World Bank performance standards review reveals need to raise the bar

18 June 2010

With a review of the social and environmental performance standards of the International Finance Corporation (IFC, the Bank’s private sector lending arm) underway, internal reports as well as civil society critiques highlight the need for reform.

A forthcoming report from the Bank’s Independent Evaluation Group (IEG) highlights a need for fundamental reform throughout the World Bank Group. One of the more surprising findings of the June IEG report is the estimate that at any given time over 1 million people are affected by involuntary resettlement due to active Bank financed projects, highlighting the widely felt impacts of the Bank. Two-fifths of them are likely to be physically displaced and three fifths economically displaced.

The report concludes that while attention to social and environmental safeguards is reasonably good during appraisal of lending, it is weak during supervision of loan implementation. It finds that more than one-third of Bank projects had “inadequate environmental and social supervision manifested mainly in unrealistic safeguards ratings and poor or absent monitoring and evaluation”. Furthermore, supervision and monitoring deficiencies make it difficult for the Bank to evaluate the results of applying safeguards.

The IEG proposes an overhaul, calling for: a shared set of criteria for assessing social and environmental risks across the Bank group; enhancement of client capacity, ownership and responsibility; strengthening of supervision arrangements by revising guidelines and incentives; and strengthening of safeguards monitoring and evaluation.

The methodologies and depth of the IEG evaluation report have however been called into question. “The critique could be more rigorous, and suggestions to shift more responsibility to clients, emphasised in the report, should be approached very cautiously and only with corollary requirements for greater transparency, verification of client-provided information and IFC supervision,” said Anne Perrault of NGO Center for International Environmental Law.

IFC evaluated

IEG findings on the IFC are expected to contribute to the ongoing revision of the performance standards. They highlight inadequate IFC due diligence for trade finance projects linked to agricultural supply chains with public disclosure of information being the weakest area (See Update 71). It is also highlighted that there are problems with IFC’s categorisation of the risk of projects, which dictates the standards and monitoring applied. The IEG also notes that the IFC places the responsibility for implementation and monitoring on its private sector clients with no independent verification. (See Update 67)

The Compliance Advisor Ombudsman (CAO), the compliance mechanism for the IFC, has also inputted into the IFC review with analysis based on reviewing of complaints it has received. Echoing the IEG, it finds that the IFC’s implementation of broad community support for its projects has been restrictive and not transparent, among other findings. It concludes that there is a “substantial gap between theoretical environmental and social requirements and their practical application.” Weak staff support and insufficient resources have also led to an inability to improve the environmental and social performance of financial intermediaries, such as private banks, through which the IFC channels funds. Investment staff do not appear to be adequately incentivised to support environmental and social risk and impact management. Finally, advisory services provided to low-capacity companies are insufficient for helping them utilise the performance standards. There is also a wide gap in applying the performance standards to advisory services.

Shareholder concerns

Early in the process the US submitted comments on the performance standards review highlighting a need for reform. “While we have become more comfortable with the IFC’s outcomes’ approach since it was established in 2006, we continue to believe that the balance should shift towards more accountability,” the submission states.

The US argues for the safeguards to be comprehensively extended to supply chains. It also recommends strengthening the categorisation of projects under the IFC’s sustainability framework, which provides guidance on IFC responsibilities and ultimately dictates the standards and monitoring processes applied. The paper also recommends applying stronger standards for when the IFC interacts with financial intermediaries. Other top-line concerns include establishing mechanisms for complaints by communities affected by projects that are higher risk within the lower risk categorisation (category B). There was also a call for greater attention to involuntary resettlement, specifically economic displacement and the need to compensate for loss of livelihoods to pre-IFC project levels. A strengthening of performance standards in relation to biodiversity was also flagged as being important.

Rights overlooked

Lack of consistency between human rights standards and the performance standards and sustainability policies has repeatedly emerged as a significant area of IFC weakness (see Update 67). “By failing to adequately reflect human rights standards, the sustainability framework leaves affected individuals and communities exposed to potentially serious human rights abuses, which can deepen their poverty and further entrench marginalisation,” Alessandra Masci of NGO Amnesty International said.The IFC has commissioned an analysis to identify gaps between its approach and international human rights treaties. However preliminary analysis by civil society reveals that the first draft of the revised standards, released in May, does not reflect a significant broadening of rights coverage.

In a submission to the review consultation, NGO Amnesty International argues that without articulating and providing guidance to clients on the human rights impacts of projects, rights impacts and violations are frequently invisible in IFC processes.

Amnesty expressed concern over the weakness of IFC’s human rights due diligence and the problems with implementation of the sustainability framework. Amnesty is particularly concerned about the IFC’s increasing delegation of responsibility to its clients and the lack of effective monitoring and supervision of projects it supports, such as the lack of transparent engagement of communities to get their support for a project; the fact that the IFC often disregards the findings and research of the CAO; and that CAO recommendations are not binding on the IFC or clients.

Amnesty concludes that a clear, stated objective of the IFC Sustainability Framework should be to ensure that IFC projects and investments do not cause or contribute to human rights abuses. The EBRD has made such a commitment and suggests that the IFC, which promotes itself as a leader in private sector lending, should take similar, if not greater measures.

Consultation continues

Civil society representatives from approximately 100 organisations have made a joint submission to the review highlighting a large number of concerns about the substance and application of the performance standards. The first draft of the revised standards have led to civil society warnings of policy dilution in the process of revision and calls for the IFC to meet best practice in the sector. The next round of consultations will be carried out 2 June to 31 July with a series of multi-stakeholder meetings worldwide. According to IFC they will also consult with 10 communities in the coming six months.

“To truly make a difference, significant changes must be made and consultation with those most affected must be more genuine and has to be reflected in the IFC’s new standards,” said Sergey Solyanik with NGO Crude Accountability in Kazakhstan.