Time for a new approach to environmental and social protection at multilateral development banks

Briefing papers
April 2016

One can only hope that the China-led Asian Infrastructure Investment Bank (AIIB) and the New Development Bank operated by the BRICS states (NDB BRICS) find a better solution than the safeguards employed by existing MDBs – an approach that is well intentioned in its aim of protecting project-affected social groups and the environmental, but conceptually and practically flawed. It was put in place at the insistence of shareholders in wealthy countries and designed to ease criticisms of MDBs from civil society organisations and domestic legislatures  rather than to find the best solution to serious development challenges.

Current MDB safeguards do not address the core developmental problem facing environmental and social oversight – weak legal frameworks and implementation capacity. Protecting against negative environmental and social impacts from infrastructure projects has often fallen short in many developing countries. Ignoring these impacts can not only threaten the effectiveness of an investment project itself but more broadly undermine a country’s social fabric and environmental  sustainability, with potentially global implications related to climate change, conflict and migration. While many countries increasingly recognise this and are strengthening their oversight frameworks accordingly, others continue to take a more short-term approach of pushing ahead with the project first and worrying about problems later.

Rather than addressing this very serious issue head-on, safeguards instead create a parallel universe of rules that apply only to MDB projects, allowing MDBs to defend their reputation. Safeguards allow (in fact, in many cases require) MDBs to bypass national frameworks, and thus have minimal impact on the vast majority of projects, which are not undertaken by MDBs. Borrower governments have no incentive to strengthen their systems, since they know that no matter how strong or weak they are, MDBs will use their own safeguards anyway.

But the era when the World Bank and other MDBs could dictate to developing countries is gone, and it is time for legislators, officials, and NGOs in wealthy countries to come to terms with that. The last 20 years have seen a huge increase in global private capital flows, a growing influence of new non-traditional bilateral financers, and strengthened fiscal balances in much of the developing world. Many countries – especially the large middle-income economies, where most major infrastructure is being built – vote with their feet, and seek alternative financing to avoid safeguards. As a result, development suffers: borrowers pay higher loan costs and lose valuable MDB knowledge and assistance to design and implement top-quality projects that protect the environment and vulnerable social groups.

The actors for whom a change in mindset on safeguards may prove most difficult, but who are at the same time essential for progress, are the NGO community and the domestic legislatures of major non-borrower shareholders. Most NGOs are committed defenders of social and environmental standards, and they are to be commended for that. Their dogged criticisms of ill-conceived and ill-executed projects in developing countries – MDB-financed and otherwise – play a valuable role in protecting the environment and the people impacted by the projects. But their successful efforts to pressure MDB shareholders via domestic legislatures have led to a dysfunctional system that does little to strengthen national laws and implementation capacity, and perpetuates a neo-colonialist approach of dictating western standards to the developing world. Until NGOs and wealthy country legislatures accept the need for a new approach, MDB shareholders will not have the space they need to make meaningful changes to environmental and social oversight in MDB operations.

MDBs and other development financers will lose relevance if they are unable to find a way to make the legitimate aspirations of developing countries compatible with environmental and social sustainability. The safeguard system as currently designed is not achieving the best development results, and this is increasingly a reason for countries to avoid MDBs entirely for projects that may trigger safeguards. It is time for MDBs to find a new approach, one that focuses on strengthening the national laws and regulations of developing countries rather than protecting themselves against criticism. Such an approach implies a major shift in policies and operations at MDBs, but most importantly it requires a shift in thinking about how to achieve the best development results for the good of our planet.