World Bank mulls capital increase, climate focus in new reform plan

The World Bank is weighing a potential one-time capital increase, along with the ambitious idea that donor nations create a new concessional lending fund to address severe development challenges across all its client countries, according to a reform roadmap sent to shareholders. The goal is to accelerate efforts to tackle climate change, increase the lender’s capacity to fight poverty, and boost support to middle-income countries — including doing regional projects on cross-border challenges, in what would be a huge shift for the bank. Notably, the 20-page evolution roadmap obtained by Devex says the bank’s mission needs to more clearly reflect a focus on “global public goods,” such as climate change and pandemic preparedness. This would also mean stepping up support to climate-vulnerable countries, even if their income levels place them above the poverty lines for the most concessional lending. “The effects of climate change on growth are becoming more visible,” the bank wrote in the document sent out in late December, noting that lower-income countries’ economies are hit the hardest. The bank put together the roadmap following a landmark speech on reforms by U.S. Treasury Secretary Janet Yellen, as she and other key shareholders demanded an overhaul to make the lender fit to face global challenges such as climate change and the fallout from the COVID-19 pandemic. In the document, the bank lays out a framework for what it dubs an “iterative” back-and-forth with shareholders over the coming 10 months to work out the pathway to reform, including a set of negotiations due to take place before the bank’s Spring Meetings in April. In a letter to shareholders that was also obtained by Devex, bank president David Malpass said the roadmap is “a key step in the consultative process to update our mission, strengthen our operating model, and improve our financial model and capacity.” Additionally, the bank is considering ways to do more projects involving multiple countries while maintaining its core model focused on country-specific lending. The new approach could facilitate regional efforts to step up clean energy or health initiatives to mitigate cross-border risks, which are “increasing in frequency and intensity,” the report said. Conflicts are also spilling over borders, with the bank saying such violence must also be addressed to shore up development gains. The roadmap bluntly states that the bank “must evolve its mission.” The momentum for reform gained steam this fall in the wake of Malpass’ now-infamous fumble on climate change. Reuters first reported on the call for a capital increase for climate finance. Keeping AAA, increasing staff levels Despite some calls from activists, there appears to be no appetite for damaging the bank’s AAA credit rating, which allows the bank to borrow cheaply on capital markets and then pass on the savings to countries. It also helps ensure the bank is not taking excessive risks. Critics say the bank could increase some risk-taking without harming its rating — though pinpointing the precise amount is hard to do. Malpass has repeatedly tried to assure staff that any changes will not be disruptive to their work lives. The roadmap calls for an increase in staffing to support higher levels of lending. A bank “with an evolved Mission will require increased staffing and budget resources to deliver high-quality operations with concrete country, regional, and global development outcomes,” the roadmap said. Malpass had previously spelled out some of his plans in a note to staff in November. And in an interview with Devex just before the conference of parties COP 27, he insisted he embraced the calls for reform. He is under pressure to move quickly, with a Treasury official saying the need to enact significant changes is “unequivocally clear.” Yellen had even suggested the option of using more concessional finance to wean middle-income countries off coal, and recently the Group of Seven major economies has been supporting coal transition projects in South Africa, Indonesia, and Vietnam. Middle-income country syndrome In the roadmap, the bank said that middle-income countries are “instrumental to achieving progress on global challenges.” They also tend to have more private sector involvement, creating more opportunities for innovative finance like sustainable bonds and blended finance projects, which will let the bank leverage its role as a “trusted intermediary.” The roadmap includes a section questioning whether country income levels should be the sole criteria for concessional lending, proposing that vulnerability to climate shocks could be substitutes for poverty criteria. This lends itself to the option to create a new concessional fund that could be accessed by middle-income countries, which often end up unable to tap the cheapest loans from the development banks but often still face demands for high yields on capital markets, especially in the current interest-rate environment. Reform benchmarks over the coming 10 months include workshops with shareholders on the “three building blocks” of the reform, defined as the bank’s mission, operating model, and financial model. These will effectively be negotiating tables for the proposals. The bank will seek consensus on possible low-hanging fruit at the April meeting and then arrange another set of talks leading up to the Annual Meeting in October. Among the other options laid out in the document are “balance sheet optimization” — meaning unlocking more value from the current resources — and a “moderate reduction” to the minimum equity-to-loan ratio, a proxy measure for risk, which would “enhance the efficiency of capital utilization.” There have already been discussions with executive directors — the representatives of key countries — on more granular matters such as risk transfer and callable capital, along with other recommendations made in a report by a set of experts to the Group of 20 leading industrial nations issued last year, which outlined five interconnected ideas to increase lending across all the major development banks. Moving the money around Sources told Devex that some Western shareholders might be concerned that a capital increase would change the power structure at the bank — possibly giving China more sway. The roadmap includes a nod to the idea of a capital increase using non-voting capital, which would not lead to any changes in the breakdown of power on the bank’s board. The U.S. is the bank’s largest supporter and shareholder, followed by Japan, and then China, with Germany and the United Kingdom taking the next spots. In the document, the bank’s management also considers the option of having shareholders increase support for the International Development Association, or IDA, fund, which is the pot of money used for the world’s lowest-income nations. Typically, it is replenished every three years. One source familiar with the matter said this would reduce the need for the bank itself — known internally as the IBRD — to support IDA giving the institution’s core wing more money to lend to middle-income countries. The political aspect is that this would cut down on the need for a capital increase. The bank management has argued that donor support to IDA has been flat in the last replenishment rounds and that shareholders need to step up to help the fund if they are pushing the lender to support more countries. Overall, across its operations and branches, the lender says that “World Bank support is set to decline starting in” the fiscal year 2024. The document notes that in addition to IBRD and IDA, the bank’s private sector wing, the International Finance Corporation, and its Multilateral Investment Guarantee Agency, which provides political risk guarantees, would also need more support.