Oct 13, 2012

ASEAN - World Bank project dilemma

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BANGKOK - The 10-member Association of Southeast Asian Nations (ASEAN) is awash with ideas for major infrastructure investments - from proposals for a deep-water port and massive industrial complex in Dawei, Myanmar, to construction of an East-West highway system traversing the Greater Mekong Sub-Region, to laying tracks for bullet trains to speed trade and travel between Southeast Asia and China,

Some of the multi-billion dollar projects will be domestically or privately financed; others will require significant support from multilateral development lenders such as the World Bank. But as the Bank and the International Monetary Fund open their annual meetings today in Japan, it's unclear whether it will commit to the strong safeguards needed to ensure the quality and effectiveness of its future lending in Southeast Asia and beyond.

The World Bank is poised to begin a two-year process to review and update the environmental and social protections required of all its borrowers. The review comes amid ongoing concerns by many borrowing nations over the time and resources required to implement existing safeguards and the rise of alternative lenders such as China who attach fewer strings to their government-to-government loans.

Civil society organizations and other stakeholder groups, meanwhile, have raised questions about the effectiveness of those same safeguards on various World Bank-financed projects, ranging from hydropower projects in Laos to road networks in Indonesia. As the World Bank moves to review its policies and mitigate future lending risks, the question remains: who will safeguard the World Bank's own safeguards?

The question is particularly pressing today with growing demand for financing from international financial institutions. As their economies begin to slow amid global economic tumult, Southeast Asian governments in particular are seeking more growth-promoting loans for major infrastructure investments, including projects to facilitate the implementation of the ASEAN Economic Community due to take effect in 2015.

The Asian Development Bank (ADB), a regional multilateral development bank that, like the World Bank, focuses on poverty reduction and lends primarily to governments, underwent an intense years-long internal debate and consultative process on its own safeguards policy when I served beginning in 2007 on the institution's board of directors. The shared hope was that the mandated review would help to streamline the ADB's own bureaucracy and long project development lead times, while also ensuring necessary environmental and social safeguards.

Developing nations such as China and India, both key ADB members, pushed for greater flexibility, calling for use of so-called "country systems" that effectively would allow borrowing countries to apply their own environmental and social standards to ADB-financed projects.

The United States and other developed nations, while acknowledging the goal of greater country ownership of development efforts, in contrast emphasized the need for strong protection of the environment and of people who might be impacted by ADB-financed projects. They also called for a better understanding of how "national standards" actually worked.

What to do, though, when a country's national standards - and how they are applied or implemented - differ from those of the ADB or World Bank? In Indonesia, for example, a multilateral lender requirement that cash compensation be made to those who are resettled as part of an ongoing integrated water resources management project has come into apparent conflict with the government's definition of who should be considered a legal settler.

Other multilateral loans have been vexed by rigid government interpretations of who should and should not be considered "isolated" or "vulnerable" in state-led development projects. Similar divergent interpretations and applications of national standards have impacted on indigenous persons and forestlands that lie in the way of important road, water and power projects.

Asia's borrowers have often argued that lenders should trust a country's own interpretations and rule of law rather than subject them to time-consuming international requirements for environmental and social impact studies and reviews. At the same time, ADB and World Bank staff are also acutely aware that China and other potential lenders with less demanding standards and requirements can provide less cumbersome, alternative financing.

Blindly accepting national standards with little consideration of how such standards are actually applied, however, threatened a serious weakening of the ADB's built-in lending protections. To his great credit, ADB president Haruhiko Kuroda committed publicly in 2009 that there would be "no dilution" of standards for protecting the environment and the people affected by ADB projects in light of its safeguard review.

His much noted "no dilution" commitment came amid competing demands by a range of ADB shareholders and stakeholder groups, and in the face of the rising competition from China's and other's relatively no-strings-attached lending practices.

New World Bank president Jim Yong Kim should make a similar "no dilution" commitment as the World Bank begins to review and update its own safeguard requirements, as well as its policies on investment and procurement. Harmonization of standards with borrower country norms, including in Southeast Asia, should be upward towards best international standards and as strong as those that were ultimately agreed at the ADB.

There is understandable concern that the World Bank's safeguard review may instead lead to a lowering of environmental and social standards and a "dilution" of existing mandatory protections as part of an effort - misguided though it might be - to help the World Bank better compete with other financial institutions. Such a move towards lower standards would in the long run be to the detriment of the region and the institution.

The World Bank's safeguards review is an important opportunity to ensure the highest international standards for global finance. Done right, the outcomes of the review will include robust new safeguard policies - encompassing principles, clearly defined rules and responsibilities, and specific due diligence procedures - and a Southeast Asia region where no person is worse off due to the World Bank's lending.

In pushing for harmonization of environmental and social safeguards, there is always a lowest common denominator risk among countries willing to sacrifice long-term sustainable growth for near-term borrowing and procurement opportunities. The World Bank will undoubtedly play a key role in shaping future infrastructure investment projects and related policies in Southeast Asia. And those decisions will inevitably impact reviews at other financial institutions, influence emerging legal frameworks and standards, and serve as de facto benchmarks for bilateral aid agencies, international investors and governments alike.

As all international financial institutions rightly focus on improving their efficiency, impact and reach, it is equally important that their lending safeguards remain strong and inviolate.

Doing so will help to ensure that neither vulnerable individuals nor the natural environment are worse off as multilateral lender investments in infrastructure and other projects in Southeast Asia, and indeed around the globe, move forward in the years ahead.

Curtis S Chin

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