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Full Speed Ahead

In the wake of World Bank President Lewis Preston’s unfortunate resignation, it’s reassuring that the institution quickly named a qualified …

In the wake of World Bank President Lewis Preston’s unfortunate resignation, it’s reassuring that the institution quickly named a qualified and talented successor. I’ve known Jim Wolfensohn, a colleague in the investment banking business, for many years, and don’t doubt he will adroitly handle the bank’s demands on his attention and energy.

Nevertheless, for the World Bank to continue its 50-year history of leadership in providing capital to emerging countries, Wolfensohn must immediately give priority to changing the way the institution funds infrastructure projects around the world. His first three tasks: streamline the bank’s activities, give it a private-sector mind-set, and significantly change the role of the International Finance Corp.-or spin it off.

In crucial cases, such as Russia and Mexico, the bank should catalyze and support necessary reform. The demand for infrastructure projects is well-established, and the benefits-especially in terms of increased productivity and growth-are compelling.

Yet financing them through the World Bank remains a slow and tortuous process.

It currently takes 12 to 18 months to review a project and determine if it is eligible for bank financing. The loan typically isn’t granted for another six to nine months after that. The entire process leading up to disbursement of the funds has been known to last five years or more. I see no reason why this time cannot be cut in half.

There’s a lesson to be learned from the “lean” production methods that have succeeded in the auto industry. It once took seven years to bring a new car model to market. Now it takes less than three. Toyota can build a custom-made car in only two weeks.

Lean loan production with high quality control can happen in the World Bank as well, if bureaucracy and duplication are removed from the loan approval process. To begin, Wolfensohn should delegate much more authority to the bank’s lending officers and hold them accountable for implementation and results. Getting board approval of project loans should be the exception, not the rule.

Concern over the World Bank’s activities is not new. Last year, after an in-depth review, the Bretton Woods Commission suggested: “Give high priority to increasing [the bank’s] internal efficiency and effectiveness. The skills and experience of its people should be adapted to its new private-sector orientation. Less staff time should be devoted to internal matters.”

Wolfensohn will have to think “private sector” to unchain the organization. Setting lending limits, assigning timetables, and making area chiefs responsible will free the bank to operate faster and more efficiently in a world that now shuns public-sector dominance as it embraces private enterprise and free markets.

The most radical organizational change would entail eliminating the bank’s internal board to let Wolfensohn and his professional staff make loans without interference- interference that too often is political rather than professional. Not only should governance be changed to the private-sector model, but the bank should, as much as possible, privatize the loan preparation process, using outside contractors to do for private-sector infrastructure activity and thus leverage its impact many times over.

In addition, Wolfensohn must clarify and expand the International Finance Corp.’s role, delineating where the bank’s private-sector activity ends, and the IFC’s mandate begins. At minimum, the bank should expand the IFC’s mandate for co-financing activities beyond just those of the commercial banks. Permitting the IFC to act as lender of record for capital market transactions would greatly expand the sources of funds available for project financing. Spinning off the IFC with a large capital infusion also should be considered. This would create a more direct competition between the bank and the IFC, but it could improve the performance of both-and make each self-sustaining within a short time.

The World Bank is in a unique position to meet the challenges posed by the world’s basic human and physical infrastructure needs, and to use its own lending policies to promote free markets. And Wolfensohn is in a position to ensure it all happens. Hopefully, he will.


John M. Hennessy is chairman and chief executive of CS First Boston in New York, an investment banking firm. He was a member of the Bretton Woods Commission when it reviewed World Bank operations. 

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