International finance institutions are increasingly funding development through policy-based lending instruments. While policy loans often carry similar environmental and social risks as project –based loans, they are not covered by the World Bank’s safeguard policies. This session explored possibilities for strengthening the management of social and environmental risk in policy lending, drawing from the World Bank’s 2015 review of development policy operations, recent learning products from the Independent Evaluation Group, and voices from civil society.

• Jason Allford, Executive Director, Alternative (moderator)
• Hassan Zaman, Director for Policy and Quality, World Bank Operations Policy and Country Services
• Nick York, Director of Human Development and Economic Management, Independent Evaluation Group
• Arif Fiyanto, Head of Climate and Energy Campaign, Greenpeace Indonesia
• Korinna Horta, Senior Policy Advisor, Urgewald

Jason Allford

• Development Policy Loans, for budget, institutional support
• Initiated 10 years ago, now about a quarter of WB lending
• Safeguards being reviewed, as working on conditions, getting more demand for DPLs
• Risks are a bit more abstract than for project finance

Hassan Zaman

• Why we do DPLs, current economic downturn, end of commodity super cycle, fiscal pressures
• In 2015 same level of fiscal deficit that in 2009-10
• Difference that the traditional buffers to get economies out of the downturn are more limited now
• Some of the buffers were not rebuilt, lot of commodity exporters have pressures on exchange rates, price inflation, hard to use counter cyclical monetary policy
• Importance of thinking about how to strengthen the economies with less use of traditional instruments
• More and more countries are approaching WB, share of DPF financing has again grown to about 35%, similar to 2008-09 crisis
• Difference that it won’t be one off this time, but steady in years ahead
• Demand for all lending instruments goes up, but DPL slightly more
• What do we do with these loans – the retrospective is available, see a distribution of the type of reforms, eg budgetary reforms, regulatory reforms
• Social and environmental aspect, summarised, have to highlight any likely significant impact, positive, neutral or negative
• Each loan as it goes through the review process, which is thorough, for compliance
• Every 3 year a DPL retrospective, reviews all the loans together covering many aspects
• When negative impacts are identified, social impact analysis, what the nature of the impacts would be and what mitigative measures would be put in place
• On environment front, 82% of prior actions, eg budgetary reforms, did not have any effect on the environment, 1% likely negative impact
• Independent group of experts also reviewing to cross check, 83% of prior actions did not have any negative impacts
• Even the 1%, there are still improvements we could make, thereby actions identified
• Revisions on the staff guidance, more systematic screening table
• Welcome feedback from groups watching the DPLs, appreciate it, in order to improve

Nick York

• Did not do a full evaluation, looking at one set of issues, to provide learning – also look at our other products, eg re commodity prices
• Looked at a decade of operations, founds some positive examples, but did find some issues in terms of how the policies are implemented
• Clarity of definition on likely significant risk/effect, needs to be defined
• Tried to define ourselves, found that significant under identification of social and environmental risks
• DPF as an instrument has positive effects too, but an important finding
• Another significant issues, don’t know about ex post risks, monitoring and evaluation is weak – our role as IEG is to check this, but there is nothing there to check
• Part of a series of learning products, are now looking at environmental DPOs, should be there to strengthen systems
• Did our analysis just about in time before the retrospective was concluded
• We are independent so have different views and will come up with different messages

Arif Fiyanto

• Report that will be launched soon on Indonesia, DPLs and climate change
• WB on climate change, recognise that all its work takes place in a world shaped by climate
• Pledges include to help countries onto a low-carbon development path, avoid exceeding a 2 degree warmer world
• DPLs, key for changing government policies, aimed at creating right incentives in countries
• DPL loans can be carbon intensive or support renewable
• Indonesia vulnerable to climate, one of the least prepared to deal with it
• GHG emission per capita in top 5 globally, in our energy plan includes coal power plants, to grow from 47 – 70%
• 20 DPLs totalling 8.8 billion, four infra DPLs from 2007-11
• DPLE incentives higher government expenditures, PPPs, including tax breaks
• Indonesia Infrastructure Guarantee Fund – first guarantee to coal power plant in Batang, only power projects four coal plants
• IFC secured investors
• Energy DPLs, natural gas investments, for exploration, processing & transportation, etc
• Energy DPLS new geothermal law and electricity tariff reforms, but lacks support for low-carbon alternatives – no specific DPL measure, eg re solar
• Contradicts WB core climate change objectives
• Central Java – GOI EIA capacity insufficient – local community protest to coal power plant
• Central Java Coal Power Plant – almost five years community protest, threaten their livelihoods, and will emit huge CO2 emissions if built (same as whole Myanmar)
• NGO letter to WB req to cancel the project, but no action
• DPL in Indonesia didn’t initiate the right incentives to address climate change
• Recommends robust cc assessment for DPLs, end to fossil fuels subsidies, current energy DPL to cancel guarantee to Central Java Coal Power project

Korinna Horta

• Hard to overstate the importance of DPLs, normally a quarter, but in the wake of the financial crisis 40 per cent, now expecting another spike
• 117 billion to DPLs over the past five years
• Many of the DPLs address or effect other sectors, eg infrastructure, agriculture, mining, natural resource management, energy sector
• Retrospective 80% of prior actions no kind of sign environmental effect, 1% potential negative effect
• But amongst those identified as positive are forest DPLs
• IEG did a good review of the forest sector, and looked at DPLs not finding environmental sustainability, outcomes at risk
• IEG said lack of meaningful participation, too much focus on technical interventions, and involvement of people
• The findings of forests could be applied on other DPLs
• So what does the DPL policy says, expected to consult key stakeholders, WB supposed to provide analytical work on poverty social and environmental impacts, but rarely made public
• Less than 50% described consultative processes
• Under reporting of environmental and social risks, no forms of systems to monitor and evaluation social and environmental risks, and no improvement over time
• What is the alternative, see 2012 report on safeguards – call for all WB activities to be covered by the same kind of safeguard, to ensure different WB branches wouldn’t work at cross purposes and recognises that the DPL OP is ineffective
• IEG and Inspection Panel wanted DPL to be included in review
• 2012 basic services programme in Ethiopia, Panel investigation found association with forced evictions of indigenous peoples, human rights violations – the interpreter accompanying the IPN is still in jail today
• What did the WB, now doing a PforR, another instrument not covered by the safeguards
• Need clear sufficient and mandatory role, to address the risks in all of the Bank’s lending instruments – now focus on large scale high risk infrastructure

 Q&A

ADB representative

• Don’t do as many programme development loans as WB, discussion regarding doing more due to requests
• Changing role we need to play in our region, as it becomes more middle income, and what is the value by ADB, but also what the capacity is
• On the safeguards, no specific safeguards for the DPLs, need to look at this if we do more DPLs

Heike Meinhardt, Oil Change

• Working on several case studies on DPLs, including Indonesia – full report to be available by annual meetings
• The draft on Indonesia is available to anyone for comments, looking specifically at climate change
• Paramount to get the right incentives in place, to end fossil fuels subsidies, but the DPL in Indonesia is creating new fossil fuel subsidies
• If the OP has no guidance on climate change, have some guidelines mentioning climate change, but not clear (?)

Hassan Zaman

• Consider context when countries come to us for lending, can go to sovereign bonds, bilateral loans etc
• WB provides support, but there are trade offs, that’s why we have these policy provisions
• Small percentage could have negative impacts, but why do we think improving a PPP framework makes sense – think about the alternatives as a country is sovereign
• We know they could invest in projects such as coal, but that’s why we have our environmental guidance
• Why investments in the forest area, the share is probably 1% of the whole portfolio
• Need to have conversation about proportionality – of the actions where we thought we needed additional work, half of them in previous retrospective were covered, there has been some improvement in the relatively small number
• The differences with IEG, should look at the numbers, the differences in terms of shares was not that different – not as significant as perhaps perceived

Nick York

• Difference between DPL is the use of government systems, the real prices is to develop strong systems – instruments are not substitutes for each other
• Try to get away from project mentality, short term control but not long term development
• Need to be clear of the role of the policy, eg re climate change, but can’t build every aspect into a policy – need stronger and more specific guidance
• Regarding numbers, agree on the share of DPLs with no significant risk is large

Arif Fiyanto

• We have an option, but why DPLs are considering coal power plant which is in contradiction to WB

Korinna Horta

• Shocking, there is nothing there, nothing to check – this is the knowledge bank, what must be done so we know what the impact is of a quarter of WB lending, something must happen

Q&A

WRI comment on if we don’t do it someone else will – make sure that the money is going in the right direction. Climate Action Plan, interesting to see different strands that aren’t unified. Argument that DPLs aren’t particularly risky is not an argument against policy. If you have a policy or in-depth assessment. Interesting we don’t know the results of DPLs in many cases, don’t have the studies. Different types of safeguarding, how many of the WB safeguards experts don’t think highly of the DPL process, understaffed, underemphasised

Q – BIC for civil society OP doesn’t provide the necessary protection, what’s the hold back from cover by the proposed framework as well.

Nick York

• Gap in monitoring and evaluation, DPLs are subject to scrutiny, but in completion report
• We didn’t evaluate the policy, we looked at the guidance

Q – Gender Action colleagues from Indonesia said that a big Indonesian FI, that seems to be the opposite of becoming more transparent. For Sam from ADB, said ADB has no safeguard for DPL, but do the safeguards exclude DPLs.

Q – Egypt recently signed DPL, no public consultation, knew about loan through leaked document on twitter, public assessment too simplistic.

WB representative

• The most current energy DPL is heavily focused on helping the government towards more renewables, but large part of population has no access to energy, so important o provide infrastructure in general
• About Java Bali, WB did not provide any guarantee
• Appreciate BIC’s work, we are happy to provide some information

Hassan Zaman

• Not correct that two part of the WB are saying different things in the climate action plan
• WB to influence the necessary policies that deal with climate change, key instrument is through DPLs, can also use P4R
• Why not the same safeguards framework, because of issue of proportionality and different instruments are used for different things – but when the new package is being finalised, we will have a look and see if any guidance need to be updated
• Don’t have the details on Egypt DPL, but having worked on poverty and social analysis impact, can be done, but best if you look at one policy change at a time

Arif Fiyanto

• The IFC’s role with FIs, to respond to WB clarification, clear that Indonesia has low access to electricity, but has 17,000 islands, the energy policy 60% from coal power plants, 20% renewables
• 20GW Jawa coal power plant is the first guarantee, IFC through FI

Nick York

• Have done major evaluation of electricity access, how well targeted to countries
• New evaluation P4R to be out in next few months