Presentation by Dexter Whitfield, European Services Strategy Unit, to meeting ‘Rethinking Private Financing of Scottish Public Projects’ at the Scottish Parliament on 29 January 2020, organised by Jubilee Scotland and chaired by Neil Findlay, MSP.

I welcome the refreshing straight-talking report on NDP and hub PPP contracts from Audit Scotland this week. I strongly recommend that the Scottish Parliament, local authorities and public bodies immediately adopt six strategies for public infrastructure projects in Scotland.

1 – Increase direct public investment in public infrastructure and stop all planned Mutual Investment Model projects

The Government should take the opportunity to increase direct public investment in infrastructure in the current period of low interest rates.

Planned MIM projects and those that have been approved with options appraisal and business cases, but yet not commenced the start of the contractual procurement process, should be stopped. The Scottish Government should support the local authorities and public bodies in arranging direct public investment for these projects.

The Mutual Investment Model (MIM) allows the public sector to invest up to 20% of the risk capital in project companies and to meet the private investment classification (off public sector balance sheet). However, the public sector, in effect, becomes a commercial partner with the private sector in sharing all the risks and rewards. This significantly deepens the degree of privatisation, extends the scope of secondary market trading in PPP equity and the takeover or merger of infrastructure funds (Whitfield 2016 and 2017b).

2 – Scotland should adopt a new public design/finance and operate model

This would have three objectives, to integrate the design and construction process, to reduce the cost of construction and to minimise the risk of delays. Two examples illustrate how these objectives can be achieved.

The UK’s Integrated Project Insurance (IPI) offers a guaranteed maximum price and protection against defects underwritten by insurance. A project alliance is formed with a Gain/Pain Share agreement under IPI in which all members of the project Alliance share in risk and reward. It was recently successfully piloted at Dudley College. The target outturn construction cost of £9.83m was agreed and exceeded by only 1.8%. The client share of the additional cost was only 0.34% of the target cost. The building was ready for occupation as planned at the start of the 2017/18 academic year.

Construction Management At Risk (CMAR) has been widely used in many US states for public building, transportation and utility projects. The client selects an architect who commences the design and later selects the construction manager/contractor, based on qualifications and track record, before the design stage is completed. The architect and construction manager work together in the final stage of the design process. The construction manager/contractor gives the client a guaranteed maximum price and coordinates all the subcontracted work. This process strengthens coordination, enhances transparency, delivers efficiencies and minimises delays (Whitfield, 2020).

3 – Local authorities and public bodies should intensify the monitoring of PPPs to identify defaults and poor performance.

Monitoring of PPP projects has often been inadequate due to inadequate monitoring staffing levels being included in business cases and contracts and over-reliance on self-monitoring by the private sector. Local authorities should now intensify contract monitoring focusing on all aspects of the quality of performance and other contractual requirements. This information should be reported to relevant committees and publicly disclosed.

Local authorities should also establish contract reviews where defaults and poor performance have been significant or systemic. They should draw on evidence from service users, community and tenants organisations and trade unions. There remains considerable scope for local authorities and public bodies to consider terminating operational PPP service contracts and return provision in-house. Where defaults and poor performance are evidenced and remain after the issue of contractual warnings by the authority, termination without compensation is a viable and legal option. In some cases a contractor has withdrawn from a contract on technical or operational grounds. There have been 27 PPP contract terminations and 12 buyouts in the UK to date (Whitfield, 2020).

4 – Establish a comprehensive and rigorous Economic, Social, Equality and Environmental Cost Benefit Analysis methodology

This should be mandatory for all infrastructure projects in Scotland. The Scottish Government should also require comprehensive and rigorous impact assessments to identify the positive and negative economic, employment, equality and environmental consequences of projects and to identify where and what form of mitigation action is required.

The quality of impact assessment is reliant on assessment of the impact on inputs, processes, outputs, equity and outcomes to establish cause and effect and the use of a counterfactual (the situation that would exist if the project did not proceed). Furthermore, employment impacts must include a full analysis of current jobs, terms and conditions, health and safety and equality practices and planned changes.

5 – The Scottish Parliament and local authorities should oppose the sale of equity in PPPs

The average annual rate of return on the sale of equity in PPP projects was 28.7% (based on a significant data sample) at the end of 2016 with acquisition mainly by offshore infrastructure funds in tax havens (Whitfield, 2017b). This evidence is in sharp contrast with the expected 12%-15% rate of return contained in PPP business cases or contract documentation.

The scale of equity transactions and offshoring to tax havens is very significant. “A total of 87.5% of Scotland’s PFI/PPP education projects (280 out of 320 schools) are currently partly or wholly owned by offshore tax haven funds. Nearly half the schools had 100% of their equity owned offshore” (Table 11, Whitfield, 2016). The NDP and MIM models in effect lock-in and legitimate public sector investment in PPP projects and the secondary market.

Whilst the sale of equity is legally permissible, there is a very strong case that it should be opposed on political economy and ethical grounds.

6 – Challenge the trend of Scottish pension fund investment in PPPs

There are direct links between Scottish public sector pension fund investments, offshore tax havens and shares in NPD and hub companies. At least four Scottish pension funds have investments in offshore infrastructure funds with stakes in NPD and hub projects. Glasgow City Council, on behalf of Strathclyde Pension Fund, has had a £30m investment in the Equitix Fund IV LP since 2016 which was extended by further £50m investment in the Equitix Fund V LP, managed by Equitix GP 5 Limited (Guernsey).

Edinburgh City Council, on behalf of Lothian Pension Fund and Lothian Buses Pension Fund and the Falkirk Council Pension Fund have investments in the Equitix Fund II LP. Equitix Ltd is one of the largest UK PPP companies and although a registered UK company it is owned by Tetragon Financial Group Limited and registered offshore in Guernsey (Whitfield, 2018).

The targeted 10% annual rate of return of these investments is not in the public interest because it ramps up the cost of public infrastructure. Likewise, public sector investments in NDP and MIM projects feed potential gains in the secondary market which may only cover the cost of risky investment in other PPP projects.

I believe these policies are essential in developing a genuine public alternative to PPPs in Scotland.

References

Whitfield, D. (2016) The financial commodification of public infrastructure: The growth of offshore PFI/PPP

secondary market infrastructure funds, ESSU Research Report No. 8,

https://www.european-services-strategy.org.uk/wp-content/uploads/2017/01/financial-commodification-public-infrastructure.pdf

Whitfield, D. (2017a) PFI/PPP Buyouts, Bailouts, Terminations and Major Problem Contracts, ESSU Research

Report No. 9,

https://www.european-services-strategy.org.uk/wp-content/uploads/2017/02/pfi-ppp-buyouts-bailouts-and-terminations.pdf

Whitfield, D. (2017b) PPP profiteering and Offshoring: New Evidence, PPP Equity Database 1998-2016 (UK), ESSU Research Report No.10,

https://www.european-services-strategy.org.uk/wp-content/uploads/2017/10/PPP-profiteering-Offshoring-New-Evidence.pdf

Whitfield, D. (2018) Ownership and Offshoring of NPD and Hub Projects: Scottish Futures Trust, May,
https://www.european-services-strategy.org.uk/wp-content/uploads/2018/06/SFT-Offshoring-report.pdf

Whitfield, D, (2020) Public Alternative to the Privatisation of Life, Spokesman Books, Nottingham.

Spread the word...

The post Dexter Whitfield recommends that Holyrood stops all MIM projects appeared first on Jubilee Scotland.

1. The Scottish Government launched its White Paper ‘Scotland’s Future’ on the 26th November. In this, debt relief is highlighted as a priority for international development, with the statement: “The Scottish Government will give careful consideration to the question of ‘unjust’ debts; will work to ensure that Scottish export politics do not create new unjust debts; and support moves to establish Scotland as an international centre for debt arbitration.” While remaining neutral on the issue of Scottish independence, Jubilee Scotland is welcoming the Government’s recognition of sovereign debt as a key issue for Scotland’s international development policy. This is a great campaign success. It is recognised however that in either scenario following the referendum Jubilee Scotland’s work must continue to ensure unjust debts are given full consideration through an audit of Scottish and UK debts and a commitment made to cancel all those deemed to be unjust. Jubilee Scotland’s paper outlining their asks for debt justice in both a yes and no vote, and responses by the Yes Scotland and Better Together campaigns can be found here. The Scottish Government’s commitment appears in chapter 6 of the white paper.
2. Egypt has been revealed to be the most indebted country in the Middle East and Africa, seventh in the World. (Argentina remains in first place globally as the country least likely to be able to pay its debts.) Egypt’s debts now make up 79.8 percent of its GDP, totalling $234.4 billion which is the equivalent of $2600 for every Egyptian citizen. The likelihood of Egypt being unable to pay its debts has now risen to 37.9 percent. Egypt is a key case for Scotland and the UK with many debts owed by the country being to UK Export Finance for loans made during the Mubarak regime and for arms. Meanwhile, Kuwait plans to buy $2 billion of Egyptian bonds as part of a second aid package having already pledged $15 billion in aid alongside Saudi Arabia and the United Arab Emirates earlier this year. Read more on Egypt’s debts here.
3. Grenada is making plans to lower its income tax threshold on the recommendations of the International Monetary Fund (IMF) and as part of its debt restructuring programme. Grenada is currently seeking to hold a conference with all of its creditors to come to a mutual agreement about how to meet its debt obligations.
4. The IMF Fiscal Monitor Report estimates that Pakistan requires $76.9 billion, the equivalent of 30 percent of its yearly GDP to pay off its existing debts. This places it at the top of the of the list of indebted emerging countries and suggests it is going to find itself borrowing more in order to meet its repayments.
5. Several developing countries, including Jamaica, El Salvador and Pakistan, are failing to meet international development goals after rich countries reneged on a pledge to deal with their debts. Moreover, unjust debts in countries such as Greece, Portugal and Latvia are now increasing poverty at an alarming rate. These findings are part of Jubilee Debt Campaign’s ‘Life and debt: Global studies of debt and resistance’, published in October 2013. The report compares debt crises in nine countries: Egypt, El Salvador, Greece, Jamaica, Latvia, Pakistan, the Philippines, Portugal and Tunisia. Key findings include:
   • Jamaica pays more on its foreign debt repayments than Greece at a staggering 33 percent of its revenue.
   • Greece is spending 29 percent on its revenue on debt repayments.
   • El Salvador continues to spend 25% of government revenue on foreign debt payments, the debt originating from lending by the western world to the vicious military junta in the 1980s, whilst hunger and extreme poverty are increasing.
   • Pakistan is unlikely to be able to meet many of the Millennium Development Goals because of its debts, including those aiming to halve the proportion of people going hungry, eliminating gender disparity at all levels of education, and reducing by two-thirds the child mortality rate.

   The report also gives inspiring examples of the campaigns in countries for debt justice, for example calls in Tunisia for a debt audit.

6. At the Commonwealth Heads of Government Meeting in Colombo, Sri Lanka, 15-17th November 2013, on the issue of debt it was minuted that: ‘Heads welcomed the report of the Commonwealth High Level Mission on the debt and financing challenges of Small States. Heads emphasised the need to continue advancing global awareness of unsustainable Small States’ debt and the accompanying financial challenges they confront, building on the Mission’s recent work. They endorsed the recommendations of the Mission’s Report, underlining the importance of continued collaboration within the international community to address these debt and financing challenges and to build small states’ resilience as well as continued engagement on innovative solutions such as the Mission’s proposals for debt reduction and the inclusion of a vulnerability criterion in debt alleviation interventions and allocation procedures of international financial institutions. Heads reaffirmed their support for the Commonwealth Secretariat’s current debt management and recording work.’ It is reassuring to see sovereign debt maintaining a place on the agenda of the Commonwealth Heads of Government. The report to which they refer includes recommendations on the need for integration of resilience building of small states, provision of grace periods for debt repayment during times of natural disasters or other external shocks and provision of countercyclical loans. Whilst these are valuable contributions to the pursuit of debt justice, Jubilee Scotland believes these efforts must go further if they are to tackle the unjust economic systems which support existing lending and borrowing principles. Equally, more attention must be paid to the concept of ‘unjust debt’ and its necessary cancellation.
7. The IMF wants Sri Lanka to boost its tax revenues to cut both its budget deficit and public debts, a further demonstration of the IMF seeking to impose its economic policies on developing countries. Read the full story here.
8. Qatar has agreed to provide $150 million in debt relief to Palestine. This was announced by US Secretary of State John Kerry during Israeli-Palestinian peace talks in October although no further details were provided.
9. A new Eurodad report, ‘The new debt vulnerabilities. 10 reasons why the debt crisis is not over’ was published in November 2013. It finds that debt vulnerabilities have changed, but overall have not been substantially reduced. The number of bank failures has dropped since the height of the financial crisis which is good news. However, the downside is that governments have paid a high price to stabilise the financial sector, and sovereign debt levels have surged. It states that: Debt has not been canceled or paid off, it has simply been shifted from one balance sheet to another, and primarily from the private purse to public or government coffers. The opportunity to use the financial crisis for fundamental reforms in nation and international debt management and debt crises prevention and resolution has largely been wasted. To read a summary of the report and its recommendations as well as download a copy you can visit the Eurodad website.
10. A Bank of England report has criticised existing methods of dealing with sovereign debt crisis. Referring to bailouts in Greece, Ireland, Portugal and Cyprus, the authors say using public money to bail out nations leaves taxpayers shouldering an “inequitable” burden. They suggest that private creditors, those who lent indebted nations the cash in the first place, should instead foot the bill for any rescue. Whilst acknowledging that current trends in ad hoc bailouts in response to debt crises are poor, the report pays no attention to considering alternative longer-term solutions to debt workout upon which Jubilee Scotland campaigns. It maintains a commitment to bailouts and simply shifts emphasis from public to private rescue plans. Note: in a disclaimer the report states that the views are not necessarily the official view of the Bank of England, rather the authors of the paper.
11. US American Brooking Institution recently published a new paper on sovereign debt restructuring entitled ‘Revisiting Sovereign Bankruptcy’. It highlights creditors’ role in irresponsible lending, a positive statement in shifting focus away from placing blame on debtor countries for their debt burden. It also promotes the contribution of stakeholders, including NGOs and civil society, in discussions of debt restructuring. Jubilee Scotland welcomes these commitments. On the downside, however, there are only very weak proposals for a reformed scheme. Whilst understanding the need a statutory insolvency framework for sovereign states – a system through which debts can be restructured – rather than presenting alternative ways in which this can be done they point largely only to a wide range of challenges which are presented. Read a full account written by Jürgen Kaiser of Erlassjahr, a Eurodad member and a partner organisation of Jubilee Scotland.

Spread the word...

The post Debt around the world – winter 2013 appeared first on Jubilee Scotland.

If Malawi had received its debt relief with no hidden reductions and cuts, it would have had $101 million extra per annum free in its budget (the UK, in comparison, gave $180 million in 2006: SID, table 16.2). What it has really had is less impressive even than this. At best Malawi’s debt relief amounts to nothing more than a marginal adjustment to its domestic debt interest bill; at worst it amounts to less than nothing.

In September 2006 Malawi completed the Heavily Indebted Poor Countries process. Goodall Gondwe set out his intention to use the money saved specifically for the benefit of the poor. “Mr Speaker, Sir, and Honourable Members”, he stated, “during the budget review in March, it was proposed to spend these debt relief resources on those social activities that would benefit the poorer segment of the population.” (2007/8 Budget Statement, para. 48 – link now broken.)

But this appears to be impossible, since the terms and conditions of the debt relief Malawi received actually reduce the amount of money available for “the poorer segment”.

Gondwe’s 2007/8 Budget Speech explains that the overall debt stock was reduced from $3.0 billion to $0.5 billion, leading to saving in interest and capital repayments of $101 million in 2007/8; however, Malawi had been receiving $36 million per annum since the year 2000 in interim debt relief; so extra value provided by debt relief in 2006 was around $65 million per annum

However, a large proportion of this new debt relief money was provided under the terms of the deal agreed at the G8 Summit in Scotland in 2005: and under these terms, countries receiving debt relief also get a cut-back in the amount of development loans they receive from the World Bank. One of the terms of the debt relief deal for Malawi was that its World Bank funding would be reduced by $27 million per annum (this is, apparently, because the US won out over the UK during the 2005 G8 Summit debt relief negotiations: download article here). Now, the World Bank provides money to Malawi, it says, specifically to help with reducing poverty; given this, it seems fair to say that this $27 million per annum reduction is money that would have been, and now is not, available to benefit the “poorer segment”.

Malawi has – or had, in 2006 – huge domestic debts; this is because the government under Muluzi shored up its budgets by borrowing large amounts from Malawian and Malawi-resident businesses. An agreement was made with the IMF that a large proportion of the money saved through getting debt relief in 2006 would be directed towards reducing domestic debt. This agreement, set out in the 2006 Article IV Consultation(para. 22) ringfences $26 million per annum for the Malawian budget, and directs the the remainder to reducing domestic debt.

This means that only $26 million per annum is available for spending specifically on projects that benefit “the poorer segment of the population”. But we have already seen that the World Bank is reducing the money available for reducing poverty by $27 million per annum So Malawi had less, not more, money available for spending against poverty as a result of getting debt relief.

Certainly, by reducing domestic debt, the Malawi government will have a lower domestic debt interest bill to pay, and this will improve its financial situation overall. The IMF Article IV consultation says it will reduce domestic debt by 1.4% GDP; I have not tried to calculate the significance of this for the annual domestic debt interest bill. However, the claim made by governments and NGOs alike, was that debt relief money would go directly to pro-poor spending. “The debt relief to be provided as a result of reaching completion point will provide a great push to Malawi’s poverty reduction efforts”, said Michael Baxter, World Bank country director for Malawi.

This is a tremendous overstatement. If Malawi had received debt relief without these underlying conditions, it would have made less difference than an ungenerous donor. As it is, the debt relief will result in less money available specifically for “pro-poor” spending, but with some circumstantial reduction in the pressure of the domestic debt interest bill.

Debt relief is a noble cause: but delivered in this form it is vitiated.

Jubilee Scotland

Spread the word...

The post Malawi’s debt relief enigma appeared first on Jubilee Scotland.

‘Odious debt’ is a concept which enjoys some international credibility, but not nearly enough! Put simply, it is based on the idea that, if a dictator takes out loans for violent, abusive or simply frivolous purposes, his people should not be required to pay back the debt after he has gone. Every victory of debt-cancellation on this basis – and there are many such campaigns all over the world – strengthens this important doctrine.

Why is there any need for this? What was wrong with campaigning for debt cancellation solely on the basis of a country’s poverty? Here are a couple of reasons to be going along with, although there are plenty more.

Firstly, the existing debt-cancellation mechanisms demand that a country be branded as a ‘Heavily Indebted Poor Country’ before it qualifies for debt relief. It is obvious why this is demeaning.

Secondly, if debt cancellation is enacted on the basis of bad lending, it turns the spotlight back on the lender, and perhaps makes them think twice about dealing with dictators in the future.

This is a global movement within which Jubilee Scotland plays a small part. Jubilee USA are campaigning, for example, on cancelling the debts extended to Haiti’s infamous Duvalier regime, the European anti-debt coalition EURODAD is working to get government’s to sign a declaration of responsible lending, while the Norwegian government has already cancelled its debts to Ecuador and other countries on the grounds of illegitimacy.

More to follow…

Spread the word...

The post January Campaign Update on Indonesia appeared first on Jubilee Scotland.

At about 2.30pm, several thousand people dressed in black emerged from the ranks of the eighty-thousand peaceful demonstrators and marched at the police. Clashes started shortly afterwards. The police’s initial charges were limited, and did not disperse the group in black – though they did send panicking bystanders fleeing into the festival area that had been agreed as a no-conflict zone. After several hours, as crowds restricted access by fire engines to a burning car, heavy anti-riot machines were brought in and five hundred injuries from tear gas ensured, with two hundred arrests and injuries to twenty police (according to reports).

I don’t think that the violent protesters on Saturday had a thought-out political programme (whereas the peaceful summit blockaders do – and they are being injured and arrested in large numbers, possibly as a result of tougher policing following Saturday’s violence). However, their actions lent the Summit a needed air of crisis. For as regards the intermeshed causes of global poverty, the only thing in question at the Summit is what margin of backsliding will be countenanced. This G8 is a theatre of sterile debate: 2005’s categorical pledges to end global poverty have been broken down – as they always are – into incomprehensible technical formulae, which consume the intellectual energy that should be spent on making a just world.

For background information, and pictures, see Jubilee Scotland’s website.

Debt and poverty: the trends and debates.

Level of reduction

The G8’s debt deal has been implemented for twenty-two countries. This has reduced the net debts of these countries from US$34.7 billion to US$15.4 billion (calculated by Eurodad using World Bank figures: see Eurodad p.6). Of these twenty-two, the eighteen in Sub Saharan Africa have had debts reduced from US$26.3 billion to US$9.3 billion.

Meanwhile:

The World Bank offsets the costs of this debt cancellation by reducing the loans it makes to the countries in question (see “World Bank Debt Relief – TOTAL scam“, and “Disappearing Debt Relief“).

The crucial question for us is: by how much are countries’ monthly debt repayments being reduced? The IMF’s recent State of Implementation for HIPC (PDF here) report shows that, due to new borrowing, the debt service is not reducing by very much at all. It looks like it is down by about a fifth (18%) (p.10, fig.4).

How can it be that the overall debts are being reduced by over half, but the debt service reduces only by a fifth? One reason is that countries are taking on new loans. The IMF says that countries will have to show “strengthened management of both external and domestic debt” to avoid falling back into unsustainable debt. That is, it blames the countries themselves for their debt problems. But, arguably, the root problem of debt was not poor financial management: it was the structurally unfair trade that prevents the poorest negotiating a fair price for their exports. The fact that countries are having to take on new loans to survive suggests that the structural problems are unresolved. There will always be those, however, who want to present the African finance ministers as feckless or venal. Another reason may be that the loans being cancelled were not really being serviced anyway, or that there were other debts that were not being serviced which were serviced using the relief (this certainly happened in Zambia), such that the debt cancellation was on paper only.

However, some judge the debt cancellation a success, because what definitely is reducing is the ratio between debt service and export earnings. This is down by over half (p.10, fig.4). The very poor countries are making more from exports, and so are judged by able to pay off their debts.

The IMF reports that poverty reducing expenditures have increased from 7% of GDP to 10% of GDP in the poorest, most indebted countries, since 1999; however, the definition of what counts as a poverty reducing expenditure has also been expanding over that period, so the actual increase may be lower. An alternative World Bank report says there is an increase in education spending, and a very slight increase in health spending, in the poorest countries (p.12 nt.16).

A fair summary of the present situation, then, could be that the G8 has done very little to solve the problem of debt, and that the high primary goods prices caused by China’s growth are providing a temporary respite to Africa’s problems.

Spread the word...

The post G8 in Rostock: The State of Debt appeared first on Jubilee Scotland.

Officially, Zambia is receiving a reduction in debt service equal to 5.3% of its GDP, annually, over the next few years; but according to McKinley and Weeks the new money available for anti-poverty spending is only 0.8% of GDP.  Where’s the rest?

1. Redirection of G8 debt relief to private debts

According to Weeks and McKinley, over half of the funds accruing to Zambia by way of debt relief are redirected to pay other debts.

Given that the Bank of Zambia faced large debt service obligations, whose non-payment could have resulted in a curtailment of non-HIPC donor assistance, [some of the] HIPC interim debt service relief accruing to the Bank of Zambia was designated for debt service payments.  [IMF 2005]

Thus, according to McKinley and Weeks, “over half of HIPC interim debt relief (3.1 out of 5.7 percentage points) was merely an accounting entry.”

The debts to be serviced by this redirection of HIPC money are likely to be private sector debts – possibly government bonds bought by domestic businesses, possibly commercial banks in donor (G8) countries.  If so, banks are benefitting from money supposedly given to the poor.  Note that the figures given above are for interim HIPC relief; the figures for relief at completion point are lower (see section 3, below), but still considerable.

2. Tighter public spending limits

One of the conditions Zambia had to meet for debt relief was a reduction in its fiscal deficit: public overspending was to be reduced from 3.9% of GDP (2000-2004) to 0.6% of GDP (2006 onwards) (p. 11, table four).  Unless these savings are found by cutting budgets which have nothing to do with human development, the consequences will be felt by the poor.

3. Reduction in grants and other loans

As pointed out previously, the World Bank reduces the amount of aid available to heavily indebted countries in order to offset the cost of debt cancellation.  According to EURODAD, Zambia will receive debt service reduction of $38 million in financial year 07-08; but it will have its loans from the World Bank’s International Development Association reduced by about $31 million (pdf of report here; table 4; loans reduction calculated by subtracting column three from column two, or column four from column one).  Net benefit to Zambia of G8 deal is thus $7 million a year.

McKinley and Weeks calculate the reduction in grants, plus the accounting entries described above, to total 3.0% of GDP.  In summary (paraphrasing p.11):

The G8 debt deal ought to reduce Zambia’s debt service by 6.9% of GDP.  Better terms of trade also improves things by 0.2% of GDP.  Total improvement in Zambia’s finances ought to be 7.1% of GDP (as it stood in 2005).

However:

Redirection of debt relief to commercial debt service, plus reduction in grants, reduces this by 3.0. Tighter deficit limits reduces it by 3.3.

So:

Real benefit to Zambia of G8 Debt Deal is: 0.8% of GDP.

However…

The use of debt relief to service commercial debts looks like a naked transfer of aid money to the private sector, but it’s possible that the IMF is doing Zambia a favour by allowing this.  Officially, countries are meant to clear debt arrears before they can receive HIPC relief; this redirection of interim relief might have been a way for Zambia to meet that criteria and so qualify for completion point.  This needs further investigation.

On the face of it, though, it seems the conditions attached to debt relief have the effect of making virtually all the money disappear.  If the analysis is right – and if, as seems possible, what holds for Zambia also holds generally – we can expect very little improvement over the next few years, and the lack of improvement might well be used to discredit the idea of debt relief itself. 

But if the situation really is as McKinley and Weeks describe, debt relief is not at fault: the fault lies with the conditions under which it is disbursed.

Spread the word...

The post Disappearing debt relief appeared first on Jubilee Scotland.

The G8’s debt deal seems to work like this: the financial flows out of the country represented by debt service payments are cut, and at the same time there is a cut in the financial flows into the country represented by World Bank development aid. Result: countries find themselves in pretty much (not quite, but pretty much) the same situation they were in in the first place. They are paying less debt service and receiving less aid.

I would love to hear from people who think I’ve got this wrong – particularly if you work at the Bank and worked on the deal. As, if it’s not wrong, the G8 Debt Deal (the “Multilateral Debt Relief Initiative” or MDRI) is a near-total scam.

Not a total scam, though, for at least three reasons. For one thing, the IMF (International Monetary Fund) has cancelled its share of the debts of (pretty much) those nineteen countries. This happened in January, and doesn’t seem to have the same caveats as the World Bank proposal. But the IMF’s debt only amounted about 10% of the debt cancellation package agreed by (actually: prior to) the G8 in Gleneagles.

Second, the World Bank is generally upping its aid to the countries that are supported by the IDA (International Development Association), so even after their aid is cut to offset the debt cancellation, they will be in a better situation than before. Only not much better. According to a report from EURODAD (based on report from Debt Relief International here) the net benefit of the World Bank’s part of the debt deal ranges between $53 million a year to $1 million a year (mean benefit about $13 million), with the money being awarded according to what the World Bank thinks of national social and economic policy. Big winners are Ethiopia ($53m), Tanzania ($39m) and Uganda ($27m); little winners are Guyana ($1m), Bolivia ($4m), Niger ($5m). These are the figures which – as far as I can tell – represent the true value of the G8 Debt Deal.

Third, because the debt cancellation, even if offset by a cut in development aid, might leave the governments of the countries in question in a better position to respect their own internal democratic processes in setting economic and development policy. Last week Susan George came to Edinburgh (where I’m writing this) and spoke at the Scottish Parliament. Debt, she says, is power: the creditors have great influence over economic policy in the developing countries. For someone who takes this view (as I do), the G8 debt cancellation ought to be welcome since it might make a political difference even if the financial difference is small. But in the present case, the debt cancellation is only available to countries that have already satisfied the IMF that they will adopt and pursue strong programmes of adjustment and reform – to countries, it seems, that have already had the power exercised over them.

The World Bank debt deal has had a lot of publicity: Reuters/ABC tells us, for example, that $2.7 billion of cancellation has been granted to Zambia. Wonderful! And what’s the overall benefit to them this year? errr… $7 million (according to EURODAD).

I am very cynical about cynicism: it can be very superficially attractive (think only of Han Solo), and it’s a great way to make oneself look more clever than one actually is: but generally speaking it’s a rocky road. This isn’t meant to be cynical; it’s mean to be sceptical. If anyone thinks I am missing something, if there’s a substantial reason why this debt deal really is to be welcomed, I’d like to hear it.

Ben at Jubilee Scotland

Spread the word...

The post World Bank Debt Cancellation – a TOTAL scam? appeared first on Jubilee Scotland.