To paraphrase American satirist PJ O'Rourke, if you buy yourself something with your own money, odds are that you'll spend time making sure you get exactly what you want. If you spend your own money on something for someone else, you won't be quite as careful. But if you're given money by one person and told to buy something for someone else, you're likely not to be careful at all.
Governments are one kind of institution that falls into the last of these categories, multilateral agencies are another. We don't generally trust governments to spend taxpayers' money wisely, and if the European Bank for Reconstruction and Development's recent record in Russia is anything to go by we should not expect multilaterals to do so either.
The EBRD's Russian losses have cost it more than all the profits it has ever made. Its investment bankers, particularly those responsible for the bank's investments in financial institutions, have learnt too late that they were powerless to protect their shareholders' money. Only the recent news that the Russians are demanding 75% write-offs on $100 billion of Soviet-era debt may make them feel that things could have been worse.
While there may have been individual failings at the EBRD - there was an instance of one senior figure dismissing a mistake with the words "I don't have time to look at the small print in annual reports" - the true problem is structural. What are these institutions? What is their purpose? How should they operate?
The EBRD was constrained by its charter and its politics to lend to Russia and to do part of that lending in the most dangerous way possible - taking minority equity stakes. A key plank of the bank's debt policy is also a recipe for disaster - using local bank intermediaries to funnel credit to small and medium-size businesses.
In Baku, Bishkek and now apparently even Dushanbe (the capital of Tajikistan), supervision of local financial institutions is frail or non-existent. Information disclosure by local businesses is insufficient. It will be no surprise if the SME lending programme throws up high levels of non-performing loans. This is particularly true as the bank is effectively forced to leave markets in which it is a commercial success because that success attracts other investors who will take over its role.
The IFC (see page 45) has the same problems. Its role is to fund bankable projects with a maximum development impact. But how does it do this while minimizing the risks? After all it is a bank not a government agency. And like the EBRD, the IFC has been pushed by its shareholders to get into tougher markets, take more risk and become more adventurous.
What these institutions need is a clear separation of politics from business. If they are primarily extensions of the aid budgets of their shareholders, then this should be made explicit. If they are there to make a profit, they should be run as banks. The half-way house that prevails forces bankers to make commercially dubious decisions for political reasons. Without change, expect more losses.