Author: Naomi Roht-Arriaza

This week, the World Bank holds its annual meeting in Washington, DC.  Despite the fact that many Latin American countries are now classified as middle-income, the Bank still has a sizeable presence in the region, especially through its private sector arm, the IFC. The IFC invested over $50 billion in the region in 2012. Thus, its policies and practices, especially those related to infrastructure, extractive industries and agriculture, have a substantial effect on the region. The Bank has come under particular scrutiny this year: civil society groups complain that changes in Bank policies amount to backsliding on its commitment to environmental, social and human rights safeguards in Bank-financed projects. If the changes go through, it will become more difficult for communities affected by Bank-financed mining, palm oil or other large-scale extractive schemes to obtain redress.

Ever since the 1970s, affected communities and activists have complained that some development projects, despite the promise of raising living standards or incomes, have done more harm than good. Starting with the Narmada Dam in the late 1980s, communities began targeting financing of these projects by international financial institutions (IFIs). Pressure to avoid or minimize these harmful collateral effects has over the last quarter century led to an expanding set of guidelines, operational procedures (OPs), and impact assessment requirements for IFIs. These were joined over time by monitoring and redress mechanisms of various sorts, all aimed at improving the quality and outcomes of projects and programs as well as avoiding controversy, bad publicity and legal challenges from dissatisfied local communities or workers. For example, in 1993 the World Bank created the Inspection Panel; the regional development banks, like the Inter-American Development Bank, soon after created their own accountability mechanisms. The World Bank’s private sector arm, the International Finance Corporation, created a Compliance Advisor Ombudsman; the US Overseas Private Investment Center has an Office of Accountability.

In all these cases, the performance of the lender is measured against a set of internal guidelines and operating procedures. The most common complaints involve failure to do an adequate environmental and social assessment, or to comply with involuntary resettlement rules and those involving indigenous peoples. Other current safeguards involve dam safety, pesticides, and cultural heritage. In 1997, the World Bank grouped ten Operational Policies as specific safeguard policies – six environmental, two social, and two legal policies.[1]

The safeguards system for IFIs created in the 1980s is being pulled in two directions. On the one hand, growing lending in infrastructure and natural resource-related sectors has made it even more imperative that those providing the funding have some way of assessing, and avoiding or reducing, harmful effects on local communities, water and land. In particular, investments in Reduced Emissions from Deforestation and Forest Degradation (REDD) projects in countries with tropical forests have raised concerns that indigenous and forest communities will be the losers in a global market for forest carbon. To the extent that other actors, especially multilateral and bilateral aid agencies, fund similar projects, they become subject to the same pressures. Indeed, UNDP and several bilateral aid agencies now have – or are developing – their own safeguards. Combined with this, social, environmental and human rights assessment and monitoring, and accountability for unanticipated effects of private as well as public projects is becoming a key demand of civil society in forums ranging from the negotiation of the post 2015 Sustainable Development Goals to the UN Working Group on Business and Human Rights. Businesses, private banks and bilateral aid agencies are all, to one degree or another, developing their own safeguard, assessment, and due diligence systems.

On the other hand, the IFIs have to contend with the rise of new financial and political actors.   Sovereign wealth funds and Chinese and Brazilian development banks now provide alternative sources of development project finance, often without any environmental or human rights strings attached. According to the Economist, these banks’ lending “already dwarfs the $52.6 billion the World Bank disbursed last year. In 2013 BNDES of Brazil doled out $88 billion. Its Chinese equivalent made loans worth $240 billion.” (“An Acronym with Capital,” July 19, 2014) Last July, the BRICS countries created a New Development Bank (NDB) and Contingent Reserve Arrangement (CRA) as potential alternatives to the World Bank and IMF. The NDB has an initial capital of $50 billion and the CRA of $100 billion. The Bank must figure out how to compete in this new landscape.

In response, the World Bank has sought to push evaluation, mitigation and monitoring of environmental and social risks and impacts onto borrowers, thus “streamlining” the Bank’s own role. This, combined with the Bank’s efforts to cut down on time and paperwork in order to compete in a newly-diversified funding arena, and to increase its loan volume by 50% over the next decade, led to the current review of the environmental and social safeguards.

The proposed revision: structure and controversies

In 2009, the Bank’s Independent Evaluation Group found that the safeguards had, to some extent, been working, but that they needed to be updated to take into account new lending modalities.   The Bank announced that it would review and update the policy framework. The stated goals of the review (at consultations.worldbank.org) include incorporating existing requirements, including new ones, providing greater accountability as well as a tailored approach which takes into account the country and sector context. It would “[a]llow, where and when appropriate, for less front-loading during project preparation, with more investment in effective monitoring and supervision for the realization of agreed project commitments”; and “promote a project-based approach focusing on outcomes rather than procedural compliance.” In other words, the Bank is trying to get away from a “box-checking” approach, become more agile, and shift away from prior assessment towards more monitoring throughout the project life cycle.

The new framework replaces the existing Operational Procedures with a statement of Environmental and Social Policy, combined with ten Environmental and Social Standards (ESS). The policy statement is intended to clarify the scope of the safeguards, restricting them to investment project financing. It creates a classification system, ranging from little risk to high risk projects. It specifies the responsibilities of Borrowers, who are given a larger role in design and implementation of safeguards compliance, with the Bank limited to setting timeframes and outcomes.

The new ESSs do amplify existing safeguards in some important areas. There is, for the first time, a labor standard, which includes provisions on nondiscrimination, child labor, forced labor, and worker health and safety and requires a worker grievance procedure. However, it only applies to direct project employees, not to contractors, which greatly reduces its scope. Another ESS consolidates concerns about pest management with other pollution and resource issues, including a requirement to “consider options to reduce project-related greenhouse gas (GHG) emissions.” An ESS on Community Health and Safety includes, for the first time, provisions on oversight and accountability of security personnel, both public and private, used on a project. It also includes provisions on emergency preparedness and a wide array of potential local impacts. Other ESS topics include biodiversity and habitat loss, including controversial provisions allowing limited biodiversity offsets; protection of cultural heritage; rules for financial intermediaries, and general requirements to consult with stakeholders over the life of the project.

The most contentious nucleus of issues around IFI lending to date has involved land, forced displacement and the rights of indigenous peoples to control what happens within their territories. Here too there are some advances: periodic monitoring, for example, of people who have been involuntarily resettled as a result of a project. In the case of indigenous peoples, the draft goes beyond the current requirement of free, prior and informed consultation before any project involving their ancestral lands goes forward. In three specific high-risk circumstances –impacts on lands and natural resources under traditional ownership, use or occupation; relocation from those lands; and significant impacts on cultural heritage — borrowers must go beyond consultation to obtain the consent of the affected indigenous people.

However, a number of worrisome changes have caused a broad coalition of over 300 civil society groups to raise concerns that, despite assurances to the contrary, the draft does “dilute” the existing standards. It does so both through specific provisions and through an overall approach to flexibility and tailoring that will make it more difficult to hold the Bank accountable to a specific set of rules, through the Inspection Panel or otherwise.

The specific concerns include the following:

First, the draft limits its applicability to project finance, leaving out almost half of the Bank’s portfolio, which the Bank argues will be dealt with by having each new financing instrument have its own set of standards.

Second, by cutting down on “front-end” consultation and approval before the actual disbursement of funds, the Bank’s safeguards staff as well as affected peoples lose whatever leverage they might have had to improve projects or mitigate harms. They are left with monitoring, but trying to stop or improve an ongoing project when problems arise has significant political and economic costs, and so is unlikely to be done well or often. The track record to date, at least, has not been promising.

Third, the indigenous peoples standard, while admittedly an advance on the issue of consent, leaves a huge loophole for governments that do not wish to recognize the existence of indigenous people in the first place. The draft allows the application of an “alternative approach” where identifying indigenous peoples would create a serious risk of exacerbating ethnic tension or civil strife, or is inconsistent with the provisions of the national constitution. The borrower must agree that indigenous peoples are treated at least as well as other groups. Civil society groups fear that this may become a broad exemption for governments, wiping out decades of work on the specificity of dealing with indigenous populations.

Third, the provisions on land and forced displacement allow for communities to be displaced and projects to go forward before provisions for resettlement are in place. The provisions, moreover, leave considerable flexibility to borrower governments to substitute cash compensation for resettlement land and services, a strategy that has proven in the past to impoverish and destroy communities. Nor do the provisions on land cover land titling or land use policies, which have in the past had deleterious effects on communities and encouraged land-grabbing.

There are many more critiques, including that the process of reforming the safeguards has been opaque and disingenuous. Given the problems, civil society groups are calling for the Bank to slow down the approval process and allow for meaningful consultation. As of now, the consultation period runs until the end of 2014, after which another draft will be produced. Hopefully, there is still time to fix the significant flaws in approach and avoid not only a weakening of the Bank’s safeguards, but the demonstration effect that any weakening will be likely to have on the procedures of other development actors.

[1] The current safeguards are OP 4.01 Environmental Assessment; OP 4.04 Natural Habitats; OP 4.09 Pest Management; OP 4.10 Indigenous Peoples; OP 4.11 Physical Cultural Resources; OP 4.12 Involuntary Resettlement; OP 4.36 Forests; OP 4.37 Safety of Dams; OP 7.50 Projects on International Waterways; OP 7.60 Projects in Disputed Territories.

Naomi Roht-Arriaza is Professor of Law at the University of California Hastings College of Law. She is the author of Impunity and Human Rights Violations in International Law and Practice.