A Watershed in the Financing of Infrastructure for Water Security

By John Briscoe

Water is a basic necessity – crucial not only for sustaining life, but also for facilitating sustainable economic growth. Below, Professor John Briscoe calls out the hypocrisy of much of the last four decades of rich countries’ policies towards large-scale infrastructural projects in the developing world, and questions what recent game-changing announcements mean for the future of development. Is the hegemony of the Western-dominated World Bank coming to an end?

Economic development is a straightforward business.  Countries that have successfully developed over the last several decades have largely followed the path established by the now-rich countries. An important element in this path has been to improve water security and build a water platform for growth. Since rainfall and river flows are variable across time and space and since hydropower offers a cheap, renewable (and we now know, low-carbon) source of energy, now-rich countries have made very large investments. Now-rich countries have developed about 80% of their economically-feasible hydropower potential, and have created large amounts of storage in arid areas (1000 days of average flow on the Colorado, for example). With few exceptions these investments were funded by the public sector – witness the New Deal and the Tennessee Valley Authority and Columbia Basin projects in the United States.

The countries on the outside looking in have long wanted to do more or less what the rich countries did. The problem was that, for the most part, the poor countries did not have domestic capital markets that could fund such long-lived infrastructure at low rates of return. Sixty years ago the World Bank was created to use the callable capital of the rich world to underwrite these investments in infrastructure in the developing world. My last job at the World Bank (where I worked for twenty years) was as the Country Director in Brazil. In its first ten years in Brazil, the Bank financed a major hydropower project every year and helped build an essential element of what is now “the world’s cleanest energy matrix”. There was not a ripple of dissent about most of these projects, until the 1970s. This was an era in which “civil society” in the rich countries became active on environmental and social issues. The politics of this were and are complex.

 

“Safeguards” for “Soft” Development

On the one hand “the movement” was seized with a conviction that everything that had been done in, say, the United States, was wrong. In the water domain, activists in a California which existed in its present form only because of power and water supply from large projects, denounced large water projects as “against nature” and “anti-poor” – while still using the electricity, food and water from Hoover Dam and other icons of the golden age of U.S. development. A peculiar form of moral hazard emerged. Rich people (enjoying the benefits of such projects) became strident advocates for “new paradigms”, especially when these new paths were to be pursued by other (poor) people. The governments from the rich countries on the boards of the international financial institutions were soon enlisted, because “sustainable and equitable development” was a bone that could be thrown to otherwise-intransigent domestic constituencies who did not get what they wanted in their own countries.

Sixty years ago the World Bank was created to use the callable capital of the rich world to underwrite these investments in infrastructure in the developing world.

If the focus was on serious challenges within some projects, this would have been for the good. But the activists did not have to live with the consequences, and so every time there was a problem (and there were problems in some projects) the push was for new, zero-tolerance, regulations (known as “safeguards” in the World Bank) and watchdogs so that “this can never happen again.” No attention was given to the sins of omission – the life-changing benefits that could have resulted from hundreds of good projects made impossible because of the enormous transaction costs so imposed.

The decades of the 70s, 80s and 90s were ones in which the World Bank (the iconic development institution) essentially withdrew from funding of these “risky” projects. The reaction of the now-emerging middle-income countries (MICS) – including Brazil, China and India – was largely to turn away and make their needed investments with their own resources (and with the fungible resources from the international financing institutions).   For the poor countries the situation was dramatically different, because their budgets were dominated by “aid” and they did not have access to other sources of long-term, low-interest public financing. The hypocrisy was stark – the rich countries who used 80% of their hydropower potential refused to fund hydropower projects in Africa, where the comparable figure was 5%. The rich countries who stored 1000 days of average flow on their rivers in arid areas, would not fund dams in poor arid countries ravaged by floods and droughts where storage was of the order of 30 days.

 

Tides of Change in the New Millennium?

I was privileged to be the Senior Water Advisor at the World Bank when this tide started to turn around 2000. The MICs were showing that following the only demonstrated path (with, of course, national characteristics) was the only practical way, and that this meant large investments in water security. And the results were showing also, with spectacular economic development and poverty reduction. The MICs were starting to voice their concerns about the “soft development path” favoured by the rich countries and by the governance arrangements that left the World Bank dominated by the concerns of those who did not live with the consequences. There were some high-profile successes. I was heavily involved in the first policy process in which Brazil, China and India flexed their collective muscles against the “small and soft are beautiful” philosophy. The World Bank board (representing all the member countries) voted in favour of the Bank investing in “high-risk/high-reward” water infrastructure. The MICs made clear that if there were not changes in governance and policies, the World Bank risked becoming yet another charitable aid agency and becoming irrelevant to the big development challenges.

The rich countries who used 80% of their hydropower potential refused to fund hydropower projects in Africa, where the comparable figure was 5%.

There were some changes – over the past decade there has been some increase in World Bank lending for hydropower, for example, and new leadership at the Bank has made strong verbal commitments to such “transformational” projects. But there have been no changes to the massive edifice of “zero-tolerance” safeguards which made Bank engagement with such projects time and attention intensive. The small, 250 mw hydropower project at Bujagali in Uganda is a good example. The project was chosen as a focus by the rich-country anti-dam movement, complemented by a local organisation which had all of 14 members. In 2002 President Museveni railed “I am not happy because a project that should have taken two years has taken seven years to start. All this hullabaloo has been a waste of time and a lack of seriousness”.1 Little did President Museveni know that the project would only produce power in 2012. As the President of the International Finance Corporation has recently noted, a small project like this would take two, not seventeen, years to build in China.

While the rich-country development world barely changed at all, the world was changing dramatically around it. Suddenly China became the main financer of large water infrastructure in Asia and Africa; suddenly the Brazilian National Development Bank was lending 3 times the amount of the whole World Bank. Yet still little changed in Washington. The two major appointments made by the US Government in recent years (the President of the World Bank and the head of USAID) are physicians whose careers were made in the NGO world, in which development assistance is an act of charity.

 

Looking to the Future

Recently, as has been widely publicised, the middle-income countries have largely decided that the struggle for representation (the Benelux countries, with 27 million people collectively, have more representation than China, with 1,300 million, on the Board of the World Bank and the International Monetary Fund) is not worth the effort. The MICs’ bilateral programs with developing countries have grown rapidly, and are now responsible for most of the much-needed large infrastructure being built in the developing world. This is not perfect: in particular there is a need for the “other leg”, namely strong domestic institutions to make sure the right things are built, that they are built right, and that they are operated effectively. But it is a whole lot better for the poor countries than the alternative, which is to be denied the opportunity to develop in the name of equitable, sustainable development.

Recently there have been announcements of game-changing new multilateral institutions run by the MICs – the Asian Infrastructure Financing Facility and the BRICS Bank. Strikingly, these banks focus uniquely on infrastructure – something that has been fundamental for their own growth and which they (and their borrowers) believe to be essential for development of the still-poor countries.

Much is yet to be decided in, for example, the New Development Bank (NDB), as the BRICS bank is appropriately titled. In a great act of irony the World Bank has offered to help the NDB develop its social and environmental safeguards – the embodiment of the very problem the NDB is designed to address! Given their own experience and pragmatism, and given the absence of rich busy-bodies from their governing structures, the challenge for the new facilities will be to help countries build their much-needed infrastructure. But the challenge is also to ensure that the cash cow of hydropower does not mean ignoring public goods (including flood and drought control, and navigation), and to “walk on two legs” and use the building of infrastructure as a stimulus to help developing countries build practical, fit-for-purpose institutions for planning, building and operating this infrastructure.

About the Author

John-briscoeJohn Briscoe is a Professor of Environmental Engineering at Harvard University and director of the Harvard Water Security Initiative. He is an expert in the fields of economic development and water, having worked for twenty years at the World Bank as Senior Water Advisor and later as Country Director for Brazil. Professor Briscoe has received numerous awards for his teaching excellence and contribution to the field, and was named 2014 Laureate for the Stockholm Water Prize.

References

1. Reuters, “Peeved Museveni launches $550 million Uganda dam”, January 24, 2002.