Getting the World Bank Out of Development's Way: The Case for a Project Finance Exception to the World Bank Negative Pledge Clause

Abstract

During tumultuous fiscal years of the past few decades, the World Bank, acting in its capacity as lender of last resort, granted unsecured loans to debt-ridden sovereigns. Instead of taking a lien over the state's assets, the World Bank protected its interests via a broadly-worded Negative Pledge Clause. This clause ensures that any lien created on any public assets as security for external debt which results in a priority for a third-party creditor equally and ratably secures all amounts payable by the borrowing state. In short, should such a lien be granted, the World Bank shares in the amounts paid out to the third party creditor, thus preventing the creditor from enjoying senior creditor status and undermining the value of any later-granted lien. Including the Negative Pledge Clause in the World Bank loan agreements helps mitigate the World Bank's risk of providing unsecured loans by ensuring that a developing nation will not give a later creditor priority over its assets. In theory, such a pledge protects both the World Bank, as a creditor, and the sovereign nation, as debtor. However, the barrier that the Negative Pledge Clause constructs around a state's ability to engage with other creditors is so formidable that the clause ends up preventing the state from attracting commercial investment for project financings. As currently drafted, the Negative Pledge Clause dissuades commercial lenders from investing in exactly the kinds of projects that might further development and enrich a nation (thus strengthening the nation's ability to pay back its debts). This is not only unfortunate for the developing countries involved, but also challenge the raison d'etre of the World Bank, a multilateral institution designed to promote development. This article proposes reforming the Negative Pledge Clause by clarifying the language of the text and the consequences of a breach in the way which narrows the breadth of the clause. This article also argues that the World Bank would better achieve its overall purpose of promoting development by including a project finance exception to the Negative Pledge Clause to attract investors to projects that help expand national infrastructure.