Protections in infrastructure financing

Asia is gearing up for increased infrastructure financing to support the drive for stronger economic growth. -- PHOTO: AFP
Asia is gearing up for increased infrastructure financing to support the drive for stronger economic growth. -- PHOTO: AFP

ASIA is gearing up for increased infrastructure financing to support the drive for stronger economic growth.

That is good news for narrowing the perennial problem of infrastructure gaps in energy and transport that block growth in many economies.

But, unless accompanied by protective safeguards, these projects risk damaging the environment, climate and communities - and hindering growth.

This must be a top concern for both the established lenders, such as the World Bank and Asian Development Bank (ADB), and the two new lenders for development: the Asian Infrastructure Investment Bank (AIIB), planned to be established in Beijing later this year, and the New Development Bank of Brics countries.

Recall the 2010 BP-Amoco Gulf of Mexico oil spill in the United States which cost US$25 billion in damages and clean-up. In the second half of the 20th century, discharges from factories and mines severely hurt people's health in Minamata Bay in Japan and the island of Marinduque in the Philippines.

New road projects in forest areas in Brazil contributed to massive deforestation while forest fires in Indonesia caused large-scale air quality disasters in South-east Asia. The Sardar Sarovar Dam on the Narmada River in India eventually displaced over 200,000 people, far more than planned, while China's Three Gorges Dam displaced six times as many.

The gain from avoiding damage would be several times higher than the cost of taking preventive action. For example, the environmental benefit of pollution abatement is three to 10 times the cost of such mitigation, according to some estimates. The benefit of preserving biodiversity may be in avoiding a trigger for an ecosystem collapse.

In recognition of these risks, development banks have, for decades, required safeguards in their loans. The scale of the needed response can be huge but necessary: The Ertan 1 hydropower project on China's Yalong River successfully resettled 46,000 people.

Development banks must continue to improve safeguard policies, including support for ensuring the adequacy of countries' safeguard systems. ADB revised its safeguard policy in 2009 and the World Bank is now doing the same, which could influence others. The original World Bank proposal was widely criticised for weakening the obligation for safeguard compliance. World Bank president Jim Yong Kim has assured that the revision will not mean a "dilution". Earlier last month, ADB president Takehiko Nakao and Mr Jin Liqun, secretary-general of the Multilateral Interim Secretariat of the AIIB, jointly stressed "the importance of safeguards policies on environmental and social impacts of projects".

These commitments are critical because in the push for faster growth, businesses increasingly regard safeguard provisions as an onerous cost to be tolerated or avoided. Safeguard regulations are also being violated.

The vital question for established banks and newcomers alike is twofold: what is a desirable scope of safeguards, and how to get good compliance. There is a growing consensus on the question of the "what", but the "how" remains highly problematic.

In particular, growth concerns press for greater flexibility in how safeguards are implemented. By citing a need to alleviate the burden for borrowers and executing agencies, it is tempting for alterations or new proposals to relax requirements for mitigation when approving a project and table them later instead. But rather than diluting safeguard policies this way, development banks should adhere to delivering sound safeguards while seeking greater efficiency and speed by reforming internal procedures.

Indeed, sound economics argue for enforceable actions to rectify market failures that cause spillover damage from public and private investment. At the start of projects, and not just those supported by development banks, there has to be a binding mitigation plan based on established and clear rules, and compliance with the plan ought to be verified by an independent party and disclosed publicly.

Multilateral banks need to make improvements in their safeguard policies, which could provide lessons for the new agencies as well. But the changes sought need to be about strengthening safeguard implementation to get better environmental and social results, and not about weakening compliance and enforcement of the regulation.

Development banks must aim for better environmental and social impacts from safeguards as they expand infrastructure investment. That includes support for commitment, capacity and systems in countries to strengthen these defences and their efficiency.

The author is director-general of independent evaluation at the Asian Development Bank, and held the same position at the World Bank. A longer version of this article was published by Future Development at Brookings, Washington D.C.