Received: from ATHENA-AS-WELL.MIT.EDU by po7.MIT.EDU (5.61/4.7) id AA15103; Thu, 24 Mar 94 15:23:53 EST Received: from auvm.american.edu by MIT.EDU with SMTP id AA23532; Thu, 24 Mar 94 15:21:54 EST Message-Id: <9403242021.AA23532@MIT.EDU> Received: from AUVM.AMERICAN.EDU by AUVM.AMERICAN.EDU (IBM VM SMTP V2R2) with BSMTP id 4020; Thu, 24 Mar 94 15:15:52 EST Received: from AMERICAN.EDU (NJE origin LISTSERV@AUVM) by AUVM.AMERICAN.EDU (LMail V1.1d/1.7f) with BSMTP id 7234; Thu, 24 Mar 1994 15:05:24 -0500 Date: Wed, 23 Mar 1994 10:52:02 -0500 Reply-To: Kenneth Walsh Sender: Technology Transfer in International Development From: Kenneth Walsh Organization: Environmental Defense Fund Subject: B Rich Test Re Int. Fin. Institutions X-To: Interested@edf.org, NGOs@edf.org, etc@edf.org, researchers@edf.org To: Multiple recipients of list DEVEL-L This is one EDF's periodic mass mailings. If you do not want to receive such materials, please let me know by return e-mail. Cheers. Ken Walsh wild@edf.org STATEMENT OF BRUCE M. RICH ON BEHALF OF ENVIRONMENTAL DEFENSE FUND FRIENDS OF THE EARTH NATIONAL AUDUBON SOCIETY NATIONAL WILDLIFE FEDERATION SIERRA CLUB CONCERNING PUBLIC INTERNATIONAL FINANCIAL INSTITUTIONS: ENVIRONMENTAL PERFORMANCE AND MANAGEMENT BEFORE THE SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY, TRADE, OCEANS AND ENVIRONMENT COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE MARCH 3, 1994 ? CONTENTS I. Introduction and Summary II. The World Bank A. Forced Resettlement of the Poor B. Energy Inefficiency C. Morse Commission Report and Recent Events at the Sardar Sarovar Dam D. Wapenhans Report E. The Bank's Response to Wapenhans: "Not Serious" F. And More Public Relations G. The New Information Policy and Independent Inspection Panel H. What About the Poor? I. Adjustment, Poverty, and the Environment J. World Bank: Conclusion and Recommendations III. Global Environment Facility IV. African Development Bank V. Inter-American Development Bank VI. Asian Development Bank VII. International Monetary Fund VIII. Conclusion ?I. Introduction and Summary Mr. Chairman, thank you for the opportunity to testify today before the Senate Foreign Relations Subcommittee on International Economic Policy, Trade, Ocean and Environment. I am Bruce M. Rich, Senior Attorney with the Environmental Defense Fund (EDF), and Director of EDF's International Program. I am testifying today behalf of EDF, the National Audubon Society, Friends of the Earth, U.S., the National Wildlife Federation (NWF), and the Sierra Club. EDF is a public interest environmental research and advocacy organization with over 200,000 members nationwide. The National Audubon Society has a national membership of 550,000, and the National Wildlife Federation is the largest conservation organization in the Western world with more than 5 million members, Friends of the Earth has 13,000 members nationwide, and the Sierra Club over 600,000 members and supporters. These colleagues at EDF and Friends of the Earth have assisted in the preparation of this statement: James Barnes, Scott Hajost, Korinna Horta, Mimi Kleiner, Steve Schwartzman, Karan Capoor, and Todd Goldman. My statement will address the environmental performance and overall management issues associated with the Administration's FY 1995 funding requests for the World Bank, the Bank-associated Global Environment Facility (GEF) and other regional multilateral development banks, and the IMF. The Administration is asking for a 33 percent increase in funding for the MDBs, $2 billion, over last year's actual appropriations of $1.5 billion. It is asking the Congress to authorize major capital increases for the African Development Bank soft-loan facility (the African Development Fund--AFdF), the Inter- American Development Bank (IDB) and for the GEF, as well as approve a replenishment of the IMF's Enhanced Structural Adjustment Facility. The Asian Development Bank has requested its member governments to negotiate this spring a doubling of its capital resources. The most succinct summary of the current status of the environmental performance of the MDBs was given by Vice-President Gore just two days ago in a speech before parliamentarians from several countries (Global Legislators for a Balanced Environment--GLOBE) here in Washington: "Many of the multilateral banks have developed new policies in the areas of forestry, energy and public participation in decision making. But to date, implementation has fallen woefully short." He went on to state that "In view of this poor performance, together we must ensure that these institutions are part of the solution, rather than a continuing part of the problem." The message the national environmental organizations I represent today wish to convey to you in the strongest terms is that the money the Administration is requesting the Congress to authorize and appropriate this year for the MDBs will too often be poorly used, without very significant improvements in the overall management and environmental performance of these institutions. We would suggest that the overall poor environmental performance of these institutions may be only a leading indicator of deeper and more widespread management and project quality problems. We wish to emphasize that the environmental performance of the MDBs is a key issue with respect to carrying out our commitments to reduce global warming and protect biodiversity in the conventions signed at Rio. The $45 billion in annual MDB lending has a much greater impact on global warming and biodiversity--currently for the worse, hopefully in the future for the better- -than the two billion dollars the Global Environment Facility will disburse over the next three years., In this regard, the case of the World Bank and associated GEF is particularly important, because of the leadership role that institution is perceived to have. Events over the past two years reveal a long building, serious breakdown of accountability and responsibility at the highest levels in the Bank, despite belated, ineffectual steps of management to respond to increasing international pressures for greater transparency and improvements in project quality. There are differences in performance among the other MDBs: the IDB deserves praise for being more innovative, and going farther than any of the other institutions in several of its projects to promote the local involvement and accountability necessary for truly sustainable development. We are worried, however, about proposed organizational changes in the IDB which would weaken the role of that institution's Environmental Management Committee and environmental staff. The African Development Bank suffers from the most serious management problems and inability to deliver on its environmental commitments, and major reforms are needed in the Asian Development Bank. Mr. Chairman, we commend the Administration and particularly the Treasury Department and the U.S. Executive Directors' offices in the MDBS for their many intensive efforts to promote environmental responsibility in the multilateral banks. Such efforts include numerous interventions to attempt to change environmentally damaging loan proposals, systematic efforts to promote new information policies and reviews of portfolio performance at the regional MDBs and efforts to promote the creation of independent inspection panels at the World Bank and other MDBs. But we would submit that these efforts notwithstanding, there is growing evidence that the MDBs and particularly the World Bank are not succeeding for the most part in making their lending environmentally sustainable. We believe that it would be a wiser use of taxpayers' money not to concentrate resources so intensively on the World Bank and other MDBs, with their disturbing record of declining project quality and demonstrated management problems, but rather to also encourage and support a diversity of alternative development institutions and channels for foreign assistance, ones that would have a better chance of helping the poor and helping the global environment. There are several institutions supported by the U.S. that we believe are very cost-effective in promoting environmental sustainability and social equity. Their approach is worthy of increased support and wider replication. These agencies--the Inter-American and African Development Foundations, and Appropriate Technology International--do not finance large government bureaucracies, but have a mandate to assist community groups, non-governmental organizations and smaller businesses and enterprises. We also recognize that although the charters of the MDBs require them to lend principally for specific projects, this project lending has become driven in many cases by shorter-term needs for balance of payments support for vulnerable economies. Thus, alternatives to help the macro-economic crisis of the poorest nations, particularly Sub-Saharan Africa, should be found before reducing MDB lending for these economies. We believe, however, that the best way to help these countries over the middle term is not through continuing to use MDB project and adjustment lending for balance of payments support, which often contradicts the need for project quality that is at the heart of the mission of these institutions. Rather, increased debt relief--for example by adopting the so-called Trinidad Terms--and fairer terms of trade will do more to help the poorer nations than using MDB loans to fill what is essentially a bottomless financial hole. According to the United Nations Development Program, fairer trade would spur $60 billion in increased annual financial flows from the North to the South, and debt forgiveness another $50 billion annually. I would note that of the $2 billion the Administration is requesting for the public international financial institutions, only $7 million is for debt relief under the so-called enhanced Toronto Terms. We would suggest that without increasing the general levels of funding for multilateral assistance, more funds could be allotted for debt relief for the poorest nations and less for increases in MDB replenishment. The current approach is perversely increasing the debt burden of the most vulnerable nations--at the expense of U.S. and other donor country taxpayers--without sufficiently addressing the external economic conditions that are in significant part responsible for the chronic financial difficulties of these economies. We would also suggest that further exploration of these issues through oversight hearings and possible legislation, including consideration of using a portion of the World Bank's $18.5 billion in liquid reserves and the IMF's billions in gold reserves to reduce the multilateral debt of the weakest and poorest developing nations. If the MDBs are to fulfill their purported mission of helping the poor and promoting environmentally sustainable economic development, the profound institutional forces that make pressure to lend and moving money their first priority must be reversed. If the World Bank and other MDBs were to truly focus on project quality, with full public consultation, participation, and access to information, there would be fewer loans, and smaller but better ones. They would be more modest institutions, but ones that might be able to make a real difference through example. It also is important to remember that the Congress has passed legislation directing the Treasury Department to promote environmental reforms in the MDBs--for example greater emphasis on end-use efficiency in the energy sector, and greater transparency and public participation--MDBs for nearly a decade--with relatively little to show. With respect to the IMF, Congress enacted legislation in 1989 and 1992 calling upon Treasury to promote a number of modest reforms in the Fund to address environmental and poverty issues--and there has been virtually no action by the Fund. In short, we urge you not to write a blank check for two billion dollars to these institutions--not after a decade-long record of Congressional hearings, legislation, and broken promises. We recommend, therefore, that for FY 1995 the Congress not authorize the GEF and MDB capital increases that are being proposed until these institutions show that they have carried out a number of fundamental reforms discussed in detail later. Since all of the new replenishment--for the GEF, AFdB, and IDB are still being negotiated, vigorous actions by Treasury and more responsiveness by the MDBs might conceivably forestall any delays. Alternatively, on a case by case basis, release of funds from the authorizations could be conditioned on Treasury certifying that certain benchmarks have been bet. The heart of needed reforms lies in major institutional changes to make project quality, not pushing money, the overarching priority of the World Bank and other MDBs, and reforms to ensure independent review of MDB projects, public access to most MDB documents, and greater responsiveness and accountability to local populations affected by MDB projects. Given the particularly disturbing record of the World Bank, we suggest that for FY 1995 that the Foreign Relations Committee recommend to the Appropriations Committee that cut a portion of authorized funding for the Bank's hard loan window, the IBRD. We believe this will be the most effective spur to reforms at the Bank. In the case of the GEF, we believe it would be a mistake for the U.S. to commit funds for major projects before the GEF has completed Congressionally mandated restructuring and reforms enacted in legislation over the past two years. It is important that smaller amounts for the GEF be authorized and appropriated quickly, to fund more limited activities related to the immediate implementation of the Climate and Biodiveristy Conventions, such as developing country planning and reporting requirements, capacity building and developing country travel. We believe authorization of more money for the IMF ESAF should be linked to concrete evidence of significant progress by the Fund in acting on the Congressionally mandated reforms of 1989 and 1992. Given the tremendous financial and policy leverage of the international financial institutions, we also believe that management and environmental reforms need to be promoted through the G7 process and through the OECD as well as before the Executive Boards of these institutions. The U.S. also needs to direct our representatives to the MDBs to institute and implement binding policies to evaluate and take into account in loan preparation the effects of each project on global climate change, particularly in the energy and transportation sectors. I would note that the most recent meeting of the Intergovernmental Negotiation Committee on Climate Change in Geneva there was consensus amount developing and industrialized countries on the need to set up a permanent system to monitor the climate impacts of MDB lending and policies so as to ensure that these financial flows support activities consistent with the objectives of the Climate Convention. There is also a critical need to promote enahnced environmental standards in the U.S. Export-Import Bank and, through cooperation in the G7 and OECD, in the export credit agencies of other major industrialized countries. It makes little sense to be promoting enhanced environmental responsibility in the MDBs when export promotion banks are lending tens of billions annually with little attention to the same concerns. Representatives of some of our groups met recently with Ken Brody, head of the Exim-Bank, and we were encouraged by his concurrence, and indeed commitment on this point, as well as by the interest that has been expressed by other Administration officials. But the attention and encouragement of the Foreign Relations Committee would help push this effort along. Finally, we would also suggest the need for a closer examination of the Administration's current strategy of further concentrating foreign aid resources in the Bretton Woods institutions and multilateral development banks. In the post-Cold War, post-Rio Earth Summit world we need to encourage greater diversity and competition among alternative economic development institutions and networks, to create a more flexible and responsive international system, one that can deal with global environmental and economic problems at the local level. Our view is that U.S. policy should be promoting a greater diversity of institutions and approaches--bilateral, non- governmental and in the private sector--to deal with global environmental and developmental issues, and use its financial leverage to prompt institutional reform in multilateral organizations to make them more transparent, accountable, and flexible. If there is a need to reinvent and to heighten the efficiency of domestic government, we would argue that in this 50th Anniversary year of Bretton Woods there is surely an even greater need for a U.S. led initiative for such an exercise in the international sphere. The remainder of this statement discusses indetail, with specific recommendations, our evaluation and criticism of the environmental performance of the World Bank, GEF and three regional development banks. II. The World Bank Every year since 1985 the Congress has enacted legislation instructing the Treasury Department to promote key environmental reforms in the World Bank and the three regional multilateral development banks. In the case of the World Bank, it has ceased financing a few of its most environmentally destructive programs, such as gigantic colonization projects in tropical forests, and, with much fanfare, greatly increased its environmental staffing several years ago, and is constantly promulgating new environmental policies--though the first ones date back well over a decade. It is expanding financing of projects it claims are environmentally beneficial. On a small scale, compared to the main body of its lending, it is supporting national environmental ministries and funding protected areas. But, alas, many of the larger scale "environmental" projects, for example in the forestry sector, have turned out to be the same old unsustainable schemes doused with a new coat of green paint. Finally, last year about 13 percent of Bank lending went for programs in education, health and population. Some of these loans undoubtedly reflect the typical problems of Bank projects, that is inefficiency and inappropriateness linked to trying to push too much money too quickly through weak developing country bureaucracies. But lending for these purposes is something we can all support, if it is done effectively. But this is an institution with an outstanding loan portfolio of over $140 billion, and, overall, Mr. Chairman, over the past several years the Bank's record has been a disaster. The record has worsened--and not just in the environmental area. Four years ago when the World Bank asked the industrialized nations for the Ninth multi-billion dollar replenishment of the International Development Association, it promised its donors to support environmentally sound projects, alleviate poverty, to "expand its efforts in end-use energy efficiencies and renewable energy programs and to encourage least-cost planning in borrower countries" and ensure greater public access to information and promote public participation. The Bank's promises proved mostly worthless; it continues to finance numerous schemes that are documented environmental and social failures, and to withhold most information on its activities. Perhaps the most scandalous aspect of all in the Bank's record is its gross negligence in ensuring that its borrowers rehabilitate the more than two million poor who currently are being forcibly relocated by Bank-financed infrastructure projects. Projects approved this year alone will involuntarily resettle another 600,000 people, and loans approved through 1996 are estimated to uproot without adequate compensation more than two million more of this planet's poorest and most powerless human beings. In several of its major lending regions--Latin America and Africa, for example--recent internal Bank surveys cannot find a single project where displaced populations have not been made worse off than before. And yet the Bank cites poverty alleviation as its "overarching objective" to justify before the parliaments of its donors requests for more taxpayer support. The Congress has required the Treasury Department to promote greater attention to end-use efficiency and conservation in Bank lending since late 1985. Energy is the Bank's second most important lending sector, and, in the light of concerns over global warming the need for alternative investments in end-use efficiency and conservation has never been greater. Yet a U.S. A.I.D. financed study found that Bank support for end-use efficiency and conservation actually decreased in the late 1980s and early 1990s. A study prepared by EDF and the Natural Resources Defense Council examined new Bank power loans in preparation, so as to evaluate the worth of new Bank policies issued last year espousing greater commitment to supporting demand- side management and end-use efficiency in Bank power projects. Our findings, released last month, are that of 46 power loans totalling over $7 billion that are in preparation for 33 nations, only two reflect the commitments of these new policies, and only three others significantly support end-use efficiency and demand-side management. One response of Bank management to this critique is that the policies-- prepared at considerable expense and with great public relations fanfare--are not mandatory, only hortatory. I would like to discuss for the record a bit more about the Bank's resettlement record and energy lending, and then address the Bank's ongoing response to two unprecedented reports completed in 1992 that reveal an institution almost totally dominated by the pressure to lend, to the detriment of all sense of direction, accountability and responsibility. I will then address the credibility of two recent reforms the Bank announced late last year in response to growing dissatisfaction in the Congress and in the governments of other nations with its management: a new information policy, and the creation of an independent inspection panel. This section will also discuss for the record our concerns about the Bank's approach to the interrelated issues of structural adjustment, poverty, and the environment, and conclude with several recommendations. A. Forced Resettlement of the Poor There is no other issue that so exposes the systematic operational failure of the World Bank than its record on resettlement and rehabilitation of populations forcibly displaced by Bank-financed projects. It goes to the heart of its credibility and ability to police itself. Over the past decade three separate, Bank-wide internal studies have documented the failure of Bank management to carry out the resettlement policy, with no effective action by management: the 1979-1983 Bank-wide Resettlement Review, the 1986 Bank-Wide Resettlement Review (covering 1979-1986), and the June 30th 1993 Operations Evaluation Department study of "Early Experience with Involuntary Resettlement." Meanwhile, the number of people forcibly resettled from ongoing Bank projects, has increased from 450,000 in 1983 to over 2,000,000 in 1994, and over 2,000,000 more will be displaced by projects slated to be approved through 1996. In India alone the number of people being forcibly resettled by ongoing Bank projects in India totals over 800,000. In fact, 14 percent of total IBRD/IDA lending is currently financing projects that forcibly resettle the local poor. The Bank's policy on resettlement and rehabilitation of displaced people--now Operational Directive 4.35 (it may be reissued as a more general, less binding Operational Policy--see discussion below on the Bank's response to the Wapenhans report)--dates back to 1980 and is one of the Bank's oldest and most important social and environmental policies. It requires simply the minimum of human decency: that a borrowing government prepare before project appraisal is completed, with the consultation and approval of the affected population, a resettlement and rehabilitation plan that at least will put the affected population in an economic situation that is no worse, and hopefully actually improve their welfare. Strict monitoring of government implementation of the plan by the Bank is essential for its success. The latest, June, 1993 report of the Bank's Operations Evaluation Department (OED) discovered total negligence on the part of Bank management: implementation of the policy has been lax or non-existent, and indeed Bank staff and management have not even bothered to collect basic data on the fate of the millions of poor its schemes have displaced over the past 13 years: information even on the incomes of the forcibly resettled is simply lacking for most Bank schemes involving displacement. A substantial proportion--about 40%--of the projects reviewed in this report were approved after 1980 when the Bank's resettlement policies were in force and should have been adhered to. With some understatement, the report concludes: "Have Bank guidelines helped to improve resettlement results and outcome? Only very general judgments on satisfactory or unsatisfactory outcome can be made since few projects have any data on incomes [of forcibly resettled people]....Bank guidelines have not led to improved monitoring efforts which would permit an assessment on resettlement outcome....This is a serious lacuna since it gives rise to an impression that the Bank is not seriously interested in the achievement of this objective." Internal Bank studies of recent regional performance shows an equally disturbing picture. According to OED, a 1990 review of Bank resettlement projects for the Latin America region "was unable to find a single study of a Bank-financed project in Latin America which quantitatively demonstrated that a resettlement policy had been adequately rehabilitated in terms of income, health or other social welfare measures." A 1992 internal study of Bank financed forcible resettlement in Africa concluded "it was impossible to measure the impact of resettlement" due to completely inadequate or non- existent information gathering on resettlement impacts, and inadequate or non- existent monitoring and funding resettlement components when they were identified in some form." The Bank is currently undertaking a review of its projects with involuntary resettlement components--the fourth such exercise in little more than a decade. This review was one of the actions Bank management pledged to the Executive Directors (at their express request) to undertake in the aftermath of the controversy over the Bank-financed Sardar Sarovar dam in India. The completed review report, with a plan for corrective actions, is to be presented to the Board of Executive Directors for approval in March, with a Board Meeting to discuss prospective actions on April 15, 1994. We strongly urge the Subcommittee to ask the Treasury Department to raise the following demands before the Bank's management and with other major donor countries on its Board: 1. The Bank should make the Bank-Wide Resettlement Review, as well as the India and China country resettlement studies, publicly available in draft form so that NGOs and affected peoples and communities can have input before the document is presented for approval to the Executive Board. 2. The U.S. should demand what measures the Bank plans to take, and to inform the public of, concerning retroactive measures to economically rehabilitate those already impoverished through negligence of the Bank's resettlement policy in previous Bank projects; a list of all such projects be made public, together with details on what is currently known about the situation of the people who have been displaced. 3. The Bank should give a specific response on how it will hold Bank staff and management accountable and responsible for not complying with the Bank's guidelines on resettlement. 4. The Bank should put a moratorium on the preparation of all projects that will entail forced resettlement, until there is hard evidence that alternatives to avoid resettlement have been examined, economic rehabilitation measures for populations that would be displace are fully developed in consultation with the communities affected, and monitoring systems are installed to ensure compliance with Bank guidelines. B. Energy Inefficiency Energy supply is the most capital intensive sector in developing countries, accounting for between one quarter and one third of all public investment--and diverting desperately scarce capital from other investments such as health, education and conservation. Indeed, according to a 1990 World Bank Energy Department paper, "estimates suggest that if 20 percent of commercial energy in developing countries were saved, total gross savings for developing countries would amount to about US $30 billion per annum or about 7.5 percent of the total value of merchandise imports. This is about 60 percent of the net flow of resources out of developing countries for debt service in 1988, and about two-thirds of the official development assistance from OECD and OPEC countries in 1987."1/ Yet, in late 1991 a comprehensive, EPA financed review of the Bank's energy lending by the Washington based International Institute for Energy Conservation concluded that the Bank was devoting less than one percent of its energy lending to end use efficiency and conservation investments, and that the proportion actually decreased slightly in the late 1980s. In early 1993, the Bank issued a new energy efficiency policy paper and a new power policy paper in early 1993 in which it claimed that it would "be more selective in lending to energy-supply enterprises" and that "approaches for addressing demand-side management (DSM) and end-use energy intermediation issue will be identified, supported, and given high-level in- country visibility."2/ But these policy papers lack specific commitments for actually increasing lending for end-use efficiency lending--which, according to the Bank's 1991 energy sector review will account for only 1 percent of Bank energy lending for the period 1992-1995. Indeed, as mentioned above, a recently released EDF-NRDC study of 46 power loans totalling over $7 billion currently being prepared by the World Bank for 33 countries, found only five that significantly support improved end-use energy efficiency, and only two that actually comply with the Bank's own policy papers on energy efficiency and power. Once again we see an all too typical pattern: the Bank churns out vague, new policy commitments in response to public pressure, while the Bank's lending operations continue mostly unchanged. A prime example of the Bank's total, ongoing disregard for demand- side, end-use efficiency alternatives can be seen in a $400 million IBRD loan Bank management pushed before the Executive Board on the second last day its fiscal year, June, 29 1993 (the height of the "bunching season" when a disproportionate number of loans are presented before the Board for approval to meet lending targets before the close of the financial year). The loan is the first in a series in a on a Bank energy lending sector program for India to add over 16,000 megawatts of new coal-burning capacity over the next decade, with no consideration of end-use efficiency and conservation alternatives. This single lending program will add over 92 million tons of CO2 a year to the earth's atmosphere, or about 2.5 percent of estimated worldwide increases in CO2 emissions (a cause of global warming) in the same period. Worse, this loan virtually allots no funds for compensating and rehabilitating over a 140,000 people forcibly resettled (in contravention of Bank resettlement policy) and otherwise adversely affected by previous Bank-financed projects in India in the coal-fired power sector. The total lack of consideration of demand-side, end-use efficiency alternatives in this lending program and in other Bank energy lending makes the commitments of the world's governments at Rio to reduce unnecessary CO2 emissions, and the limited funds of the GEF to be allotted for this purpose, a travesty. Indeed, a 1991 U.S.A.I.D. study, prepared as part of a World Bank Indian Power Assessment, concluded that if only half the cost- effective end-use efficiency and conservation measures were pursued in the Indian Power Sector through 2004-2005, peak generating requirements would be reduced by 22,000 to 36,000 megawatts at 40 percent of the cost of new generating capacity--saving ten to sixteen billion dollars in capital outlays for new power plants and dams. Last June 29th, the World Bank Executive Directors representing Germany, the U.S., Austria and Belgium refused to approve this loan on environmental and economic grounds--in vain. C. The Morse Commission Report and Recent Events at the India Narmada River Sardar Sarovar Dam In the summer of 1992 two independent reports were released that documented the disastrous economic, environmental and social consequences of World Bank mismanagement of its lending portfolio. How the Bank is responded to, and is responding to these findings is an acid test of its trustworthiness both as a development and a financial institution. The first report was published by the so-called Independent Commission on the [India] Sardar Sarovar Projects, headed by Bradford Morse, former U.S. Congressman, U.N. Under-Secretary General and head of the United Nations Development Program. The commission was set up by former World Bank President Barbar Conable in the waning days of his tenure because of growing international protest over continued Bank funding of the Sardar Sarovar dam on the Narmada River in India. The first outside, independent assessment of a World Bank project documented a nearly decade long pattern of bureaucratic malfeasance, willful withholding of information from the Bank's management and Board of Directors, and sheer incompetence. The not only confirmed virtually all of the criticisms of NGOs in India and abroad, it revealed a pattern of gross negligence and delinquency on the part of the World Bank and Indian government much worse than anyone imagined. "There appears to have been an institutional numbness," the report noted, "at the Bank and in India to environmental matters," "a history of omissions, unmet deadlines, and ex post facto revisions" that the Commission concluded amounts to "gross delinquency."3/ The Morse Commission also charged that the abuses in Sardar Sarovar were not an isolated exception, particularly with respect to mistreatment of hundreds of thousands of forcibly resettled rural poor: "The problems besetting the Sardar Sarovar Projects are more the rule than the exception to resettlement operations supported by the Bank in India."4/ Why did this happen and why was it continuing? The Morse Commission states that its comprehensive review of Bank files and numerous discussions with Indian government officials all point to the same conclusion: "the Bank is more concerned to accommodate the pressures emanating from its borrowers than to guarantee implementation of its policies."5/ The Bank's response has been to ignore and defy the Morse Commission's recommendations, and even go so far as to openly misrepresent them to the Bank's Executive Directors--apparently on the assumption that they were too busy or not intelligent enough to read it themselves. Morse felt compelled to write president Lewis Preston on October 13th, 1992 with copies to the Bank's Executive Directors, charging that Preston had sent a document to the Board on management's proposed "Next Steps" that "ignores or misrepresents the main findings of our review." Subsequently charges were made that Bank management and staff have perpetrated a "coverup," that the Bank's management and staff is "not trustworthy", and cannot be relied upon to tell the Executive Directors the truth. Others have charged that the Bank has shown "a profound lack of accountability to [its] shareholders," and denounced its "suppression of information" to officials of member countries concerning controversial projects. Who made these charges? I am quoting from minutes of the oral statements of the Executive Directors of the World Bank at a meeting held October 23rd, 1992. At this meeting, the representatives of the United States, Germany, Japan, Canada, Australia, and the Nordic countries--some 42% of the voting shares of the Bank--requested Bank management to halt its disbursements on $450 million of IDA credits and IBRD loans for the Sardar Sarovar dam in India. The then U.S. Executive Director E. Patrick Coady warned at this meeting that if the Bank continued to finance Sardar Sarovar "it will signal that no matter how egregious the situation, no matter how flawed the project, no matter how many policies have been violated, an no matter how clear the remedies prescribed, the Bank will go forward on its own terms." Well, the Bank went ahead on its own terms and continued to support this disastrous scheme until last March. As a face saving device, the Indian government announced it would not be requesting any more disbursements from the Bank. It is important to note that although disbursements have halted, the Bank still has a responsibility to monitor the environmental and resettlement provisions of its loan agreement with the Indian government until the loan is paid back. I would like to attach for the record an internal memo from the Bank's general counsel that makes precisely this point. Mr. Chairman, just last week the Indian authorities started to close the sluices of the Sardar Sarovar dam, violating the Indian government's still binding commitment in its loan and credit agreements with the World Bank concerning resettlement, as well as more recent promises to the Bank and to aid donors that the sluices would not close before June, 1994. If construction continues as planned, 10,000 people face imminent submergence in the next monsoon, which will begin in June. We request the Subcommittee to write the World Bank and the Indian government asking that the legal commitments and promises concerning resettlement cease being violated and that the premature closing of the sluices halt. D. Wapenhans Report Sardar Sarovar, and the disasters in the Bank's India lending in general, are just the tip of the iceberg. In fact, there are alarming signs that pressure to move money and meet lending targets at the Bank is so great that the institution is violating its own policies with increasing frequency. Not just the environmental record is a disaster, but other areas that receive less public attention, such as financial monitoring and enforcement of the conditions in World Bank loan agreements. In the summer of 1992 a review of the Bank's $140 billion loan portfolio (led by Willi Wapenhans, now retired World Bank vice president and special advisor to the president) showed that according to the Bank's own criteria, 37.5 percent of recently evaluated projects are failures, up from 15 percent in 1981. The most alarming aspect is economic: according to the Wapenhans report, nearly four-fifths of the financial conditions in World Bank loans--78 percent--are not complied with. The Bank's economic appraisal process is viewed by many staff, according to the same report, as a "marketing device for securing loan approval," and confidential internal surveys of Bank professionals show that "only 17 percent of staff interviewed felt that analytical work done during project preparation was compatible with the achievement of project quality." The report cites a "pervasive" "culture of approval" for loans. In the face of this pressure to lend, other Bank policies, particularly those concerning environmental quality and rehabilitation of forcibly displaced populations, are reduced to a cynical travesty. E. The Bank's Response to Wapenhans: Not Credible 1. First Response: Management Concludes That Under Current Conditions the Bank's environmental and Social Policies are too Complex and Complicated to Carry Out, So It Weakens and Eviscerates the Policies. The Bank's first response to the Wapenhans report occurred in January, 1993, six months after the report was released. It has been relatively little noted, but the implications are shocking: rather than strengthening its existing development policies and making their implementation a priority to ensure project quality (the policies, are known as "Operational Directives" or ODs), Bank management concluded that they are too complicated and difficult to carry out. The Bank's Vice-President for Human Resources announced to staff that the Bank will reissue all of the major ODs--for example on forced resettlement, environmental assessment, protection of tribal peoples, protection of wildlands--as new, simplified, less specific "Operational Policies," limited to a page or two in length. The new Operational Policies will not even specify at what stage in project preparation required measures are to be taken. The more specific, detailed criteria that are currently found in many ODs are to be relegated a non-binding, non-mandatory, "advisory" background documents called "Best Practice." Several Executive Directors of the Bank were troubled by the implications of the initial, January proposal, and as a result in March, 1993 Bank management was pressured to retreat a bit, but not entirely: the short, vague Operational Policies would also be accompanied by associated Bank Procedures for each policy, that "spell out required documentation and the common set of procedures that need to be observed to ensure consistency and quality across [the Bank's] regions."6/ But these Bank Procedures "are to be as brief as possible, almost a checklist." Most detailed procedures--and probably significant parts of what are now mandatory in the ODS--would still be relegated to "Best Practice." Bank professionals who have worked in some cases for years to formulate and push through the Bank's ODs on social and environmental issues view the relegation of what were formerly mandatory concerns to the bureaucratic trash heap of "Best Practice" as a giant step backward in making Bank staff accountable and responsible for the developmental impact of their actions. The practical, operational irrelevance of the procedures to be contained in "Best Practice" is well illustrated in the terms of reference for the new Independent Inspection Panel (see below) that will investigate complaints by affected parties in borrowing countries concerning allegations that the Bank is not implementing its policies. No complaints can be raised for the Bank's ignoring or violating "Best Practice." Senior Bank management have declared that a key thrust of Bank efforts to promote sustainable development in Bank operations will involve expanding and propagating among Bank staff information and documentation on "Best Practice." 2. Second Response: "Next Steps" It took Bank management nearly a year to formulate a more comprehensive plan of action that purported to address the problems described by Wapenhans. The proposed actions, presented to the executive directors in a document in spring, 1993 in a document entitled "Next Steps," were initially so inadequate that they sent "Next Steps" back for major revisions. The U.S. executive director complained at a Board meeting in early May, 1993 that "the expected actions are not concrete enough to be monitorable." "Those hostile to the Bank," he warned, would seize on "Next Steps" "as not a serious response to critical issues of project implementation."7/ The revised version of Next Steps was approved by the Board in July, 1993, and is little improved. The heart of the plan is a purported new focus on "country portfolio management," with "portfolio restructuring" and a newly declared willingness to refrain from new lending commitments for sectors or even whole countries where performance is poor. There is little that appears to be concretely monitorable, and the declared means to accomplish this, however, are not reassuring: simplifying existing Operational Directives accompanied by advisory "Best Practice" documentation is a cornerstone of the new approach. Projects are to have "implementation plans," but on the other hand the report states that projects have become "too complex" (i.e. too many environmental, economic and social measures), so their design, and demands, should be "simplified," i.e. keep lending but require less, not more of borrowing governments. This appears to be a surrender to continued poor project quality, rather than a credible approach to improve it. An annual report on portfolio performance will be prepared, simply adding to the already overwhelming volume of paper the Bank produces on its operations. These reports, when they have been more honest and critical--like those of the Operations Evaluation Department (looking at completed projects), or the "Annual Review of Supervision and Implementation" (examining ongoing projects)--have been ignored for over a decade. Other more recent reporting exercises, like the Annual Environment Report, are vapid public relations whitewashes, useless both to staff within the Bank and knowledgeable parties outside. The hollowness of "Next Steps" is exemplified in its lead recommendation for improving the effectiveness of the Operations Evaluation Department: the name of the report that Bank staff prepares on the performance of a project at its closing is to be changed from "Project Completion Report" to "Project Implementation Report."8/ Recommended changes in the content of this report appear to be more semantic than substantive. In any case, changing the name and content of Project Completion Reports--which are what OED reviews and criticizes--has no serious relation or connection to the central issue of OED's effectiveness, namely that in operations Bank management has systematically ignored OED's criticisms and conclusions for years. Last spring coalition of U.S. church, environmental and development groups wrote the Bank expressing concern that "Next Steps" also contains no suggestions or plans to concretely improve the quality of Bank lending in terms of sustainable development, such as indicators related to poverty reduction and environmental improvement. As part of the follow-up to the Wapenhans Report the Bank is preparing more studies of indicators to measure project performance in areas such as poverty reduction. Given the manifest lack of political will and real commitment in the institution to make the most basic efforts in new lending over the past year to carry out long- standing existing environmental and social policies (such as in the energy and resettlement areas), it difficult to see what effect these studies will have except to bury exasperated Task Mangers in an ever growing mountain of paper which they have no obligation to follow. F. More Public Relations If the Bank's senior management had devoted more time to focussing on the need to improve project quality, "Next Steps" might have been less of an embarrassment. But a major priority for the use of their time appears to be a new, ambitious world-wide public relations campaign. In a meeting in late February, 1993 with the Bank's President, they were told (in the words of an internal memo summarizing the meeting) "that the Bank needs to adopt a pro-active approach to external communications, rather than trying to defend itself ex post against criticism from well-organized environmental and human right organizations." "All VPs agreed that the Bank should develop a donor- outreach program and a conscious strategy to counteract the negative image generated by NGOs and other critics." The Vice Presidents made "numerous suggestions," including "assigning individual Senior Managers as spokespeople to specific donor countries," creating a "speech bank," and "using modern communications techniques, such as mass media advertising." The thrust of the entire discussion is on enlisting the highest levels of Bank management in efforts to change public perception of the Bank's "image"--and no discussion that there may be some connection between its tarnished image and the profound, systematic mismanagement of the institution documented in the Morse Commission and Wapenhans reports. The Bank has also hired at considerable expense a high priced public relations consultant, the former Vice-President of Mobil, Herb Schmertz, to advise it on its heightened PR campaign; it is hard to see what relation such expenditures have with the Bank's self-proclaimed mission of poverty alleviation. With your permission, Mr. Chairman, I would like to submit the memorandum describing this meeting of Bank Vice Presidents for the record. G. The New Information Policy and the Independent Inspection Panel In response to growing international concern with its lack of transparency and accountability, not the least of which has come from the U.S. Congress, the Bank has instituted new information policy and an Independent Inspection Panel, remotely inspired by the example of the Morse Commission, that will investigate complaints of violations of Bank policies and procedures that materially affect parties and groups (not individuals) in borrowing countries. These initiatives are just being put into place (the new information policy at the beginning of the year, and the Inspection Panel has not yet been formed....), so we cannot not yet say very much about how they are working in practice. There are, however, very serious flaws in the way they have been conceived that raise serious doubts about their potential effectiveness. The most disturbing aspect about the new information policy is that alternative proposals of relatively senior Bank staff--by the head of the Environment Department and the head of the External Affairs Department--to release much more information than the current policy were rejected. Instead, under the "new" information policy, before Board approval, all project information is still secret. Information on Bank activities and projects is mostly of practical use during the critical stages of project identification, preparation and appraisal, leading up to submission of the project to the Board of Directors for approval. Thus, key documents such as feasibility studies, consultants's reports on environmental and social risks and issues, engineering studies, economic studies etc. all remain secret. The only change is the preparation of a short "Project Information Document" (two or three pages) which is little better than a glorified press release. Project Appraisal Reports (the main document summarizing and describing the project) are to be made publicly available after loan approval--but already for years they circulated widely in donor countries, and in many donor country governments have made them available for years to development consulting and engineering firms that bid on World Bank procurement contracts. Environmental assessments and National Environmental Assessment Plans are to be made generally available to the public after borrowing governments make them available in their own countries. A key issue is the extent to which the Bank will require that governments receiving Bank financing make draft assessments and action plans are made publicly available for discussion and input. So far there is disturbing evidence that many borrowing governments only make the environmental action plans and assessments available after they are finalized and are a fait accompli, undermining much of the purpose and utility of environmental planning, which to be effective depends on wide public review of draft documents and assessments. On the positive side, country economic and sector documents will be made publicly available, after they are finalized. Some of these documents, such as Country Economic Memoranda, are of considerable importance for understanding the Bank's middle-term development and lending strategies for a given nation. Finally, the single most important advance in the new policy is that not only is there a "presumption of disclosure" (which was the case before--except that the Bank specifically prohibited releasing most documents!), but that if NGOs ask Bank staff for additional information and documentation on a project in preparation, "upon request...the Country Department Director responsible will, after consultation with the Government to identify any sections that involve confidential material or compromise Government/Bank interactions, release factual documents, or portions thereof, that provide inputs in the project preparation." The Independent Inspection Panel will consist of three members who will hear complaints from parties or groups (not individuals) in borrowing countries who have been, or threaten to be, materially affected by the Bank's failure to carry out its operational policies and procedures ("including situations where the Bank is alleged to have failed in its follow-up on the borrower's obligations under loan agreements respect to such policies and procedures") in the design, preparation or implementation of a project. They prepare a report, and issue recommendations to Bank management, which then decides on a course of action. The panel's report and management response is sent to the President of the Bank and the Executive Board. Although the Board presumably (as in the Sardar Sarovar precedent) would have the option of revisiting management's response if a majority thought it was inadequate, management has never been formally overruled by the Board in the entire history of the World Bank. In reality the management response would be a fait accompli. The panel as presently constituted suffers from critical weaknesses: A majority of Board members can overrule the recommendation of the panel to initiate an investigation of a claim, the panel's report and management's response are kept secret until after the final decision on what action to take is a fait accompli, and the budget is limited. Even more disturbing, the purview of what constitutes a valid claim is limited: even the most flagrant violations of "Best Practice" and Bank guidelines are explicitly excluded from consideration. Bank Vice management has publicly declared on several occasions that the very heart of the Banks "sustainable development strategy" is the elaboration and dissemination to Bank staff of more information and documentation on "Best Practice." What possible real incentive can they have to incorporate "Best Practice" into operations when the highest levels of Bank management and Executive Board are sending the strongest signals that neither the Bank nor any staff will be held the least bit accountable for ignoring it? H. What About the Poor? The World Bank's principal argument against calls for reducing its funding is that individuals and organizations that espouse such a position are knowingly or unknowingly enemies of the poor. Bank management has argued that those who suggest diverting funds the Bank, particularly IDA, into environmentally, socially, and economically more sustainable alternatives are making the Bank "a whipping boy for what they perceive as poor project policy at the World Bank" and this "threatens to transfer the burden to the world's poorest people, who are desperate for programs and projects to improve their lives." We believe that the money for IDA and IBRD appropriations can be used to really help the poor in much more cost-effective and accountable ways through bilateral channels-- U.S.A.I.D., and organizations like the Inter-American Foundation, African Development Foundation, and Appropriate Technology International. Already in the 1970s U.S.A.I.D. moved away from the World Bank model of large grants and loans to government agencies for gigantic infrastructure schemes in the poorest countries, particularly in sub-saharan Africa, to smaller, more flexible funding of private voluntary organizations, that have demonstrated their capacity to directly help poor communities in many of these countries. Huge foreign aid flows to client bureaucracies in governments in some parts of the developing world have frankly compounded problems and inequality in many cases. There is another model of development assistance that the U.S.supports through its appropriations for foreign assistance that the two national environmental organizations I represent today endorse wholeheartedly. It is an approach that provides technical assistance and transfers small grants and loans (typically less than $500,000) to local communities, small businesses, farmers and entrepreneurs, non-governmental groups and cooperatives in the developing world. It is an approach that has demonstrated its capacity for promoting economic development that is much more likely to be environmentally sustainable and culturally appropriate. Last year the combined annual budgets of Appropriate Technology International (ATI), the Inter-American Foundation (IAF), and the African Development Foundation (ADF), were less than $65 million--considerably less than one medium size World Bank loan. Funding for these organizations should be greatly increased, and above all their model should be studied and replicated on a much larger scale. We believe this should be the model for U.S. foreign assistance in the '90s. Our organizations strongly support increased assistance for poor communities in the poorer nations of the world--but assistance that is locally responsive and environmentally responsible, and, above all, and that has a better chance of working. We would hope continuing debate over the future of U.S. foreign assistance will emphasize more the need to increase this kind of aid to communities, small businesses and farmers along the models of the I.A.F. and the African Development Foundation, and some of the innovative programs that A.I.D. is now carrying out. One such program is the United States-Asia Environmental Partnership, a program that involves U.S. and Asian community groups, businesses and governments in a program of technology cooperation, biodiversity conservation, environmental improvements in infrastructure, and fellowships and training. A second point that needs to be made about the poor and the World Bank, and IDA, is that most World Bank and IDA disbursements flow right back again out of borrower countries in the form of procurement contracts, and the lion's share of these contracts go to the richest industrialized nations. Net disbursements (i.e. balancing out gross disbursements with repayments back to the Bank of previous credits) of the IBRD and IDA to borrowing countries in the Bank's Fiscal Year 1993 were $7.005 billion. But the Bank's borrowers in the same 1993 Fiscal Year paid out to the 24 rich OECD countries $6.835 billion in procurement contracts on existing Bank projects, leaving the Bank's borrowers with exactly $170 million in net positive flows in their business with the Bank for that year. In 1992, the industrialized, OECD countries received $195 million more back from procurement contracts in Bank business than the Bank's borrowers received in net disbursements for the same In 1993 developing country World Bank borrowers paid for goods and services associated with Bank projects nearly a three quarters of a billion dollars to France, $727 million to Britain, $846 million to Japan, and $489 million to Switzerland and its six million inhabitants. In fact, IDA disbursed more money back to Britain last year than it committed in future loans to Bangladesh ($290 million versus $171 million), and more money flowed on IDA contracts to Switzerland ($125 million)--than IDA made in loan commitments to the Philippines ($70 million), Sri Lanka ($110.1 million), and numerous sub-saharan African countries with significantly larger populations than Switzerland: Senegal ($40 million), Mali ($12 million), Mauritania ($26.7 million), Guinea ($85.5 million), Madagascar ($32.7 million), Sierra Leone ($81.3 million)--the list goes on and on. As far as the U.S. share of World Bank procurement is concerned, there are cheaper, more efficient, environmentally sustainable ways to subsidize U.S. business than through the World Bank, ones targeted towards small, high-technology businesses that create the most jobs. A final argument is sometimes made that the community-oriented assistance programs we propose as alternatives are fine, but because they do not transfer the large amounts of money to governments in Sub-Saharan Africa or South Asia that IDA does (even if more than half flows right out again for procurement), they do not address urgent macro-economic problems confronting many of these nations, namely chronic balance of payments and trade deficits, declining terms of trade and external outflow of financial resources. But the main external financial burden facing many of these countries is their debt. The foreign debt of Sub-Saharan Africa is approximately $150 billion--about equal to the entire region's annual GNP. This debt is eating up more than ten percent of the export earnings of eight sub-saharan countries, and more than a third of the earnings of Zambia and Uganda.9/ Unlike Latin America, a much higher proportion of the African debt is owed not to private banks, but to governments of the industrialized countries, and 36 percent is owed to multilateral agencies like the World Bank. In fact, Uganda owes 62 percent of its debt solely to the World Bank. Annual IDA net disbursements to the region are relatively insubstantial compared to the long term financial relief that debt relief could provide. We strongly believe that the U.S. government should endorse the so-called "Trinidad Terms" for debt relief, so-called because they were agreed on by the Commonwealth Finance Ministers at a meeting in Trinidad in September, 1990. The Trinidad terms envisage cancelling two-thirds of the existing debt, and rescheduling what remains over a twenty-five years, with a five year grace period. If we are serious about ending trickle down economics not just in the U.S., but for the world's poor, we should start by endorsing them. The previous administration rejected the Trinidad terms; but surely this Administration should be able to accept a debt relief proposal that was endorsed by both conservative and liberal governments in Europe, a proposal indeed championed by John Major. In fact, the World Bank could finance substantial debt relief for Africa without additional appropriations or touching the callable capital of its hard loan window, the IBRD. The Bank has some $18.5 billion in liquid reserves which it maintains in a semi-permanent investment fund, placed in government and high grade corporate bonds. The interest alone that the Bank earned on this portfolio was about $1.13 billion in 1993. This fund has existed for decades, and since 1985 has not sunk below $17 billion. The major shareholding countries of the Bank could easily direct it to allot several billion dollars from this fund to its poorest and most economically strapped borrowers for relief from the burden of their World Bank debts. The Bank argues that it needs a substantial bond portfolio "to ensure flexibility in its [the IBRD's] borrowing decisions should borrowing be adversely affected by temporary conditions in the capital markets."10/ But half or a third of $18.5 billion would be more than sufficient these purposes. Indeed, Oxfam has endorse precisely this proposal for Africa, having witnessed first hand the social damage precipitated by Bank-Fund adjustment programs.11/ I. Adjustment, Poverty and the Environment Another area of Bank negligence that concerns us is rooted in the social and environmental consequences of World Bank and IMF structural adjustment programs. Adjustment as promoted by the Bank12/ and IMF has resulted in government domestic austerity programs on the part of borrowing countries and intensive efforts to increase export earnings. Too often the way in which the Bank and the Fund have promoted such measures have resulted in reduced education, health, and environmental protection expenditures, and reductions in real wages for working populations already on the edge of poverty (in Mexico, often cited as a model, real wages plummeted by 50 percent in the 1980s). Numerous case studies have linked to World Bank/IMF adjustment policies an appalling drop in education and public health services for the poorest populations of the poorest countries, particularly in Africa.13/ The United Nations Children's Fund (UNICEF) and the United Nations Commission for Africa published reports in the late 80s that bitterly indicted the Bank's approach.14/ The UNICEF report reached the conclusion that World Bank and IMF adjustment programs bore a substantial responsibility for lowered health, nutritional and educational levels for tens of millions of Third World children.15/ Last spring, the international aid and relief organization Oxfam condemned World Bank adjustment programs for "dramatically worsen[ing] the plight of the poor" in Sub-Saharan Africa. Oxfam recounts that under Bank/Fund adjustment dictates consumer prices for low-income families in Zambia doubled in an eighteen month period, and that over the past decade the number of Zambian children "suffering from malnutrition has risen from 1 in 20 to 1 in 5." Bank adjustment policies during the 1980s, the Oxfam report continues, bear responsibility for many African countries spending less in 1990 on public health per capita than they did in the 1970s, and contributed to a drop in primary school enrollment in the region from 78% at the beginning of the decade to 68% at its end.16/ The Bank's approach to the economic crisis of Sub-Saharan Africa has worsened it rather than alleviating matters. In Africa, it led to what Oxfam calls "export-led collapse." The Bank encouraged numerous countries around the world to convert agricultural land and tropical forests to increased production of commodities such as coffee, cacao and cotton--and prices for these commodities plummeted, as could have been expected. In West Africa between 1986 and 1989, Oxfam notes, "cocoa exporters increased their output by a quarter, only to see foreign-exchange receipts fall by a third as prices collapsed." In some cases adjustment-promoted cuts in domestic spending further crippled the export capacity that adjustment was supposed to increase: in one district in rural Tanzania in 1992 farmers were unable to market most of their cotton crop because of the collapse of road maintenance prompted by adjustment-sponsored cuts in government expenditures.17/ The adverse environmental effects of adjustment are considerable.18/ For example, adjustment in Mexico during the 1980s resulted in the budgets of the Department of National Parks and the Bureau of Urban Development and Ecology falling faster, according to a World Wide Fund for Nature study, "than government spending in general."19/ Reductions in agricultural extension services in several countries pushed more small farmers into unsustainable practices, either depleting lands they owned, or expanding into tropical forests and other marginal lands.20/ Increased social disparities and poverty precipitated by adjustment are an major cause of environmental degradation in themselves. A recent case study of World Bank--IMF adjustment policies in the Philippines prepared by Robert Repetto and Wilfredo Cruz of the World Resources Institute concluded that real wages fell more than 20 percent between 1983 and 1985. As vastly increase numbers of workers migrated to the open access resources of the uplands and coastal areas, deforestation, soil erosion, the destruction of coastal habitats, and the depletion of fisheries increased.21/ In the Philippine case as in many other countries, adjustment did not succeed in launching export-oriented growth as intended. The World Bank contends the failure is a consequence of poor government compliance with Bank prescriptions as well as the result of a global economic slump. Repetto and Cruz conclude that if the Bank adjustment program had achieved its goals, unsustainable exports of natural resources and environmentally negligent production would have been the consequence; in their simulation "both logging and mining expand dramatically, by 7.3 percent and 29.4 percent, respectively. Energy use grows by 3.0 percent, and erosion-prone agriculture by 2.5 percent." According to a recent World Wildlife Fund and World Resources Institute studies, from which I excerpted the examples cited above, the Bank has done little to take into account the environmental impacts of its adjustment programs. To attempt to alleviate the supposedly short-term, adverse social effects of its adjustment lending on the poor, the Bank has responded with still more loans for "social impacts of adjustment." Their objective is to soften the effects of increased food prices and reduced wages for particularly vulnerable poor populations. OXFAM studied two such "social impacts of adjustment" programs of the World Bank in Zambia and Ghana, and concluded that they "probably have served more of a political purpose in giving adjustment the appearance of a human face, rather than a genuine compensatory purpose."23/ The one certain impact of this approach is to further increase the immense debt burden of many developing countries-- a principal cause of their having to submit to adjustment in the first place. The Bank's claims that it is helping the poor in Africa and elsewhere increasingly lack credibility. Having witnessed the effects of the Bank's activities first hand in the continent, Marguerite Michaels, a fellow of the Council on Foreign Relations, concluded in an article in published earlier this year in Foreign Affairs that "the root problem with the bank has been a powerful combination of arrogance, ignorance and absolute, unchecked power." Indeed, for the World Bank the whole continent and its people have been a field of experimentation and manipulation, a "research lab" in Michael's words, for dubious and untried economic theories whose application would be politically, socially and morally unacceptable in industrialized democracies.24/ J. World Bank: Conclusion and Recommendations We believe that the World Bank is currently being mismanaged: in response to evidence of relentless decline in project quality, and increasing concern in the U.S. and elsewhere with the institution's lack of transparency and accountability, half-hearted, largely cosmetic reforms are undertaken while the fundamental institutional pathology--pervasive pressure to lend that traduces most Bank policies and quality control--continues largely unabated. Senior management is increasingly drawn into public relations damage control, while the environmental, social and economic quality of the lending portfolio continues to fester. The Bank's record and continuing abysmal performance in areas that go to the heart of its mission as a sustainable development institution--such as rehabilitation of millions of poor forcibly resettled by its projects, and energy efficiency and conservation--all point to an alarming lack of focus and profoundly distorted priorities on the part of management. We would note that on June 25th, 1991, the Chairman and Ranking Minority Member of the Senate Appropriations Subcommittee on Foreign Operations wrote the Secretary of the Treasury to set down benchmarks for improved performance by the World Bank in four critical areas: energy efficiency, treatment of forcibly resettled populations, tropical forest protection, and environmental assessment. "In the event that workable benchmarks are not met by [mid-1993], we will have a clear basis to consider appropriate actions, including withholding a portion of IBRD appropriations in FY 1994 or future years." We believe that the evidence is substantial that rhetoric and new policies notwithstanding, that both new lending and ongoing implementation of the Bank's project portfolio show little real effective improvement in these areas. 1. We would suggest that it is time for the Foreign Relations Subcommittee on International Economic Policy and Appropriations Subcommittee on Foreign Operations to collaborate in discussing possible cuts in IBRD appropriations for FY 1995. We believe this will be the most effective spur to real World Bank reform in the four areas cited in the June 25th, 1991 letter to the Secretary of the Treasury, as well as in needed improvements in transparency, accountability, and focus on project quality. 2. Congress for the first time last year authorized the IDA replenishment for only two instead of three years. We believe that next year IDA should not be reauthorized if the Bank does not make substantial progress in carrying out the following measures to ensure greater transparency, accountability, and change of internal priorities to emphasize project quality over the pressure to lend. We urge the Subcommittee to communicate the need for these measures to the Treasury Department and work with it to monitor their implementation: a. The Bank's new information policy must be expanded so that gives access to affected populations and the public most Bank documents generated in project preparation and appraisal before loan approval. Other critical Bank documents for evaluating its performance--such as full project evaluation reports--should also be readily accessible. The revised policy should precisely define categories of information which will be considered confidential. Information listed as confidential should be justified by compelling policy reasons. All other information should be made available in its entirety to the public. b. The newly created inspection panel should have its now limited authority expanded so it can exercise real accountability: the panel's decision to initiate an investigation should not be subject to being overruled by the Executive Board, and the panel's report and recommendations should be made available to the party bringing a claim and to the public before the final decision of management and/or the Executive Board on what action to take. There should be a strong presumption that management should follow the recommendations of the panel unless it can demonstrate to the Executive Board extraordinary and compelling policy and institutional reasons why it should not. Finally, the initiative to weaken Bank Operational Directives by reissuing them as watered down Operational Policies must be reversed, since if this proceeds the Panel will have very little to hold Bank staff and management accountable for, whatever its putative powers. c. There is a critical need to identify and carry out more effective measures to address the problems identified in the Wapenhans Report-- perhaps through the creation of an independent panel not beholden to Bank management. The thrust of these measures has to be to make project quality in all areas--financial, environmental, economic and social--the number one priority of all Bank operations. To change the "approval culture" (to cite the Wapenhans report) of the Bank, a radical change is needed in career incentives for staff so that employees are rewarded for making quality in projects the first priority, rather than moving money. In particular, the following two measures would immediately contribute to enhancing project quality: 1) As mentioned in point 2.b. directly above, the Bank's Operational Directives must be preserved, not watered down into a system of weak, mandatory Operational Policies and a superfluous, non-binding paper pile of "Best Practice." 2) The phenomenon of the "bunching season," when a disproportionate number of World Bank loans are submitted for approval before the Board in the last few weeks of the fiscal year, must be eliminated. The U.S. Executive Director should be instructed to promote a management directive that will require that no more than 15 percent of the Bank's annual lending can be presented before the Board for approval in any one month. We understand that, much to its credit, the management of the Asian Development Bank has recently issued such a directive. Such a directive would also be appropriate for the other regional development banks. 3. There is a great need to improve the procedures and modalities for the Bank to truly address poverty alleviation in its operations, including: a. environmental and social impact assessments, including poverty impact assessments, should be required for all structural and sector adjustment loans. b. Benchmarks that enhance the focus of Bank lending on poverty reduction should be implemented--the Bank is currently conducting studies on the issue, but there is little evidence that these studies will have any more impact on its operations than most of the other paper it produces. c. The Bank should be urged to devote some part of its lending portfolio to package loans that would support micro-enterprise development, that is, small loans (limited to $6000 or $12,000 in size) to the poor in the informal sector. The Grameen Bank in Bangladesh has often been cited as a paradigm for the kind of institution that could be supported to make such loans, and, alone among the MDBs, the IDB is the only institution that has made loans of this type, both through its small projects facility and through four loans from its main lending operations over the past several years. 4. We urge the Congress to request the Secretaries of Treasury and State to raise the issue of World Bank reform along the lines suggested above in the G7 process as well as in the forum of the OECD. 5. We suggest that Congress commission from the Office of Technology Assessment two studies to be completed over the next year: a. A an analysis of bilateral, multilateral, private sector and non- governmental alternatives to World Bank lending for assisting the poor promoting sustainable local development in the poorest developing nations; and b. A study of existing debt relief proposals and an analysis of specific measures the U.S. can take to assist the poorest developing nations in reducing their debt burden, in particular, a thorough analysis of the feasibility of using a significant part of the World Bank's $18.5 in liquid reserves to retire the multilateral debt of the poorest economies. 5. Finally, the 50th Anniversary of the Bretton Woods Conference this July is a particularly important and much needed occasion for a Congressional and Administration initiatives to review the effectiveness of existing multilateral institutions in promoting U.S. foreign policy goals in a post- Cold War, post-Rio Earth Summit world. We would suggest, for example, a series of oversight hearings. We believe that existing multilateral institutions have grave flaws in terms of accountability, transparency, and flexibility, flaws that are totally dysfunctional in a world where global environmental problems can only in reality be addressed locally but must be coordinated internationally. III. Global Environment Facility We wish to reiterate two points the Vice-President touched upon in his speech before "Global Legislators for a Balanced Environment" Tuesday evening, namely, that, first "as we move forward on the GEF we must always keep in sight the overall lending practices of the multilateral banks." Second, "the recently completed pilot phase of the GEF had a lot of flaws. It was not democratic enough. It did not have a clear enough direction." It is indeed true that the proposed GEF replenishment will at best be good money thrown after bad if the World Bank and other MDBs do not make much more progress in reforming their main lending operations. These operations are running at a rate of $45 billion in new loan commitments a year, supporting projects and programs whose total cost is probably well over $130 billion. What good, for example, will another two or three hundred million in grants a year do to reduce CO2 emissions while the Bank continues to lend billions for huge coal fired power plants in India and China without considering least cost alternative demand side investments that could obviate the need for many of these plants? Donor countries, including the U.S., have already given tens of millions of dollars to the ESMAP (Energy Sector Management Assistance Program) program within the World Bank, with negligible effects on changing the priorities of Bank energy lending to give greater emphasis to end-use efficiency investments. What stake will poor populations in the developing world have in GEF projects if they are conducted along the same lines of small-minded secrecy and closed, top- down, bureaucratic planing that characterizes so much of the Bank's current way of operating? The Vice-President's second point is of critical importance to the current replenishment discussion: The official GEF evaluation report--conducted by the implementing agencies themselves--was highly critical of the GEF pilot phase. In fact, the evaluation report recommended that the GEF not undertake program initiatives with new funds until it has put in place new strategies and program guidelines. In this regard, we wish to call attention to legislation the Congress has enacted two years in a row to the effect that no funds should be released to the GEF until the Secretary of the Treasury determines and reports to the Committee on Appropriations that the GEF has established clear procedures on full public access to information on GEF projects, and the larger projects of implementing agencies with which the projects may be associated; procedures to ensure full consultation and participation of affected populations in recipient countries; that GEF governance is reformed to ensure full oversight by participating nations of individual projects, with full participation of non-governmental organizations; and that if by the end of the fiscal year these requirements are not met all appropriated funds for that year are transferred to A.I.D. for activities that further the goals of the G.E.F. While the next GEF Participants' Assembly, scheduled to take place in Geneva on March 14-16, is to obtain a final agreement on the establishment of a permanent GEF and the GEF replenishment, decisions on several issues that are critical to the transparency and accountability of the GEF have been postponed. These issues concern basic - yet indispensable - ground rules that (a) public access to information on GEF projects and associated activities of the implementing agencies and (b) the establishment of procedures ensuring participation of NGOs and affected communities during the GEF project cycle as well as NGO observer status at GEF Council and Assembly meetings. The need for sound procedures in these areas is further compounded because the Secretariat of the GEF, as is currently being envisioned in the founding document for the permanent GEF, does not have the degree of independence from the implementing agencies that would allow it to become the "independent arbiter" that the official GEF evaluation report strongly calls for and that we think is of utmost importance. Indeed, in view of the fact that the GEF's Chief Executive Officer is likely to come from one of the implementing agencies and/or return there after his or her position with the GEF expires, and that staff for the GEF Secretariat will be either seconded from, or hired by, the implementing agencies, it will be difficult for the GEF Secretariat to exercise the much needed "watchdog" function over the activities of the implementing agencies. In view of the above we strongly recommend that authorizing legislation for the GEF replenishment provide that all final decisions on disbursing U.S. funds to the GEF be made contingent upon evidence that the future GEF Council is ready to adopt the type of procedures that ensure the transparency and accountability we all have worked for - and that the Congress has required as a pre-condition for appropriating GEF funds. As it will take time to develop the appropriate guidelines and have them adopted by the future GEF Council, there seems to be no need to rush the disbursement of funds, particularly as it is our understanding that a large part of the resources in the already existing GEF core fund have yet to be disbursed. In addition, the GEF's principal "clients", the Climate and Biodiversity Conventions Parties, are still in the process of developing detailed guidance on policies, program priorities and eligibility criteria--criteria that the Parties to these conventions view must be in place before any new commitments of the GEF replenishment can begin. For these reasons the GEF authorization should articulate a deliberate approach. We believe that immediate release of funds would be appropriate for supporting developing country planing processes, reporting requirements, developing country travel expenses and capacity-building efforts. I might add that these and other GEF reform measures have widespread and growing support among non-governmental groups all over the world. The recommendations of this testimony on the GEF have been endorsed by 10 national U.S. environmental organizations with over 6 million members and by the Union of Concerned Scientists in a letter sent yesterday to the U.S. Treasury Department. IV. African Development Bank A. Introduction The African Development Bank, which lent about $3.5 billion last year, suffers from many of the same problems as the World Bank, but worse: a steady, pervasive deterioration of overall project quality, gross environmental negligence, and highly restrictive, secretive information policies. It has an Environment and Social Policy Division with half a dozen staffers, as well as an Environment Policy Paper issued in June, 1990, that sets out environmental policies for sectors such as agriculture, forestry, transportation etc. In 1992 it also prepared a set of Environmental Assessment Guidelines for use in project preparation, and within the past few weeks issued a final version of a Forestry Policy, which like the World Bank Forest Policy issued last year commits the African Development Bank to not financing commercial logging in primary forests. But the environmental staff, policies and guidelines have had little effect on improving the environmental quality of most projects--a familiar story. Over the past three years EDF has encountered a number of blatant examples of AFDB projects that are needlessly threatening Africa's remaining rainforests and their inhabitants. These include a road-building project in the largely intact rainforest of southeast Cameroon, and coffee-growing project in the Central African Republic that threatens a forest reserve and national park established through recent World Bank loans. In Guinea, the AFDB's Diecke Oil Palm and Rubber Project promotes agro-industrial activities affecting an area that is one of Guinea's last two remaining areas of intact rainforest. The Rubber Scheme Phase II Project for Gabon involves clearing several thousand hectares of forest for rubber plantations. Yet the ecological impact has been dismissed as irrelevant on less than half a page of the Staff Appraisal Report. B. Failed Commitments from the last Replenishment of the African Development Fund (AfdB) The African Development Bank (AfDB) has requested a 50% increase in funding from international donors for its soft loan window, the African Development Fund (AfDF). The AfDB is asking for a total of$ 4 billion for the three-year cycle of AfDF VII and expects the United States to at least maintain its share of ca. $ 492 million for this period. The replenishment negotiations have been ongoing throughout 1993 and are expected to be completed at the time of the AfDB's annual meeting in May 1994. During the negotiations for the previous replenishment cycle (AfDF VI), the United States and other donors obtained the AfDB's agreement to several important environmental reforms to ensure the long-term sustainability of its investments. Among the promised reforms were: - the commitment to environmental screening of projects; - the completion of environmental impact assessments (EIAs) and their timely delivery to the Bank's Board of Directors; - the guarantee of ongoing public participation throughout the EIA process; - the presentation of new Bank policies for the forestry and energy sectors. There have been major problems for NGOs and citizen's groups in obtaining information from the AfDB. Even the simple listing of projects in the AfDB's pipeline, the Quarterly Operational Summary, has not been made available to NGOs despite numerous written and oral requests over the past three years. Despite the AfDB's lack of cooperation, NGOs have tried to monitor the AfDB's progress in environmental performance, especially the implementation of the provisions agreed to under AfDF VI. While some environmental measures have been taken at the formal level, there is little evidence that these did have an impact on actual operations. With respect to the major areas of promised reform, the overall results are unacceptable: 1. Environmental Screening of projects Improper initial classification of projects is a major problem. Let me cite two recent examples. In the Malawi Lilongwe Forestry project--for a country which suffers from one of the highest deforestation rates in the world- -the AfDB classifies it as a category III project, i.e. not requiring any type of environmental analysis. This is despite the fact that the goal of the project is to "improve management and production of remaining indigenous forests" (Quarterly Operational Summary, March 31, 1993). The Mozambique Forestry Development Project receives no environmental category at all, although it involves significant forest management activities. (Quarterly Operational Summary, June 30, 1993). 2. Environmental Assessments The AfDB does not have budgetary provisions for carrying out EIAs. Therefore Bank staff have to devote considerable energy to finding bilateral donor support for EIAs for individual projects. Relatively few full EIAs have been prepared during the cycle of AfDF VI. During the year of 1992 (the only full year for which figures are available), the AfDB and AfDF approved 93 project and policy-based loans totalling just under $ 3 billion (AfDB Annual Report 1992, page 41). During that same period, the United States had to abstain from voting on projects for lack of timely availability of EIA summaries, i.e. compliance with the Pelosi amendment, on 34 projects (U.S. Treasury Department's International Financial Institutions Quarterly Transactions covering the period from November 25, 1991 to May 3, 1993). The AfDB had made a commitment to consulting affected groups and NGOs on an ongoing basis during the EIA process, to provide them with copies of the completed EIA report and to report to the AfDB Board on these consultations (Report on the Sixth General Replenishment of the Fund, March 1, 1991, page 9). The commitment to consulting affected groups and NGOs has all but been ignored in practice. EIAs have largely been carried out by short- term missions of foreign consultants without participation of and consultation with affected communities and NGOs. Bank management has also failed to report back to the AfDB Board on the consultations, or the lack thereof, as required by AfDF VI. 3. New forestry and energy policy papers The AfDB group committed itself to present these policy papers to the Board in the fourth quarter of 1992 (Mid-term report, AfDF VI, page 35). As of February 1994 the Board has not been presented with final draft policy papers for discussion and adoption by the Bank. C. Flawed Projects and Flawed Decision Making A recent Committee on Foreign relations memorandum points out that the United States currently votes against about 30% of AfDB and AfDF loans on the grounds that the loan proposals are poorly designed and the projects are not likely to be effective (Committee on Foreign Relations, January 18, 1994, subject: Nomination Hearing for Alice M. for Alice M. Dear to be U.S. Executive Director to the AfDB). The current situation at the AfDB is one where decision-making on projects has little to do with the quality or merits of a project. No regional member country will vote to deny a loan to another regional member country. The formal voting structure at the AfDB which - independent of financial contributions to the Bank -grants regional member countries 2/3 of the voting shares in the AfDB and 50% of the voting shares in the AfDF, sets this Bank apart from all the other MDBs. Environmentally and socially highly questionable projects have gone ahead despite significant opposition from some Board members. This has been the case with the Barbara dam project for Tunisia. In neighboring Algeria, the AfDB plans to finance the Koudiat Acerdoume dam, which is opposed by some Board members, including the United States, because of the project's lack of adequate provisions for a large number of people to be forcibly resettled under the project. To this date the AfDB has no policy or guidelines to help ensure fair compensation and adequate re-establishment of populations affected by involuntary resettlement carried out under its operations. The poor quality of many AFdB and AFdF loans can only result in further increasing the already unmanageable debt burden of many of the African countries without producing commensurate benefits. If anything, many of these ill-conceived loans contribute to further aggravating the economic, social and environmental problems in the borrower countries. D. Recommendations We believe that the current negotiations for the Seventh Replenishment of the AFdF have to set down benchmarks for tangible improvements in project quality, benchmarks whose achievement should be linked to release of the full replenishment. These include: 1. Portfolio Performance Report. Final decisions on the replenishment of AfDF VII should wait for the results and recommendations of the ongoing AfDB Project Portfolio Review, an exercise similar in intent to the 1992 World Bank Wapenhans Report. In the interim, short-term bridging funds for AfDF VII are more likely to produce reforms from which the AfDB will emerge as a stronger institution than a firm commitment to fresh funds before the development impact of AfDB operations is known. 2. Access to Information. Project documentation should be made available in a timely manner to permit public input, which ultimately will help ensure the sustainability of the AfDB's portfolio. Documentation to be publicly available should include: * Quarterly Operational Summaries * Environmental Impact Assessments (Cat. I projects) or environmental analysis for projects with impacts requiring mitigation (Cat. II projects) * Descriptions of consultative processes in regional member countries (as required by AfDF VI) * National Environmental Action Plans * Staff Appraisal Reports * Reviews of project performance results carried out by Operations Evaluations Office (OPEV) The AfDF VII negotiations should request the African Development Bank to inform its members about the logistical arrangements it plans to put in place to ensure timely public access to project documentation (for example use of U.N. library system). 3. Participation of affected groups and NGOs. As already required under AfDF VI replenishment, the Bank should establish procedures for systematic reporting on the consultation and active participation of affected communities and NGOs in the early stages of project development and throughout the project cycle. In the current replenishment negotiations the AFdB should make a commitment to the Board that it will not present projects for approval without reporting to the Board on the consultative process taking place in the regional member country. 4. EIA process The African Bank should be asked to propose a system for both promoting national capacity-building through the EIA process and for internalizing the costs of EIAs. 5. Supervision of AfDB projects. The monitoring and evaluation of AfDB projects is extremely weak. Supervision of projects is rare. In view of the scarcity of resources for development purposes, the Bank's focus must be to achieve a maximum of benefits. The U.S. should promote in the AFdF negotiations a request for the bank to develop a system of substantially stronger supervision of its project portfolio. In addition, the bank should establish a procedure to regularly report to its members about the findings of its monitoring and evaluation reports. 6. Establishment of Policies. Both the Bank's new forestry and energy policies should be widely reviewed and discussed by interested parties before final drafts are submitted to the Bank's Board for approval. In addition the bank must develop a policy and clear guidance to its staff on projects involving involuntary resettlement, and commit itself to produce an inventory of all ongoing AfDB-funded projects which require resettlement. 7. Establishment of an independent appeals mechanism. As a sign of commitment to environmental reform the Bank should establish an appeals mechanism or independent inspection panel which would allow those negatively affected by Bank projects or alleged violations of Bank policy a means of recourse. V. Inter-American Development Bank (IDB) The Inter American Development Bank (IDB) is now negotiating its eighth capital replenishment, and management is confident that the replenishment will be signed at the upcoming annual meeting in mid-April. The governors have provisionally agreed on a capital increase of approximately $40 billion in the Bank's Ordinary Capital, or a two-thirds increase from the $60 billion attained in the seventh replenishment. An increase of $950 million in the Fund for Special Operations (FSO), the IDB's concessional window, is also proposed. Our organizations would support the proposed capital increases, provided that several key issues are adequately addressed in the conclusion of the replenishment negotiations, and that the upcoming reorganization of the IDB will strengthen--rather than attenuate--the institution's capacity to address environmental and social concerns in its operations. Several ongoing projects raise serious concerns with the Bank's ability to ensure public participation in critical areas, and several potential projects on the horizon could create major environmental and social problems. We will be happy to submit additional material for the record on these problem projects. It is also the case, however, that the IDB has in several instances taken innovative steps to involve local populations in development decisions, and to create new models for addressing some of the most intractable environmental problems in the hemisphere. A. Public Participation and Environment in the IDB--Positive Examples 1. Brazil Porto-Velho-Rio Branco Road Improvement Project The IDB's ongoing experience in the environmental component of this project is a benchmark in the active involvement and direct participation of affected populations in internationally financed development. The IDB has in this project set the standard by which all other multilateral institutions (and indeed other operations of the IDB) should be judged with respect to project transparency and consultation with local NGOs. It shows that in difficult situations, when there is political will, the MDBs can get it right. The project dates to 1985 when the IDB approved $58.7 million in two loans to pave 502 kilometers of road between the Amazon capitals of Porto Velho and Rio Branco. The loans included $10 million for the Project for the Protection of Indigenous Communities and the Environment (or PMACI, in Portuguese). The road threatened to greatly increase migration, deforestation and the invasion of indigenous areas, as well pressure on the forest-dwelling rubber tappers of Acre state. In 1987, after rubber tapper leader Chico Mendes denounced the effects of the project, and government failure to comply with the PMACI loan conditions, the IDB suspended disbursements, under US pressure. Before agreeing to restart the disbursements, the IDB held an unprecedented negotiation between government agencies, and local Indian, rubber tapper and environmental organizations, and required an agreement on how the environmental component was to work as a condition of restarting disbursements. Among other results, the negotiation forestalled a military plan to greatly reduce indigenous lands in the project area. Subsequently, the IDB convinced the federal government to transfer responsibility and funds for much of the PMACI to local agencies and NGOs. The IDB is in consequence now supporting the most innovative work in the region in creating sustainable economic alternatives for rural people including increasing local processing for forest products, popular education for Indians and rubber tappers, and the demarcation of extractive reserves. IDB, the NGOs and government agree that this has greatly increased project quality. Gains in project quality followed directly on the Bank's willingness to hold a substantive discussion between government and NGOs--despite political controversy--before moving ahead with the project, and to reformulate project goals based on this discussion. 2. Fund for the Development of the Indigenous Peoples of Latin America and the Caribbean - (Indigenous Fund) The IDB, following the initiative of the government of Bolivia in 1991, has supported the creation of a new, international mechanism to finance sustainable development projects by and for indigenous peoples in the region. The IDB has provided $2.5 million for start-up costs of the technical secretariat of the Fund, as well as invaluable support in the successful inter- governmental negotiations of an innovative governance structure. The agreement which established the fund was signed by 17 Latin governments, in 1992, and subsequently the parliaments of three nations (Mexico, Bolivia and Peru) have ratified the agreement, such that the Fund now has juridical personality and can start operations. The great step forward made by the Fund is that the establishing agreement stipulates that each member country in the region be represented by a government representative, and a representative of the indigenous people. The government must accredit the indigenous representative (a compromise to gain government acceptance for autonomous indigenous representation.) Extraregional members or regional members with no indigenous population have one representative. The Board, when constituted will maintain the same tripartite structure--three Indigenous Peoples representatives, three representatives of regional governments, and three non-regional government representatives. While the Fund is a very recent initiative, it has already succeeded in making important advances in promoting dialogue between indigenous organizations and government, and in assuring government recognition of autonomous indigenous organizations. This mechanism has great promise for generating small locally controlled, ecologically sustainable and culturally appropriate development projects for the indigenous peoples of Latin America and the Caribbean. B. Policy and Institutional Issues In 1993, the IDB convened a Task Force on Portfolio Management, to carry out a Wapenhans-like evaluation of portfolio performance and made recommendations to Bank management. The report notes for example, that "a review of 110 Project Completion Reports prepared by the Country Offices concluded that two-thirds had been successful." (Managing for Effective Development, p. 10). "These documents, however, did not recalculate internal economic rates of return using data collected on data collected after project completion." (Ibid.) That is, data on a basic gauge of whether or not projects have succeeded--whether or not projects met their appraised rate of return--are not available. Evaluation is largely of the completion of physical works, and whether projects were completed on time. One of the report's recommendations is that such data be collected in the future. Given that the Bank has committed itself in the eighth replenishment to greatly increased lending to the social sector (health, education, basic sanitation, job creation and so on), as opposed to its traditional emphasis on infrastructure, and that evaluation of project success in the social sector is far more complex than is the case for infrastructure projects, putting a priority on improved data collection and monitoring is of critical importance to ensure that the capital increase will be effectively used. Unfortunate, the report draws conclusions that in our view could lead to reduced project quality and less stringent monitoring and evaluation of the IDB's portfolio--a huge red flag that raises questions about the advisability of proceeding with the replenishment until these issues are resolved. The report reiterates frequently statements such as, "The Bank needs to move beyond the idea that successful projects result from strict application of Bank rules and procedures and enforcement of borrower compliance with conditions" (Ibid., p. 11), or ". . . rigid adherence to the rules and regulations . . . conspire to have an adverse impact on project implementation and execution." (Ibid. 31) The task force's preoccupation that the Board concern itself with policy and the future direction of the Bank, rather than exclusively with the minutiae of loan contracts is understandable, as is the desire to allow management sufficient flexibility to adapt to varying circumstances and new challenges. It is, however, curious and disturbing that the task force appears to find Board involvement in ensuring that loan conditions are met, or that procedures (e.g., public bidding requirements) are followed in itself problematic. At a minimum, if the task force finds the "control culture" of the IDB an obstacle to meeting future challenges, it should stipulate how the IDB is to address the problems in response to which the "control culture" arose, i.e., a bank in which the borrowers are the majority and the history of inefficient, patronage-driven public works, extensive. The report also recommends that the Country Offices be given greater responsibility and autonomy. This could be a positive step, but only provided that mechanisms are guaranteed to ensure project quality and broad public consultation and participation. An example to avoid is the World Bank's 1987 reorganization, that granted greater autonomy to country offices but in practice reduced accountability for project quality, exacerbating the deterioration of the Bank's portfolio documented in the Wapenhans report. Certainly, the IDB's Brazil Country Office has played a critical role in the advances the IDB has made in public participation in project planning and implementation, and its experience should serve as a model for dealing with these issues throughout the Bank. C. The Eighth Replenishment The Treasury must be commended for proposing and obtaining agreement on the inclusion of an information disclosure policy and an inspection function in the negotiating documents for the eighth capital replenishment. But a disclosure policy (which management plans to present to the Board in early 1994) which is as restrictive as the current (new) World Bank and ADB policies will be unacceptable, since these policies still keep confidential almost all documents generated in project preparation and appraisal in the period preceding loan approval. There are two potential major concerns with the inspection function as proposed. First, it is not clear in the current text that parties who would potentially be affected by a proposed project could apply for redress before project approval. If the inspection function is to be anything more than the ex- post hashing out of already consummated tragedies, this point is key. Second, while the present language makes reference to the Bank's "operational policies", these polices do not address some of the most critical environmental and social problems that arise in IDB projects in the region. Bank policy for indigenous peoples issues and for forced resettlement is contained in "Strategies and Procedures with respect to Socio-Cultural Issues", issued by the Environment Management Committee (CMA), and is not an operational policy in the sense of having Board approval. To the extent that these procedures are not held to be binding on the Bank, and failure to comply with them does not constitute grounds for appeal to the inspection function, then the inspection function will be a relatively empty exercise. It is in also critical that the replenishment agreement contain language clearly stating that indigenous peoples are a priority for the IDB in the eighth replenishment. Indigenous peoples are a substantial minority of the region's population, in some countries a majority, and in others a majority of the rural population, and in all cases are the poorest populations in a region of chronic poverty. Failure to mention indigenous populations and their situation would be a major omission in a document that seeks to orient a new emphasis by the IDB on poverty and the social sector. Moreover, indigenous lands in both South and Central America overlap extensively with remaining forests, such that their land rights are intimately linked to the region's remaining reserves of biodiversity. Italy has proposed language on indigenous peoples for the replenishment agreement that should be strongly supported by the US. D. Reorganization of the IDB Bank management is studying proposals for reorganization, which we understand will go forward in one form or another. With respect to environmental concerns, it is critically important that the IDB not lose its unique institutional advantage in dealing with environmental and social problems in project design. At present the IDB's Environment Management Committee (CMA) constitutes a high-level locus of accountability for these concerns, and with the technical backup of the Environment Division, can function as a screen for the worst problems before project approval. It would be deeply counter-productive should the IDB, in pursuit of a more streamlined operation, dilute the authority the CMA and the Environment Division, which together offer the possibility of effective quality control over projects. It is also important to note that while streamlining may be in order, as the Bank moves into social-sector lending, it will need greatly increased professional staff in the social (anthropological, sociological, grassroots development) area. VI. Asian Development Bank (ADB) Many of the generic institutional criticisms that have been directed at the the other MDBs apply also to the Asian Development Bank: prevalence of the pressure to lend over project quality, lack of transparency, accountability, and involvement of people affected by its projects, etc. The ADB has requested a doubling of its capital this year. Governments are currrently negotiating this, apparently with the expectation of agreeing to it by the time of the Annual Meeting in early May. The Treasury and the U.S. Executive Director's Office deserve praise for their efforts to promote freer access to information, a Wapenhans-type review of project quality, and greater consultation with NGOs in the ADB. The new President of the ADB also appears to be open to considering institutional changes in these areas. But just as with the other multilateral banks, we urge the Congress and the Administration not to hand the ADB a blank check, but to use the financial leverage of the capital increase negotiations to ensure major improvements in project quality and decision making: A. Action to Improve Project Quality The proposed call for a General Capital Increase must be seen in the light of the report released on January 28, 1994 by the ADB's Taskforce on Improving Project Quality. Known internally as the Schultz report, after Bank Vice-President Gunter Schultz., the study acknowledged that only 60 per cent of the Bank's post-evaluated projects were "generally successful." By the Bank's own admission and by its criteria of economic/financial viability, social impact, implementability and sustainability, 40 percent of all its projects were less than successful or outright failures. Just as in the World Bank, the report also acknowledged that annual performance data shows a declining trend in project performance. We believe it would be unwise to finalize such a large capital increase without evidence of an effective action plan--one more convincing than, for example, the World Bank's efforts to date--to change institutional priorities at the ADB to make project quality an overriding concern. Such a plan should be developed in a transparent fashion, with review of drafts by, and consultation with member nations and NGOs. B. More Transparent and Open Review of Policy Papers In recent weeks the ADB has released a plethora of new policy papers, in the context of its request for a capital increase. They include: a revised Forest Policy paper, a revised Energy Policy paper, a new Information Policy paper, a review of its past performance, and its "future directions" paper. In general, the process of obtaining timely comments from NGOs from both Developing Member Countries and donor countries has been difficult, because the papers have been distributed too late for their to be any sort of consultative process. When NGOs in Manila have asked the relevant ADB officials for these papers, the response has been mostly negative, although US officials have been extremely helpful in providing copies to NGOs in Manila and Washington. Only belatedly did the ADB, in response to U.S. pressure, has delayed the approval process for some of these papers to permit more input. We urge that the capital increase not be finalized until the ADB has committed itself to procedures to ensure serious consultation with NGOs, especially from Developing Member Countries, concerning policy documents that will affect them and the constituencies they represent. C. A More Open Information Policy We urge the Congress and the Administration not to authorize a doubling of the ADB's capital without that institution's adopting a much more open information policy. The Asian Bank recently issued a Working Paper on "Confidentiality and Disclosure of Information" (February 1, 1994) which frankly falls far short of the transparency and openness needed to promote sustainable development in a post Rio Earth Summit context. The Working Paper purports to emphasize "increasing disclosure of information," and although parts would constitute a modest improvement over what we perceive to be current practice, the focus mostly is on maintaining confidentiality and in justifying a continued adherence to procedures that block the affected and interested public from timely access to crucial information. It keeps almost all relevant information secret from affected populations and the public until the loan is approved, that is, during the time when the information would actually be of use in influencing project design in a constructive fashion. D. Independent Inspection Panel or Appeals Commission The U.S. should promote during the capital replenishment negotiations the creation of an independent commission or panel to which populations affected by abuses or violations of ADB policy and procedures could appeal. We understand that the Administration is already considering proposals in this regard, and we commend the Administration for this initiative and encourage it to continue it vigorously. E. Withdrawal of Support in Two Test Cases of Environmentally Destructive Projects: The Masinioc coal-fired thermal power plant (Philippines) and the Arun Dam (Nepal). The Schultz report recommends, among other things, that a one-time spring cleaning of all projects under implementation should be carried out to restructure the portfolio of existing projects. One projects that is a prime target for such a spring-cleaning is the unsustainable, socially unacceptable and seemingly non-implementable Masinloc power project in the Philippines. In addition, both the ADB and the World Bank are currently planning to fund another environmentally, socially and economically unsound large dam, Arun III in Nepal, which is generating growing opposition within Nepal and internationally. 1. Masinloc project Nearly four years ago, the Asian Development Bank's Board of Directors, approved a project for the construction of a two-stage 600 MW coal-fired power plant in Masinloc, Philippines. Co-financed by the Export- Import Bank of Japan, the project met with strong social opposition from the local residents, and construction has not yet begun in this beautiful, placid bay-side community. The plant has no plans for a desulfurization device and ash from the plant is expected to have an impact on the marine biodiversity in the area as well as on the thousands of mango trees. The plant will also siphon off scarce local water resources from agriculture. Residents face near certain dislocation from their hither-to peaceful and sustainable existence as fisherfolk and harvesters of mangoes. The Philippine Department of Environment and Natural Resources recently upped their minimum emissions standards in an attempt to improve ambient air quality. The proposed plant would fall below this new standard. The Philippine National Power Corporation (NPC) has been attempting to acquire land around the proposed site of the project. As of December 31, 1993, due to opposition to the sale of their lands, only 10 hectares, or about ten per cent of the total site area, had been purchased by NPC from local landowners. Meanwhile, local residents and nongovernmental organizations have reported the intimidatory presence of Philippine National Police Forces and other military troops in the area. Four years have passed since the project was approved and construction of the plant has yet to begin. Rather than continue with the folly of pursuing this project, the ADB should not renew the latest deadline for acquiring the land -- the newest deadline is June 30, 1994 --and rather, search for alternatives to meet the energy needs of the Philippines. And alternatives do exist -- Philippines has one of the largest reserves of geo-thermal energy in the world and natural gas reserves have been discovered in the Masinloc area. At the very least, if a coal-fired plant must be built, its siting must be revisited. The ADB is now preparing the loan for the second stage of this project -- Masinloc II. The US should oppose the project when it comes before the Board. Masinloc has been, in fact, up to the ADB's intervention, an example of a successful involvement of outside bilateral aid agencies working in concert with local people. As in many rural areas in resource-based economies, the survival of the people is closely linked to the health of the natural environment. Masinloc residents enjoy a highly sustainable means of livelihood. They manage the San Salvador Fish Sanctuary which is an example of a successful community-based resource management project by fisherfolk. Such models must be emulated, not destroyed. 2. Arun III a. The Project The Arun III hydroelectric project will be undertaken in the Arun valley, an isolated area in Nepal, which is home to many ethnic groups and has a high level of biodiversity. The dam will be constructed of concrete, and is projected to be 155 meters wide and 68 meters high. The ultimate capacity of the Arun III will be 402 megawatts (MW), by the year 2001. Construction of the access road will require 11 bridges and is slated to begin in 1994. There are presently no roads in the Arun valley. Arun III is one of three proposed dams in the area. The road is likely to lead to further road building in the area to connect the dam sites. The project is slated to be voted on by the World Bank Board (as an IDA credit) in April 1994. The Asian Development Bank Board would then vote on the project shortly thereafter. According to the Asian Wetlands Bureau, a Malaysia-based Non-Governmental Organization (NGO), construction of the road and the dam is expected to have serious adverse impacts on land and other natural resources as well as on the economic, social, and cultural environment of the affected population. There are 450,000 people from 10 ethnic groups living in the Arun Basin. The Sankhuwasabha District, which will be directly affected by the project, is the home of 160,000 people. The impact is evident in the case of the Kumhals. The Kumhals have already lost land at Tumlingtar (located along the proposed access road, downstream of the slated dam site) due to the construction of an airstrip as well as a permanent road camp and are likely to lose more to the Arun III project. The area threatened by the road and the dam is one of the last virgin forests in the Himalayas. The road would endanger a proposed national park, the Milke-Danda area, as well as the Hurure-Chichila cloud forest. Three sal forests would also be at risk, as the road be built directly through them. Another facet that has not been adequately examined is the cumulative impact of multiple feeder roads, and the extension of the access road to build the Upper Arun dam in the future. A Nepalese NGO, the King Mahendra Trust, claims that due to the present slash and burn practices in the area, total deforestation is likely to occur in the Arun Basin within 15 years or less. The U.S. EPA makes the point that the access road, as well as construction of the dam, will accelerate the deforestation. Workers moving into the area will expand the pressure on the forest by increasing the demand for firewood for fuel, construction of worker camps and various "forest products." The road will make access to the forest easier, which is likely to increase the incidence of illegal logging. This raises the question: why is the World Bank funding a development project that will exacerbate the already existing problem of deforestation? Why not adopt a program of conservation and careful forest management, and support other, less destructive energy projects? b. Reckless Negligence of Less Costly Alternatives Arun III would be one of the most expensive hydro power projects in the world. Presently, the cost of the project is estimated at $764 million, which equals Nepal's national budget for one year. Most developed countries cannot afford to spend an entire year's budget on one project, let alone a developing country. In comparing Arun III to alternative projects, the proposed dam is the least cost effective, as it has the highest cost per kilowatt hour. This project is the most expensive and destructive of the energy alternatives available to Nepal. The cost per kilowatt hour is not the only factor, but the environmental and social costs of the Arun III, when factored in, far outweigh those of the alternatives. According to the investment plan of the Nepal Electricity Authority (NEA), $100 million yearly will have be dedicated to the Arun project for the next 12 years. This is to be compared with $0.2 million for micro-hydro schemes and $0.1 million for other projects for the same time period. The amount for smaller projects is woefully inadequate. The NEA is not examining seriously any options other than large-scale projects. Several senior officials from the World Bank, the German lending agency, Kreditanstalt fur Wiederaufbau, and the ADB question Arun III. They argue that the project is not in line with World Bank policies, including the promotion of private sector investments, the enhancement of local capacity for sustainable development, and least-cost energy investments. VII. International Monetary Fund For more than a decade, NGOs, academics, economists, and local people from all around the world have testified about the devastating social impacts of IMF structural adjustment programs. For the past four years, environmentalists have questioned the negative impacts of SAPs on sustainable development efforts and documented the increasing environmental degradation caused by short-term, unsustainable economic development programs. As the list of case studies continues to grow, the call for policy reform grows more urgent. NGOs commend the U.S. Congress for passing IMF reform legislation both in 1989, as part of the Foreign Aid Appropriation and Authorization Bills, and in the 1992 Freedom Support Act (Russian Aid Bill). The 1992 IMF reform legislation strengthens the language on the need for environmental impact assessment in the 1989 Foreign Aid Appropriation Bill. It requires the U.S. Executive Director to promote the following changes: 1) Incorporation of poverty alleviation and reduction of barriers to economic and social progress into all Fund programs and consultations; 2) Incorporation of environmental considerations into all Fund programs and consultations; 3) Fund participation in the design and operationalization of a revised national income reporting system; 4) Creation of an audit system to review, on a country-by- country basis, the impact of the implementation of IMF-required or recommended policy prescriptions on poverty, economic development, and environment; 5) Insurance of policy options that increase the productive capacity of the poor; 6) Establishment of procedures for public access to information; 7) Development of procedures to measure the levels of military spending and incorporation of analysis and assessment of military spending in Fund consultations. The 1989 reform legislation appears to have had an impact on the rhetoric used by the IMF Managing Director, Michel Camdessus. In his remarks before the United Nations Economic and Social Council in Geneva on July 11, 1990, Camdessus emphasized high-quality growth. He defined that as growth that is sustainable, concerned with the poor, the weak, and the vulnerable, which does not wreak havoc with the atmosphere, with rivers, forests, or oceans, or with any part of mankind's common heritage. In February 1991, the IMF's Executive Directors met to discuss the establishment of an Environmental Unit. They rejected the idea. Instead, they assigned the time of "one and a half" staff economists to study environmental issues. Reassigning one and a half Fund-trained economists to study environmental issues still falls far short of satisfying this requirement. The discussions in the U.S. around the IMF quota increase and the IMF reform language, as part of the Freedom Support Act spurred the Executive Board of the IMF to give staff the mandate to take a few modest steps forward: (1) develop a greater understanding of the interplay between economic policies, economic activity and environmental change; (2) draw extensively upon the research and information from other institutions with environmental competence and responsibilities; and (3) use these findings to help staff carry out informed discussions with national authorities who may face difficult macroeconomic policy choices in the context of country's serious environmental problems. As a result, the IMF organized a seminar on macroeconomic policies and the environment, May 12-14, 1993. The conference was successful in bringing issues to the table, but nothing has changed as a result. The IMF refused to consider setting up any mechanism that would enable the institution to deal with social and environmental concerns in a constructive manner. The IMF continues to focus on narrowly conceived policy measures that aim to correct short-term balance-of-payments problems without regard for the long-term impacts of such measures. The IMF lacks the expertise to deal with social and environmental issues and operates wi