Strengthening Safeguards for Development Policy Loans

Lundrim Aliu / World Bank

World Bank Development Policy Loans (DPLs) are programmatic loans that largely fund policy reform in borrowing countries. DPLs are often made through rapidly-disbursed budgetary support, rather than project-based investments like dams, roads and other physical infrastructure. DPLs were created in 2004 by merging Sectoral Adjustment Loans (SECALS), Structural Adjustment Loans (SALs), and other instruments.

Despite being tied to similar, and sometimes even greater environmental and social risk than investment projects, DPLs are subject only to stand-alone policy OP 8.60 and not the Bank’s full suite of safeguards.

The World Bank recently released its 2015 Development Policy Financing Retrospective after two phases of public consultation. The 2015 Retrospective determines that “OP 8.60 has appropriate provisions for ensuring that social and environmental requirements in DPFs are adequately addressed” (p. 55). BIC and others remain concerned, however, that OP 8.60 is not robust enough to consistently and comprehensively identify and manage indirect and long-term risks to communities and the environment.

In July 2015, the Bank’s Independent Evaluation Group (IEG) published a report revealing significant gaps in how environmental and social risks are managed through OP 8.60 in development policy financing (DPF). Below are some of the key problems identified in the report, titled “Managing Environmental and Social Risk in Development Policy Financing”:

• Focus on direct, short-term impacts over indirect, longer-term impacts
• Ambiguity in the sequencing of requirements in the policy- i.e. environmental and social risks can be identified before comprehensive analytical work is carried out
• No formal or required role for qualified environmental and social specialists
• Lacking requirements and incentives for environmental and social risk identification and reporting.

IEG finds that after a policy action is implemented, there is at present no formal system in place in the Bank to monitor and evaluate environmental and social risks and their mitigation in DPF (IEG 2015, xi).

The pressure to deliver operations quickly, combined with the lack of a formal role for environmental or social specialists, provide incentives for task teams to deprioritize management of environmental and social risks in DPOs [Development Policy Operations] (IEG 2015, xii).

In light of these issues, BIC and our civil society partners have campaigned for DPLs to be included within the scope of its integrated safeguards framework (see BIC’s primer on why safeguards should apply to DPLs here). While the 2016 Environmental and Social Framework covers only project-based investments, BIC continues to work with key allies to advocate for strengthened environmental and social policy protections for communities and ecosystems affected by DPLs.

 

Los Amigos Conservation Concession, Madre de Dios, Peru

 

DPLs and Climate Change

NEW: BIC reports find World Bank is undermining its own climate change commitments and forest protection efforts through Development Policy Financing

Between fiscal years 2005-2015, the World Bank Board approved $117 billion in development policy financing. While certain DPLs are specifically designed to create climate-smart investment incentives, most DPLs aim to boost private sector investment regardless of whether it will be carbon-intensive, even in countries whose poor stand to be most affected by climate change.

BIC’s analysis of the Bank’s Peru portfolio in a 2015 report reveals that reforms supported by DPLs over the last two decades boosted the export agriculture, mining and hydrocarbon sectors at the expense of Peru’s forests and water supply. While the Bank more recently funded a series of Environmental DPLs to try and address this, the loans were not able to reverse Peru’s increasing climate vulnerability.

In order to ensure climate risks are addressed in DPLS, BIC recommends that Bank policy lending be covered by a strong climate directive that prohibits its borrowers from using Bank money to subsidize fossil fuels, and that includes a quantitative greenhouse gas (GHG) emission threshold. The directive would ensure that the Bank supports low-carbon investment incentives and promotes resource efficiency in all of its policy loans. BIC urges the World Bank to operationalize these asks in order to honor its commitments post-Paris and ensure that its policy lending supports keeping our world under 2°C.