International Bank for Reconstruction and Development (IBRD) General Capital Increase and Selective Capital Increase; International Finance Corporation General Capital Increase
This chapter considers two related proposed treaty actions:
the International Bank for Reconstruction and Development (IBRD) General Capital Increase and Selective Capital Increase (IBRD Capital Increase Treaty); and
the International Finance Corporation (IFC) General Capital Increase (IFC Capital Increase Treaty).
Both the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC) are part of the World Bank. The World Bank is the world’s largest multilateral institution providing development finance. Its role is to reduce poverty and build prosperity across the world. Both the IBRD and the IFC are active in the Indo-Pacific region. The treaty actions, while dealing with the same subject, capital increases, differ slightly so will be dealt with separately here.
IBRD General Capital Increase and Selective Capital Increase
The IBRD is an international organisation established by the Articles of Agreement of the International Bank for Reconstruction and Development (the IBRD Articles of Agreement). Australia has been a signatory to this treaty since 1947. The IBRD provides financial products and policy advice to middle income countries, and credit worthy low income countries, to reduce poverty and encourage sustainable growth. According to the IBRD National Interest Analysis (IBRD NIA), the IBRD provides policy based loans to governments to support institutional reform and build institutional capacity.
The IBRD Articles of Agreement permit the IBRD to increase its capital from time to time with the agreement of the Governors of the World Bank. According to the IBRD NIA, the capital increases under consideration here will:
… give the IBRD greater capacity to mitigate the impacts of economic shocks and systemic crises and allow for increased responsiveness to global security and stability …
Further, the IBRD NIA argues that the capital increase allows the IBRD to remain an attractive source of quality financing for its clients.
The IBRD Capital Increase Treaty is the result of two Resolutions of the IBRD Board of Governors in 2018. Resolution 663 relates to a general capital increase for the IBRD, and Resolution 664 relates to a selective capital increase. The method for raising capital agreed in both Resolutions is to offer a subscription of shares to the member states of the IBRD. The share subscription will increase the paid in capital of the IBRD by US$7.5 billion.
Under the proposed Treaty, Australia’s paid in contribution for the two share subscription offers will be AU$154 million, representing 20 per cent of the value of Australia’s shares in the general capital increase and six per cent of the selective capital increase.
In relation to the impact on the Australian Government’s finances, Ms Lisa Ellison, Division Head, International Policy and Engagement Division with Treasury, advised the Committee that:
The paid-in contributions have no impact on the underlying cash or fiscal balance, because they represent a change in the composition of the government’s assets. We’re essentially giving cash and receiving shares in the institution in return.
General Capital Increase
IBRD general capital increases allow countries to subscribe to additional shares in proportion to their existing capital share. The general capital increase under consideration here offers an additional 230,500 IBRD shares, each with a value of US$120,635, to member states. The number of shares available to each member is set out in a table in Article 2 of Resolution 663. Australia has been offered 3,243 shares.
Member states wishing to avail themselves of the share offer can subscribe to the number of shares they wish to purchase up to the limit set out in the Article 2 table by the fifth anniversary of the date on which Resolution 663 was adopted, which is October 2023. There is the possibility of extending the time of the offer under certain circumstances.
Member states availing themselves of the share offer must pay the IBRD two percent of the value of the shares subscribed in gold or United States dollars, and 18 per cent of the value of the shares subscribed in the member state’s own currency.
Before a member state’s share subscription is approved, it must complete all necessary action to authorise the subscription, make the relevant payments, and ensure that the IBRD can make immediate and unrestricted use of the 18 per cent payment that is made using the member state’s own currency.
All rights associated with a share subscription, such as voting rights, will be suspended if a member state has failed to make a payment in the prescribed time.
Shares that have not been subscribed by the end of the subscription period will become part of the IBRD’s unallocated capital stock.
Selective Capital Increase
Selective capital increases allow some member states to increase their share of capital beyond their historical proportional allocation, which increases their voting power in the IBRD.
The selective capital increase under consideration here offers an additional 245,773 IBRD shares of the same face value as those of the general capital increase. For this share subscription, Australia has been offered 4,219 shares.
The terms of the selective capital increase share subscription are identical to those in the general capital increase, except that the amount the subscribing member state is required to pay is 0.6 per cent of the value of the subscribed shares in US dollars and 5.4 per cent of the value of the subscribed shares in the member state’s own currency.
Member states who subscribe to the selective capital increase must, however, be prepared for the IBRD to call on remaining subscription funds up to 20 per cent of the value of the subscribed shares when needed.
As noted above, Australia is only required to immediately pay for a specific fraction of the IBRD shares it has purchased. The IBRD will be able to call on the outstanding sum of the value of the shares, amounting to slightly more than AU$1 billion.
This funding arrangement, in different forms, is a consistent feature across international financial institutions, including the World Bank and the International Monetary Fund (IMF).
The IBRD share subscription under consideration here will increase Australia’s callable capital available to international financial institutions to AU$4.7 billion.
In total, the share subscription will increase the callable capital of the IBRD by US$52.6 billion. The IBRD NIA notes that the IBRD has never exercised its right to call on these funds.
According Ms Ellison:
… there’s a great reluctance across those institutions to call on the capital, because they recognise that it would undermine their creditworthiness and their long-term future operation …
… we are quite confident, in the Treasury, that [it is] a very unlikely prospect, but, of course, it is callable capital, which means that we can’t rule that out as a possibility.
The callable component is a contingent liability, and it will be reflected in the Australian Government’s Budget’s statement of risk.
The IFC General Capital Increase
The IFC is an international organisation established by the Articles of Agreement of the International Finance Corporation. Australia has been a member state of the IFC since 1956.
The IFC is the world’s largest multilateral institution providing development finance. The role of the IFC is to support the development of robust private sector economies by providing investment, advisory and asset management services to encourage private sector development in developing countries.
The IFC general capital increase is the result of Resolution 272 of the Board of Governors of the IFC. According to Treasury, the IFC has not sought a capital increase for some time. As a consequence, without the increase, the IFC would be required to reduce its lending operations.
The capital increase for the IFC will more than triple the capital available to it. In total it currently has US$2.57 billion in capital available, and the additional capital increase is worth US$5.5 billion in total, increasing the IFC’s capital available to US$8.2 billion.
The IFC general capital increase will involve 4,579,995 additional shares with a value of US$1,000 each. Australia’s allocation is 102,370 shares.
As with Australia’s purchase of the IBRD shares:
The paid-in contributions have no impact on the underlying cash or fiscal balance, because they represent a change in the composition of the government’s assets.
A member state wishing to subscribe to the shares must advise the IFC of its intention to do so before the third anniversary of the date of the offer (which occurs in April 2023), and must pay for the subscribed shares before the fifth anniversary of the offer, 15 April 2025. The cost of Australia’s subscription will be AU$144 million.
The decision to seek capital increases for the IBRD and the IFC pre-dates the COVID-19 pandemic. Nevertheless, the capital increases mean that the World Bank as a whole is better placed to assist in supporting the global economy during the pandemic.
The World Bank’s initial response was to provide a US$14 billion fast-track facility to assist member states with immediate financial needs associated with the pandemic. Following on from that, the World Bank has implemented a separate package allocating up to US$350 billion over five years to assist member states with responding to the pandemic and its impact on the economies of member states. This will take the form of grants and loans as well as technical assistance to those states.
To implement the two proposed treaty actions, the Government has introduced amendments to the International Monetary Agreements Act 1947 (the Act).
Previously this Act has been amended in relation to each change in Australia’s obligations to international financial institutions. In this case, however, the Act is being amended to permit the relevant Minister to change Australia’s obligations without having to amend the Act on each occasion.
According to The Treasury, the proposed amendments will mean that the Act will no longer contain redundant details about previous capital increases, and dollar values and share amounts that are no longer current.
The proposed amendments are contained in Schedule 4 of the Treasury Laws Amendment (2020 Measures No. 2) Bill 2020. The Bill provides that the relevant Minister can enter into agreement with the IBRD and the IFC to purchase additional shares, and that funding for these additional purchases will come from the Consolidated Revenue Fund.
Decisions to enter into future share purchases will continue to be subject to Australia’s domestic treaty-making processes, including consideration by the Joint Standing Committee on Treaties.
According to Treasury, this approach is consistent with other provisions in the Act that authorise the Minister entering into agreements in support of programs of the International Monetary Fund, the World Bank or the Asian Development Bank.
In addition, the Bill includes amendments that would require that IFC capital increases facilitated by a direct change to the IFC Articles of Agreement be implemented via a disallowable legislative instrument.
The Committee notes that the amendments contained in the Treasury Laws Amendment (2020 Measures No. 2) Bill 2020 means that, while the treaties associated with future share purchases will be subject to JSCOT scrutiny, the share purchases themselves will not be subject to a vote in Parliament. The Committee also notes that the proposed arrangement is already in place for a number of other international institutions.
The timing of the capital increase in relation to the COVID-19 pandemic, while coincidental, adds to the resources available to the World Bank at a time of high demand. The Committee supports the capital increases to the IBRD and IFC and recommends that binding treaty action be taken.
The Committee supports the International Bank for Reconstruction and Development (IBRD) General Capital Increase and Selective Capital Increase and the International Finance Corporation (IFC) General Capital Increase and recommends that binding treaty action be taken.