estimated at 14%. And Africa’s average national electrification rate of 43% <a href="http://www.worldenergyoutlook.org/resources/energydevelopment/energyaccessdatabase/">compares poorly</a> with 81% in developing countries in Asia and 98% recorded in Latin America. </p>
<p>The amount of capital required to close the infrastructure gap in Africa is estimated to be in the region of US$93 billion annually <a href="http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/ECON%20Brief_Infrastructure%20Deficit%20and%20Opportunities%20in%20Africa_Vol%201%20Issue%202.pdf">until 2020</a>.</p>
<p>With China stepping in and funding economic infrastructure, as well as the establishment of the <a href="http://ndbbrics.org">BRICS Development Bank</a> and the <a href="http://www.aiib.org/html/aboutus/AIIB">Asia Infrastructure Investment Bank</a>, will the funding gap be filled? The answer is no. Africa needs to look to capital markets. </p>
<h2>What we know</h2>
<p>Sourcing funds for huge infrastructure development in Africa has always been fraught with difficulties. One major challenge is that the multilateral development finance institutions, which are dominated by the rich western countries, often impose stringent policy conditions to loans. It also appears that the funding required to close the infrastructure gaps is simply not available on the balance sheets of the World Bank and the African Development Bank. </p>
<p>Another issue is that the major lenders have historically been more active in financing social infrastructure such as health and education. Their approach to development in Africa has by and large been related to “poverty alleviation”. The critical role of economic infrastructure in spurring economic growth has not been accorded serious attention. </p>
<p>While social infrastructure is important for economic development, economic infrastructure is more urgent. Wealth creation and capital accumulation are facilitated more by investments in economic infrastructure. </p>
<p>The truth is that the old approach of countries relying heavily on multilateral and regional development finance institutions to fund infrastructure is unworkable. It is also incapable of closing the huge financing gap. In fact, neither the old nor the new institutions have the risk appetite for the kind of investments needed. If countries continue to rely on these organisations and institutions the pace for closing the infrastructure gap will be very slow. </p>
<h1>The way forward</h1>
<p>The point is that traditional development finance institutions are hesitant to provide resources for the huge but critical infrastructure investment required in Africa. </p>
<p>The emergence of the new multilateral development institutions is a welcome development. But they are in no way a panacea to current infrastructure financing challenges. The game-changing infrastructure projects that can make a dent in the infrastructure deficit and move economies to a higher growth path need to come from elsewhere. The place to start would be the time tested sources of long-term finance such as the debt market. </p>
<p>International capital markets provide a viable source of capital where, for instance, local debt markets are shallow or non-existent. Since 2007 more than ten African countries have raised considerable amounts from the international capital market in the form of <a href="http://www.euromoney.com/Article/3369170/African-Eurobonds-not-lucrative.html">Eurobonds</a>. </p>
<p>Traditionally, most African countries, with the exception of South Africa, have not seen the capital markets as a critical source of finance. One of the reasons countries didn’t float international bonds was because they didn’t have sovereign credit rating. But there are now 12 sub-Saharan Africa countries with ratings. Most have gone onto international capital markets to source <a href="http://www.euromoney.com/Article/3369170/African-Eurobonds-not-lucrative.html">funding</a>. Sadly, most countries are yet to get sovereign credit ratings, a prerequisite to accessing finance from international capital markets.</p>
<p>Yet raising debt financing in the capital market is probably one of the most potent sources of finance for rapid infrastructure development. This is because countries are able to raise funds for earmarked projects without policy conditionalities. And the cost of the funds, while relatively expensive compared with concessional loans from the World Bank and other multilateral development finance institutions, is often cheaper than loans from international banks. </p>
<p>Countries have to be encouraged to go to international capital markets to raise funds for projects. And these funds should not be used to finance consumption but should be channelled directly into the financing of much-needed economic infrastructure.</p>
<p>The railways and canals in America were largely financed with capital raised through bonds in the first half of the 19th Century. The American railways securities, as they were called, were financed from both domestic and foreign sources. </p>
<p>Since time immemorial huge infrastructure projects have been financed with funds from the capital market. This is because national budgets are often unable to support the required infrastructure expenditure. In other words, the balance sheets of states lack the fiscal space to accommodate the huge financial outlays required for infrastructure development. On the other hand project finance provides off-balance sheet resources that do not compromise the fiscal balance. </p>
<p>Any suggestion that traditional finance institutions or development finance institutions would be willing and able to fund the mega projects required in Africa is an illusion. Governments must turn to the market to raise capital.</p><img src="https://counter.theconversation.com/content/50782/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Kofi Ocran receives funding from the NRF. </span></em></p>Since time immemorial, huge infrastructure projects have been financed with funds from the capital markets. Africa should not rely on development finance institutions.Matthew Kofi Ocran, Professor of Economics, University of the Western CapeLicensed as Creative Commons – attribution, no derivatives.