5 November 2009
In 2009, Development Policy Operations increased dramatically as a percentage of overall World Bank lending, from an average of about 33% to over 50%. Dogged by concerns that stem from a lack of a strong set of safeguard policies or clear results, this shift to greater dependence on DPLs/DPOs raises concerns about arbitrage by Bank clients to soften or avoid transparency and accountability commitments.
Since 2004, the World Bank has introduced Development Policy Loans (DPLs) as a softer and gentler form of conditionality to replace the adjustment loans that had became a lightning rod for public criticism. External critiques of policy-based lending have emphasized the misuse of disbursement conditions as being ineffective, intrusive, and in some instances harmful.[1] Despite these concerns, Development Policy Operations have represented 35% of all Bank lending in recent years. In the 2008-2009 fiscal year, DPOs shot up to over 50% of all WBG lending.
For the rapidly expanded weight of the DPLs in the portfolio of the World Bank, surprisingly little evaluation attention has been devoted to the effectiveness of these types of loans. The Bank's operations department (management) carry out a DPO retrospective every two years, which have generally produced positive assessments of DPOs performance but lack the rigor and independence of evaluation that is necessary. The most recent DPO retrospective is currently under review by the World Bank Board.
Environmental DPLs - ADVANCING A Green REFORM AGENDA or FINANCIAL ARBITRAGE?
In a new set of DPLs for Brazil, Mexico, Peru, and Colombia, the World Bank has begun to focus on various environmental and climate policy reforms. This new generation of environmental DPLs are designed to support a wide variety of ongoing energy, forestry, transport, extractives and agriculture policy reforms, couched within the Bank's "Low Carbon, High Growth" development strategies. In Latin America, the World Bank has been forced to retreat from large infrastructure projects such as transport and energy, due to the perceived transaction costs of the Bank's social and environmental safeguard policies. Without these large ENV DPLs, World Bank lending levels for environment would still be far below the level of the 1990s (WB ARDE 2008)
Overall World Bank lending to Latin America had leveled off at about $6-7 billion between 2000 and 2007, raising questions about the relevance of the Bank in the region. The emergence of DPLs have clearly represented a increase in the power of Latin American governments (and in many other emerging economies) to define the preferred financial instrument from the World Bank.
However, the proliferation of DPLs in general and these new instruments that target climate related reforms have also called attention to the many concerns associated with DPLs as a policy change instrument. Primary among these concerns is the lack of transparency at critical moments in the project cycle and about core decision making processes associated with the DPL. DPLs fail to disclose adequate public information before Board approval and also during implementation. The determination of the loan amount with reference to the proposed reforms remains a mystery. A structural problem with DPLs/DPOs is the inability to track unearmarked funds to know what relation, if any, the actual Bank finance has on the fulfillment of policy actions.
The DPLs constitute a broad grey area in terms of accountability, both in terms of weak monitoring and evaluation and the less rigorous application of Bank safeguards. The environmental DPLs point to a core problem in the differential application of Bank Safeguards when the reforms that are "triggers" in the DPLs are associated with some of the most sensitive environmental and climate policy debates in the recipient country, yet provide no specific mechanism for public disclosure or consultation that otherwise would be available under conditions of a high risk investment loan.
With over half the IBRD and IDA portfolio of new lending in FY2008-2009 in the form of DPLs/DPOs, one might wonder whether clients are strategically opting for DPLs to avoid the most stringent safeguard policies. Could the World Bank be facilitating this practice of financial instrument arbritrage?
In November of 2008, the WB announced a $US 1.3 billion development policy loan to the Brazilian National Bank for Economic and Social Development (BNDES). The Sustainable Environmental Management (SEM) DPL, which was approved in March 2009 but awaits Senate ratification to disburse the first $US 600 million tranche, is the first operation in a series of two loans which span the period 2008-2010.[1] According to the loan documents, the SEM DPL aims to support the Government of Brazil (GoB) efforts to (i) improve the effectiveness and efficiency of policies and guidelines of the Brazilian environmental management system; and (ii) further integrate principles of environmentally sustainable development in the development agenda of key sectors.
What is most striking about the SEM DPL is its connection to nearly every major climate related legislative or policy initiative in Brazil. The loan lists as prior actions or triggers (Bank labels for conditions) the restructuring of IBAMA to speed up environmental licensing; the approval and implementation of a National Climate Change Action Plan and an Environmental and Social Institutional Policy for BNDES; the regulation of the Amazon Fund and the restructuring of Brazil’s Public Forest Management Law; the formulation of sub-sectoral social/environmental guidelines for key investment sectors such as energy, sugar cane - biofuels, cattle among others.
The expected results of the DPL predict increases in renewable energy production, fewer judicially challenged environmental licenses, reduced GHG emissions and deforestation, as well as full social-environmental screening, approval and monitoring of all new BNDES projects.
Civil society organizations with interest in the SEM DPL have written two letters to World Bank officials raising questions about the lack of full transparency or a clear consultation plan for a loan of this significance.
[6] In the context of the ongoing review of the World Bank’s information disclosure policy, the SEM DPL highlights one of the many weaknesses in the Bank’s current practices.
[7] Perhaps most surprising is the fact that no SEM DPL documents have been translated into Portuguese.
What information that has been made public points to a number of additional substantive concerns regarding the coherence of the Brazilian development policies supported by the DPL and the risks associated with the proposed modalities of Bank support. Among those risks outlined in greater detail in a policy brief, are the lessons apparently not learned about uneven performance of past WB policy loans to achieve improved environmental performance, the backpedaling on strategic environmental analysis tools for the energy sector, the gaps in arguments favoring expedited environmental licensing, and the absence of any public consultation plan for the formulation of a social-environmental institutional policy for BNDES.
$8 BILLION IN WB DPLs TO MEXICO
Since the crisis broke in late 2008, the Mexican economy has been hit harder than most in Latin America. The World Bank has responded in kind with nearly $8 billion in DPLs. Three DPLs totaling $4 billion have been approved since November 2008, and another 5 operations are slated to deliver an addional $3.8 billion in the coming months.
While these Mexico DPLs target a variety of issues (incentives for low carbon, green growth; health; cash transfers; housing; rural investment), one DPL stands out for the association with a series of controversial policy reforms underway or in debate. The $US 1,500 million WB Economic Policies in Response to the Global Crisis DPL provides support for changes in Mexican labor laws (reducing non-wage labor costs, flexibilization, support for the expansion of the temporary work program, or PET, in urban areas), furthering trade liberalization, customs reform, as well as fiscal and financial sector reforms. With the recent deliberate anti-labor measures taken against against electrical workers union in the capital, Luz y Fuerza, a DPL that is conditioned upon labor law reforms is being fast tracked to the World Bank Board on November 24th can only be viewed as a breach of transparency in a country with strong guarantees to freedom of information. The Economic Reform DPL was proposed in late September and has until recently had a 1.5 page descrption on the Bank's website. Just weeks before the Economic Reform DPL will go to the Board, the Bank has an 8 page project description (PID) on its website.
Considering that this DPL is conditioned upon a number a very controversial policy reforms and has provided virtually no space for public consultation on whether these are the most appropriate reforms upon which $1.5 billion in public debt should be conditioned. The Mexican case illustrates some of the more problematic aspects of the recent shift toward greater use of DPLs in the World Bank and the likely losses in transparency and accountability.
Background on DPLs
Development policy lending (DPL), or development policy operations (DPOs) more generally, came about as a replacement for structural adjustment lending which was seen as a lending mechanism full of Bank imposed conditions, which lacked meaningful input from the borrowing countries and were ineffective or counterproductive in terms of positive reforms in many countries.. Development policy lending was an attempt to re-focus the goals of fast-disbursing loans to include a development perspective and to reflect the borrowers’ demands.
In many ways, the emergence of DPOs are a softer and gentler form of conditionality to replace the adjustment loans that became a lightning rod for criticism of the World Bank. DPOs have conditions called “prior actions” for loan approval and “triggers” for loan disbursement, but these newly labeled conditions are no longer legally binding. This represents a loss of power by the World Bank in light of growing ability of borrowing countries to resist the imposition of lending conditionality of the past. While the legal framework for conditionality may have been softened with DPOs, these operations reflect a shifting form of Bank influence
DPOs aim to help the borrower achieve sustainable poverty reduction through a program of policy and institutional actions, for example, strengthening public financial management, improving the investment climate, addressing bottlenecks to improve service delivery, and diversifying the economy. This represents a shift away from short-term and widely controversial macroeconomic stabilization and trade liberalization reforms of the 1980s-90s towards more medium-term institutional reforms.
Development Policy Lending is addressed and governed by the World Bank’s Operational Policy 8.60.
Since the inception of DPLs by the World Bank in 2002, dependence on them has increased steadily. Support to Latin America during FY09 of $US 17 billion represents almost a third of total IBRD/IDA lending, and 42% of total IBRD lending. Fast-disbursing development policy loans comprised 51% of IBRD/IDA lending. These loans focused on key areas such as social protection, environment and economic policy with Brazil, Mexico, Argentina, Peru and Colombia being the leading borrowers.
Transparency and Accountability:
Development Policy Lending is addressed and governed by the World Bank’s Operational Policy 8.60, with extensive guidelines. In most respects, these separate operational policies constitute a weaker set of safeguards than those which accompany most Bank investment loans. Because the funding is fungible and the focus is more on the policy dialogue than on procurement and direct impacts, the social and environmental protections, for example, are inherently weak. This is a problem when the policy reforms involve national legislation that targets protection of the environment, but does not automatically trigger any meaningful, systematic consultation or disclosure obligations.
DPO (Development Policy Operations) have several products including: sector adjustment loans, subnational adjustment loans, programmatic structural adjustment loans and rehabilitation loans. The loans are balance of payments support; they are normally disbursed into the account of the borrower’s central bank and have no earmarks.
The purpose of Development policy loans is to help the borrower “address actual or anticipated development financing requirement that have domestic or external origins”. The DPLs do not try to fill a country’s debt (they realize that there are other financing options) but the Bank’s DPL is a contribution to close the debt gap. The borrowing government decides from whom they would like to receive money and how they will use the funds.
The total volume of a country’s DPL (or DPLs) is set out in the Country Assistance Strategy. The CAS spells out the percentage of total lending that should be carried out in DPLs. These loans carry certain conditions. The primary condition is that the borrowing country has an adequate macroeconomic policy. One of the criteria that the Bank uses to determine whether or not a country has aadequate macroeconomic policy is the presence of an IMF program. The conditions of the loan itself ought to be an agreement between the bank and the government. OP 8.60 says the following about conditions in DPLs: “Good practice staff guidance would suggest limiting the number and focusing the scope of conditions on key, fully country-owned actions that are critical for achieving the objectives and results of the operation.” The Country Assistance Strategy also contains the Deferred Drawdown Option for the borrowing country. DDO gives the borrower the chance to postpone drawing on a loan for a certain period of time.
The Program Document of a Development Policy Loan first goes to the World Bank Board, then to the borrower’s legislature, and then the public. In other words, there is no public document before the DPO is approved. The Program Document includes the DPL’s objectives, links to other/previous analytical work, knowledge of poverty and social consequences, effects environment, forests, natural resources and the Bank’s recommendations on how to reduce these negative effects while increasing the positive ones. These topics are discussed in the following paragraphs.
Development Policy Operations 8.60 (which went into effect in 2004) references various “Good Practice Notes” for further staff guidance. From the World Bank’s website one can find a “Good Practice Note on Development Policy Lending” from 2004. The 2004 operational policy 8.60 refers staff to a chapter of this 2004 Good Practice Note to provide further guidance on “Environment and Natural Resource Aspects in Development Policy Lending”. The OP 8.60 also refers staff to the “Good Practice Note on Poverty and Social Impact Analysis” which is a distinct document dated August 2008. The Operational Policy 8.60 refers to several other Good Practice Notes that went into effect in 2004 or 2005. The OP 8.60 also refers staff to a “Good Practice Note on Supporting Participation in Development Policy Operations”. In DPOs, the Bank encourages the country to consult with and engage the participation of stakeholders and civil society but this is not mandatory nor does the bank set minimum standards for consultation and public participation.
The DPOs are not subjected to the World Bank’s safeguard policies. The Bank has the responsibility of determining if a Bank operation is “likely to have significant social, poverty, or environmental effects”. There is a lack of transparency in this process as there are no mandatory requirements for these critical sectors. This crucial decision-making process is ambiguous and not subject to mandatory public consultation.
If the Bank determines that a DPL is indeed “likely to have significant social, poverty, or environment effects” it looks at previous analytical work to use in their recommendations for implementation. If previous analytical work (including ESWs) is not sufficient, a Poverty and Social Impact Analysis can be done. The two key elements of a PSIA are 1) an analysis to determine the distributional impacts and 2) a process that engages appropriate stakeholders in policy-making. Granted, the Bank suggests that much of the PSIA can be conducted outside the Development Policy Operation. While the PSIA promotes evidence-based decision making, there is no template for the PSIA. It should be done “upstream” that is before the loan is disbursed. The PSIA decision (whether or not they are undertaken/in what sectors) should be clearly explained in the Program Document. It is the responsibility of the borrowing government to incorporate PSIA findings into their programs and policies.
With regard to the Environment, Forests and other Natural Resources, the Bank carries out “due diligence” in “determining the likelihood of significant effects”. The Bank assesses the country systems to determine whether there is appropriate environmental management capacity to handle potential effects and recommend corrective actions. The Bank looks at previous analytical work for these recommended actions, (i.e. the Country Environmental Analysis). As is the case with the PSIA, any effects to the environment, forests or natural resources from DPOs must be mitigated by the borrower. This mitigation can take place outside the DPO (i.e. the country program). OP 8.60 does not specifically treat forests.
There are three types of DPLs; programmatic, multi-tranche, or single-tranche. Programmatic loans (DPL I, DPL II, DPL III) have various triggers for the sequential disbursement. These triggers are not legal and can be changed. Programmatic loans give the board, government and Bank more room for adjustment. These types of loans are often used if the implementation capacity of the borrower is uncertain. Multi-tranche loans, unlike programmatic ones, are legal and cannot change. Board approval is needed if multi-tranche loan triggers are changed. While the Bank is moving away from multi-tranche loans, they sometimes use them at the borrower’s request as in the case of India and Brazil. Single-tranche loans have certain conditions (just like the others) but there is no expectation of a series.
In conclusion, the Bank and borrower bear responsibilities in the approval and implementation process of a Development Policy Loan. The World Bank, must review (in conjunction with the IMF) the borrowers’ central bank and the country’s public finance management and procurement. In terms of publishing documents, the Bank does not have an obligation to publish the Memorandum of the President or the Program Concept Document. If the borrower objects, the Bank does not have to publish the Letter of Development Policy (sets out the actions, objectives and policies supported by the loan). The Bank does suggest ways to mitigate effects on environment, forests, natural resources, as well as poverty and social impact analysis. The Bank also looks at the loan’s outcomes and the Internal Evaluation Groups puts together an evaluation. An Internal Completion Report is also completed within 6 months of the closing date and is shared with borrowing government. The borrower’s responsibilities include the following: the letter of development policy, implementation, monitoring (which includes managing the effects on the environment and other DPL safeguard guidelines), and an evaluation of loan.
[1] For a summary of the controversy, see Koberle, Stephan (2003), Should Policy-Based Lending Still Involve Conditionality?, The World Bank Research Observer, Vol. 18, pp. 249-73.
[1] See First Programmatic Development Policy Loan for Sustainable Environmental Management (P95205), which as of August 20, 2009 has not disbursed. http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/0,,countrycode:BR~menuPK:64820017~pagePK:64414648~piPK:64414956~subTitle:All%20Loans~theSitePK:40941~pageNo:1~pageSize:Show%20All,00.html