February 7, 2002
 

Dear [World Bank Board Member]:

The Board of Executive Directors is scheduled to consider the PSD Strategy this month.  We urge you to postpone consideration of the Strategy until the institution consults with stakeholders about the ways in which the PSD Strategy relates to WTO talks.  We believe that the vital interests of borrowing country constituencies are at stake.

Specifically, we urge you to examine the ways in which the Strategy could expedite the application of existing or future trade rules to the basic service sectors (e.g., education, health, water, sanitation, power, transportation, public safety, libraries, and insurance).

If the rules of the WTO General Agreement on Trade in Services (GATS) apply to basic services, we believe that they would jeopardize access to such services, especially by poor and vulnerable populations.  This could be the case since the GATS rules (especially domestic regulation, market access and national treatment) would undermine the ability of developing countries to develop domestic regulatory capacity and, thus, handicap democratic processes.

Basic Services.

The PSD Strategy would (1) expose basic service sectors to the GATS trade rules, (2) compel the use of official development aid (ODA) to subsidize private service providers, (3) handicap the regulatory flexibility of developing nations, and (4) impede the bargaining position of developing nations in WTO negotiations.

1.  Expose basic service sectors to GATS trade rules. 

The PSD Strategy could virtually push developing countries into subjecting their basic services to GATS rules.  For instance, it encourages the provision of basic services on a commercial basis - that is, at a price covering the actual costs of supplying the basic service while also encouraging competition among service suppliers.  As the IFC facilitates greater private participation in IDA countries, basic services will increasingly be provided on a commercial basis.  And, if output-based aid (OBA) schemes proliferate, governments will delegate basic service provision to private (and NGO) providers under contracts that tie provision of financial support to the outputs or services delivered. In sum, the PSD Strategy promotes "commercial presence" in basic service sectors as stipulated by mode 3 of GATS.  Hence, government provision of basic services could be challenged.

Since January 2000, the negotiators to the General Agreement on Trade in Services  (GATS) have attempted to increase the number of service sectors that are opened up to various service providers (public, private, for profit, or non-profit).  Although WTO officials indicate that the agreement does not pertain to services provided "in the exercise of governmental authority," the GATS contains no universally agreed, unambiguous exclusion for public or non-profit basic services.  While a WTO panel has not yet ruled on the "governmental authority" exclusion, the European Court of Justice has taken a restrictive interpretation of this clause (called "official authority") in the EC Treaty.

Article 1:3 of the GATS agreement states that "a service supplied `in the exercise of governmental authority' means any service that is supplied "neither on a commercial basis, nor in competition with one or more service providers." The GATS provides no definition of these terms and there is no agreement, even within the WTO membership and secretariat.  This ambiguity opens many public services to a challenge before a dispute panel.

Once basic service sectors are subjected to GATS disciplines, the sectors would need to conform with rules on domestic regulation and, if the government so chooses, with the rules on market access and national treatment as well.

The affected sectors already include sewerage, solid waste, health care and education.  Some governments are making commitments to subject environmental services to GATS rules.  Hence, it is significant that the European Union is proposing that drinking water and solid waste be classified by GATS (along with sewerage, refuse and sanitation) as an "environmental service."  If the EU prevails, the water sector would be covered by GATS disciplines.  The WTO Secretariat has emphasized this point saying that, with regard to the core environmental services, sewage and refuse disposal, it does not seem to be completely clear how much falls within the scope of Article 1:3 (services supplied in the exercise of governmental authority) and Article XIII (government procurement) and how much is subject to the main GATS disciplines.

In the health and education sectors, the "governmental authority" exclusion may be limited to the cases wherein services are provided and funded directly through the government.

2.Compel the use of Official Development Aid (ODA) to subsidize private service provision.

If the national treatment rules of GATS apply to basic services, then a government could be accused of non-compliance with GATS if it subsidizes public services, but not private service providers.  If, on the other hand, subsidies were extended to for-profit providers, they could undermine the viability of the public service providers.  Either scenario points to the potential of the PSD Strategy to foster borrower dependency on fickle ODA subsidies for the provision of essential services into the indefinite future.

Although the United States Government is urging that half of IDA's resources be converted from loans to grants, it has NOT stated the intended uses of grant resources.  Some PSD Strategy documents (e.g., "Note on IDA13 and  PSD") suggest that grant flows, rather than concessional loans, should subsidize the cost of fees for poor consumers of basic services.

3.  Handicap the regulatory flexibility of developing nations.  

The PSD Strategy calls for the development of regulatory principles, particularly for infrastructure, in early 2002.   New regulatory principles should not prejudge the outcome of GATS negotiations that call for (but do not define) "least burdensome" obligation for domestic regulation of services. Hence, we urge the Bank to avoid developing principles relating to trade restrictiveness that would inappropriately limit government flexibility in negotiations.

While there are some sectors in which deregulation may unleash market growth and competition, governments should think twice about applying this logic to infrastructure and social sectors.  If developing countries are forced to develop their capacity under the constraints of a "least burdensome" mandate (as called for by GATS), then their capacity will necessarily be weaker in terms of legal clout and flexibility than the regulatory capacity of industrialized countries, which is NOT the least-burdensome approach to regulation.

To be accountable to citizens, governments must maintain regulatory flexibility.  Governments need to determine whether or to what extent to sacrifice regulatory flexibility in the GATS negotiations.  It is important to preserve the bargaining power of developing country governments and citizens in the process of negotiating the definition of what constitutes a "burdensome" regulatory regime under GATS rules.

4.  Impede the bargaining position of developing nations in WTO negotiations. 

There is no agreement about how governments that are negotiating trade agreements can receive "credits" for "voluntary" liberalization (including liberalization as a condition imposed by IMF and World Bank loan or grant instruments).

With respect to capacity development, the lesson of experience is that private provision of services cannot meet public interest tests unless the government has the capacity to address complex and difficult issues, especially in monopoly situations.  These issues range from ascertaining the cost of service provision by firms that can shift costs among operations, valuing dedicated investments, imputing interest rates, determining appropriate returns, continuing service during deficit conditions, and compensating for below-cost service.  An important effect of private service mechanisms is that the public sector's ability to provide service atrophies and cannot easily be reactivated.  Hence, it is imperative that private service provision strategies be preceded, as an integral precondition, by a robust program of institutional capacity-building.

A consequence of service "discipline" is that specific liberalization undertakings cannot be costlessly reversed or modified if the undertakings prove unsuitable or mistaken.  Problems with retail energy market liberalization in California, with railway liberalization in the UK, or with water privatization in Bolivia suggest that developing countries may not wish to be surprised to learn that, by experimenting with a private provision arrangement, they had inadvertently "locked in" the liberalization of basic services.   There are many other examples of governments making commitments in a particular sector without understanding the full import of its commitment for the health and safety of its citizens.

Investment.

The PSD Strategy proposes the establishment of "minimum investment standards" through a new generation of policy-based, or adjustment, lending.  We object to this on several grounds.  First, in their negotiation of investment standards under WTO auspices, developing countries would be handicapped if they are simultaneously required to implement World Bank-financed adjustment programs that prescribe certain investment standards.  Second, if a sector is subjected to investment rules, borrower standards may be "locked in" in order to build investor confidence; that is, governments may find themselves in a regulatory straightjacket.  The Enron debacle has underscored how a liberalized investment regime for energy futures now needs radical surgery.  If a government is "locked in" to certain standards, it loses the capacity to modify them.  Finally, the World Bank Group should not proceed to develop minimum investment standards without a determination by WTO members about how developing countries would be credited for adoption of these standards.

Conclusion

The World Bank Group touts the importance of national ownership and control of the development process.  However, by implementing the PSD Strategy, the World Bank could impair the capacity of developing countries to determine the sectors in which they should retain decisive control, to set regulatory standards for those sectors, and to decide whether to subsidize public or nonprofit services in those sectors.  We hope that you are fully apprised of the long-run implications of different types of policy coherence between the World Bank Group and the WTO, particularly in the area of basic services, e.g., health, education and water.

We urge you to postpone consideration of the PSD Strategy and undertake a more thorough consultation about the implications of the Strategy, especially for the vulnerable populations that the Bank hopes to champion.

Sincerely,


Nancy Alexander
Globalization Challenge Initiative

James Hug
Center of Concern