PSD Blog - The World Bank Group

Blackbeard's co-op on the high seas

If you are looking for something a little different to read at the beach, then Peter Leeson’s new book on economics and piracy might fit the bill. In The Invisible Hook, Leeson applies an “economic way of thinking” to the actions of Blackbeard, Captain Kidd and co.

One item that jumps out is the strict system of governance at work on pirate ships, in part a consequence of the ships being owned by their crews. For example a flat pay structure minimized opportunities for abuse, which is in stark contrast to merchant ships where officers took advantage of strict hierarchies.

It seems that today’s CEOs, facing public anger over executive pay, greed and governance failures, might have something to learn from “pirate management”. Those calling for greater employee ownership within struggling firms (as the Financial Times reports in Germany) might find ammunition from this tale of the high seas.

What can the London Underground tell us about PPPs?

If you’ve ever been to London, then you’ve almost certainly seen the emblematic red circle and blue stripe with the word UNDERGROUND emblazoned on it. The Underground is a huge operation, made up of some 270 stations and 400km of track. So how does London keep this operation running?

Earlier this decade, the government experimented with a public-private partnership (PPP) under the name of Metronet. The hope was to generate efficiencies by bringing in the private sector. So did it work? A recent report by the UK National Audit Office (published 5 June 2009) makes it pretty clear the answer is "no." The report pinned responsibility for this failure on poor corporate governance:

The World Bank disclosure policy review

Editor's Note: Larisa Smirnova is a consultant at the World Bank and is currently working with the Transparency Indicator team.

Earlier this week I attended the Workshop on Proposed Revisions to the World Bank’s Disclosure Policy. The World Bank revises its disclosure policy every two years. The concept of the current comprehensive review is outlined in the paper Toward Greater Transparency: Rethinking the World Bank's Disclosure Policy. Most importantly, the paper suggests a shift from only disclosing information on the "positive list" to disclosing any information in the Bank’s possession unless it is on the "list of exceptions".

The paper is available at the World Bank’s external website in seven languages and is open to comments by everyone. Have your voice heard!

Dani Kaufmann, anti-corruption expert and blogger

After more than two decades of service, Dani Kaufmann will be leaving the World Bank. If you didn't catch his farewell lecture last week, you can still see a video of it here. I highly recommend it - if ever you wondered whether someone could make a difference inside a large institution, this is it.

I'll leave Kaufmann's long list of achievements to others who know better than I. Instead, I'll just point out two things that grabbed my attention during his lecture. The first is that Kaufmann was introduced as being, among other things, "a pioneer in blogging" at the World Bank. If you haven't had a chance to read Governance Matters you've been missing out. (Also check out his personal blog, The Kaufmann Governance Post.)

How to fight a banking crisis

The world has undergone enough banking crises that some useful lessons might be gleaned from past experience. A working paper from the IMF attempts to do just that with a database of all systemic banking crises between 1970 and 2007 - a total of 42. Systemic Banking Crises: A New Database offers up a few guidelines on what to do when faced with a crisis:

Our preliminary analysis based on partial correlations indicates that some resolution measures are more effective than others in restoring the banking system to health and containing the fallout on the real economy. Above all, speed appears of the essence. As soon as a large part of the financial system is deemed insolvent and has reached systemic crisis proportions, bank losses should be recognized, the scale of the problem should be established, and steps should be taken to ensure that financial institutions are adequately capitalized.

Perhaps just as important is what has not worked well during a crisis:

Creative destruction on Wall Street

Get ready to hear it ad nauseum: creative destruction! If you're an ardent supporter of the free market, there is little else to fall back on in the face of today's events on Wall Street. In fact, one might even be pleased about the turn of events, given that financial authorities allowed Lehman Brothers to fail. Avinash Persaud sums up this perspective in an op-ed today in the Financial Times:

[T]here is the subject of moral hazard. While central banks have been offering liquidity on generous terms and stopping institutions from going bankrupt, some banks were not engaged in hard restructuring but gaming the system. They were busy hoarding liquidity and pushing risky instruments into the hands of the authorities... the game is not about luring sovereign wealth funds to invest before markets recover but about how to restructure for a brave new world in which the financial sector is smaller.

According to this reading, it's good that Lehman fell - an inefficient firm has been destroyed, and capital will be freed to migrate to new, better managed institutions. But while all of this may be true, the next few weeks and months will certainly not be pretty for the U.S. economy. I noticed one thing missing from most of today's coverage in the press and (surprisingly) in the blogoshere: What will the effect be on developing economies? 

Oil Prognostications

The sky is falling—or so the head of Gazprom, the state-owned Russian energy giant, would have us believe. Today’s FT reports that Alexei Miller has predicted oil will hit $250 per barrel in 2009. Should we believe such a prognostication? Before you throw all your money into investments in oil companies, let’s remember the backdrop for such a prediction: Russia is courting foreign investors concerned about the security of their investments at the same time as BP and a group of Russian shareholders are fighting over control of the TNK-BP joint venture oil company. Medvedev, Russia’s new president, has been attempting to convince foreign investors that Russia is a safe bet, but Russian shareholders in TNK-BP have been making this look questionable with the trouble they’ve been causing for BP (subscription required).

Oil, oil everywhere…

In just the last two days, two articles have pointed to growing pressure for greater state control of energy resources. In Brazil, the state-owned oil company Petrobras (subscription required) has been pressuring the country’s Congress to change the rules of the game to its benefit. Currently, foreign oil companies bid in auctions for exploration rights, paying a combination of an upfront fee and royalties on any discoveries. However, a huge discovery last year by Petrobras has upped the stakes. Petrobras wants to force all new explorations to be carried out as joint ventures, a la Venezuela and Nigeria.

A case in Russia is also pointing to continuing pressure for state control of the energy industry (subscription required). TNK-BP, a joint venture of British Petroleum and Russian-owned Alfa-Access-Renova, has seen a falling out between its foreign and Russian shareholders. The details of the case are truly convoluted, but the main contention is this: The shareholders of Alfa-Access-Renova would like to sell their shares to one of the state-owned oil companies, but they need to achieve a takeover of TNK-BP before handing the joint venture over.

Sustainable banking awards: who's winning what?

The Financial Times and IFC announced shortlists of potential winners for the 2008 Sustainable Banking Awards. The awards recognize financial institutions that have led the way in integating their policies with social, environmental, and corporate governance objectives. Below is a sample the categories and the shortlisted candidates, the full list is available here.

Sustainable Bank of the Year

• Banco Real, Brazil
• Citi, US
• HSBC, UK
• Rabobank, Netherlands
• Standard Chartered, UK

Sustainable Deal of the Year

• BlueOrchard Finance, Switzerland/Morgan Stanley, US (microfinance loans)
• Calyon, France (solar thermal power plants)
• Citi, US (financing for rural housing)
• Glitnir Bank, Iceland (geothermal power generation)
• Merrill Lynch, US (carbon finance to reduce deforestation)

Banking at the Bottom of the Pyramid

• ASA, Bangladesh
• Banco Bradesco, Brazil
• ICICI Group, India
• Opportunity International, UK
• Wizzit, South Africa

Microfinance's "two cents" on its own future

Microfinance professionals, who responded to a new survey by the Center for the Study of Financial Innovation, identified poor management skills as the main risk the industry faces. Poor corporate governance is also seen as a great risk, but more so by investors and analysts than by practitioners.

According to the report "microfinance institutions tend to be dominated by 'visionaries' who are strong on charisma but less so on management skills and strategic flexibility."

More than 300 respondents from 74 countries contributed to the survey. It focused on institutions with more than $5m in assets which are profitable and capable of commercial growth.

Do you have any insights to share? Feel free to leave your own "two cents".