Co-written by David de Ferranti, President of the Results for Development Institute

As multilateral development banks gear up to fill the serious gaps in infrastructure in Asia and elsewhere, attention also focuses on safeguards used to deflect potential spillover damages to communities, habitats and livelihoods from these investments. The value of such defenses is at an all-time high because of the heightened fragility of the environment and society today – as the United Nations’ new Sustainable Development Goals stress. 

Indeed, safeguards should be a top concern for established lenders such as the World Bank and ADB as well as the two new lenders: the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank of BRICS countries. While the borrower is responsible for implementing such protection, the financier must be accountable for robust checks on the projects financed. 

The World Bank just issued a reform proposal of safeguards and AIIB outlined a plan. Inevitably, these directions are driven by a growing demand for lending operations to be speedy, and for safeguards to be flexible. That said, the purpose of reform should be to elicit better environmental and social outcomes, while implementing the policy more economically and efficiently. 

When it comes to spillover damages, the crucial question is how flexibility is balanced with compliance. Whether it is polluting the air we breathe and the water we use, or violating the speed limit and jumping a red light endangering people’s lives, regulatory efficiency ought not to be confused with policy compliance. The damage from inadequate regulation or compliance or independent monitoring is all too clear from experiences in developing and industrial countries – Volkswagen’s emission scandal being the latest example.

The World Bank proposal raises central concerns. First, the scheme entertains the use of a country’s safeguards system for externally financed projects, with gaps to be filled during implementation. The ready application of country systems for risky projects (labelled as high and substantial as opposed to moderate and low) would endanger people and the environment, as seen in community grievances from applying country systems in the People's Republic of China, India, and many others. So it is essential that their equivalence with the multilateral development bank framework is established before applying them. 

Second, while the new draft rules require an environmental and social commitment plan at project approval, key targets are to be developed and met some time during implementation. An environmental management plan, a resettlement plan, or a hazardous waste plan may be prepared at an undefined time, with their scope evolving in response to circumstances. To prevent spillover damages, however, projects must reflect inputs from the communities, and their approval predicated on specific and binding targets.

Deferring specificity of compliance from the project approval to the implementation stage can lessen upfront work and screening by the board, and hasten project ratification. But that will not save time if an adequate mitigation plan were indeed to be developed later. The approach could place sole reliance on self-monitoring and self-reporting, and open the door to softening requirements during implementation. Corrective action is unlikely to follow without specific legal provisions in the first place. 

A combination of flexible requirements and national standards for risky projects would dilute safeguards – especially if additional funds and staff were not allocated during follow-up. So instead, balance between compliance and flexibility could be struck by using the MDB system until national ones are equivalent and investments made in filling gaps, and by having an action plan with legally binding targets that can be improved upon during implementation. 

Evaluations of safeguards noted that downstream oversight ought to be strengthened: the World Bank proposal has advisory and supervisory elements that try to do so. But evaluations did not suggest that upstream regulation be weakened, rather that it be maintained while processing speed is achieved through greater efficiency. So the current proposal calls for two key explanations and changes. 

First, environmental and social indicators that can be tracked and reported against will need to be legal conditions for approving high and substantial risk cases. Second, the World Bank’s standards are needed for high and substantial risk projects, while efforts continue to strengthen national systems. Velocity of project processing should be sought through process and procedural efficiency, and enough resources for their implementation. 

Greater financing for infrastructure is good news for revitalizing economic growth. But the increase in infrastructure investment needs to be accompanied by environmental and social care, if indeed growth is to be sustained. Multilateral development banks must ensure that safeguards accompanying these investments are strengthened, not weakened.

This blog was first published in the Financial Times.