By Benedicte Bull , Alf Morten Jerve and Erlend Sigvaldsen With inputs from

1. The World Bank’s and the IMF’s use of Conditionality to Encourage Privatization and LiberalizationCurrent Issues and Practices ByBenedicte Bull, Alf Morten Jerve and Erlend Sigvaldsen With inputs from Hege Gullie, K.A.S. Murshid, Pamela Rebelo and Oliver Saasa,

2. Background • The Soria Moria Declaration (political platform for the current Norwegian coalition government): • “Norwegian aid shall not support programs that are made conditional on liberalization and privatization” (p.10) • Reforms in the World Bank • Good practice principles (GPPs) (Ownership, Coordination, Tailoring to circumstances, Criticality, Transparency) and recent reviews of practice. • Reforms in the IMF • 2002 guidelines (Ownership, Parsimony, Clarity, Coordination, Tailoring) and recent reviews of practice. • Persistent NGO critique of use of policy conditionality

3. Mandate • Conclude about the extent to which the World Bank and the IMF in recent years have put pressure on governments to introduce policies of privatization and liberalization through the use of conditionalities. • Conclude about the extent to which the World Bank and the IMF have followed the principles set for themselves in their most recent guidelines. • The report makes no attempt to assess the soundness of privatization and liberalization policies, or their consequences. • Limitations: • Short time passed since new guidelines were introduced. • Time and capacity of team: • Team identified, consultants hired and study finalized between August and November.

4. The Study • Clarification of concepts • Review of existing recent studies: • World Bank/IMF studies • NGO studies • Studies by independent academics • Studies by other international organizations • Case studies conducted in four countries • A brief desk review of 40 recent PRGF supported programs. • Review of change in policy and practice in three sectors: utilities (water and energy), social sectors (health and education), trade.

5. Clarification of Concepts • Conditionalities: • Specific, pre-determined requirements that directly or indirectly enter into a donor's decision to approve or continue to finance a loan or grant. • We employ this definition with no preconceived notion on whether “conditionality” means that it is “imposed” or whether a high number of conditionalities is “good” or “bad”. • Privatization: • The partial or total transfer of property or responsibility from the public sector (government) to the private sector (business) or private persons. • Liberalization: • Any relaxation of previous government restrictions, in areas of social or economic policy or political organization. Focus here on economic liberalization: trade liberalization, price liberalization and the lifting of monopolies.

6. The “New Conditionality Debate” • Have IMF/World Bank practices changed? Has the number of conditionalities declined? • Has the policy content changed? Is there a move away from privatization and liberalization? • To what extent are the programs perceived as “owned” by national government and stakeholders? • Do the programs adequately reflect national development plans? • Have the processes of elaborating these plans been inclusive? • Have national governments been given sufficient policy space in the elaboration of plans?

7. Disputes in the literature • The number of conditionalities: • World Bank: significant decline in the number of conditionalities • IMF: decline in the use of some types of conditionalities, no decline in others • NGOs: rise in the number of conditionalities. • Disagreement between NGOs and the World Bank partly due to different definitions of conditionalities. • Substantial issues arise from the presumption of imposition and equation of high number of conditionalities with a high degree of IFI influence.

8. Disputes in the literature • The content of conditionalities: • World Bank: shift away from privatization/liberalization towards institutional issues, governance and “improvement of business climate”. • IMF: shift away from “micro” reforms (e.g., privatization) towards debt and financial management. Increased focus on “core” IMF concerns. • NGOs: Still strong focus on liberalization and privatization in policy advice and conditionalities. • The issue of ownership: • World Bank: Strong improvements in “ownership”. Rejects that pressure is exerted. • IMF: Report improvements and ownership and in giving the borrowing members “policy space”. But admits weaknesses in the way PRGF reflect PRSPs, and in participatory processes on macro-economic issues. • NGOs: Criticize the World Bank’s definition of ownership. Claim lack of policy space and continued imposition.

9. A Desk Review of Recent PRGFs • Review of 40 PRGF supported programs signed between 2002 and 2006. • Privatization conditionality in 23 of 40 programs. Detailed description of privatization policies in another 10 “Letters of intent”. • Liberalization conditionality in 11 of 40 programs. Few conditionalities on trade liberalization. • Great variation in the number of conditionalities across cases (from 1 to 29). • Some variation across regions (privatization conditionality less predominant in African PRGF supported programs, most in those of Central and Eastern European counties). • No indication of a changing trend: no significant variation across time. • Limitation: • Says nothing about process or ”imposition”.

10. Sector Review • Utilities (water and energy) • Recognition of significant flaws in earlier strategies. • Less focus on privatization, more on institutional issues, establishment of regulatory framework. • Recognition of the need for special solutions to water issues. • Social sectors (health and education) • World Bank moved away from user fees in basic health and education • A general move towards less hard fronts in the general debate about user fees. • Trade • World Bank and IMF still advocate trade liberalization. • World Bank: Focus on “behind the border” measures and poverty consequences of liberalization, pragmatic on regional trade agreements (RTAs), supports multilateral negotiations. • IMF: Trade liberalization part of its mandate, more “orthodox” in policy recommendations (e.g., RTAs versus unilateral liberalization), supports multilateral negotiations.

11. The Cases • Bangladesh • World Bank Development Support Credit III, emphasis on energy reform; • Mozambique • World Bank Energy Reform and Access Project emphasis on privatization of electricity; • Zambia • IMF Poverty Reduction and Growth Facility supported program, emphasis on privatization of ZESCO (electricity) and ZNCB (bank); • Uganda • World Bank Poverty Reduction Strategy Credit 5.

12. Have the World Bank/IMF programs included privatization/liberalization conditionality? • Yes, in three of four cases. • But: • Many of these kinds of conditionalities in new programs are “left-overs” from older programs, or have been agreed well before the agreement was signed. • Often good reasons for encouraging privatization. • In no case have conditionalities been an efficient way of ensuring policy change. • Conditionalities not the most important way of influencing policy.

13. What Has Been the role of the World Bank/IMF in encouraging policy change? • Zambia • The IFIs are reported to have used conditionalities to pressure for the adoption and implementation of policies to privatize state owned banks and utilities. • Mozambique • The World Bank was the main proponent of privatization in the energy sector, but when government priorities shifted away from privatization, the WB accepted it. • Bangladesh • The privatization of parts of the energy sector in line governmental priorities and earlier reviews of the sector. WB viewed as having been deeply involved in the elaboration of these reviews and in setting the agenda for reforms. • Uganda • Privatization and liberalization not important elements in current reforms and all PRSC conditionalities are jointly decided by the government and donors.

14. Is There Real Ownership to the Programs? • The programs adequately reflect government priorities set out in national development plans. • Civil society has been consulted in the majority of the cases, but the quality of the participatory processes is questioned in some of them. • Parliament seems to play a marginal role in the elaboration of economic policy. • Significant use of external consultants reduces customization to local circumstances and impedes ownership. • Lack of policy advice and assistance on elaborating alternative policies. • In some cases there have been internal differences within the government, and the IFIs have tried to establish alliances with the actors that share their opinions.

15. Has There Been a General Change of Practices? • Change in IFI practice noted in all the cases: • Greater inclusiveness • Greater openness and transparency • Greater flexibility • Greater donor harmonization • But also some critical comments • Donor harmonization means that donors can “gang up” against the government. • IFI flexibility questioned when used on conditionalities related to accountability and anti-corruption measures. • Local IFI representatives show little in-depth knowledge of the World Bank’s GPPs.

16. General Conclusions • Do the IFIs still use conditionalities to promote privatization and liberalization? • Privatization and liberalization are still included as conditionalities in World Bank and IMF loans, but are less common than before. • The policy advice given by the IMF and the World Bank on privatization and liberalization has changed; a clear trend towards greater pragmatism and focus on complementary policies, but changes not uniform across cases and sectors. • The IFIs exert considerable influence through providing policy advice, and have not generally elaborated alternative policies to those involving privatization and liberalization

17. General Conclusions (contd.) • Do the IFIs adhere to their own new guidelines? • Stronger emphasis of national “ownership” of the programs, but this is reduced by: • Weaknesses in participatory processes; • Extensive dependence on IFIs and foreign consultants in elaboration of policies, and lack of local input; • Lack of “policy space” and analysis of policy alternatives; and • Lack of unified view within the government, frequently used by IFIs to promote their own cause. • The IFIs are more flexible in enforcement of conditionalities. Sometimes bilateral donors and civil society demand less flexibility. • Donor coordination is strengthened, but this may reduce policy space and weaken borrowing member countries’ bargaining power.