SAFEGUARD POLICIES: FRAMEWORK FOR IMPROVING DEVELOPMENT EFFECTIVENESS

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized DISCUSSION SAFEGUARD POLICIES: FRAMEWORK FOR IMPROVING DEVELOPMENT EFFECTIVENESS A DISCUSSION NOTE ENVIRONMENTALLY AND SOCIALLY SUSTAINABLE DEVELOPMENT AND OPERATIONS POLICY AND COUNTRY SERVICES OCTOBER 7, 2002

2 ABBREVIATIONS AND ACRONYMS BP CAO CAS CDD CEA CODE CPIA CY EA EIA ENV ESSD ESW FY IBRD IDA IFC LEG MFI MFI-WGE MIGA NGO OED OD OP OPC OPCS OPN PREM PRSC QACU QAG SDV SEA SecEA Bank Procedure Compliance Advisor/Ombudsman Country Assistance Strategy Community-Driven Development Country Environmental Analysis Committee on Development Effectiveness Country Policy and Institutional Assessment Calendar Year Environmental Assessment Environmental Impact Assessment Environment Department Environmentally and Socially Sustainable Development Network Economic and Sector Work Fiscal Year International Bank for Reconstruction and Development International Development Association International Finance Corporation Legal Vice Presidency Multilateral Financial Institution Multilateral Financial Institutions Working Group on Environment Multilateral Investment Guarantee Agency Nongovernmental Organization Operations Evaluation Department Operational Directive Operational Policy Operational Policy Committee Operations Policy and Country Services Operational Policy Note Poverty Reduction and Economic Management Network Poverty Reduction Support Credit Quality Assurance and Compliance Unit Quality Assurance Group Social Development Department Strategic Environmental Assessment Sectoral Environmental Assessment

3 SAFEGUARD POLICIES: FRAMEWORK FOR IMPROVING DEVELOPMENT EFFECTIVENESS A DISCUSSION NOTE CONTENTS Page Executive Summary... iii I. Introduction...1 II. The World Bank Group s Safeguards Framework...3 III. Emerging Safeguard Issues...6 A. Policy Issues...6 B. Client Priorities, Systems, and Capacities...7 IV. Two-Pronged Modular Approach for the Bank...9 A. Improving the Clarity and Consistency of Safeguard Policies...10 B. Fostering Borrower Ownership...13 V. Moving Forward...16 A. Benefits and Risks...16 B. Implementation C. Next Steps Boxes Box 1. World Bank Group s Safeguard Policies...3 Box 2. Borrower and Bank Responsibilities: An Illustration from Environmental Assessment...4 Box 3. The World Bank s Inspection Panel...5 Box 4. Client Capacity Building Representative Examples...9 Box 5. IFC s Sustainability Initiative...10 Box 6. Pollution Prevention and Abatement Principles An Illustrative Example...12 Box 7. Innovations in Capacity Building An Example from Brazil...14 Box 8. Vietnam Pilot on Policy Harmonization...15 Box 9. Elements of the Two-Pronged Modular Approach: Linkages and Responsibilities...18 Annexes Annex A. World Bank s Safeguard Policies Annex B. Safeguards Work Program and Action Matrix... 23

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5 SAFEGUARD POLICIES: FRAMEWORK FOR IMPROVING DEVELOPMENT EFFECTIVENESS A DISCUSSION NOTE EXECUTIVE SUMMARY 1. The World Bank has been a leader among development institutions in promoting attention to safeguard issues. It has developed policies, established implementation and oversight frameworks, and made resource commitments for safeguards that are unequaled among international development institutions. However, in light of recent changes in development approaches and lending instruments, the Executive Directors of the World Bank have requested an opportunity to discuss the future of the Bank s system of safeguard policies, including specific mechanisms for making them more relevant to changing development practices and client needs. 2. Overview of Paper. This note discusses the emerging issues to which the safeguard system of the World Bank Group must respond, touches on current safeguards-related work undertaken by IFC and MIGA, and makes recommendations for the Bank that are intended to maintain and enhance due diligence while permitting innovations that improve development effectiveness. No changes to policies are proposed in the short-term. In fact, the Bank anticipates that both compliance and results will continue to improve because of measures already in place and additional actions proposed such as enhanced supervision and greater emphasis on results. Any changes to policies in the medium- to long-term would be made only after careful and transparent pilots are undertaken and evaluated, and discussions with Executive Directors, borrowers, and external stakeholders are carried out. 3. Short-Term Measures. The paper proposes a number of short-term measures to clarify the intent of safeguard policies and improve their effectiveness: preparing and disseminating a Management statement on the purpose of safeguards and their role in improving development outcomes; clarifying the treatment of safeguard issues in different lending contexts, including adjustment lending; strengthening supervision and increasingly focusing on both results and on the downstream review and learning required to achieve them; strengthening borrower capacity and creating incentives for improvement appropriate to borrowers with different capacity levels; making greater use of the existing flexibility to share specific safeguard responsibilities with clients that have proven capacity, and to determine the type and modalities of oversight on the basis of client capacity and track record;

6 iv introducing transparent and carefully monitored pilots intended to use national systems in countries with proven capacity and to draw lessons from this experience; and supporting ongoing efforts to harmonize impact assessment principles and procedures with other donors and with borrowers. 4. Medium- to Long-term Measures. Depending on the results of pilots and other actions, the outcome of the work on harmonization, and the conclusion of consultations with Executive Directors, borrowers and other stakeholders, measures to be taken in the medium- to long-term could include preparation of an integrated statement on safeguard objectives and procedures for the Bank; establishment of a safeguard system based on principles that can be more broadly applied in the programs of client countries in pursuit of enhanced development results; and increased reliance on country systems and procedures in countries with proven capacity. 5. IFC and MIGA. The Bank, IFC, and MIGA each administers its own safeguards systems independently, and a formal mechanism for coordination, involving managers and staff, has recently been instituted. IFC is pursuing relevant safeguard issues through its ongoing sustainability initiative and through a review of safeguards by the Compliance Advisor/Ombudsman s office. IFC and MIGA will consider specific actions when this review has been completed and reviewed by IFC and MIGA managements. 6. Benefits and Risks. While significant benefits can be derived from the proposals presented in this note, there are also risks and costs. The benefits include a significant scaling up of the development impact of safeguards when countries own and apply them not only in Bankassisted operations, but also broadly across their development programs. Among the risks is a possible concern among borrowers that attention to safeguard issues is being broadened, while others may misperceive proposed innovations as a way for the World Bank to dilute its commitment to its safeguard policies. To minimize these risks, Senior Management will continue to closely oversee the implementation and further evolution of safeguard policies. The process will be carried out in a transparent manner with regular reporting to Executive Directors and with broad consultation and consensus building. 7. Next Steps. Bank Management has discussed this note with the Executive Directors in the Bank s Committee on Development Effectiveness and is now posting it on the Web for public comment. A dialogue will also be initiated with borrowers and other stakeholders. Within the Bank, this work will be managed by the Quality Assurance and Compliance Unit within the Environmentally and Socially Sustainable Development Network, in close collaboration with Operations Policy and Country Services.

7 SAFEGUARD POLICIES: FRAMEWORK FOR IMPROVING DEVELOPMENT EFFECTIVENESS A DISCUSSION NOTE I. INTRODUCTION 1. The operational policies of the World Bank Group 1 are vital to its efforts to promote poverty reduction and sustainable development. A subset of these policies requires that potentially adverse environmental impacts and selected social impacts of Bank Group investment projects should be identified, avoided or minimized where feasible, and mitigated and monitored. Although the Bank has had environmental and social policies for more than 20 years, Bank Management first articulated the concept of safeguard policies in 1997 to stress the importance of this specific set of operational policies for achieving its environmental and social objectives and for enhancing the quality of its operations. Today, the institutions of the Bank Group share a set of similar safeguard policies, and they have institutional arrangements for implementation and oversight, with modifications as necessary to address their specific lines of business and organizational structures. 2. Beyond Compliance. In the past few years, the Management and Executive Directors of each of the Bank Group institutions have focused on further strengthening the implementation of their safeguard policies. In recent discussions within the World Bank, 2 the Executive Directors reaffirmed the importance of compliance with safeguard policies, but they also requested an opportunity to discuss the future of the Bank s system of safeguard policies, and to consider mechanisms for making safeguards more relevant to changing development practices and changing client needs. In particular, they wanted to know how the Bank Group might do more to promote country ownership and innovation, build country capacity, and avoid excessively riskaverse behavior by staff and clients. 1 2 In this paper, IBRD and IDA (the World Bank or the Bank), IFC, and MIGA are together referred to as the World Bank Group or Bank Group. The International Center for the Settlement of Investment Disputes is not included. In June 2000, Bank Management circulated to the Board a note entitled Country Focus and Safeguard Policies: Institutional Issues (attached to INSP/R2000-4/1), June 12, 2000, which, among other things, summarized the program to improve the implementation of safeguard policies and began to raise issues about how the safeguard framework should evolve. During further discussions in November 2000, the Committee on Development Effectiveness (CODE) stressed the importance of promoting country ownership and capacity building. This issue surfaced again during the discussion of the Cost of Doing Business: Fiduciary and Safeguard Policies and Compliance (SecM ), July 17, 2001, and in November 2001 when the CODE Subcommittee considered the Operations Evaluation Department s (OED) evaluation of the Vietnam Country Assistance Strategy in which OED recommended actions to strengthen country ownership and countrywide application of safeguard policies; see Vietnam: Country Assistance Evaluation, OED Report No , November 2001.

8 2 3. Purpose of this Note. This discussion note responds to the Executive Directors request. It describes changes inside and outside the Bank Group that make it necessary for the system to continue to adapt and evolve, and touches on current safeguards-related work undertaken by IFC and MIGA. 3 It then makes a series of recommendations intended to maintain and enhance the Bank s due diligence in the short term while supporting innovations in meeting safeguard objectives and enhancing development impact. The paper also describes medium- to long-term measures to develop a safeguard system based on principles that can be broadly applied in the programs of client countries, improve the quality of borrower programs, and allow financing institutions to increasingly rely on a country s own systems and procedures. The proposals include provisions for dialogue and consensus building and for Executive Directors approval, as appropriate. 4. Related Work. In February 2002, the Committee on Development Effectiveness (CODE) received a companion paper discussing recent Bank efforts to strengthen internal controls and management of safeguards. The Bank s broader environmental and social agendas are discussed in the Environment Sector Strategy, 4 as well as in ongoing work on the Social Development Strategy and the proposed social analysis policy. In addition, the work on the update of the Bank s operational policy on adjustment lending covers environmental and social aspects of the Bank s work in that context. 5 The Office of the Compliance Advisor/Ombudsman (CAO), the independent accountability mechanism for IFC/MIGA, is reviewing the impact and implementation of IFC s safeguard policies, and will summarize its findings and recommendations in a report that is expected to be finalized by the end of MIGA will also review its safeguard policy system in light of the CAO report and will report to its Board with recommendations on how it will further develop its framework. 5. Organization of the Note. Following this introduction, Section II of this note briefly describes safeguard implementation arrangements, and Section III describes the changing context of the Bank Group s safeguards system and key issues relevant to the effectiveness of the safeguard policies. Section IV presents proposals for Bank action, including the adoption of an approach that builds on lessons from ongoing efforts in procurement and financial management. Section V summarizes the benefits and risks of these proposals, discusses implementation, and sets out next steps The Environmentally and Socially Sustainable Development Network and Operations Policy and Country Services gratefully acknowledge the contributions of IFC and MIGA in providing information for this note, and in reviewing and commenting on drafts. Making Sustainable Commitments An Environment Strategy for the World Bank, ESSD, World Bank, December From Adjustment Lending to Medium-Term Development Support: Key Issues in the Update of World Bank Policy (CODE ), May 20, 2002.

9 3 II. THE WORLD BANK GROUP S SAFEGUARDS FRAMEWORK 6. Safeguard policies provide a mechanism for integrating environmental and social concerns into development decision making. In addition to providing guidance on measures to improve and sustain operations in specific areas, most safeguard policies provide that (a) potentially adverse environmental impacts affecting the physical environment, ecosystem functions and human health, and physical cultural resources, as well as specific social impacts, should be identified and assessed early in the project cycle; (b) unavoidable adverse impacts should be minimized or mitigated to the extent feasible; and (c) timely information should be provided to stakeholders, who should have the opportunity to comment on both the nature and significance of impacts and the proposed mitigation measures. As indicated earlier, the institutions of the Bank Group share a set of similar safeguard policies and institutional arrangements for implementation and oversight, with modifications necessary to address their specific lines of business and organizational structures 6 (see Box 1). Box 1. World Bank Group s Safeguard Policies OP/BP 4.01 OP/BP 4.04 OP 4.09 OP/BP 4.12 OD 4.20 OP 4.36 OP/BP 4.37 OPN OP/BP 7.50 OP/BP 7.60 World Bank (IBRD and IDA) Environmental Assessment Natural Habitats Pest Management Involuntary Resettlement Indigenous Peoples Forestry Safety of Dams Cultural Property Projects on International Waterways Projects in Disputed Areas IFC and MIGA IFC s safeguard policies are similar to the Bank s, with modifications to reflect the private sector focus of IFC operations. IFC applies OP 7.60, Projects in Disputed Areas, through its Legal Department, and, because of its business focus, it has a policy statement on Harmful Child Labor and Forced Labor. MIGA follows its environmental and social safeguard policies which are similar to those of IFC. Note: OP/BP is Operational Policy/Bank Procedure; OD, Operational Directive; and OPN, Operational Policy Note. The disclosure of information is an important aspect of the Bank s safeguard system; see BP 17.50, Disclosure of Operational Information, and The World Bank Policy on Disclosure of Information (The World Bank, Washington, D.C., 2002). IFC and MIGA each have individual policies on information disclosure. 7. Implementation Arrangements. The Bank, IFC, and MIGA each administers its safeguards system separately and independently, and each institution is accountable for its own decisions about compliance. When two or more Bank Group institutions are involved in joint projects, they collaborate closely and systematically on the due diligence, decisionmaking, and supervision processes (e.g., through joint missions, back-to-office reports, and clearances), and they exchange informal information and views on environmental and social issues on a regular basis. A formal mechanism for coordination and information exchange, involving staff and senior managers, was recently instituted. 8. Roles and Responsibilities. The borrower is responsible for selecting, preparing, and implementing projects that are assisted by the Bank Group, and for complying with Bank Group 6 IFC adopted a set of safeguard policies like the Bank s, but with modifications necessary to address its client base, project cycle, and organizational structure, in MIGA adopted IFC s policies in 1999 and, in May 2002, modified its policies to correspond more closely to its business needs.

10 4 policies. Staff advise and support borrowers in carrying out their responsibilities. Institutional arrangements for oversight are as follows: Within the Bank, operational staff in the Regions provide information to borrowers and ascertain whether policy requirements have been met 7 (see Box 2). The Environmentally and Socially Sustainable Development (ESSD) Network s Quality Assurance and Compliance Unit (QACU), which includes specialists from environmental and social disciplines and the Legal Vice Presidency, provides coordination and oversight support. The Legal Vice Presidency also provides advice on compliance with policy requirements. In IFC, the Investment Support Group in the Environment and Social Development Department appraises the environmental and social issues arising from projects by reviewing environmental and social documentation prepared by the project sponsor, with levels of due diligence appropriate to the significance and complexity of issues involved. The Investment Support Group is responsible for providing environmental and social clearance for projects to proceed to Board approval, independent of the Investment Departments. Like IFC, MIGA has a unit that is independent of the operations department and is responsible for environmental and social review and clearance of prospective guarantees. Box 2. Borrower and Bank Responsibilities: An Illustration from Environmental Assessment Borrower Identifies and proposes projects to the Bank. Bank Screens projects and determines environmental assessment (EA) category. Carries out EA in accordance with Bank requirements. Consults project-affected groups and local NGOs. Provides relevant information in a timely manner in a form and language understandable and accessible to the groups being consulted. Submits draft EA report to Bank before appraisal. Advises borrower on the Bank s EA and other safeguard requirements. Makes information available to the public through the InfoShop. Reviews draft EA report and determines whether it provides an adequate basis for processing the project for Bank support. 9. Oversight. The Bank Group institutions also have mechanisms for evaluation and independent assessment. 7 Safeguard considerations are now integrated into Regional and corporate risk reviews. These risk reviews consider, among other things, the risks associated with the client s implementation of safeguard policies as well as substantive and reputational risks if problems arise. They also consider ways to minimize and mitigate such risks during preparation and implementation.

11 5 The Bank s Quality Assurance Group (QAG) reviews compliance with Bank safeguard policies in its quality-at-entry and quality-of-supervision reports; and the Operations Evaluation Department (OED), an independent unit within the World Bank, evaluates the Bank s work, the borrower s performance in implementing projects, and the Bank s contribution to the country s long-term development. An Inspection Panel provides a mechanism for independent review of the Bank s compliance with the provisions of its own policies (see Box 3). For IFC and MIGA, the CAO provides independent audits of compliance and advice to the President of the World Bank Group on environmental and social outcomes, and investigates complaints filed by those affected or likely to be affected by a project they finance. In its two years of operation, the CAO has received 11 formal complaints, of which 9 have led to assessment and action. Guidelines on audits and reviews of policies are to be published shortly by the CAO. 8 Box 3. The World Bank s Inspection Panel The World Bank created the Inspection Panel in 1993, to serve as an independent mechanism to ensure accountability in Bank operations. This was an unprecedented step among international financial institutions. The Panel provides an independent forum to review complaints that may be submitted by a community of persons such as an organization, association, society, or any other group of individuals in a country who believe their rights or interests have suffered or could suffer serious harm directly from the Bank s failure to follow its operational policies and procedures. The panel is empowered to review compliance with all Bank policies other than those related to procurement. The Panel consists of three members who are appointed by the Executive Directors for a nonrenewable period of five years. It is functionally independent of Bank Management and reports solely to the Executive Directors. Since the Panel was created, the Bank has approved over 2,400 projects. The Inspection Panel has reviewed 26 requests for investigation on these projects and it has proceeded to fully investigate 9 of them. The most frequent complaints involve the policies on Environmental Assessment (OP/BP 4.01), Involuntary Resettlement (OP/BP 4.12), Indigenous Peoples (OD 4.20), Project Supervision (OP/BP 13.05), and the Economic Evaluation of Investment Operations (OP 10.04). The Inspection Panel issues an Annual Report that provides a detailed overview of its activities and includes information on its mandate, staffing, and budget. More information on the creation, mandate, roles, and activities of the Inspection Panel is available at: Bank Evaluation Results. QAG studies over the past five years confirm generally good compliance with safeguard policies, with minor variations from year to year in overall environmental performance and sustained improvement on poverty and social indicators. A recent OED evaluation concluded that Bank projects are usually well designed to avoid environmental damage and have good environmental management plans, and that they have contributed to strengthening local capacity to carry out environmental assessments and implement environmental management plans. 9 The same study recommended that the Bank strengthen its safeguards oversight system and processes, and in parallel, modernize and adapt the policy framework to take account of changing practices and Bank instruments and to reflect 8 9 The CAO also provides an ombudsman service with a focus on mediation and problem solving. Information on the Office of the Compliance Advisor/Ombudsman is available at See OED Review of the Bank s Performance on the Environment Final Report, March 2001.

12 6 the lessons of recent experience. It also recommended that the Bank expand safeguard training to ensure that managers and staff fully understand the safeguard policies and standards and this has since been done. 11. Strengthening the System. The Bank Group s safeguard policies, implementation and oversight frameworks and resource commitments are among the most rigorous and substantial of the multilateral financial institutions, and the Bank Group has been a leader in promoting attention to these concerns. Since the safeguards system was established in 1997, Bank Group institutions have improved the effectiveness of their safeguards frameworks by updating policies and adapting policy implementation to reflect business models. The Bank has also taken steps to establish procedures for risk assessment, review, and safeguard sign-off on projects; strengthen staffing, funding, and monitoring and reporting mechanisms; and improve procedures for applying safeguards consistently across Regions and departments. IFC s management systems include an explicit environmental and social procedure for project review, a reference manual and project processing program, and a new environmental and social risk rating system to track the shifting risk profile of projects and prioritize resources in project supervision. III. EMERGING SAFEGUARD ISSUES 12. Building on the progress reported above, the following sections of this paper set out the next steps in the continuing process of improving the Bank Group s safeguards framework. This section examines issues related both to the coherence, consistency, and applicability of the policies themselves, and to the focus and effectiveness of the system in mainstreaming environmental and social concerns in the work of client countries and the private sector. These issues, and the recommendations presented in the next section, are discussed as they relate to the Bank, with references to IFC and MIGA where relevant. A. Policy Issues 13. Recent work to convert World Bank policies from Operational Directives (ODs) to Operational Policies and Bank Procedures (OPs/BPs) has improved the clarity of individual environmental and social safeguard statements. However, these policies address different kinds of impacts and historically were not designed to be part of a tightly integrated and coherent suite of statements, so a number of issues remain on coherence, applicability, and specificity. 14. Coherence across Bank Safeguard Policies. Although the Bank s safeguard policies embody common principles, there are differences among them and within the system as a whole. For example, the environmental assessment policy covers all significant environmental impacts, but the social impacts it covers need to be clarified. Other policies differ in their provisions for public consultation and disclosure of information, in the lending instruments to which they apply, in clarity about exemptions, and in the level of guidance they provide to staff (see Annex A for details). In addition, the mix of safeguard policies is not comprehensive and risks creating policy compartments that inhibit a more holistic view of project impacts. Indeed, some of the policies such as Forestry (OP 4.36) and Pest Management (OP 4.09) provide broad advice on operations within a particular sector or sectors that goes beyond narrow do-no-harm concerns.

13 7 15. Applicability across Bank Instruments. The Bank s safeguard policies were developed primarily for traditional investment projects, which typically are narrow in scope, finance specific expenditures, and are geographically circumscribed. As currently conceived and drafted, the safeguard policies are not well suited to adjustment lending, which typically supports broader, economywide policy reforms that often have indirect, lagged, and uncertain effects. 10 Similarly, safeguard policies are not readily applicable to sector investment lending operations, and to some variations of investment lending with multiple subprojects, such as social funds and community-driven development (CDD) projects. 16. Front Loading. Bank staff and borrowers give considerable attention to the safeguard policies during preparation and appraisal of projects. However, the policies give less attention to results, and supervision needs to be strengthened. Indeed, with the increasing focus on results in development operations, safeguard approaches are now needed that put more emphasis on monitorable benchmarks for progress, allow more flexibility in how the borrower achieves these benchmarks, and entail more accountability for results. 17. Issues in IFC and MIGA. Bank Group institutions share many of the same concerns. In addition to confirming the issues raised above, IFC has identified some major problems related to the length and prescriptiveness of the safeguard statements, and limitations on the use of professional judgment in safeguards interpretation. IFC has also found that safeguard policies do not provide adequate guidance to the private sector on accountabilities for the actions of third parties, including governments, which are crucial to development outcomes, but over which the private sector does not have direct control. Both IFC and MIGA are engaged in their own efforts to evaluate the effectiveness of their safeguard policies. 18. Differences among Financing Institutions. Most multilateral and bilateral partners have environmental and social policies. However, a recent survey found that even in areas that are broadly agreed such as the environmental assessment process there are significant differences in the specific requirements and in how they are applied. While most institutions have policies covering both environmental impacts and selected social impacts, they vary on requirements for the analysis of alternatives, consultation, disclosure, occupational health and safety, and core labor standards. These differences between donors reduce incentives for clients to develop common approaches, and for donors to collaborate on safeguard capacity building. They may also lead borrowers to shop for donors whose requirements in a particular area are less stringent. B. Client Priorities, Systems, and Capacities 19. As the development paradigm increasingly emphasizes country ownership and development results, the Bank s safeguards approach needs to be responsive to these changes and evolve in tandem. Some key issues are the fit between these policies and country environmental and social priorities, and countries varying capacities to apply them. 20. Changing Development Issues. Bank borrowing countries often face different types of issues from those typically addressed in traditional investment loans. For example, economic 10 OP 4.01, Environmental Assessment, applies to sector adjustment loans, and OP 4.09, Pest Management, applies to all adjustment loans.

14 8 reform, privatization, and displacement caused by natural disasters and conflict often involve environmental and social impacts that are very different from those the safeguard policies were originally intended to address. Indeed, the application of specific safeguard provisions may distract attention from other important environmental and social concerns. For example, in a recent Bank-assisted investment project, considerably more Bank staff time was given to 5,000 people who were involuntarily resettled than to the 50,000 people moving to the same area on a voluntary basis, even though the problems they faced on arrival were virtually the same. 21. Application in Client Countries. The development paradigm is moving toward a model of client collaboration that sets objectives and reinforces country-specific, incremental steps toward achieving them. At the same time, however, safeguard policies have become increasingly specialized and prescriptive, and with this their application within the particular legislative frameworks of borrowers has become more difficult. As a result, some countries have two classes of programs from a safeguard policy perspective one financed by the Bank, and the other by the borrower. In such cases, country ownership is limited and clients may avoid projects or project components with specific safeguard requirements or request support from other donors who have different policies or standards. This is a particularly crucial problem for the policies on resettlement and land acquisition, indigenous peoples, and consultation and disclosure, areas in which country legislation and approaches may differ in important ways from the approaches the Bank Group takes. There are fewer issues in the overall approach to EA, where more similar procedures are in place across countries. 22. Variations in Client Capacity. After more than a decade of environmental and social awareness and capacity building, there is now considerable diversity among countries and among agencies and enterprises within countries in their interest, commitment, and capacity to deal with environmental and social impacts and issues. 11 But these differences have not been systematically reflected in the Bank s approach to safeguard implementation. In some cases, project-by-project approaches require redundant processes in more capable countries; and in countries that need significant ongoing institutional support, they may focus attention and resources on isolated projects rather than capacity building. To promote internal ownership and commitment to safeguard policies, an approach is required that clearly defines the objectives and principles behind these policies, assesses client capacity to implement them, and invests in developing or strengthening client capacity to put these principles into action. In many regions, such approaches are already being stressed. (See Box 4 for examples of recent Bank-supported capacity-building initiatives). 11 For example, a recent evaluation of 15 of the 27 countries in the Europe and Central Asia Region describes two systems, one based on Western environmental impact assessment models and the other used in many countries of the former Soviet Union. Some countries using Western models and seeking European Union accession have systems that are well advanced (e.g., Poland), while those country systems that are based on the Soviet model are often not fully compatible with Bank procedures. For this reason, capacity building requires an approach that is tailored to each system. See Environmental Impact Assessment (EIA) Systems in Europe and Central Asia Countries (The World Bank, May 2002).

15 9 Box 4. Client Capacity Building Representative Examples All Regions and many Bank-supported country programs have capacity-building programs in place. Two notable examples follow: Africa. Drawing on the preferences expressed in a high-level meeting of environment ministers in Nairobi, the Africa Region developed a comprehensive strategy for developing EA capacity in Sub-Saharan Africa. From this initiative, a new Africa-based program emerged. One element is a program called Capacity Development and Linkages for Environmental Impact Assessment in Africa. Based in Ghana, the program s secretariat will serve to strengthen networking, cooperation, and collaboration in EA capacity building in African countries. In addition, a new center of excellence, the Southern African Institute for Environmental Assessment, has been established in Namibia to provide professional EA review, mentoring, and training focused mainly on the southern Africa region. Europe and Central Asia/Middle East and North Africa. In 1998, the Mediterranean Environmental Technical Assistance Program initiated an Environmental Assessment Institutional Strengthening Project through the World Bank s Development Grant Facility to assist cooperating countries in acquiring the necessary technical and policy tools to establish credible and operational EA systems. EA systems in Albania, Croatia, Egypt, Jordan, Tunisia, Turkey, and the West Bank and Gaza were assessed, and the results were used to define specific action plans to improve national EA systems and to increase their coherence with international norms, World Bank guidelines, and European Union directives. A second phase, initiated in 2000, established an EA Center in Tunisia; extended the assessment of EA systems to Algeria, Lebanon, Morocco, Syria, and Yemen; undertook collaborative workshops; and established a network of EA directors that have met several times in the last two years. 23. Oversight and Performance. Safeguard policies require the same level of Bank Group oversight and scrutiny of borrower processes for all clients, regardless of their track record or capacity. Current procedures and approaches do not recognize clients good performance in addressing safeguard issues, nor do they provide strong incentives for countries to systematically enhance their own policies and institutions, or for private sector enterprises to build their capacity. 12 Client consultations have shown that borrowers in the public and private sector generally agree with safeguard principles, but have reservations about the detailed prescriptive requirements that limit their approaches to achieving agreed ends. The challenge for the Bank is to find ways to advance the consensus around safeguard principles that are focused on development results and help borrowers manage the transition toward core principles and good practices, while recognizing and addressing stakeholder concerns about the Bank s own commitment to, and compliance with, those principles. IV. TWO-PRONGED MODULAR APPROACH FOR THE BANK 24. A Bank effort to address each of the two broad groups of issues raised in Section III is warranted in its own right. Greater coherence and clarity would help staff and clients to better understand safeguard policies and their role in enhancing the quality of development outcomes. In addition, stronger ownership of safeguards based on principles accepted across the 12 In recent years, private sector enterprises have faced growing pressures to adopt environmentally and socially sound policies and practices pressures from regulatory improvements, increased public scrutiny, changing consumer behavior (putting a premium on environmentally and socially sound products), and changing investor behavior (in favor of socially responsible investment). As a result, leading institutions in the private sector can, and in some cases do, play an important role in developing the ground rules for corporate responsibility and promoting innovative approaches to implementation. However, the safeguard policies tend to command and control and are not formulated in a way to maximize the capacity of the private sector for self improvement using market-oriented approaches.

16 10 development community could lead countries to apply them more effectively in Bank-assisted operations and in their own development programs, thereby reducing transaction costs and scaling up development impact. However, addressing these two sets of issues in a coordinated way would also allow the proposed solutions on one set of issues to reinforce or facilitate actions on the other. This section presents a two-pronged approach through which the Bank could address both types of concerns. IFC will pursue relevant issues through its ongoing sustainability initiative (see Box 5), and through the CAO s review of safeguards. Box 5. IFC s Sustainability Initiative As IFC continues to rigorously apply its safeguard policies, the external environmental, social, and governance landscape is changing rapidly. In response to new business opportunities and threats to business as usual posed by public concern over sustainability, many firms have responded by upgrading their environmental, social, and governance performance. While the aggregate financial returns of more sustainable firms compared with those of others remain a topic of debate, the evidence is clear that many individual firms have succeeded in improving their bottom line through strengthened environmental, social, or governance performance (the business case for sustainability). Through its sustainability initiative, IFC has adopted a new role to help clients become aware of opportunities to gain from sustainability, beyond what they have to do to comply with the safeguards framework. A. Improving the Clarity and Consistency of Safeguard Policies 25. The following measures are recommended to help the Bank communicate more effectively the importance and relevance of safeguards, and the principles that underpin and unite them. 26. Producing a Management Statement of Due Diligence for the Bank. A brief overarching statement, issued by Management, would set out the Bank s general approach to the management of environmental and social impacts, reinforce the need for broad attention to these issues both in Bank/country dialogues and in projects, and clarify accountabilities between the Bank and the borrower and within the Bank. The development of this statement would allow a discussion about principles and approaches to due diligence, and would support other work on the key issues of coherence, consistency, and applicability. 27. Clarifying Social Coverage within the EA Process. The EA procedures of most multilateral financial institutions (MFIs) routinely consider social impacts that are mediated by the environment (noise and water pollution, for example). They may also consider impacts on directly affected groups (such as displacement or resettlement and adverse impacts on the welfare and livelihoods of local communities or vulnerable groups), and basic working conditions (especially issues of health and safety). Typically, broad social impacts, such as distributional impacts, are evaluated through other forms of economic and social analysis. Work is planned within the Bank to clarify which social impacts would be routinely addressed in the EA process, and which would be identified and addressed through such other mechanisms as country social analysis, social assessments, poverty assessments, or poverty and social impact analyses for countries with a poverty reduction strategy. This work would benefit from and would support related work undertaken in the context of the MFI harmonization effort described below.

17 Clarifying and Adapting the Application of Safeguards. While there is broad agreement that environmental and social impacts should be anticipated and addressed in Bank-financed operations, there is a need to develop or clarify approaches in the following situations. (a) (b) (c) (d) (e) Environmental and social impacts in adjustment operations. Work under way to update OD 8.60, Adjustment Lending Policy and convert it to the OP/BP format will address the environmental and social aspects of adjustment operations, 13 including poverty reduction support credits (PRSCs). 14 The evolving approach under consideration combines upstream analysis at the level of the Country Assistance Strategy (CAS), which would build on related analytic work where feasible, and treatment of environmental and social aspects at the level of an individual adjustment operation. Safeguard approaches in other lending contexts. Work is also under way to better adapt safeguard approaches to sector investment loans, and to investment loans with multiple subprojects, such as social funds and CDD operations. For sector investment loans, strategic and sectoral assessments and other types of environmental and social analyses would be used to identify critical issues and mitigation options and to lay the groundwork for capacity building in critical sectors and programs. The emerging approach to social funds and CDD operations would involve project-level frameworks for the review of environmental and social safeguard issues. 15 Special circumstances. Procedures for addressing safeguard issues in the context of emergency projects and other unusual circumstances are being developed for the use of ESSD/QACU and the Regional safeguards units. Innovation. Guidance will also be prepared on clearance mechanisms for staff, clients, and other stakeholders who want to use innovative approaches in applying, implementing, and monitoring safeguard policies on a pilot basis. Such innovative proposals would be discussed with Senior Management and presented to the Executive Directors for approval when appropriate. Consolidation and updating of good practice. Safeguard policies are available on the Web and on a widely distributed free compact disk, but detailed guidance is yet to be consolidated. This work will be done in two phases, with oversight by ESSD/QACU. In the first phase, existing guidance will be consolidated and made accessible electronically. In the second phase, more will be done to align and integrate guidance, update materials, and translate and disseminate them to borrowers and other stakeholders. The timing of such work will depend, in part, on the availability of resources See From Adjustment Lending to Development Policy Support Lending: Key Issues in the Update of World Bank Policy, op. cit. Introduced in 2000, PRSCs are a relatively new adjustment lending instrument, and experience in using them is evolving. They are processed according to interim guidelines that cover, among other things, the treatment of environmental and social issues. See Interim Guidelines for Poverty Reduction Support Credits (IDA/SecM /2), May 16, Guidance issued by QACU concerning the application of safeguard policies to social funds and CDD operations is being followed up by training and dissemination of good practice.

18 Harmonizing Policies and Procedures. The Bank is collaborating with donor partners to develop a common framework and basic principles of safeguard policy and practice to which donors and clients can subscribe, and around which donor and borrower capacity can be built. 16 The Multilateral Financial Institutions Working Group on Environment (MFI-WGE) is drafting a document on important institutional practices, key elements of environmental assessments, and good practices in the environmental and social areas that environmental assessments routinely cover. 17 (Box 6 illustrates the type of principle that may be developed.) Besides setting out general principles, the MFI-WGE document would provide links to the policies of individual agencies. When the draft document has been agreed at the technical level (planned for December 2002), it will be discussed within the participating institutions and with borrowers and other clients. Once the document is finalized, each institution will need to decide whether and how the outline of broadly accepted principles would affect their own policies and procedures. Since MFIs have different capacities, mandates, and constituencies, outcomes may differ between agencies. However, if widely adopted, this document could improve consistency and quality across a broad spectrum of financing institutions, and it could improve the quality of borrower programs and reduce their transaction costs. Box 6. Pollution Prevention and Abatement Principles An Illustrative Example Objective To protect human health and ecosystem functions by eliminating or minimizing the output and impact of air, land, and water pollution. Principles The significance of pollution impacts and options for elimination or mitigation should be identified within an EA framework that incorporates technical knowledge and stakeholder views. Project requirements or standards should be determined with reference to both national law and relevant internationally recognized directives or guidelines. a Normally, the higher of the two is applied. Where national standards are not technically or economically feasible, deviations from these should be fully justified and agreed to by both the client and the funding agency. Any proposed deviations should be fully disclosed in the EA and project documents. In new facilities, state-of-the-art or cleaner technologies (stressing prevention rather than abatement) should be used where technically and economically feasible. a Internationally recognized directives and guidelines include European Union Directives (for European Union accession countries), the World Bank s Pollution Prevention and Abatement Handbook, and/or World Health Organization Guidelines Noting that aid recipients cite differences in donor operational policies and procedures as the single most important impediment to the effectiveness of external development assistance, a report to the Development Committee in April 2001 called for donors to harmonize their requirements as one way of reducing the transaction costs of development assistance. Priority areas for harmonization included procurement, financial management, and environmental assessment. The Committee encouraged all development partners to rely increasingly on the borrower government s systems, strengthening these systems and processes where needed through common good-practice approaches. See Harmonization of Operational Policies, Procedures, and Practices: Experience to Date (SecM ), March 8, The MFI exercise covers environmental impacts as well as such social impacts as resettlement and impacts on local communities and vulnerable groups. It recognizes that both environmental and social impacts should be covered in project assessments using qualified technical specialists, and that different institutions may have different mechanisms for doing this.

19 Toward a Simple, Unified Policy. In addition to meeting immediate business needs, the work and experience in each area discussed above would potentially become part of the foundation on which the Bank Group could, over the medium term, build a statement of safeguard policy and procedural principles. This statement would describe the intent of safeguard policies and their role in quality enhancement and development results. It could also summarize the general processes to be followed when adverse impacts were expected, and could set out principles in the key areas of coverage. Ideally, such a statement would be amenable to application in a broader spectrum of lending operations and to mainstreaming in client countries. B. Fostering Borrower Ownership 31. Even clear, coherent, and rigorous safeguard policies will produce mixed results unless borrowers see them as relevant to the quality of their development operations and internalize the principles upon which they are based in their own development programs. Moreover, no system, however desirable, will be efficient and effective if it duplicates functions that borrowers must also carry out using their own systems. For these reasons, an important medium-term objective for the Bank is to develop a safeguard system that is based on agreed principles and can be applied broadly in client countries, uses borrower systems that respect these principles, and provides strong incentives for systematic and sustained improvement, as required. 32. Lessons from Recent Fiduciary Work. The proposals in this section draw from recent work on procurement and financial management areas in which efforts to foster ownership and strengthen recipient capacity have intensified in recent years, and from which early lessons are emerging. These lessons demonstrate the importance of strong country-level analytic work to identify policy and procedural differences among donors, gaps between donor and recipient requirements, and capacity constraints and remedies. When done collaboratively with donors and recipients, such analytic work can help provide the context and build consensus for coordinated action. Lessons from the procurement and financial management experience also highlight the importance of explicitly acknowledging gaps and tensions between the Bank s own requirements and those of recipients, and putting in place mechanisms that offer assurance to Executive Directors, donor partners, and recipients that such tensions will be managed responsibly and transparently. These lessons are reflected in the proposals that follow. 33. Improving Assessment of Country Capacity. In safeguards, as in procurement and financial management, country analysis would provide the basis for tailoring interventions to particular country conditions and capacities. Such analysis would include an assessment of legislative frameworks, institutional arrangements, and track record at the country and sectoral levels, and would provide the basis for developing benchmarks and incentives for improvement. It would build on available upstream tools and analysis, including country environmental analyses (CEAs), strategic environmental assessments (SEAs), and sectoral environmental assessments (SecEAs), 18 as well as poverty and social analyses, country or sectoral social analyses, and other studies that identify social opportunities, constraints, and risks. Such analysis 18 Making Sustainable Commitments An Environment Strategy for the World Bank, op. cit., recommends using CEAs with a strong focus on capacity assessment, and expanding SEAs and SecEAs to identify the priority issues that need to be addressed in sectoral programs and adjustment operations. Parallel work is being done, in the context of the preparation of the Social Development Strategy, to develop mechanisms to move social analyses upstream (e.g., through country social analysis) and focus on systemic issues.