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Global
Institutions & Politics
Harmonizing in Rome:
Will Rome’s High-Level Forum in February 2003
Undermine the Environmental and
Social Policy Safeguards of the Lending Institutions?
by
Nancy C. Alexander
Citizens' Network on
Essential Services (CNES)
January 30, 2003
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I. Background
Over the last fifteen years, controversy has raged over the extent
to which financial institutions should be obligated to ensure
that their operations “do no harm” to the natural
environment and groups directly or indirectly affected by these
operations (e.g., roads, big dams and other large infrastructure).
Broadly defined, “International Financial Institutions”
include multilateral development banks, bilateral development
financial institutions and export credit agencies. The World Bank’s
private sector affiliate, the International Finance Corporation
(IFC) chaired a “mapping” exercise in which 43 IFIs
sought to compare and contrast the extent of their “due
diligence” in regard to information disclosure, financial,
procurement, and social and environmental management and assessment
policies. After the mapping process was complete, the IFIs established
working groups that sought to harmonize their policies.
For the most part, governments and corporations that conduct
business with the IFIs play the institutions off against each
other. Oftentimes, IFIs found that there was an inverse relationship
between the strength of their social, environmental, and other
policies and their ability to attract business. That is, the institutions
with the lowest standards attracted the most business and vice
versa. For the World Bank, the preparation and issuance of the
2001 “Cost of Doing Business” study represented a
turning point in the history of the institution. A Governor of
the World Bank lamented that:
Unrealistic requirements and arbitrary increases
in safeguard standards have engendered higher costs in project
implementation. This has not only constrained developing countries’
ability to use the Bank’s loans, puts limits on the Bank’s
role in economic development, but has also contributed to the
recent decline in the Bank’s loan commitments.1
Rather than focusing on the tremendous benefits of the policies
to the natural environment and vulnerable groups, the study concluded
that:
To enhance the development impact of these policies
would require a…shift…from policy leadership to increased
harmonization with clients and regional development banks. 2
Hence, “external harmonization”
is an exercise geared not only to leveling the playing field among
IFIs in the business of penetrating and expanding market share,
but also reducing transaction costs for governments and the private
sector.
Although this “Note” is about the secretive external
harmonization that has significantly accelerated in the last two
year, a word about internal harmonization is in order. At each
IFI, the business of establishing and harmonizing policies has
its own unique history. This “Note” briefly describes
the process at the World Bank, which is viewed as a “pacesetting”
institution due to the fact that other IFIs sometimes follow its
lead.
Internal harmonization of policies. Over the
years, there has been heated controversy within the World Bank
and the regional development banks about the extent of their obligations
to prevent or mitigate harm arising from their lending operations.
Due to the activism of certain parties, especially the U.S. Congress
and leading environmental organizations such as Environmental
Defense, the World Bank elevated certain policies out of its coterie
of __ operational policies (OPs) to the status of “safeguard”
policies. The Bank took these steps only after it was publicly
humiliated by its failure to anticipate and avert widespread environmental
and social harm in lending operations, such as the Narmada Dam
in India and the Polonoreste Project in Brazil.
The “Cost of Doing Business” study discussed the
costs of the World Bank operational policies in ten “safeguard”
areas: Environmental Assessment; Forestry; Involuntary resettlement;
Indigenous Peoples; International Waterways; Dam Safety; Natural
Habitats; Pest Management; Cultural Resources; Projects in Disputed
Areas. Safeguard policies aim to ensure that the institution adheres
to a “do no harm” approach to lending in the specified
areas. In contrast to the World Bank, the four regional banks
(Africa, Asia, Europe and Latin America) have fewer policies and,
in lieu of policies, they have either no institutional requirements
or “guidelines.” The European Bank for Reconstruction
and Development (EBRD) has no requirements.
The Bank’s operational policies represent standards to which
the Bank can be held accountable. Indeed, if the Bank violates
its policies, aggrieved parties can file a compliant with the
Bank’s Inspection Panel. Although the Inspection Panel process
is plagued with difficulties (it is largely captured by the Bank’s
management), it represents a potentially important mechanism of
global governance. Many groups have felt that if public
institutions, such as the World Bank, could set responsible
standards, then private institutions could be
induced to conform to similar standards.
Over the last several years, the Bank has been executing a “harmonization
process” which ostensibly aims to clarify the institution’s
obligation with respect to each of its operational policies, including
the safeguard policies. The process also clarifies accountability
for high-risk operations and integrates all safeguard policy applications
(e.g., Forestry, Natural Habitats, Pest Management and Dam Safety)
under the umbrella of “environmental assessments.”
This has been a highly political process.
The Bank has sometimes engaged in consultations with outside
groups, including NGOs, about its revision or reformatting of
the policies. NGOs have been dismayed by the often shoddy Bank-facilitated
consultation processes and the extent to which, in re-writing
the policies, the Bank apparently waters them down and disregards
the views of affected groups and interested parties.
Since the external harmonization process is conducted in secretive
meetings, it is not always evident how the external process guides
the internal harmonization process.
Box 1
Roaring Back into Infrastructure:
The World Bank’s Beleaguered
Water Resources Sector Strategy (WRSS)
The Bank’s Water Resources Sector Strategy (WRSS)
notes a decline of 30% in lending for infrastructure (Energy
Sector decline of 65%; Transport, 28%; Urban, 25%) over
FY95-01. The institution’s 2001 “Cost of Doing
Business” study concluded that an important part of
this decline is attributable to client distaste for Bank’s
safeguard policies.”3
The World Bank’s management has presented numerous
drafts WRSS to the institution’s Board of Executive
Directors over the course of recent years. The latest date
for Board approval of the Strategy, January 23, 2003, came
and went. Why does this policy live in limbo? It appears
that the Board is gaining independence from management and
refusing to capitulate and approve a Strategy that dismisses
many lessons relating to infrastructure lending.
It also appears that the World Commission on Dams (WCD)
has had an influence on the Bank’s Board.4
The Bank’s Board met five times to consider
the recommendations of the WCD. The WCD and the broader
public have been stunned and disappointed that Bank’s
Board decided that the WCD’s 26 recommendations are
more ambitious and costly than its safeguard policies and,
hence, will only “inform” Bank operations rather
than be adopted as guidelines. The WCD is one of many collaborative
processes in which the Bank has engaged and, in the end,
flouted the outcome.
Still, it is promising that the Bank’s Board has
stalwartly refused to approve a WRSS that would roar back
into the business of what the Bank euphemistically calls
“high risk/high reward” infrastructure.
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II. Turning Point: February 2003 in Rome
The larger process addresses not only environmental and social
standards, but a whole host of other policies as well. The Italian
Government is hosting a High Level Forum in Rome on February
23-25, 2003 with the OECD-DAC and the Multilateral Development
Banks (MDBs) as sponsoring partners. This High Level Forum is
expected to be a turning point in terms of transferring responsibility
for policy compliance to developing country governments, as described
in part II. Citizens’ groups are largely excluded from this
process. “Harmonization” is such an innocuous word;
it belies the weighty decisions that are being made about the
future of global and national governance.
The Forum is determining harmonization processes with respect
to numerous issues, but the top three issues relate to financial
management (fighting corruption, etc.), procurement and environmental
assessment. While the IMF is not included in the High-Level
Forum, a quick review of dozens of recent IMF loans (Stand-by
Arrangements and PRGF Arrangements) demonstrates routine binding
requirements related to procurement and financial management.
A range of Multilateral Financial Institutions are taking the
lead with respect to the Working Group on the Environment.5
The WGE addresses issues relating to Environmental Assessments
and Financial intermediaries. With respect to environmental assessment,
the multilateral financial institutions established a Working
Group on the Environment began preparing “A Common Framework
and Agreed Principles for Environmental Assessment” in July
2001.6 The
document selectively takes into account social issues, e.g., resettlement,
indigenous peoples and cultural heritage.7
One can easily imagine the different dimensions of harmonizing
environmental issues so that dozens of agencies take similar approaches
to: adopting environmental policies; conducting environmental
risk analyses; performing environmental impact assessments; complying
with international environmental treaties and conventions; complying
with legal requirements of a host country; applying special consideration
of eco-systems, such as wildlife sanctuaries, national parks and
rainforests, historic temples, etc.; addressing involuntary settlement
concerns, reviewing discriminatory practices relating to religion,
race, or gender; applying core labor standards, engaging in public
consultation, disclosing social and environmental information
to the public and so on.
The WGE spent considerable time focusing on what an environmental
assessment should contain, what special considerations should
be granted to the private sector, what information should be publicly
disclosed, and so on.
The Multilateral Development Banks are taking a lead with respect
to:
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Financial Management and Analysis, including
country diagnostic work; financial management; financial analysis
(approaches to tariffs, subsidies, and affordability); accounting
standards.
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Procurement Issues, including standardizing
master documents relating to supply of goods, civil works contracts,
request for proposals for consultants, and prequalification
for civil works.
-
Country Diagnostic Work, including Country
Procurement Assessment Reviews. CPARs are being conducted in
Guinea, Philippines, Uzbekistan, Costa Rica, El Salvador, Paraguay,
Yugoslavia, and Azerbaijan. In 2003, common procurement, implementation,
and monitoring standards will be adopted.
The OECD – DAC Task Forces are taking a lead with respect
to:
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Donor Practices. The Task Force is heading
up processes addresses good practices in financial accountability,
pre-implementation stages of the project cycle, and reporting
and monitoring requirements – as well as recipient engagement.
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Financial Management and Accountability, including
fiduciary standards, donor accountability, financial reporting
and auditing.
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Pre-Implementation Phase of the Project Cycle,
including sectoral analytic work, risk analysis, Logical Framework
and Results Assessment, and Cofinancing.
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Reporting and monitoring.
III. Who Bears the Responsibility for Policy Compliance?
Many observers claim that IFIs should be accountable for their
operations. That is, they should be held to certain standards
and, if they fail to meet those standards, there should be consequences.
Others claim that the IFIs finance a small proportion of development
projects internationally and, ultimately, host governments need
to be accountable for compliance with sound social and environmental
standards.
In June 2002, a Committee of the World Bank’s Board of
Executive Directors, the Committee on Development Effectiveness
(CODE), reviewed a paper that outlines the timeline for “modernizing”
the Bank’s safeguard system to facilitate the assumption
by borrowing governments of responsibility for policy compliance.
Poverty Reduction Strategy Papers (PRSPs). Each
low-income borrowing country is obliged to prepare a PRSP in order
to qualify for external assistance. In PRSP processes, countries
are encouraged to identify harmonization priorities. The IMF-World
Bank Joint Staff Assessment, which determines the acceptability
of each country’s PRSP, will make judgments about the treatment
of harmonization priorities in the PRSP.
Country Assistance Strategies (CASs). The World
Bank’s business plan for each borrower, the CAS, must henceforth
discuss the Bank’s plans to improve harmonization, especially
related to financial management, procurement, and environmental
assessment.
Graduation. The process by which a country may
“graduate” consists of the following stages:
1) Capacity Assessment. The Bank assesses a country’s
current standards, including a) laws, regulations and policies;
b) institutional capacity, c) capacity for participation and information
disclosure, d) review and approval processes, e) monitoring and
evaluation, and f) the quality of outcomes.
2) Capacity Building. The Bank assists governments in a process
of strengthening key agencies in order that they can meet required
standards.
3) “Graduation.” The Bank and other agencies certify
that the country has met key standards and can apply its own national
processes. A client government can be “certified”
after an initial trial period, certification, and monitoring.
The Bank is exploring third-party certification options wherein
the third-party will verify agencies and enterprises. To provide
an incentive, the third party may be associated with potential
financial advantages to borrowers and private sector clients (e.g.,
preferred rates in capital markets).
The process is carried out in one or two sectors (e.g., procurement
and environmental safeguards). Examples: Poland and Eritrea (environment);
India (resettlement); West Africa (procurement); Indonesia and
Brazil (environmental management).
The World Bank, Asian Development Bank and Japanese Bank for
Investment Cooperation are conducting a pilot program in Vietnam.
There are also pilots in Ethiopia and Jamaica.
Field-based Bank staff are encouraged to take a broad view (described
above) of their role in oversight of safeguard policies. The Bank’s
regional departments prepared work plans for their expanded role
in December 2002.
Third-Party Certification. In the future, the
Bank will utilize third-parties (big accounting firms?) to verify
the capability of agencies and country systems – as well
as to attest to the completion of project objectives. For instance,
if a private water concession promises to expand water connections
to certain poor neighborhoods under output-based aid (OBA) schemes,
a third-party would verify completion of the specified connections
before the concessionaire received subsidies.
IV. Conclusion
The emphasis of the IFIs on enhancing borrower capacity to adopt
and enforce sound policies is highly desirable. It has the potential
to reap society-wide benefits rather than the incremental benefits
reaped by enforcing compliance on a project-by-project basis.
However, the emphasis of the “Cost of Doing Business”
study is on the costs, rather than the benefits, of high standards.
Hence, rather than being a trail-blazer, the Bank appears to be
harmonizing its standards downward. The Bank’s emphasis
on capturing market share is unappealing in a public institution
ostensibly engaged in advancing the public good.
The gaping hiatus in the policy harmonization process relates
to the role of the World Trade Organization in potentially serving
as the ultimate arbiter of policy standards. It should not be
the role of an international organization to enforce regulations
and standards in ways that erode the sovereignty of member governments.
The Bank’s draft “Cost of Doing Business” study
said that some groups may see the policy harmonization process
as a means through which the Bank can “wriggle out”
of its obligations to ensure compliance with its policies. As
the Bank proceeds in watering down its operational policies, one
by one, the Bank is wriggling out of its obligations. Should the
Bank shift all responsibilities for compliance onto member governments,
its Inspection Panel may become a vestigial organ.
The IFIs have an obligation to the public to make the external
as well as internal policy harmonization processes open, participatory
and transparent. The public has a right to participate in defining
and differentiating between the Bank’s due diligence responsibilities
and the Borrower’s implementation responsibilities. The
public also has a right to help determine the nature of the standards
that will be used as a standard against which their governments’
laws and regulations will be measured. Ultimately, the public
has an obligation to ensure that their governments are accountable
to their citizenry rather than to the WTO’s arbiters in
Geneva.
End Notes
1) “Cost
of Doing Business,” December 26, 2000 draft, p. 14.[RETURN]
2) Op. Cit., p. 22.[RETURN]
3) World Bank, “Cost of Doing Business:
Fiduciary and Safeguard Policies and Compliance,” SecM2001-0469,
July 17, 2001. [RETURN]
4) At the same time, many shareholders and the
Bank, itself, were supportive of the World Commission on Dams
(WCD) which, in its November 2000 report, presented a framework
for decision-making on water and energy development based on core
values: equity, sustainability, participatory decision-making,
and accountability Management also consulted with borrowing countries.
[RETURN]
5) From World Bank, “Harmonization of Operational
Policies, Procedures and Practices: Information Note,” Development
Committee Meeting, September 28, 2002.[RETURN]
6) At one point, the Working Group
on the Environment consisted of representatives of CDC Capital
Partners plc; Compagnie Francaise d’Assurance pour le Commerce
Exterieur (COFACE); European Bank for Reconstruction and Development;
European Investment Bank, Export Credit Guarantee Department;
Export Development Corporation; Export-Import Bank of the United
States, Finnish Fund for Industrial Cooperation Ltd., Hermes Kreditversicherungs-AG,
InterAmerican Development Bank, InterAmerican Investment Corporation,
International Finance Corporation, Japan Bank for International
Cooperation, Kreditanstalt fur Wiederaufbau (KfW), Netherlands
Development Finance Company (FMO), Overseas Private Investment
Corporation. [RETURN]
7) The WGE met in August and December
2002. In August, it was hosted by the Development Bank of South
Africa to review a harmonization process proposed by the IDB and
World Bank. In December, the European Investment Bank hosted a
meeting in Luxembourg. [RETURN]
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