Playing by the rules: the World Bank's failure to adhere to policy in the funding of large-scale hydropower projects.

• Author: MacDonald, Erin K.

1. INTRODUCTION

   The World Bank (the Bank) approved its first loan to a developing nation in 1948, providing funding for a hydropower project in Chile. (1) Between 1944 and 1994, the Bank has provided approximately $58 billion in funding for six hundred dams in ninety-three countries. (2) For many of these borrowing countries, the largest single loan they have received has been for the construction of a large dam. (3) In the 1970s, however, observers began to recognize the devastating impacts of numerous large-scale infrastructure projects funded by the Bank. (4) These critics alleged that the Bank funded projects without considering the environmental devastation, social disruption, or negative impacts on the economies of the developing nations it intended to aid. (5)

   The pressure from these observers, often comprised of nongovernmental organizations and numerous World Bank donor nations, triggered the Bank's interest in becoming more environmentally responsible. (6) In an attempt to mitigate negative environmental and social impacts of Bank-funded projects, the Bank has developed a system of operational policies and procedures to aid in the preparation and implementation of Bank projects. (7) Prior to project approval, the Bank requires Environmental Assessments (EAs) to be performed by the borrower to ensure proposed projects are "environmentally sound and sustainable, and thus to improve decision making." (8) For hydropower projects, the Bank requires that the borrower select an independent expert to identify potential environmental impacts, determine the scope of the necessary environmental assessment, assess the borrower's ability to perform the EA process, and advise the borrower on the need for an independent advisory panel. (9)

   For projects with significant social components, such as many large-scale hydroprojects, the Bank and the borrower must also consult the Operational Directives on Indigenous Peoples (10) and Involuntary Resettlement (11) early in the project approval process. The policy on indigenous people requires the Bank to involve the local communities at the project development phase to ensure that the indigenous people will benefit from the project. (12) Likewise, the policy on involuntary resettlement "encourages" community participation in resettlement planning. (13)

   Although the Bank has developed a comprehensive set of policies to deal with the environmental and social impacts of large-scale hydropower projects, it has failed to implement them. (14) For example, the Sardar Sarovar project on the Narmada River in India required the resettlement of 240,000 people; however, the project failed to account for the resettlement of 100,000 of them. (15) If the Bank had followed the Involuntary Resettlement procedures and encouraged the Indian government to consult with the public, this devastating oversight could have been avoided. (16) No matter how comprehensive the Bank's environmental and social policies may be, if the Bank continues to disregard them, the policies will have little effect.

   The Bank's inability to adhere to its policies can be attributed to the absence of regular monitoring requirements and the inherent disincentives for policy compliance in Bank projects. (17) A lack of regular monitoring limits the public's access to project information and impairs accountability. (18) To improve accountability in Bankfunded projects, the Bank created the Inspection Panel (the Panel) (19) in 1993. (20) The Panel offers an opportunity for those who believe they are being adversely impacted by bank projects (or their representatives) to request an independent review of bank activities. (21) The Panel's first report, on the Arun III hydropower project in Nepal, found that, among other things, the Bank had failed to comply with its EA policy requirements by not preparing an adequate EA. (22) The Panel's report caused the Bank to withdraw support for the project. (23)

   Although the Panel may improve accountability and resolve concerns over the Bank's inability to adhere to its environmental and social policies, the problem of inherent disincentives for policy compliance remains. (24) For example, the Bank has historically rewarded the approval of large loans regardless of the possibility of devastating social and environmental impacts associated with such large projects. (25) To improve compliance, the Bank must establish a task force to monitor the implementation of Bank policies. (26) In addition, the Bank must impose sanctions for non-compliance against both Bank staff and member countries to create an incentive for compliance. (27)

   This Comment examines the World Bank's environmental and social policies and how these policies impact hydropower project development. Part II discusses the World Bank generally and its traditional role in funding global development projects. Part II also identifies the Bank's difficulties in funding large-scale hydropower projects, and the environmental and social policy that has developed as a result. Part III analyzes the Bank's environmental assessment policies as they relate to hydropower projects. Part IV analyzes the social policies, such as resettlement and indigenous people, as applied to hydropower projects. Part V determines whether the reformed information policy and creation of the Inspection Panel may be used to address the problems of Bank compliance and suggests further ways to improve hydropower projects. This Comment concludes that although the Bank has demonstrated growing environmental awareness by incorporating considerations of environmental impact, public health and safety, and resettlement of local populations into current Bank policy, actual projects fail to demonstrate change in World Bank practices. (28) While changes need to be made to Bank policy--including required public participation and accurately appraised alternatives--significant improvements in the quality of hydropower projects require that the Bank more diligently implement current operational policies and procedures.

2. THE HISTORY OF THE WORLD BANK

   1. The Establishment and Structure of the World Bank

      On July 1, 1944, delegates from around the world gathered in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference. (29) Concerned about funding of post-war reconstruction in Europe and Japan, (30) the conference established the World Bank to "assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes." (31) As Europe began to recover, the Bank's focus shifted from reconstruction of devastated European communities toward poverty alleviation in developing nations. (32)

      The Bank is composed of member countries, now including one hundred eighty-three nations around the world, each represented by a governor who sits on the Bank's Board of Governors (the Board). (33) Although the Board possesses the ultimate power to govern the Bank, (34) a board of twenty-four executive directors, representing the governments of all of the member nations, meets several times per week to make decisions regarding the day-to-day business affairs of the Bank. (35) The Board's most important task is to approve every loan and major Bank policy, and, therefore, in many ways, is responsible for the success of projects and thus the success of the Bank. (36) However, the "pervasive secrecy" shrouding Bank operations--even Bank directors are denied access to some project documents weakens the accountability and validity of Bank management and practice. (37)

   2. The World Bank's Role in Global Development

      The World Bank is the largest development organization in the world. (38) The Bank lends $22 billion to projects annually, including $6 billion to the poorest countries in the world. (39) However, the Bank's ability to move money extends beyond its direct financial contributions. (40) The Bank's Office of Co-financing and Financial Advisory Services recruits additional funds from multilateral and bilateral agencies as well as commercial banks for the co-financing of hydropower projects. (41)

      Traditionally, the Bank has funded large-scale infrastructure projects in developing nations, including transportation, agricultural development, and electrical power projects such as hydropower dams. (42) The Bank began financing large dams in the 1950s, allocating over $1 billion per year for the development assistance of large-scale dams. (43) The Bank and developers anticipated not only generating inexpensive electricity for developing nations, but also contributing to those nations' national economies by increasing irrigation and tourism and, in turn, creating jobs in these sectors. (44) For the period between 1970 and 1985, the World Bank's financing of large dams reached a peak of $2 billion annually. (45)

      In the late 1980s and early 1990s, Bank funding of hydropower projects declined because of public criticism of the failure of Bank policies to consider the negative environmental and social consequences of these projects. (46) Damming rivers submerges rich forests, eradicates wildlife species, creates reservoirs that foster waterborne diseases such as malaria, water-logs lands decreasing agricultural efficiency, (47) and causes the physical and economic displacement of local communities. (48) The Bank's lending for large-scale projects increases the debt of the borrowing nations, making it more difficult for the developing nation to develop and succeed on its own, while providing lucrative contracts for donor nations' companies. (49)

      In response to public criticism and the Bank's growing concern for the environment, the Bank began to provide lending for entirely environmental projects as well as technical assistance to improve the environmental policies and enforcement procedures of developing nations. (50) In addition, the Bank made attempts to mitigate the potential environmental and...