Journal Issue

Charting the Channels for Development Capital

International Monetary Fund. External Relations Dept.
Published Date:
June 1965
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David L. Gordon

THAT MOST COUNTRIES in Asia, Africa, and Latin America suffer from an acute shortage of capital is one of the most familiar facts in modern world affairs. They lack an adequate infrastructure of power and sanitation facilities, of roads, ports, and railways; they are short of schools, research institutions, housing, and hospitals; their agriculture is often primitive, and their industries sparse and ill equipped. Their development needs and plans typically call for a much higher investment rate than their meager savings can sustain, and for more foreign exchange than can be supplied by their present export earnings; and the provision of international loans and aid never seems sufficient to bridge the gap.

The Paradox

Yet at the same time there are frequent complaints from aid-giving countries and agencies that they are not presented with a sufficient number of well-prepared high priority projects to make use of all the funds that could be made available. As Mr. George D. Woods, President of the World Bank, told the United Nations Conference on Trade and Development in March 1964

The flow of sound, economically viable projects coming forward from many developing countries today is not enough to enable these countries to realize the growth rate which it is within their capacity to attain. It is not that good investment opportunities are lacking; what is lacking is initiative and proper organization to enable those opportunities to be realized.

This paradox—the urgent need for investment as against the lack of suitable objects for investment—is yet another example of the stubborn complexity of the problem of development. In an economy that is already technically advanced and highly productive, new opportunities for investment constantly, almost inevitably, come to light and are appraised and pursued. On the other hand, in countries where development is rudimentary or spotty, the possibilities and conditions for using capital productively are usually much less clear, and the doubts and difficulties are formidable. Development planning—whose prodigious growth was described by Albert Waterston in the previous issue of Finance and Development (Vol. II, No. 1)—can help progressively to define the sectors and magnitudes in which capital should be made or encouraged to flow, and to pinpoint investment projects. But too many national plans, at least in the initial stages of planning, resemble those early maps of little known continents—fairly clear in general outline, a few salient features more or less precisely marked, but the rest mostly blank or spotted at random with depictions of exotic beasts.

This lack of accurate information is undoubtedly a deterrent to investment. Nevertheless the urge to build, to modernize, to develop is irresistible in most countries; their governments must take action to provide the facilities, and to encourage establishment of the industries, that will begin to satisfy this urge; and so investment goes forward regardless. Even if no projects exist that have been sufficiently studied and justified to meet the conditions of the World Bank or the major governmental lenders, there will often be equipment suppliers or contractors ready to tailor a scheme around what they have to sell, and sometimes to arrange financing. The resulting investment may be ill-adapted to the country’s real needs and may cost much more than it should—it may even prove to be a burden rather than an asset for the country’s development—but at least it is something tangible, and accordingly gives some satisfaction, unjustified as it may be.

To avoid such misapplication of scarce capital resources, and consequent difficulties and disillusionment, the people who make investment decisions, both within the developing countries and in the various international and bilateral aid agencies, need to have much better information and more refined criteria on which to base their judgments. Practitioners in the field of economic development, at both ends of the flow of capital, have devoted increasing attention to this problem.

The Special Fund

This concern was given institutional form with the establishment, in January 1959, of the United Nations Special Fund, which is not only a new institution but a new kind of institution. Unlike the World Bank or the major bilateral aid agencies, it is not intended to finance capital goods or directly productive projects, nor to sponsor a diffusion of individual experts on the usual technical assistance pattern. Rather its mission is to bridge the gap between these earlier approaches—to bring technical experience and resources to bear directly

on the removal of bottlenecks and other obstacles that have been hampering the progress of a country or region. Among the most important of these is the lack of comprehensive surveys in depth of natural resources, manpower, skills and industrial potentials which would create a solid basis for future advancement.1

Its essential purpose, in other words, is to foster the preinvestment studies necessary to decide sensibly whether specific development projects ought to be carried out, and how, and to facilitate the training of the people needed to carry them out successfully.

In undertaking to cultivate this area of activity the Special Fund did not, of course, enter a virgin field. Scores of surveys of development possibilities in different countries, and hundreds of feasibility studies of individual projects, had previously been made under varied auspices. A number of governments in developing countries had employed private consulting firms to advise them; some had been glad to accept offers of technical services from contractors or suppliers interested in a project; many more had obtained experts under UN or bilateral technical assistance programs. The World Bank, when it made a project loan, would sometimes reimburse from the loan funds engineering costs incurred in preparation of the project, or include an allowance for the expense of planning a subsequent project to be undertaken by the same borrower; and some bilateral aid agencies extended similar credits for pre-investment study of major projects.

These diverse efforts were of considerable value. They brought into being a large number of productive projects, which made up the bulk of externally financed development investment during the 1950’s. But they were inadequate in a number of respects. Many developing countries were inexperienced in the selection and supervision of independent consultants—who, moreover, were usually quite expensive. On the other hand, the studies and recommendations of contractors or suppliers of equipment were frequently suspected of being biased by commercial self-interest, a suspicion that sometimes extended also to bilateral aid programs.

Moreover, decisions about the studies to be undertaken were often arbitrary or ill-informed. Almost inevitably, in the absence of adequate sector studies that would analyze over-all needs, priorities, and comparative returns, individual projects were looked at in isolation; and the choice tended to fall on big, dramatic projects, with a high foreign exchange and aid component, in preference to those of more modest size but perhaps of superior yield and long-term value.

The Special Fund, to be sure, did not eliminate these problems—nor was it expected to do so. But it did begin to offer a more satisfactory alternative and to define standards for preinvestment studies and the principles that should underlie preinvestment decisions in more rational fashion. Under the persuasive leadership of Mr. Paul Hoffman, its first Managing Director, it has gained increasing prestige and support in the developing and the more developed countries alike.

Contributions to the Special Fund—coming mainly from the industrialized countries of North America, Western Europe, and Japan, but also including substantial amounts from the developing countries and smaller sums from the Soviet bloc—rose from $25.8 million in the year 1959 to $85.5 million in 1964. The cumulative total cost of approved projects, from 1959 to date, is estimated at about $1.1 billion, of which roughly 40 per cent is being provided by the Special Fund and 60 per cent by recipient countries.

Special Fund Projects

Special Fund projects fall into four main categories. The first of these comprises large-scale surveys of resources and of investment needs and priorities and feasibility studies for major projects. The program to date includes 197 such surveys, to the cost of which the Special Fund is contributing $160 million. A study of power and irrigation in Guatemala, a mineral survey in Pakistan, a telecommunications development study in Central America, a survey of the Lower Volta River flood plain in Ghana, and studies of Bangkok port siltation and the feasibility of Sriracha Port in Thailand are typical projects drawn from this first category.

The establishment of training institutions for engineers, managers, technicians, and other key personnel for development forms a second category of Special Fund projects. Training programs so far approved involve 182 institutions and Special Fund contributions of $178 million. They include a national vocational training service for industry in Mexico, a school of engineering at the National University in Colombia, a rural vocational program in Senegal, a College of African Wildlife Management in Tanzania, and a Fisheries Training Institute in India.

The third category comprises organization of applied research programs to investigate the industrial potential of developing countries, to adapt modern technology to their needs, and to increase productivity in industry and agriculture. The Special Fund has agreed to help finance 101 research institutions with grants totaling $91 million. Included in this category are a Petroleum Institute in Argentina, a Marine Resources Research Institute in Peru, an Industrial Research Institute in the Sudan, a Savanna Forestry Research Station in Nigeria, an Animal Husbandry Research Institute in Iran, and a National Productivity Center in Malaysia.

The fourth and last main class of Special Fund projects is made up of economic development planning, including help in creating planning mechanisms and training planners. Nine such projects have been approved, with Special Fund contributions of $17 million. Examples are regional institutes for economic and social planning located in Santiago de Chile, Bangkok, Dakar, and Kuwait; assistance to the Liberian national planning agency; and an Institute of Urban and Regional Planning in Argentina.

The Special Fund’s activities differ from the other UN technical assistance programs in being pointed somewhat more explicitly toward early, tangible investment. Typically also, its projects involve fairly large teams of experts working together over a considerable period, rather than a multitude of individual assignments. To avoid duplication with other programs, and to decentralize its operations, the Special Fund farms out the execution of its projects to other agencies of the UN family, making use of the experience and skilled personnel they have built up in their several specialties. Its overseas representatives, responsible for reviewing requests and generally overseeing Special Fund operations in various countries, are also the Resident Representatives of the UN Technical Assistance Board (UNTAB). And under a plan recently approved by the UN Economic and Social Council this coordination will be further strengthened by a merger of the central administrative machinery of the Special Fund and UNTAB.

The World Bank

For the World Bank and its affiliates—the International Development Association (IDA) and the International Finance Corporation (IFC)—a steady supply of well-prepared and justified projects for financing is an obvious and vital concern.

The Bank is regarded by economic development practitioners as a strongly “project-oriented” institution. Its financing is almost invariably linked to expenditures for a specific investment purpose—a stretch of highway, an industrial or power installation, an agricultural improvement scheme—rather than being available to meet the general requirements of the borrowing country for capital or for imports. This bias was established from the Bank’s inception; the Articles of Agreement specify that its loans “shall, except in special circumstances, be for the purpose of specific projects of reconstruction and development.” And 16 years of development financing have confirmed the wisdom of this approach.

It has sometimes been criticized as too inflexible and atomistic, not taking sufficient account of the national economic context which vitally affects the feasibility and merits of individual investments. But in fact the Bank’s first concern is with the over-all development potential and program of a prospective borrowing country. (See “Project Appraisal” by Hugh B. Ripman, in Finance and Development, Vol. I, No. 3.) Its periodic economic missions seek to estimate the likely growth of the national output, of savings, of export trade and import requirements; to assess the amount and adequacy of aggregate resources for development; and to analyze the interrelation of different economic sectors and the relative emphasis they should receive. Thereafter they narrow their focus to examine which sectors and projects deserve priority in the national economic framework—which usually means the investments that offer the most favorable economic yield, taking into account both the rate and timing of the return. This is the context in which the capital provided by the Bank is linked to, or embodied in, specific projects.

Some of the projects that come forward for consideration are already quite mature, but many (nowadays probably most of them) have been nurtured by the Bank through various preparatory stages. A scheme may, for example, have been identified in embryo, or even conceived, by a general survey mission organized by the Bank at a member government’s request; the rail links that were progressively extended to become the Atlantic Railway in Colombia are an example. Another scheme may have been stimulated by a resident Bank adviser assigned to the national Planning Department; or its place in the country’s scale of development priorities may have been established through analysis by one of the aforementioned economic missions, working in consultation with the country’s own planning authorities. In many countries the Bank (or, for industrial financing, the IFC) will have helped to set up the national agency that is promoting and has responsibility for carrying out the project; examples are the highly successful industrial finance companies in India and Pakistan (ICICI and PICIC) and several smaller counterparts in other countries, the Imperial Highway Authority and the Telecommunications Board in Ethiopia, a number of power, irrigation, and port authorities, and so on. A Bank technician may have helped the government to draft terms of reference for consultants on a feasibility study, or may have suggested changes in some feature of the project to reduce the required investment or make it more efficient.

Helping member countries to define, select, and improve their investment projects has always been an important part of the Bank’s activity. In this area the line between its operational concerns, on the one hand, and technical assistance and advice, on the other hand, has progressively become blurred.

New Developments in Bank Preinvestment Studies

Until some four years ago the Bank’s assistance to preinvestment studies was largely incidental to its current lending operations. Since 1961, however, it has been helping to organize and finance a series of urgent “project and sector studies,” where such studies seem likely to clear a direct channel for Bank or IDA investment. Its commitments for this purpose have expanded rapidly over the subsequent years; the cumulative total exceeded nine million dollars by April 15, 1965. They include, for example, such undertakings as comprehensive transport surveys in Nepal and Zambia; studies of a port project in Somalia, and of the Bolivian railways; surveys of the East Pakistan inland waterways; and assistance for the planning of school buildings in Tunisia, of power development in Ecuador, and of roads in Nigeria and Peru.

This new departure might be interpreted as the sincerest flattery of the Special Fund, for the Bank-financed studies are similar to the first category (surveys and feasibility studies) of the Special Fund program. There is, however, no duplication. The President of the Bank has been, from the start, a member of the Consultative Board which considers all Special Fund projects before they are included in its final program. The Bank is serving as Executing Agency for 21 Special Fund projects in transport, communications, power, and mineral resources development; it is prepared to turn over to the Special Fund any project the latter wishes to undertake, and, if desired, to act as Executing Agency for that project; and it finances similar projects itself only when the Special Fund is unable, for one reason or another, to handle them.

In fact, direct assistance to preinvestment studies stemmed logically from the changing character of the Bank’s activities. In the first place, after a dozen years of investment on an unprecedented scale—from the Bank and even more from other sources—in Latin America, Asia, and Africa, the reserve of clearly justified projects had been considerably depleted in some countries. To decide on the merits of further investment often required more complex analysis than in the earlier phase, partly because the dynamics of development had introduced some new and variable factors into the calculation. Projects of agricultural and educational development, to which the Bank has given increasing attention, often present especially difficult problems.

Furthermore a large number of newly independent nations were joining the Bank—its membership increased from 68 to 102 in the five years, 1960-64. Many of these lacked practical programs of development or felt it necessary to review and reformulate plans associated with a former colonial regime, and the responsible governmental and financial agencies were generally inexperienced and seriously overburdened. If the Bank was to be able to do any substantial financing in these countries, their governments would have to be helped to prepare sound programs and projects. And, finally, the creation of IDA, with its softer credit terms, made it possible to envisage a larger total of lending to certain countries—if enough good projects were available.

During the past year or two this trend, toward more extensive and varied preinvestment assistance, has continued. The Economic Development Institute (EDI), the staff college sponsored by the Bank for senior officials of developing countries, has introduced a series of courses in project evaluation especially designed for officials charged with formulating and approving specific schemes. Resident advisers in project preparation have been provided to several countries, at their governments’ requests. Two field offices are being established, in East Africa and West Africa respectively, staffed with men whose specific function is to help governments in those regions in preparing projects to the point where they can be presented for Bank or IDA financing. And in March 1964, cooperative agreements were made with FAO and UNESCO that would enlist their wealth of experience and some members of their staff for the identification and preparation of projects suitable for Bank/IDA financing in the agricultural and educational sectors, respectively.

Competition and Coordination

The growth and variety of preinvestment activity are exemplified in the programs of the Special Fund and the World Bank. But these organizations, as has been noted, were not the originators and are not now, by any means, the sole practitioners of preinvestment activity. The U.S. Agency for International Development (AID) and its predecessors have done a great deal to promote it, and so increasingly have the other bilateral aid givers. The Inter-American Development Bank (IDB) and the UN regional commissions have also been active in this type of work, although the latter have tended recently to leave it to the Special Fund. Some of the work of the Ford Foundation and other private groups is also relevant. Unfortunately, no comprehensive, comparable data are available on preinvestment work sponsored or assisted by the various regional, national, or private agencies.

The multiplicity of sources of help for preinvestment studies poses problems of choice for a developing country, and the choice may have implications going far beyond the study itself. For one thing, a feasibility study made under the auspices of country X will not usually be accepted as an adequate basis for appraisal and eventual financing of the project by an agency of country Y; the latter is likely to suggest that the study be redone by consultants from Y. By the same token, despite all the conventional reservations, the willingness of an aid-giving agency to help to finance a feasibility study is usually taken to indicate that it will follow through with capital assistance for the project—provided, of course, that the results of the study are favorable. Thus very early marriages between projects and their potential financiers are quite normal. Whether the advantages, for either party, of a relatively assured continuity and of avoiding waste and duplication of effort outweigh those of maintaining freedom of action until the project is more mature is often hard to judge.

Yet such arrangements are likely to continue. So long as the provision of external capital falls far short of the desires and hopes of developing countries on the one hand, while on the other the supply of promising projects located in countries with good credit standing remains limited, developing and capital-exporting countries will be impelled to get together at an early stage. And there will be no lack of eager matchmakers—suppliers, local promoters, and various go-betweens.

This dilemma was avoided and the developing country, at least, got what appears to be the best of both worlds in the arrangements made for the Kainji Multipurpose Project in Nigeria. A survey of the potential and the best approach for developing power, irrigation, and navigation on the Niger River was one of the first investigations financed by the UN Special Fund, with the World Bank as Executing Agency. An elaborate feasibility study was carried out by internationally known consultants—in fact, jointly by two firms of different nationalities—under the Bank’s supervision. After being satisfied about the soundness of the proposed investment, the Bank expressed willingness to finance part of the cost, and invited bilateral aid givers to offer loans for the rest of the external funds required. The United States, the United Kingdom, Canada, the Netherlands, and Italy responded. For the most part their offers were tied to procurement within the respective lending countries; but it was agreed that Nigeria could award all contracts on the basis of international bidding and that, to the extent that the various winning bids came from the countries offering tied loans, their cost could be applied against those loans. Financing from the Bank made up the balance.

The Kainji Project is unusual; it involves an investment of over $200 million, its prestige value is considerable, and Nigeria is one of the largest and the richest countries of Africa. A smaller, more typical scheme would not elicit the same interest from aid-giving, exporting countries, nor justify the arduous and expensive preparatory work that was necessary. Nevertheless, for a substantial number of projects, there does appear to be a realistic possibility that internationally sponsored and supervised feasibility studies could serve as a catalyst for investment from a number of bilateral as well as multilateral sources. This prospect would presumably be more favorable in those countries for which a consultative group of the principal aid givers has been formed; this had been done in Nigeria under the aegis of the World Bank.


During the past half dozen years, then, there has been a substantial increase in the attention and resources specifically devoted to paving the way for productive investment, and considerable progress has been made toward a more rational organization of preinvestment work. What amount of actual investment will result, what multiplier effect these studies may have, are difficult even to conjecture. Mr. Paul Hoffman, in his report to the Special Fund Governing Council in January 1965, said that although only 33 out of 421 Special Fund projects had been completed by that date, 16 of them, whose cost to the Special Fund was about $16 million, had already brought forth investment commitments of $780 million from domestic and international sources. This estimate includes $208 million of projected investment in the Kainji project mentioned earlier, for which the Special Fund allocation was a little over $707,000. Such examples can be treacherous; in fact, the Special Fund contribution was only a fraction of the total preinvestment cost for the Nigerian project, including various prior and supplementary studies. But there is no doubt that the contribution helped, at a critical juncture, to precipitate favorable action. And there can be no doubt that similar assistance by the Special Fund, the World Bank, and other agencies, if properly organized and used, can facilitate sound investment to a value many times its cost.

It is no less important to prevent unsound use of scarce capital. The fact that, after careful investigation, an investment is not made seldom gets publicity—certainly it is less dramatic than the spectacular study-cost/investment ratios cited by Mr. Hoffman—but it may save a great deal of trouble and disillusionment, as well as money. Some of the Bank/Special Fund surveys—of coal resources in Colombia and power needs in Argentina, for example—have had this result, and have thereby helped to avoid absorbing available funds for which more productive use could be found.

The trend of preinvestment activity and expenditure is likely to continue upward if the rhythm of development is maintained. For increased investment and output do not slake the demand for further economic growth; rather they create new investment needs and opportunities, progressively more complex and calling for more sophisticated analysis. So just as the elaboration of over-all development plans has been the prodigy of the immediate postwar years, its indispensable counterpart, the study and preparation of specific projects, is showing similar prodigious growth in the Development Decade of the 1960’s.


The United Nations Special Fund: An Explanatory Paper by the Managing Director (New York, 1959).

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