World Bank vs. World Bank: Protecting Safeguards in a “Modern” International Institution

Community meeting, Dhaka, Bangladesh. Photo credit: flickr/waterdotorg

The World Bank has begun an effort to strengthen its environmental and social safeguards. But how relevant will these safeguards be after the Bank’s parallel proposals to “modernize” the way it does business?

As an institution of 10,000+ staff, owned by 187 governments, the World Bank invests in a wide range of development activities to help meet the needs of a wide range of borrowers. The bank’s environmental and social safeguards have emerged as a consistent approach to ensure, across these diverse contexts, that its investments “do no harm,” particularly when investments do not go as planned.

Last year, the World Bank began a series of reforms to “modernize” the way it does business, in order to revisit the bank’s strategic vision, strengthen overall financial performance, and adopt “21st century governance” that gives greater voice to developing countries (See Table 1). As part of this effort, World Bank management has publicly expressed a clear commitment to strengthen rather than dilute the safeguards. But because the safeguard reforms are taking place within the shadow of larger structural reforms at the Bank—with pieces of safeguards scattered across various reforms—the final outlook remains unclear.

For example, our analysis of current proposals¹ suggests that the bank’s traditional safeguards could cover as little as 16% of its total portfolio by volume of lending. (See below). Will the combination of changing priorities, changing leadership, and changing financial instruments weaken the bank’s commitment and capacity to shield local people and ecosystems from unintended harm?

Changing world, changing bank

The World Bank formally kicked off its safeguard review in 2011, after an internal audit found “substantial challenges in supervision, monitoring, and follow-up.” But the actual safeguard reforms are well underway as part of a wider process to remodel the Bank. These reforms reflect the changing global dynamics in which the World Bank is learning to operate:

• Greater voice of developing countries. Since 2008, many developing countries that sit on the Bank’s board of directors have begun to occasionally take public, joint positions on complex issues such as climate change. This is in sharp contrast to board discussions of the past several decades, which were dominated by developed countries. As a result, Bank staffers are becoming more responsive to the development priorities of borrowing governments.

• Greater competition from emerging economies. At the same time, the World Bank is facing new competition from banks in emerging economies. In 2009 and 2010, China’s Export Import Bank and its Development Bank lent more to developing countries than the World Bank did. Financial institutions from emerging economies are providing governments with low cost alternatives to the Bank. This has led to a sense of competition and uncertainty over the World Bank’s role as a leader in development finance.

• Aftershocks of the financial crisis. As many donor governments continue to struggle with their economies, the Bank’s own budget has become more restricted. Bank management has reduced the budget for several operations (including safeguards), and urged investments to go forward more cheaply and quickly. This has led to pressure to streamline policies as a way to cut costs.

• New types of lending. The Bank has gradually shifted its portfolio away from its traditional lending for specific projects. Now, in the majority of investments, the exact use of funds is not specified ahead of time. Instead, borrowers pool Bank funds with other donors, channel funds to broad government programs (“programmatic lending”), and use funds as general budget support for the treasury (“development policy loans”). These financing approaches allow the Bank to leverage a wider range of development activities, but their performance is more difficult to track.

Of course, these trends will bring both benefits and challenges for development. Yet early indications suggest that the Bank could respond to these trends by stepping away (sometimes unintentionally) from environmental and social responsibility in its investments. It is becoming more difficult for the public to monitor and hold the Bank accountable for its use of public funds.

A sneak-peek at the ‘modern’ Bank

A variety of reforms are underway (see Table 1). Beginning in late 2011, for example, the Bank will lend in three basic ways, where it once lent through two. Previously, governments could borrow for: (1) investment lending—for specific projects; or (2) development policy loans—for broader policy and institutional reforms. The new lending instrument, programming for results (P4R) will finance governments in tranches based on their ability to demonstrate results. This instrument will primarily apply to programmatic lending such as improving access to healthcare or electricity. The purpose is to provide borrowers with more options to suit their needs and build country ownership.

Different Bank departments are charged with updating each type of lending instrument. Perhaps for this reason, each lending instrument will have its own approach to safeguards. Each reform is also occurring along different timelines.

Will local voices be lost in the Bank’s broader agenda?

The safeguards reforms will occur in bits and pieces throughout the broader structural reforms. In fact, the actual “safeguards review” as labeled by the Bank could apply to as little as 16% of the Bank’s total portfolio. Fortunately, the World Bank is still designing the safeguards review process. Time still exists to address key concerns:

• Limited scope of the safeguards review. The World Bank has not indicated how its new portfolio will be distributed among the three instruments. Based on data from the FY2010 portfolio, investment lending could be 16% of the portfolio, P4R could be 46%, and development policy loans could be 38%. If this is the case, traditional safeguards would apply only to 16% of the Bank’s total portfolio. P4R would have its own approach to safeguards, and development policy loans would continue not to apply safeguards. (Recognizing that these are only rough estimates, we invite the Bank to publish its latest projections.)

• Timeline(s) for the safeguards review. The various safeguard reforms are operating according to different timelines. Currently, the P4R safeguards approach is scheduled to be completed in late 2011. The investment lending safeguards approach will be completed in late 2012. Safeguards for development policy loans are not under consideration at all. By the time the “safeguards review” begins, many key decisions about safeguards will have already been made.

• Staff incentives. Under the Bank’s current proposals, the Bank will provide less guidance on environmental and social safeguards in the bulk of its investments. Effective due diligence, then, will depend on the skills and interests of each operational team. Yet, as the Bank’s internal audit suggests, few World Bank staffers have an incentive to conduct a robust environmental and social due diligence process. Instead, staff members are rewarded and promoted for the volume of lending that is moved out the door. Environmental and social specialists exist but are not well integrated into operational decision-making. The Bank also rotates team leaders, and as such, staff members are not held accountable for the outcomes of their investment decisions. However, these underlying “staff incentive” challenges are not part of the safeguards review.

• Ambivalence of civil society organizations and other stakeholders. In recent years, the World Bank has been diligent about conducting broad public consultations before making major policy changes. Yet among civil society organizations (CSOs) that have historically engaged the World Bank, many remain concerned that the safeguards review will not be a worthwhile process, particular if it only affects a small percentage of the Bank’s portfolio. Other CSOs are concerned about the overall legitimacy of safeguards—this is particularly true among Southern CSOs. Many view the safeguards as a weaker alternative to the international human rights framework, and others view the safeguards (like any World Bank policy conditions) as an infringement on country ownership. This ambivalence may deter CSOs and other Bank stakeholders from participating in the review. It remains unclear how the World Bank will generate enough interest for a broad and legitimate public consultation.

• Accountability in flux. Since 1993, when communities feel that the World Bank has not followed the safeguards, they can bring claims directly to the Bank’s Inspection Panel. But it is unclear whether the Bank’s reforms will narrow the Panel’s jurisdiction. Will the Inspection Panel, for example, be able to hear complaints about P4R investments? If so, how will the Panel determine if the Bank has “complied” when there is not a specific set of safeguards to follow? The Bank has already hired staff for a separate grievance system, independent of the Panel, where communities can raise concerns directly with Bank management. While important for Bank management to respond more effectively to communities’ concerns, this new grievance system could easily block access to the Inspection Panel. (According to Bank policy, communities are required to engage management before bringing a claim to the Panel.) Despite the relevance of these reforms to the Bank’s new safeguards system, many of the decisions on how to resolve grievances over safeguards will not be a part of the “safeguards review.”

Recommendations for the World Bank

How will we know if the safeguards reforms are a success? No matter what system emerges, the Bank should be able to consistently conduct due diligence to avoid supporting activities that would cause environmental damage or human rights violations. Communities will need to be aware when a World Bank investment impacts them, and must be able to voice their concerns directly with the Bank (in the absence of local remedies). If communities are unable to point to specific violations of Bank policy, then they need another, concrete way to hold decision-makers accountable.

The current proposal for safeguards reforms, however, could leave major gaps. In the past, the Bank has relied on robust consultations before charting a path forward. As an initial first step, we recommend that the World Bank facilitate a stronger consultation process:

• Within a single review process, reform the approaches to safeguards across all lending instruments during a single timeframe and in a coordinated fashion.

• Include safeguards for development policy loans as part of the review.

• Continue to review and update the “country systems” approach that allows some governments to apply their own environmental and human rights laws instead of safeguards, as it overlaps with all of the other proposals;

• As part of the review, make the design of the Bank’s new grievance mechanisms and the role of the Inspection Panel open for public consultations.

Conclusion

As the World Bank adapts to changing global dynamics, opportunities (and threats) exist for environmental and social sustainability. The safeguards review will become a key part of this opportunity or threat. The greatest challenge for the Bank will be demonstrating that its commitment to strengthen safeguards comes from the entire institution—including the governments that own it—and not just from a small team of dedicated staff.

For more information, contact Kirk Herbertson or Athena Ballesteros.