World Bank Policy Reforms Spell Risk for Accountability

Zachary Hurwitz
At the 2012 World Bank annual meetings in Tokyo, the Bank has commenced major revisions of its safeguards policies.

The World Bank has begun a process of revising the core policies that orient its investment lending and social and environmental safeguards. The overall trend, it seems, is to streamline and consolidate the policies in order to make the Bank more flexible to borrower demands. This may make business sense, as any good company responds to its customers. But from the lens of social and environmental standards and accountability, it may spell trouble.

Making Investment Rules More Flexible

The Bank's “Investment Lending Reform” paper disclosed at the beginning of October recommends making the Bank's rules on investment lending — how the Bank does its business – more flexible, attuned to rapid response, and at times in deference to a borrower's own policies. The recommendations include:

  • Extending the options for additional flexibility currently available under OP 8.00 (Rapid Response to Crises and Emergencies) for countries faced with natural or man-made disasters and conflict to countries affected by fragility or specific vulnerabilities, including for small states;
  • Prioritizing early risk- and results-based economic analysis rather than simply rate of return during economic analysis of investment loans;
  • Revising the approval procedures for a series of IL projects that represent part of a programmatic engagement over time with client(s);
  • Dropping an existing three-year limit on additional financing;
  • Retaining the requirement of annual audits but adding more flexibility to their timing to better take into account country conditions and to allow for the use of country systems when appropriate;
  • Increasing the current Project Preparation Advance limits of US$3 million in normal circumstances to $6 million, and from $5 million, currently just for crises and emergencies, to $10 million for countries faced with natural or man-made disasters, conflict, fragility or specific vulnerabilities, including for small states.

What does this mean for how the Bank does investment lending for infrastructure? It means that the Bank will loosen its rules on providing loans, and will be able to disburse finance in a rapid response fashion, especially for crises, emergencies, fragilities, or vulnerabilities. We can expect the various types of project investment loan instruments used by the Bank to be consolidated into one single project loan type that would also include loans made from the Global Environmental Facility and Montreal Protocol. A new, singular policy has been drafted to guide this new, apparently more agile form of lending: OP/BP 10.00 on Investment Project Financing.

But what will be defined as a crisis, emergency, fragility, or vulnerability? Buzzwords again become significant to World Bank investment lending. For example, if a country defines “energy poverty” as a crisis or an emergency and requests a loan for a large dam, would the Bank disburse a rapid response loan? We hope not, since according to OP/BP 10.00, for “Projects in Situations of Urgent Need of Assistance or Capacity Constraints,” developers can hold off on doing an environmental assessment until after the project is already under construction.

Diluting Safeguards?

The Bank has also begun to review its safeguards policies, which consist of Operational Policies (OPs) and Bank Procedures (BPs). In general, the 8 OPs that refer to social and environmental standards bind borrowers to expected practices, which, if violated, are grounds for loan cancellation. Meanwhile, in general, BPs are rules and procedures that guide Bank staff's activities during loan preparation and disbursement.

The Bank states that a revision of the safeguards is necessary because many countries have developed their own social and environmental policies since the creation of the safeguards. Yet these policies are often poor, have no input from affected communities or civil society, and are often rooted in corrupt judicial and political systems, making their implementation anything but a sure bet. In this light, the Bank is already perceived as revising its safeguards downwards to appease borrowers who don't want to be held accountable to such stringent standards.

The Bank has denied that such a weakening would occur. Here in Tokyo at the 2012 World Bank/IMF Annual General Meeting, after being pressed by a civil society representative, the Bank's Executive Director for the United Kingdom, Susanna Moorehead, stated her willingness to commit to a “no dilution” clause in the safeguards revision. The Bank's President Jim Kim responded similarly during the World Bank/Civil Society Townhall Meeting, but the board has not made any official statement to confirm this position.

In short, the Bank is moving away from the strong policy language that made its social and environmental safeguards into standards emulated by many financial institutions, and towards a principled, guidance-based approach that, in some cases, will defer to a borrower's own policies on social and environmental standards, environmental destruction, human rights violations, or corruption.

The assumption that some country systems are up to the task of meeting the same standards as the Bank's safeguards, however, is a large one; if borrower policies are not strengthened first, the Bank's policy revisions may actually decrease the ability to hold institutions accountable for investments gone wrong.