Memorandum to the International Development Committee

This submission to the UK parliament’s international development committee (IDC) was originally published on the IDC website.

IDC inquiry into the Future of UK Development Cooperation
Submission by the Bretton Woods Project
3 June 2013

Summary

1. The Bretton Woods Project is an independent non-governmental organisation (NGO) established by a network of UK-based NGOs in 1995 to take forward their work of monitoring and advocating for change at the World Bank and IMF. See www.brettonwoodsproject.org/about for more details.
2. We welcome the decision of the International Development Committee (IDC) to undertake this inquiry. Our comments focus on the World Bank. At present, the World Bank is the largest multilateral recipient of UK aid, with the UK having become the largest International Development Association (IDA, the Bank’s low-income arm) donor at the last replenishment, and the Bank also being the recipient of a significant amount of additional UK funding.
3. The role of the UK as a provider of climate finance: The UK is channelling large volumes of its climate finance through the World Bank Group despite the lack of country ownership and failure to identify and reach those most in need. The projects have also been of variable quality and have been accused of furthering development bank agendas rather than piloting new innovative approaches. The UK should redirect climate finance to support the Green Climate Fund and other UN initiatives, such as the Adaptation Fund, while limiting the World Bank’s role in climate finance, including in the Green Climate Fund.
4. The right balance between bilateral and multilateral aid: The World Bank’s poor track record, excessive focus on large-scale infrastructure, and insufficient attention to the impacts of its projects on climate change and land tenure are evidence that it is not the most effective means for channelling aid spending. The increasing concentration on lending to the private sector has unproven development outcomes and the investment in the financial sector is both risky and further obscures results. DFID should not increase contributions to the World Bank Group with its increased aid budget absent substantial reforms in key areas.
5. Monitoring and influencing the World Bank Group. The UK needs to consider the needs and concerns of developing country governments and people affected by World Bank activities. It can work towards strengthening accountability mechanisms and independent evaluation as well as enhancing transparency of its own interaction with the Bank and addressing the legitimacy problem that comes with the Bank’s insufficiently reformed governance structure.

A: Effectiveness of the channelling climate finance through the World Bank Group

6. The UK has committed £2.9 billion to international climate finance until 2015 through the International Climate Fund, including £1.5 billion in fast start finance from 2010-12. As of May 2013 the UK had provided over $1 billion to the World Bank-housed Climate Investment Funds (CIFs), including £813 million in fast start finance, making the UK its biggest donor. The UK is also supporting other Bank initiatives, including £130 million (£51 million in fast start finance) to the Climate Public Private Partnership (CP3), £10 million in fast start finance to the Bank-housed Forest Carbon Partnership Facility (FCPF) and £7 million in fast start finance to the Bank-led Partnership for Market Readiness (PMR).¹
7. The CIFs have been criticised from their inception, including concerns about their governance structures (including the role of the World Bank) and lack of legitimacy because of their distance from the official UN Framework Convention on Climate Change (UNFCCC) process. Furthermore, the Bank’s role as both trustee and implementer is deemed controversial.² These critiques have been strengthened as the new UNFCCC Green Climate Fund is being operationalised, meaning the CIFs are supposed to ‘sunset’. However, few concrete actions have so far been taken to activate this sunset clause.³ The UK has so far declined to pledge financial support for the Green Climate Fund, despite the critical importance of donor funding to ensure its viability. In its engagement with the Green Climate Fund, the UK has primarily focused on the development of the private sector facility, despite limited evidence of the ability of the private sector to play a strong role in climate change adaptation. An increased push for the private sector is also seen in the CIFs, including an increased role for the International Finance Corporation (IFC, the Bank’s private sector arm).
8. Other criticism of the CIFs includes lack of country ownership and failure to identify and reach those most in need. The projects have also been deemed of variable quality and have been accused of furthering multilateral development bank (MDB) agendas rather than piloting new innovative approaches. The CIF Clean Technology Fund (CTF) has received severe criticism from CSOs for supporting large scale projects, designed for electricity export rather than for energy access for local populations. There is evidence that the Pilot Program for Climate Resilience (PPCR, one of the CIFs) has been MDB driven, with weak structures for participation of local communities. The Forest Investment Program (FIP, another of the CIFs) has been rejected by local communities and indigenous peoples in many countries, including because of its impacts on intact forests and links to commercial logging. The Scaling Up Renewable Energy Program in Low Income Countries (SREP, another CIF) is less advanced, but has already been criticised for not prioritising poor countries. Furthermore, the results frameworks for the respective CIFs as well as gender aspects require further work.⁴
9. The UK published its annual internal evaluation of the CIFs in July 2012. The evaluation noted some problems, such as “there remains limited information on the expected results” on FIP. Other challenges noted include “slow speed of disbursement and project approval” and “variable quality of some investment plans and projects”. It also noted that “lack of clarity over future of CIFs and implications for the potential funding gap should the GCF not be up and running quickly” remains. Key government recommendations included to keep pushing for the results framework to be finalised “to enable this improved monitoring of results” and to “push for a risk management framework”. Furthermore, it noted that “while good progress has been made on the measures to improve the CIFs, we should continue to watch implementation, for example on gender and development, and transparency.”⁵
10. The CP3 is implemented in collaboration with the Asian Development Bank and an IFC private equity fund. While only in inception stage it has already attracted criticism for its focus on middle-income countries, lack of transparency and accountability, and lack of focus on energy access.⁶
11. The World Bank push for carbon market initiatives, including the PMR and FCPF, has also been criticised, in particular given flagging carbon markets and due to the possible negative impact on indigenous peoples.⁷
12. Key recommendations:
    • DFID should ensure climate finance is governed by sustainable and equitable principles including: a participatory approach; in support of renewable technology; pro-poor focus; through a democratic institution; under UN supremacy; and using grants, not loans.
    • DFID should redirect climate finance to support the Green Climate Fund and other UN initiatives, such as the Adaptation Fund, while limiting the World Bank’s role in climate finance, including in the Green Climate Fund.

B. Balancing bilateral and multilateral aid – Effectiveness of the World Bank Group

13. In many critical areas the World Bank’s performance has been poor.  An annual Independent Evaluation Group (IEG) report on the Results and performance of the World Bank Group 2012, released in December 2012, showed declining effectiveness, with the Bank’s worst ratings in areas with the fastest increases in lending or extra priority, such as infrastructure and public-private partnerships (PPPs). The report from the IEG, the Bank’s arms-length evaluation body, covered projects closed before end June 2012 and looked across the entire World Bank Group. Good ratings on investment loans fell from 78 per cent for 2006-08 to 70 per cent in 2009-11. “Among the projects that exited the active portfolio in FY09-11, 26 per cent were rated either satisfactory or highly satisfactory, and 44 per cent were rated moderately satisfactory”, showing that even the positive ratings are driven predominantly by mediocre results.⁸
14. According to the IEG report, particularly problematic were investment loans for infrastructure and to projects in the East Asia and Pacific region, both of which saw statistically significant drops in good ratings for 2009-11. In its analysis of why things were going badly in infrastructure, agriculture, and beyond, the IEG found “overambitious project design, inadequate consultation with stakeholders, insufficient candour during supervision, and failure to follow up on problems identified during supervision missions as reasons for less-than-satisfactory achievements.” However, infrastructure, and particularly large cross-border projects is an area where the Bank is planning an expansion of its work⁹ despite past practice showing that this is an area rife with corruption possibilities, overspending and under-delivering on results. While no one doubts that there is an under investment in infrastructure in most developing countries, the renewed focus on mega projects rather than pro-poor infrastructure, such as rural roads or low-carbon off-grid energy, is a worrying trend.
15. The World Bank Group maintains an ineffective set of staff incentives which do not effectively prioritise value for money, development effectiveness or sustainability. While Bank staff are expected to consider development effectiveness, gender, and a suite of safeguards, their internal incentives prioritise meeting volume targets on their lending.¹⁰ Volume targets are not a good indicator of value for money or development effectiveness and in fact may encourage poor value as staff rush to meet targets at the end of the year with lower standards applied to projects.
16. The World Bank has a poor track record when it comes to the management of environmental and social impacts of its projects. Though the World Bank introduced environmental criteria into its operations in 1987 and began disclosing environmental impact assessments in the early 1990s, a plethora of projects still proceed without adequate attention to environmental or social concerns. Additionally, the World Bank still invests heavily in fossil fuel projects, creating negative impacts in relation to climate change. In essence it is subsidising carbon-intensive energy projects at the same time that the G20 has been endeavouring to eliminate fossil fuel subsidies. According to a November 2012 working paper by US-based NGO World Resources Institute, the Bank “has actually increased lending for fossil fuel projects and coal plants in recent years”.  The paper estimates that the Bank is currently funding 29 coal plants worth $5.3 billion, making it the second largest public international financer of coal-fired power plants, after the Japan Bank for International Cooperation.¹¹
17. Accountability for failing to uphold World Bank standards is also lacking. In fiscal year 2012, five projects had inspection requests filed with the Inspection Panel, the Bank’s compliance arm, with a further three cases filed in FY 2013. In one of these cases, relating to the Vishnugad Pipalkoti dam project in Northern India, Bank staff in India publicly repudiated any accountability by pre-empting Inspection Panel findings with public statements that the project would go ahead regardless of any findings of the Panel.¹² This highlights a problem with the Panel’s mandate, unlike a true judicial accountability mechanism, it is not able to force Bank management to make amends for harm caused by projects.
18. The Bank has recently faced vociferous criticism for its impact on land tenure and land rights, particularly of poor or marginalised communities. The Bank has been accused of aiding and abetting land grabs in many countries, including through a forest project in Uganda¹³, a palm oil project in Uganda¹⁴, rubber plantations in Cambodia/Lao¹⁵, a commercial real estate project in Cambodia¹⁶, and through foreign farm land acquisitions across Africa¹⁷ and Latin America¹⁸. The Bank’s work on the principles for Responsible Agricultural Investment has been consistently rejected by groups representing small farmers.¹⁹ While in April this year the World Bank president has accepted the need to work instead with the UN-organised Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security, no action has yet been taken on this front.
19. The World Bank finally launched an expected review of its environmental and social safeguard policies in October 2012. Whilst the Bank committed to a robust outcome, civil society organisations have highlighted concerns that the emerging framework will replace existing safeguards with vague principles and non-mandatory ‘flexible’ implementation standards.²⁰ Furthermore, the review only covers investment lending, but not other instruments, such as development policy lending and Program-for-Results. Bank management itself has not highlighted the implementation failures related to existing safeguards or the gaps in coverage²¹, but instead the time it takes for projects to navigate the project cycle, leading to worries about dilution of the already inadequate system. For example, the Bank safeguards do not include a requirement for “free, prior and informed consent” of indigenous peoples as spelled out in the UN Declaration on the Rights of Indigenous People, which the UK has endorsed.²²
20. In a number of significant ways, the Bank’s approach does not support country-led development. The Bank has somewhat reduced the use of policy conditionality, but a 2012 internal World Bank review²³ of one of their policy lending instruments (development policy loans or DPLs) developing countries reported that the use of prior actions has “remained at 10 per operation”. The concerns over the use of ‘one size fits all’ conditionalities remain, restricting the pursuit of democratically chosen policies appropriate to national contexts. In the review, the Bank themselves rated only 17% of prior actions as having positive social and environmental effects.
21. The Country Policy and Institutional Assessments that largely determine allocations to IDA countries have also been heavily criticised by developing country governments, the IEG and civil society for not effectively reflecting country ownership, need and effectiveness.²⁴ While the Bank has increasingly recognised that the aid allocation formulas are problematic, they have moved to amend them in this year’s IDA replenishment only for countries that are considered fragile or conflict-affected.
22. The World Bank is increasingly relying on group-wide strategies and the involvement of the private sector to deliver development results. However there is little evidence of the ability of the private sector to deliver development results. A systematic review of private participation in infrastructure, which looked specifically at a DFID and IFC supported facility²⁵, found that “hard evidence is scarce” and that “it is difficult to measure causal relationships between infrastructure provision and development outcomes.” It found that it was “very difficult for [development finance institutions] to achieve enhanced direct poverty effects using purely commercial finance”, which is the claimed modus operandi of the IFC, and the number of projects that this could be achieved on was strictly limited.
23. On top of this the IFC is increasingly using financial intermediaries, meaning third-party financial entities such as banks, insurance companies, leasing companies, microfinance institutions, and private equity funds. In early February the IFC’s accountability mechanism, the Compliance Advisor/Ombudsman (CAO), released an audit report that found that for this growing part of the IFC’s portfolio, now over 40 per cent of the total, the IFC conducts “no assessment of whether the [environmental and social] requirements are successful in doing no harm.” The CAO indicated that “The result of this lack of systematic measurement tools is that IFC knows very little about potential environmental or social impacts of its [financial market] lending.” The same lack of knowledge also applies to the development impacts of the financial sector lending. Despite pressure from civil society and the CAO, the IFC has refused to recognise that there is a problem with their systems for measuring results or risks from sub-clients of the IFC’s financial sector clients.²⁶
24. World Bank President Jim Yong Kim took over at the World Bank in mid 2012 and wants to reshape the Bank according to his own strategic vision. This strategic change and restructure will set the future direction for the Bank, but is as of yet incomplete. It would be premature for the UK to commit to increasing funding for the Bank and its concessional grants arm, given the uncertainty over the strategic directions of the Bank. They may improve the effectiveness of the Bank, or they may take it in the wrong direction.
25. Evidence so far on the new strategy has not been encouraging. Dr. Kim set two overarching goals for the Bank without effective external consultation with stakeholders. These goals have been set despite there being a robust global debate, in which the UK Prime Minister is closely involved, in what should come after the Millennium Development Goals. Dr. Kim’s speeches have reiterated emphasis on growth and very large-scale infrastructure without sufficient attention to inequality, participation of affected people,
26. Key recommendations:
    • DFID should not increase contributions to the World Bank Group with its increased aid budget absent substantial reforms in key areas, including climate and energy, the aid allocation formula, and the modality of providing finance to the private sector, and in radically improving the legitimacy, transparency and accountability of the institution.
    • Any bilateral investment institutions should carefully consider their potential value addition above existing institutions and the problems identified with the IFC’s operating model.

C. Monitoring and influencing the World Bank Group

27. The World Bank Group should take remedial measures in a number of areas, which can be facilitated by shareholder monitoring and influencing. Unfortunately the multilateral aid review focussed predominantly on bilateral UK priorities with little developing country input and ownership. Care should be taken that the UK does not dictate agendas to the Bank that are not in line with either developing country government wishes or the concerns of poor people affected by the World Bank’s activities.
28. At the World Bank there is insufficient use of independent assessment and no requirement for action in response to critical evaluations.²⁷ This is true for both the IEG and the accountability mechanisms such as the Inspection Panel and the CAO. One of the most effective mechanisms for improvement at the Bank would be to strengthen the independent evaluation and accountability mechanisms with greater independence and requirements for Bank action in response to findings of shortcomings in Bank policy and practice.
29. Ensuring that civil society organisations can effectively participate in decisions making processes at the Bank and engage with both policy and projects would also enhance effectiveness of the institution. This would especially be the case in countries where DFID does not have programmes. The Bank’s Global Program for Social Accountability (GPSA), launched this year, is supposed to help enable this, but design flaws lead to worries of the programme being compromised from the beginning with potential for the funds being used to silence opposition or whistleblowers.²⁸
30. The Bretton Woods Project believes that transparency is a key element of accountability. The UK used to be a world leader in terms of transparency of its activities in relation to international financial institutions, with annual reports to parliament on the activities at and priorities for both the World Bank and IMF. Unfortunately these reports have increasing arrived late and have scaled down their coverage. This can be improved.
31. The democratic deficits at the various arms of the World Bank Group reduce the institution’s legitimacy. The latest round of governance reforms left high-income countries with over 60 per cent of voting power across the World Bank Group – Bank claims to the contrary were based on a faulty classification of countries. Those countries in which the Bank’s impacts are felt, and who provide funding through loan repayments, have only a minority share. Low-income countries hold 6 per cent of voting shares averaged across the different arms of the World Bank, including just 11 per cent at IDA.²⁹ G24 developing country ministers have stressed that redressing the “democratic deficit in the governance structure is crucial for the legitimacy and effectiveness of the World Bank.”³⁰ The UK should pursue deeper governance reform at the World Bank.
32. Key recommendations:
    • DFID should seek to enhance the strength and enforceability of the Bank’s evaluation and accountability mechanisms.
    • DFID should push for the achievement of at least parity in voting rights between developed and developing countries to be achieved by 2015.