Multilateral Development Banks and Safeguards

By Vinod Thomas and David de Ferranti

Independent evaluations at multilateral development banks (MDBs) have called for a reform of the system of safeguards that they use to deflect potential damages to communities and the environment associated with the investments they finance. Without such mitigation, roads can harm habitats, dams displace communities and slum rebuilding hurt livelihoods. The purpose of reform, the reviews stressed, should be to improve environmental and social outcomes of safeguards, while reducing inefficiencies in their implementation.

After many months of deliberation, the World Bank recently put out a reform proposal, which will influence other financiers. Balancing financing with environmental and social attention must be a top concern for established lenders such as the World Bank and Asian Development Bank as well as the two new lenders: the Asian Infrastructure Investment Bank and the New Development Bank of BRICS countries. Even as the borrower is responsible for implementing safeguards, the financier must be accountable for robust checks on the projects financed.

The proposal is naturally driven by a growing demand for lending operations to be speedy, and for due diligence such as safeguards to be flexible. It signals both commitment to sustainable development and efficiency gains in project processing. On the important "what," or the scope of the policy, it contains improvements, for example, resettlement of affected people or consent of indigenous people. However, issues of critical habitats or social discrimination need careful clarification. Also, by attending only to investment projects, the large body of policy-based lending continues to be left out.

On the decisive "how," or modalities, there are three important changes from the current regime that are vital to be clarified. First, there is to be a new, four-way classification of risks -- "high," "substantial," "moderate" and "low." (Currently, there is a three-way classification of project impacts: "significantly adverse," "less adverse" and "limited"). This change could be positive if it strengthens attention to risky projects in the middle, as evaluations have recommended; but negative if it helps shift some high risk ones to the (new) substantial category, weakening their oversight.

Second, the proposal entertains the use of a country's safeguards system for externally financed projects (except for one sub-category), with gap filling during implementation. This could help strengthen local capabilities. But since very few country systems are adequate yet, readily applying them would be dicey, as seen in the grievances from weak applications of national systems, be it in China or India. The proposal hints at the inadequacy of borrower systems for high risk cases; this is true for substantial risk ones too. The crucial question is how equivalence of a country's system with the World Bank framework will be established.

Third, the new framework envisages an environmental and social commitment plan, developed by the country and approved with the project, setting out standards. But it will, with the help of certain management tools, seek key targets to be developed and met some time during implementation. For example, an environmental management plan, a resettlement plan, or a hazardous waste plan may be prepared during implementation, its scope evolving in response to circumstances. The critical question is if the project at approval is or is not required to meet specific and binding targets.

Deferring specificity of compliance from the project ratification to the implementation stage can lessen upfront work and screening by the Board and thus hasten approval. But that would not save time if sufficient mitigation plans were indeed to be developed later. The approach could also open the window for a softening of requirements during implementation, including resistance to stopping approved projects that cannot adhere to World Bank standards. Corrective action is unlikely to follow without specific legal provisions in the first place.

If there were a combination of flexible requirements and national standards for risky projects, that would dilute safeguards--especially in the absence of greater commitment, additional funds and staff allocation during follow-up. Balance between compliance and flexibility might be struck by presuming the use of the MDB system until national ones are adequate, while investing in improving the latter. It might also come from requiring an action plan with binding targets for safeguards, which can be improved during implementation.

Evaluations noted that downstream diligence ought to be strengthened: the World Bank proposal has advisory and supervisory elements that try to do so. But evaluations did not suggest that upstream regulation be weakened, rather that it be maintained while processing speed is achieved through greater efficiency. Accordingly, the proposal calls for two basic explanations and changes.

First, it needs to be clear that environmental and social indicators that can be tracked and reported against will be legal conditions for approving high and substantial risk cases. Second, it needs to be clear that the World Bank's standards are required for high-risk and substantial-risk projects, while efforts continue to strengthen national systems. Velocity of project processing should be sought through process and procedural efficiency, and adequate resources for their implementation.

The United Nation's new Sustainable Development Goals accord top priority for environmentally and socially sustainable growth. MDBs' safeguards accompanying policies and investments must complement these goals by ensuring that environmental and social care is not weakened but strengthened.

Vinod Thomas is Director-General of Independent Evaluation at the Asian Development Bank, a position he previously held at the World Bank Group. David de Ferranti is President of Results for Development Institute.