The real purpose for safeguard reform at MDBs

A team from the World Bank consults with villages of Par Kun in Myanmar for a community development project. Multilateral development banks must be accountable for robust checks on the projects they finance. Photo by: Meriem Gray / World Bank / CC BY-NC-ND

Multilateral development banks use safeguards as conditions of their loans to deflect damages to communities and the environment that projects can cause, notably in transport, energy and urban services.

Without such mitigation, roads can harm habitats, dams displace communities and slum rebuilding hurt livelihoods. Two big shake-ups in development banking — a review of the World Bank’s safeguards policy and the arrival of two new lenders — could affect the strength and effectiveness of these shields for communities and habitats.

The entry of the BRICS’ New Development Bank and China’s Asian Infrastructure Investment Bank, alongside multilateral development banks like the Asian Development Bank, heralds more financing for infrastructure in Asia. This will be good for the region’s legendary economic growth, but it also raises the stakes for guaranteeing social and environmental defenses.

A common myth everywhere is that mitigating socio-ecological harm will detract from growth. The reality, however, is that lack of conservation will undermine growth, critically in the face of runaway climate change. The crucial question is how to drive faster growth in tandem with greater — not lesser — protection of people and the environment.

The basic rationale for safeguards is that public and private investors do not automatically mitigate the damages that spill over from their actions — be it water pollution from an industrial plant or displacement of homes from a hydropower facility. Safeguards help redress these collateral injuries, especially in mega-projects such as the Xiaolangdi dam on the Yellow River, which involved resettling some 180,000 people in China.

The gains from safeguards can be high, but evaluations show that key weaknesses must be fixed. So even before the entry of the new lenders, the stage was set for reforms. The World Bank, which last year committed $61 billion in new loans, equity investments and guarantees to over 100 countries, is considering changes to its requirements that feature areas of improvement and those that are risky and highly controversial.

Positive in this draft review is a proposal to strengthen the supervision of safeguards, which in the current system is inadequate. Also useful is a pitch to make a sharper distinction in loan requirements between project types: for example, the treatment of a new road compared to the rehabilitation of an existing one. A plan for the standards to cover labor and work conditions, health and safety as well as climate change, is a big step forward, but their weakening for biodiversity and habitats and some community aspects is deeply troubling.

The most contentious draft proposal, currently under review by the World Bank, concerns the shift to be made from achieving safeguard requirements at project approval to agreeing on a framework for fulfilling safeguard standards during project execution — with the responsibility for implementation on client countries. The nub is whether this flexibility in approach and self-assessment will be accompanied by enhanced oversight and accountability.

All should agree that the criteria for a new safeguards policy must be better social and environmental outcomes and greater efficiency in application. Three directions must be adopted to meet commitments by the leadership at multilateral development banks to avoid diluting safeguards:

1. Establish whether safeguard systems used by countries are adequate to avert spillover damages from public and private investments. Right now, there are vast country differences in their readiness. So a new agenda should help fortify these systems before they are to be relied upon to implement the new approach.

2. Standards set need to be matched by legally binding indicators for effects such as air pollution levels or the effect of resettlements that can be tracked and reported against. This seems to be the spirit of the World Bank’s proposals, but for sensitive environmental and social issues that businesses do not naturally redress, the indicators must be mandatory in the projects’ legal agreements.

3. Progress in risk mitigation needs to be monitored, verified by an accredited third party and disclosed publicly. Such verification needs to apply not only to projects at the high end of social and environmental risks but also to all with substantial risks. These checks and balances might add to the cost of doing business, but not doing so will be far more costly for people and habitats.

The World Bank’s procedures will influence other financiers. Even as the responsibility for implementing safeguards rests with the borrower, multilateral development banks must be accountable for robust checks on the projects they finance. Strengthening the implementation of risk mitigation, without weakening its preparation, could mean higher costs. But that will pay off handsomely by improving socio-environmental results, and enabling — not blocking — economic growth.

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About the author

  • Vt connecting the dots

    Vinod Thomas

    Vinod Thomas is director general of the Asian Development Bank's Independent Evaluation Department since 2011. Thomas also has 35 years experience with the World Bank, where his last position was director general and vice president of the Independent Evaluation Group.