A BNDES Meeting in April 2011.
Original image by flickr user Raimundo Colombo (Creative Commons BY 2.0)
A new evaluation of a $1.3 billion World Bank development policy loan to promote sustainability reforms at the Brazilian National Bank for Economic and Social Development (BNDES) that questions the effectiveness of DPLs due to weaknesses in existing Bank policy guiding their design and execution. This brief calls for the reform of Bank DPL policy as an urgent part of the ongoing revision of World Bank safeguard policies to ensure consistent management of risk across all World Bank operations.
This brief is the second part of a two part analysis of Development Policy Lending by the World Bank that explores the WB SEM DPL to BNDES as an emblematic example of this evolving and tenuous relationship between the World Bank and its largest, most influential clients. Part I of this analysis focused on the evolution and trends in DPL use by the World Bank as a reflection a rapidly expanding and complex dimension of the World Bank’s relationship with its largest clients. Since 2004, development policy operations (DPLs) have emerged as a preferred financial instrument for a growing number of World Bank clients, including many in Latin America. Despite the popularity of DPLs and innovative use in new areas such as promoting reforms in environmental governance, concerns are mounting about the effectiveness and accountability of these instruments.
The Brazilian SEM DPL emerged on a fast track in late 2008 in response to the financial crisis to anchor the World Bank’s $15.3 billion Country Strategy with Brazil. The SEM DPL series follows prior World Bank analytical and financial support for the Brazilian government efforts to promote the sustainable management of Amazon agricultural lands, forests, and water resources; reduction of deforestation in the Amazon; reduction of the environmental degradation of land, water, and other resources which are key determinants of the well-being of the poor; and promotion of renewable energy.
In March 2009, the World Bank approved a two tranche $1.3 billion Sustainable Environmental Management Development Policy Loan (SEM DPL I) to Brazil that was designed to strengthen social and environmental policy reforms at Brazilian National Bank for Economic and Social Development (BNDES) – Latin America’s largest development bank and other government institutions. The SEM DPL I, with a planned $700 million follow on loan (SEM DPL II) was intended to build institutional capacity and enhance the country’s environmental management system, integrate sustainability concerns in the risk assessment of investment in key sectors and help integrate Brazil’s climate change agenda across all sectors.
From the outset, the SEM DPL was criticized by civil society for lacking adequate transparency, participation and accountability. A controversial $500 million second tranche disbursement in late December 2010 appears to lack evidence of full compliance with the loan’s policy triggers and may have provided indirect support for the BNDES financing of the 11,000 MW Belo Monte dam. Greater scrutiny of the SEM DPL by civil society organizations, the Brazilian Federal Prosecutor’s office in Pará and World Bank Executive Directors contributed to Brazil’s decision to forgo the final $700 million SEM DPL II in March 2011.
The problems identified in the design and execution of the SEM DPL, analyzed in this brief, repeat many aspects of the experience of an earlier environmental DPL to Brazil, including the premature cancelation of the final programmatic disbursements and associated reform components.
The first section of this brief surveys the emergence of BNDES within context of rapid growth in Brazil and the implications for change in social and environmental standards for development finance. The second section examines the World Bank response to Brazil as a context for understanding the evolution of the SEM DPL and identifying the central issues at stake in assessing the effectiveness and additionality of this important World Bank investment. The third section of the brief reviews the evidence (official and unofficial) to assess the effectiveness and additionality of the SEM DPL. The analysis relies on nearly three years of communication with the World Bank and other stakeholders in Brazil by a small group of civil society organizations that have expressed a demand to participate in the loan design and implementation at all stages of the project cycle. Finally, the brief draws some lessons from the SEM DPL experience in Brazil at three levels: a) the performance of the SEM DPL according to its own results framework; b) the performance of the World Bank’s Operating Policy for DPLs; c) the social and environmental risk management system at BNDES.