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Contributions from
the Column
Tribune
Shared responsibility – or
rhetoric
“Faces turn to stone”
Holding the provate
sector accountable
04/2006
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[ World Bank ]
Holding the provate sector accountable
The International Finance Corporation (IFC), the World Bank subsidiary which promotes private-sector investment in developing countries,
has recently adopted new environmental and social standards, which will replace IFC’s current Safeguard Policies. They will hold IFC clients more
accountable than in the past to secure their compliance with social and environmental standards. However, critics who claim that the IFC is shirking
its own responsibility are wrong. Every project will continue to be subject to close scrutiny.
[ By Qays Hamad and Jürgen Zattler ]
The World Bank's environmental and social safeguard policies serve to protect people and the environment from potential negative
effects of project implementation. Over time, World Bank subsidiaries such as the IFC also adopted these standards. This has not always
proven ideal because the Bank's procedures typically stipulate requirements for governments, requirements that private enterprises – i.e.
the clients of IFC – cannot fulfill (such as the amendment of legislation).
In spring 2003, the independent IFC Compliance Advisory Ombudsman declared the need to update the IFC safeguards. The overhaul was also to
take account of the results of both internal and external evaluations, such as the Extractive Industries Review. By spring 2004, IFC had completely
revised its standards. This updated version was adopted by the Executive Board in late February this year and will enter into force in May 2006.
The real novelty about the new safeguard policy lies in the fact that enterprises are accountable to a far greater extent than in the past, particularly
by being required to undertake the assessments of potential negative social and environmental impacts on their own, and for designing strategies to
avoid, limit or mitigate negative impacts. This is in line with the calls for a stronger development orientation of IFC projects. The ten World Bank
Safeguards have been translated into eight Performance Standards that will govern all future IFC projects.
The new Performance Standards cover far more areas of concern than the old Safeguard Policies did, including for instance working conditions,
community health and safety. Among other things, they stipulate, for the first time, the activities of private project operators' security services.
The conduct of such security personnel toward local communities has repeatedly caused problems in the past. Another new feature is the required
Broad Community Support for any project that is planned. This support must result from “free prior informed consultations” with the local community.
Moreover, enterprises have to set up grievance committees and arbitration procedures to secure sufficient scope for stakeholder input even
during project implementation.
The flexible character of the new approach soon gave rise to NGO criticism arguing that the new standards had been watered down. In fact, the
opposite is true. They have become a great deal stricter in some areas. For instance, the Performance Standards now include all four Core Labor
Standards defined by the International Labour Organization (ILO). In future, all IFC projects must grant workers freedom of association and assembly
as well as the right to collective bargaining. This is unprecedented in the World Bank context. The environmental standards, too, which are currently
still being revised (with the support of the German development and environment ministries), will be a great deal stricter than in the past. An
additional innovation is the annual Development Impact Reporting by the IFC, which will outline the development impact and contribution of IFC’s
projects in the partner countries.
The new performance standards also define the respective roles and responsibilities of IFC and the enterprises. The latter, as project executing agencies,
are responsible for the management of their project’s environmental and social impacts. IFC’s role will be to review and approve the clients' environmental
and social impact assessments (ESIAs) and resulting action plans. IFC may require clients to make improvements where necessary, and monitors
the implementation. In the past, enterprises did not always know precisely which requirements they had to meet in order to comply with the safeguard
policies because regulations did not always clearly state whether the responsibility for compliance rested with IFC or with the company. In future, ensuring
compliance will be primarily the responsibility of the enterprise, whereas IFC will be in charge of monitoring. The purpose of this change of paradigm aims
at building environmental and social impact management capacity in enterprises and partner countries on a long-term basis, thus strengthening ownership.
This clear definition of roles also means that in future IFC will first assess companies' capacity for environmentally and socially sound project management as
well as their track record in this area. On that basis, IFC will decide whether a cooperation is possible or not. IFC will then identify the capacity that the enterprise
still needs to build up in order to secure social and environmentally compliant project implementation.
Critics have been saying that through this new policy IFC will implicity permit enterprises to certify their own projects' environmental and social compliance.
This is not accurate. While environmental and social impact assessments should largely be conducted by enterprises themselves from now on, IFC will continue
to review every ESIA. IFC will remain accountable to its shareholders for the Quality of the approved assessments. Moreover, in doubtful cases IFC can always
demand improvements or additional assessments by the client, or commission assessments of its own. Anyway, for projects that may have an impact on indigenous people,
biodiversity, or cultural heritage, external assessments are mandatory in any case, since very specialized knowledge is needed in these areas.
External assessments not necessarily better
Practice to date has also shown that external assessments are not necessarily better or more objective. Consulting companies that conduct ESIAs on
behalf of enterprises do have a commercial interest in future contracts. In other words, they are not totally independent of the employer’s interests –
which may well lead to the delivery of “sweet-heart” assessments. Having the enterprise conduct the assessment itself intends to increase its sensitivity
to social and environmental concerns and ensure that the results are incorporated into the project design at an early stage. External assessments, on the other
hand, have all too often had the character of a tiresome obligatory ritual.
In the debate on the revision of IFC’s standards, critics have sometimes conveyed the impression that IFC projects implemented under the old safeguard regime
have always been free of problems. But in reality, the exclusively rules-based approach to private-sector projects often did not work very well. Too often
companies considered requirements as impediments to be circumvented, and the rules thus failed to provide the intended protection. The new approach, by
contrast, forces IFC to take a very close look at companies' ability and willingness to build capacity on environmental and social issues.
Germany approved the revised standards after the Federal Development Ministry (BMZ) successfully pushed through a number of vital changes to the document.
They include, in particular:
- Environmental and social impact analyses and all relevant information from the related action plan for mitigation must be published to the affected
community prior to the consultations with the community and approval by IFC.
- The IFC’s Independent Evaluation Group will critically review the experience gained with the new approach after the first 18 months. This will allow
to identify and address potential shortcomings early on.
- The BMZ attaches special importance to the evaluation of enterprises' internal ESIAs in order to ensure that they are of high quality and rely on appropriate
criteria for the decision on whether to hire external experts.
IFC now faces the challenge of implementing the new approach. This requires the IFC to train and motivate its staff accordingly. Amongst others, it is envisaged
to provide special staff incentives to managers of projects with good development results. IFC has also established a new Development Effectiveness unit and
integrated into its structure. Not least, IFC will have to invest a great deal more in future in assessing its clients and building their environmental and social
capacity.
The so called Equator Banks - some 40 private and public banks from all over the world which previously had adopted the old IFC safeguards on a voluntary basis -
have already announced that they will adopt the Performance Standards, too. This will guarantee that there will be no race to the bottom in international project
financing but that the high IFC standards will prevail.
Dr. Jürgen Zattler
is head of the Division “World Bank, IMF and Debt Issues” in the German Federal Development Ministry (BMZ).
zattler@bmz.bund.de
Qays Hamad
is assistant head of the same BMZ Division.
hamad@bmz.bund.de
On the internet:
www.ifc.org/policyreview
www.equator-principles.com
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