What are the international financial institutions?

International financial institution, such as the International Monetary Fund, the World Bank Group, and the Inter-American Development Bank, are multilateral development banks created after World War II that provide loans and credits to fund projects in developing economies countries with the goal of alleviating poverty and stimulating social and economic development. Despite their mandate, IFIs often finance projects that have considerable negative social and environmental impacts. Although there is significant evidence that for-profit corporations do not provide better services for the poor, institutions continue to fund projects that privatize public water and sanitation services. 

What is water privatization?

Water privatization means your local water utility is either owned or managed by a private for-profit company. Approximately 13% of Americans are served by privatized water systems.

What is cost-recovery?

Cost-recovery means that the company recovers all of its costs so that it does not loose any money in the investment. The costs of operation and maintenance are recovered through revenues from rate-payers. In the United States and Europe essential services, such as water, have traditionally been heavily subsidizes by taxpayer revenue in order to secure full access to all. In richer countries cost-recovery can make economic sense if affordability for low-income users is taken into consideration in the rate structure. However, cost-recovery in developing countries undermines access and affordability of clean water as families living on less than $2 a day struggle to pay for the daily essentials. Cost-recovery is often a condition in loans provided by international financial institutions along with conditions to privatize services.

Who owns the international financial institutions and how does this impact the decisions made?

Member countries own IFIs, such as the World Bank and Inter-American Development Bank. The number of shares a country holds, depends on their financial contribution to the institution, and determines the nations voting power within the Board of Executive Directors. For example, in the World Bank the United States holds roughly 17% of the vote, enough to guarantee veto power over projects and decisions. The United States. has similar power in other International Financial Institutions. Therefore the United States has tremendous influence over international finance for development. 

Meanwhile, developing countries have relatively little power within the institution even though the programs IFIs finance have a huge impact on their local economies and societies. Essentially, American tax dollars pay for a large percentage of IFI operations. The United States government should be held directly accountable for the projects they are financing.

What are the negative effects of putting conditions on loans?

International financial institutions are public international institutions that aim to change policy on the national level by giving loans only to governments that agree to meet certain conditions. Often, the loans are negotiated with ministries with no input from democratically elected parliaments. This is inherently undemocratic because citizen from countries receiving the loans do not have a say in how money is used. Even though citizens have no influence on the policies implemented in their countries, they will have pay the loans back. When privatization and cost-recovery are conditions in order to receive water loans, it undermines the stated mission of the IFI’s by undercutting access to water for the poor.

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