U.S. Treasury Blasts World Bank Plan to Finance Third World Energy Development

In a remarkably candid policy report issued in early August, the U.S. government places its support squarely behind private oil companies investing in the Third World. It also explicitly identifies the World Bank as an institution whose function is to advance the interests of Western private corporations.

The 63-page Treasury Department document, entitled "An Examination of the World Bank Energy Lending Program," sets out the U.S. position on the Bank's plans to reduce the dependence of developing countries on imported oil. Sharply critical of the lending program, the report claims that the World Bank has lessened the scope for private investment in the international energy field. The multilateral institution's proper role, the report states, is to "seek to complement and catalyze private investment In the oil and gas sector, not to displace it."

The World Bank and the U.S. government itself should use "foreign aid" programs to pressure less-developed nations into accommodating foreign oil companies, the Treasury study recommends. The , report is basically saying: "Any government, any people, any group that wants public development of oil-look out," according to Terisa Turner, a Canadian energy consultant based in New York.

The Treasury paper has come under fire from experts in many fields-and not only because of its interventionist theme. The very logic of the U.S. position has been called into question. Bankers, development officials, and oil industry analysts all doubt that private oil companies will alleviate the oil-importing burdens of non-OPEC Third World countries. In addition, these critics contend that the Treasury document seriously misrepresents the World Bank's effect on private investment in the world energy field.

Specifics aside,, the Treasury document is interesting as a prime example of a current split within the business community about the role the World Bank should assume.

Treasury is siding with private direct investors in narrowly construing the function of the Bank, and in advocating the limitation of its activities. In so doing, Treasury parts company with commercial bankers and others who believe the Bank should enlarge the scope of its lending program$. ,

Treasury's Case

"Encouraging private investment in the oil and gas area in the LDCs (less developed countries)" is the chief "U.S. objective" in the world energy field, according to the Treasury Department's report.

The U.S. argument in defense of this position hinges on two fundamental assumptions: first, that private oil companies' can meet the energy needs of Third World countries; second, that the investment policies of Third World countries have discouraged private firms from playing this beneficial role.

"Private companies can be expected to provide the bulk of investment resources for LDC oil and gas development," the report asserts, but only "if appropriate terms and conditions are offered private companies." Repeatedly, the document claims that "the most serious impediment to private investment in LDCs" is "host country policies and attitudes," whose "common denominator is nationalism and impracticality."

Treasury's Critique of the World Bank

Over the past decade, the World Bank has become increasingly concerned about the inability of non-OPEC less developed countries to meet the rising costs of oil imports. "The sharp rise in the cost of energy in recent years has underlined the urgent need to expand domestic energy production in developing countries that are dependent on imports," Robert McNamara announced last August, 11 months before he stepped down as president of the World Bank.

To help fulfill this need, the World Bank under McNamara proposed increasing energy lending by $16 billion to a level of $30 billion for the five-year period 1982-1986. Some of these funds would go directly to Third World governments or national oil companies, primarily for oil and gas exploration activities.

The U.S. Treasury objects not so much to the amount of money to be spent-although it views the sum as excessive-as it does to the kinds of projects the funds are spent for.

"Expanded Bank lending to state oil and gas companies for oil and gas exploration and development may have a negative impact on private investment," the report states. This is "most likely to occur in lending to state oil companies for exploration and development" because "national oil companies have little incentive to turn to private foreign companies to share in the profits from exploiting such discoveries."

The U.S. policy statement also claims that World Bank energy lending disadvantages commercial banks who can't compete with the lower interest-rate, longer-maturity loans that the multilateral agency offers. "Loans to national oil companies.. .are likely to have displaced private capital investments," the document declares.

The World Bank, Reagan Style

"The World Bank has an important role to play ...by encouraging host countries to remove impediments and adopt policies which facilitate private investment in energy development," the U.S. position paper states.

Treasury views the World Bank as particularly well suited for such political pressuring. The Bank's ostensible function and relatively benign reputation as a development 'agency shield it from criticism for meddling in the internal affairs of sovereign states, Treasury believes. "Here, the `neutral' stance of the Bank can play an important role," the report says. "As a multilateral `development advisor,' it can help LDCs revise their incentive structure to encourage investment" (inside quotation marks are the Treasury's).

Specifically, the World Bank should provide, according to Treasury, loans on the "condition", that less developed countries adopt more favorable policies towards private oil companies. "Bank policy conditionality could be used to significantly increase the share of private investment in oil and gas projects undertaken jointly with state companies," the report states. In addition, "the Bank's leverage could possibly be used to obtain access to reserved and prospective acreage... by conditioning Bank financing on the host government's agreement to allow private companies to share in such exploration (and subsequent development)."

The World Bank can further help private oil companies, Treasury suggests, by paying for "infrastructure." "The cost of developing infrastructure, such as ports, roads, and pipelines, may make 'a project financially unfeasible for private companies." In such instances, "multilateral bank participation in financing" can play "a key role in overcoming commercial obstacles to private investment."

Implications for U.S. Government Policy

The U.S. government should not leave the responsibility for increasing private investment solely in the hands of the World Bank, the report argues. Rather, the U.S. government should use its own resources to help achieve this goal. "The full range of USG programs towards LDCs-bilateral and multilateral aid, FMS (Foreign Military Sales), IMET (the International Military Education and Training Program), and other military cooperation-by improving the general climate, may improve prospects for private investment in oil and gas development." The document was prepared using data from the State, Treasury and Energy Departments, and from the Office of Management and Budget.

The Treasury officials who drafted the report apparently considered more overt forms of arm-twisting, but concluded that such tactics may be too explosive. "Direct U.S. pressure to improve terms and conditions is -likely to be counterproductive in most countries," the position paper says. "We are seen as interested parties (as home country to many affected oil companies) and to be seen as bowing to U.S. pressure would hand, a powerful issue to host country government opponents" (parentheses within the quotation are the Treasury's). Consequently, , the U.S. should eschew "wholesale attacks or challenges to public sector institutions," since they "are unlikely to have the desired effect."

Critiques of the Report: Where Oil Companies Fail

Treasury's key, but unargued, assumption-that private oil companies will be able to meet the energy needs of less-developed countries - has two serious weaknesses which critics point out and which the report itself inadvertently concedes.

First, the oil companies are not interested in seeing less developed countries become more self-sufficient in energy. "These companies don't go looking to oil-importing countries whose needs are for domestic consumption," says Stephen Zorn of Tanzer and Associates, a New York firm which consults with less developed countries on energy matters. "They are interested in export potential."

Few less-developed countries have enough oil for export. This may be because their reserves are small: "Many of the oil importing developing countries may have deposits of significance for their own economies but not for world supplies or trade," noted the World Bank in its August, 1980 report entitled "Energy in the Developing Countries." Or it may be, as the Treasury report admits, because their economies have high demands for oil: "In some cases, foreign investment may be less attractive in countries with large oil import needs and concomitant balance of payment problems."

Second, oil companies have no incentive to invest more in the Third World when they can get better terms and bear less risks in the West. Here, too, Treasury yields the point. "President Reagan's decision to decontrol oil prices has further increased the profitability of investment in oil and gas exploration and development in the U.S. and may, in the short term, result in a lesser level of investment activity in the OIDCs (Oil-Importing Devel oping Countries) where prospects appear relatively unattractive."

Treasury also quotes-but does not refute-a statement by the World Bank's energy director, Yves Rovani, on this very problem. "Companies naturally focus their initial interest on producing areas and large structures. They may, in time, turn to higher risk areas or small structures, but most LDCs, crippled by huge import bills, cannot afford to wait until they reach the top of the companies' priority list."

Miscasting the World Bank

As Treasury misreads the promise of oil companies, it also fails to appreciate the business-promotion activities of the World Bank, critics contend.

The drafters of the position paper "show a great ignorance of World Bank action and inaction in the oil field," says economist Cheryl Payer, who has recently completed a book on the World Bank. Frank Vibert, adviser to the senior vice-president of the World Bank, agrees: "The idea that we are misplacing private investment is a misconception."

Commercial bankers also sharply contest the report's charge that the World Bank displaces private capital lending. "The program they (the World Bank) have instituted is a big advantage," says R.W. Manderbach, senior vice president and chief energy expert for Bank of America. Far from undercutting the commercial banks, the World Bank actually assists them, Manderbach argues: "If they're in there, they will draw the banks of the world along, because the presence of the Bank brings security."

A Citibank official, who chose not to be identified, shared some of Manderbach's observations. "The World Bank's low-interest loans are helpful" in some instances, he said. "They are lending in a lot of cases where private banks won't come in." For instance, "We don't do exploration lending; the risks are too high," the official remarked. And although he expressed concern that the World Bank's program might at some point compete with commercial banks, he knew of no "concrete transactions" where that has yet occurred.

The World Bank's effect on the oil companies is also vastly different, critics maintain, than the picture Treasury draws. The report is "simply wrong" when it states that World Bank lending displaces private oil company investment, says_ consultant Zorn. The Bank finances oil exploration "either where it can be done in partnership with foreign companies, or where the majors aren't interested," Zorn explains.

Moreover, the Bank already appears to be overhauling investment policies of less developed countries in a way which benefits the companies. "It advises the countries to rewrite investment codes," says author Payer, "and it finances the costs of exploration so that the companies don't have to cover that." Former Assistant Secretary of the Treasury C. Fred Bergstew, concurs in this judgement: "Remember, when the World Bank comes in, it is always pushing countries to adopt market-oriented policies," he says.

The Rationale Behind the Policy

If the World Bank actually assists private oil companies, and if the Treasury wants to promote private investment in the oil sector, why then does the Treasury oppose expanded World Bank lending in this area? Is Treasury simply miscalculating the interests of the oil companies? Probably not.

Mobil, Standard Oil of Indiana, Texaco and Gulf all told Multinational Monitor in interviews that they were opposed to expanded lending. "It's been our thought for some time that there is adequate capital available for oil and gas development throughout the world," says Dave Tayrien, a spokesperson for Standard Oil of Indiana. "It would perhaps be counterproductive to use the World Bank's limited funds for these purposes." (Exxon, which chose not to comment, has traditionally taken a hard line against World Bank energy lending.)

"The problem for oil companies in this thing," says Michael Tanzer, director of the consulting firm Tanzer and Associates, is that World Bank lending "can strengthen the hand of government oil companies." As national oil companies become more powerful, the private companies may feel threatened. Explains energy specialist Turner: "the companies want to hold the line on the do-it-yourself approach.. They're really scared of that. It's like one good union drive. "

This company fear is expressed obliquely in an American Petroleum Institute "issue paper" dated April 1, 1981. "Massive World Bank lending for oil and gas projects might provide rewards and incentives for developing nations to create and work through national oil companies, either on ' ideological grounds or to gain ', a measure of independence I from market-determined ' economies... Bank funds and the expertise of bank specialists would be made available to make fledgling national oil companies viable," says the API paper.

The current oil glut, by strengthening the bargaining positions of the oil companies, may also help explain why the companies are united in opposing the Bank's energy lending. Even firms such as Gulf which were originally supportive of the idea apparently now believe they can dispense with World Bank assistance.

"All of them may now feel, as terms are not so great for the countries, that they want to go back to the old way," says Tanzer, referring to the period up to 1977 when the Bank did not lend for oil development. "Some always felt this way-like Exxon-and Gulf may have swung around, seeing that [World Bank loans were] no longer necessary."

The oil companies may also object to World Bank financing simply because they view themselves as better off if less developed countries don't advance. "The only rational explanation I can think of,", says Zorn, is that the companies want to "keep countries poor" and dependent on oil so that the firms can "keep making money by importing oil to these countries."

Businessmen's Quarrel

By taking the oil company position, the Treasury has situated itself clearly on one side of an internecine battle among business interests concerning the World Bank. Generally, those who oppose expanded financing by the World Bank align themselves with private investing companies and the immediate concerns of profitability. Those who worry about the serviceability of loans to Third World countries, continued markets for Western products, and the stability of the world economic system, are more inclined to favor an increased role for the Bank.

"The Treasury Department seems to represent the pro-oil wing" in the debate, says Tanzer. It is a "shorter-term view," he adds, noting that "there may be an inherent conflict of interest between the banks and the oil companies" on this issue.

"The commercial banks want to see LDCs pay off their loans," explains Tanzer, and they look to the World Bank to assist them in this regard. The Bank, for its part, is obliging. "One wants to keep debts manageable; that's one of the reasons why we proposed our increased lending for energy," admits the World Bank's Vibert, aide to the senior vice president.

Without increased World Bank lending, the balance of payments position of non-oil importing developing countries will deteriorate, and commercial banks will find it increasingly difficult to retrieve their loans, Bank of America's Manderbach feels. "Less developed countries will have to pay for their oil import bills at the same time they pay for exploration. This will create `a double debt, a double whammy,"' he explains. (Citibank is more optimistic about the debt-servicing capacities of developing countries, which may explain why Citibank is slightly less enthusiastic than Bank of America about the World Bank's expanded energy program.)

The World Bank also boosts trade by lending money to Third World countries so that they can buy Western products. Here, no matter what the specific project, World Bank loans are "in the interests of American business," as The Journal of Commerce points out (see page 11). Even "co-financings of public-sector projects.. .benefits U.S. banks, U.S. exports and the U.S. economy," a recent Journal of Commerce editorial argued. Those businesses that depend on trade, such as the transportation industry, thus tend to strongly support the Bank's expansions.

Long-term corporate planners also support the idea of a more active World Bank, on the grounds that by increasing lending, the World Bank helps protect the international economy from economic, and concomitant , social, disruptions. This represents "the trilateralist view, a nice liberal, internationalist, 'let's-get-capitalism -going' point of view," says Turner.

The Treasury report, however, is a firm sign that, if current administration planners have their way, the "trilateralist" view won't prevail. That outcome may not be beneficial in the long run for either side in the businessmen's quarrel. A limited role for the World Bank in energy lending ".`won't provide for renewed markets; it won't ease the debt burden of these developing countries, and it might breed social revolution," predicts Turner. "Increasing debt and impoverishment creates a lot of social chaos."

For a free copy of the report, write:

Office of International Affairs
Department of the Treasury
Washington, D.C. 20220

Dueling Journals One way to witness the battle within the business community over the World Bank's role is to compare editorials of the Wall Street Journal with those of the Journal of Commerce, a business daily which focuses on transportation and banking. Wall Street Journal A Reagan Blunder Wednesday, June 3, 1981 Mr. Reagan blundered when he allowed his administration to be maneuvered into backing a big increase in World Bank funding. The result is that these authorizations have squeaked through some committees and could come up for a vote in the Congress soon. They would open the floodgates for massive ending for exactly the sort of programs in other countries - nationalized railroads, co-operative lending, government subsidies to mass transit, government meddling in oil and gas production - that the administration is fighting so valiantly to unravel at home. McNamara's Regrets Thursday, June 25, 1981 The bank, however, is a giant factor in encouraging state planning and higher taxation in the Third World, both elements inimical to unfettered economic growth. It has been hewing in other ways to theories repugnant to economic freedom, such as haranguing governments on the dangers of unequal distributions of income while the brightest minds in development thought are talking about the virtues of income disparities in creating the sort of incentives upon which enterprise thrives. The same principle that apply to development in America apply to development elsewhere. The Journal of Commerce Paradoxical and Senseless Friday, May 15, 1981 Over the years, conservative Republicans have systematically accues World Bank support4ers of wasting the taxpayer's money. What is undeniable is that the World Bank and IDA have made life a lot easier for U.S. investment in develop-ping countries. It is paradoxical and senseless for conservative Republicans to take action which runs counter to the interests of American business. Reaganomics for LDCs? Friday, June 12, 1981 Just because some industrialized countries are on a supply-side economics kick doesn't mean it's what everybody else needs. While the private sector should be encouraged, in most de3veloping countries it can't do all the work that needs to be done.