A Rule for Private Sector Subsidies: Additionality and Competitive Allocation at the World Bank Group

The World Bank has yet to pin down a working definition for what it labels private sector development (PSD). This lack of clarity has permitted the World Bank to change what it treats as PSD and what PSD operations are expected to achieve. This paper defines a private sector development operation as one where public capital enters a market served by private suppliers to correct a market failure. For operations that fit that definition, it asks whether World Bank involvement is justified and whether it is additional to what would otherwise occur in the market. Applying this test, the paper identifies five approaches to private sector work between FY1975 and FY2025 and finds little evidence that changes in focus and strategy responded to worsening performance. It also finds that of the 156 operations classified by World Bank staff as PSD in FY24–25, only 29 meet the paper’s definition, and 21 fail the additionality test, accounting for US$3.20 billion in total commitments. The paper recommends making the case for intervention an approval requirement under a World Bank Operational Policy, thereby establishing a common test that does not depend on which flavor of PSD is in fashion at the time.