CGD in the News

New World Bank Funding Approach Riles Green Groups (Climate Wire)

February 02, 2012

Nancy Birdsall and Lawrence MacDonald were mentioned in an article on the World Bank's Program for Results on Climate Wire.

From the article:

Climate change activists are sounding alarm bells over a new World Bank lending policy they fear could erode environmental protections, human rights and transparency protections abroad.

Dubbed the "Program for Results," or P4R, the method represents the biggest change to World Bank funding in decades. It will direct about $1 billion annually to countries based on results instead of projects -- funding to deliver clean water to rural households rather than a big irrigation project, for example.

Another example would be dollars in return for proven boosted school enrollment rather than to simply build schools. Bank leaders and some development experts describe the approach as groundbreaking.

But a coalition of more than 200 nonprofit organizations from around the world is calling it a disaster. The coalition argues that the new instrument eliminates or dilutes more than two dozen safeguards designed to prevent everything from forced resettlements of indigenous people to the misuse of congressionally appropriated dollars.

Climate change activists maintain that by exempting borrowers from complying with World Bank standards, the institution is setting a dangerous bar for the new Green Climate Fund.

"This is not a good direction to be going," said Karen Orenstein, climate change policy director for Friends of the Earth.

Noting that the the World Bank serves as interim trustee for the multibillion-dollar climate change fund, she said: "It's really problematic that the same year that the Green Climate Fund is probably going to be tackling safeguards is also the same year that P4R comes on board, because it really does a lot to potentially gut the safeguards."

New lending era includes China and Brazil

The new funding mechanism comes at a time of great change for the multilateral lending institution. Countries like China and Brazil have eclipsed the World Bank in lending -- in December, Fitch Ratings announced that China's Export-Import Bank had extended $12.5 billion more in loans to sub-Saharan Africa than the World Bank, and Brazil's Development Bank is ranked second in the world after China.

The two competitors often demand less oversight for their dollars than the World Bank. Meanwhile, emerging developing countries are discovering a growing clout at institutions like the World Bank as they become less dependent on outside aid dollars.

"Program for Results is part of modernizing the international financial institutions in an environment for development finance that is dramatically changing," Joachim von Amsberg, World Bank vice president for operations, policy and country services, told a recent panel at the Center for Global Development (CGD).

"This old model, if it ever was valid, of rich countries giving money and advice to poor countries and believing that if poor countries just followed the path of rich countries and the advice and the money given ... is long over," he said. Meanwhile, he noted, "Our borrowers have many options" for funding, unlike decades earlier when the World Bank was the main source of aid.

Environmental activists look at those trends with suspicion, and accuse the World Bank of lowering standards many groups fought decades to enact in order to stay competitive.

They paint a picture in which World Bank funding under P4R could be given to a government for something like a forest-related program that results in forced resettlements of indigenous people -- and maintain that normal disclosure and accountability standards don't apply with the new rules of this funding mechanism.

More flexibility to borrowers

Vince McElhinny, with the nonprofit group Bank Information Center, called the World Bank's talk of results reform "a public relations statement which is perhaps disguising that which is a more relevant concern, which is that we're losing market share."

With World Bank lending decreasing and no longer the sole source of global aid, he said, countries can decide that the World Bank's safeguards are too onerous to follow. "There was a very real concern about relevance."

But, McElhinny argued, loosening standards is a slippery slope that will ensure countries like China plod even more slowly toward their own environmental and human rights safeguards. "The bank standards, if they get diluted, which P4R does, is a welcome invitation to competitors not to go up to the highest level. The ceiling has just been lowered."

Paul Bermingham, the World Bank's director of operation services, said the new lending mechanism was designed with a new goal in mind: to verify real poverty-alleviating results rather than money spent on infrastructure or other projects.

Using water delivery as an example, he said that under P4R, the World Bank might agree to fund a government plan to bring 1 million poor, rural households clean water supplies, meting out money for every 1,000 households shown to be connected. Countries would deliver that money in the way they best saw fit -- as opposed to the traditional World Bank method of financing a major irrigation project or dam, complete with hefty consulting contracts for which the borrowing countries must pay.

He maintained that the concerns of environmental groups are misplaced, and argued that programs funded under P4R will undergo risk assessments and be used only on projects where the environmental impacts would be minimal.

"We are not indifferent to the risks. In fact, we are very concerned about the risks," Bermingham said. "We care about the people, the environment and the money, and we are building in and have built into the design of the operation measures to identify the risks." Bermingham also objected to accusations that the World Bank is simply concerned with protecting its business, arguing that the new instrument was not designed to lend more money, but rather to lend smarter.

Expectations of cautious growth

"I'm not overly concerned about a race to the bottom," said Lawrence MacDonald, vice president for communications and policy outreach at CGD, the prominent development assistance think tank that has long argued for aid reforms and supports the new World Bank instrument.

"I don't think this change has been motivated by a declining demand for bank money," MacDonald said. "I think there's enough demand for their funds to keep them in business, and they're trying to foster different ways to achieve results."

And Nancy Birdsall, president of CGD, called the new funding mechanism long overdue. "The idea that development aid should reward development results may seem self-evident," Birdsall wrote to lawmakers late last year. She also downplayed environmental concerns, saying the safeguards included in the plan are sufficient to prevent harm.

That didn't allay the worries of the U.S. Treasury, or lawmakers like Sen. Patrick Leahy (D-Vt.), chairman of the Senate Appropriations subcommittee overseeing foreign assistance, or Sen. John Kerry (D-Mass.), chairman of the Foreign Relations Committee. The lawmakers demanded and won several changes in the program before it passed the World Bank board in late July, even though the United States was the only country raising concerns.

In a briefing to lawmakers last week, U.S. Treasury officials noted that the new funding mechanism will cap spending through it at 5 percent annually for the first two years -- about $1 billion -- and will not include "activities that are judged to be likely to have significant adverse impacts" on the environment.

"Recognizing that a delicate balance is being struck with this new instrument, we will be closely monitoring P4R implementation to ensure that it meets our expectations," Treasury officials wrote.

MacDonald said he expects the new funding instrument to grow cautiously. "There has been insufficient attention both from the NGOs and in the bank's response to what economists would call the counterfactual. The existing status quo is not real good," he said. "This is an experiment, a modest one. It's bound in a number of ways to avoid really bad outcomes, it's only 5 percent of the lending, it's a two-year experiment, and it's going to be very carefully scrutinized."

Orenstein was less sanguine. "I'm going to be surprised if they do anything controversial within the first two years, because they know there is going to be heavy scrutiny," she said, adding, "But beyond that, who knows?"