Some Observations Regarding Environmental Covenants and Conditionalities in World Bank Lending Activities

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References

2 There are no criteria to distinguish between reconstruction and develop- ment projects in the World Bank's Articles of Agreement. 3 Article 1 of the Articles of Agreement. Of course, the Bank is a cooperative institution whose resources are available only for the benefit of members.

4 In practice, the IBRD has lent more often than it has used its guarantee powers. Guarantees were intended to be the primary means of financing followed sequentially by co-financing and direct loans in case private capi- tal was not available at reasonable terms. The World Bank's Executive Di- rectors approved a policy for mainstreaming the guarantee instrument in Bank operations especially for infrastructure and energy projects in devel- oping countries, see T. Hassan, "Legal Aspects of World Bank Financing", Butterre�orths Journal of International Banking and Financial Law 13 (1998), 284 et seq., (286). 5 Those having per capita income below US$ 1465. 6 For the purpose of this paper, the World Bank is referred to as IBRD and IDA except if one of the two agencies is explicitly singled out. 7 IBRD Articles of Agreement- UNTS Vol.2 No. 20 (b), amended by TIAS No. 5929, 16 December 1965, and IDA Articles of Agreement- UNTS Vol. 439 No. 6333. 8 Hassan, see note 4, 288.

9 A.O. Krueger, "Whither the World Bank and the IMF ?", Journal of Eco- nomic Literature XXXVI (1998), 1983 et seq., (2007). 10 These non-project financing instruments have been developed to address the severe balance of payments issues in the 80s, and have been subjected to two conditions: (1) deterioration of the borrower's balance of payments, and (2) willingness of the borrower to formulate and implement a suitable program of structural adjustment. See Hassan, see note 4, 289. 11 In general, these institutions make specific arrangements for the World Bank to manage funds on their behalf or establish trust funds for which the World Bank is designated as trustee. 12 World Bank portfolio dedicated to environmental projects includes a total of US$ 10.7 billion and its growth is continuing (1998). See Five Years after Rio. Innovations in Environmental Policy, World Bank (ed.), Environ- mentally Sustainable Development Studies and Monographs Series No. 18.

13 It is a fact that the Bank's policy leverage increases with the concessional content of its loans, and decreases with the borrower's ability to turn else- where for needed funds, and so varies tremendously across countries and sectors. 14 I.F.I. Shihata (ed.), The World Bank in a Changing World, Selected Essays, 1991. 15 Ch. Di Leva, "International Environmental Law and Development", Geo. Int'l Envtl.L.Reu 10 (1997/1998), 501 et seq., (505). 16 Di Leva mentions that "Since its beginning, the Bank has been applying policies linked to environmental protection". He mentions a water re- source management project concerning the Indus River system and the Aswan Dam project in Egypt which were both criticized on various grounds, environment being the less important, see above at 519. 17 OMS 2.36. 18 Di Leva, see note 15, 520. 19 Environmental Directive 4.00 Annex A (1989) and 4.01 (1991) on environ- mental assessment. Operational Directive 4.01 has been converted into the new policy format which comprises Operational Policy (OP), and Bank Procedure (BP) which are binding upon Bank staff, and Good Practices (GP) which are non-binding, collectively referred as OP/BP/GP.

20 Bank projects are classified in three categories (A, B, C) to determine the appropriate level of environmental analysis and assessment to which they will be subjected. A Category A project is likely to have significant "ad- verse environmental impacts that are sensitive, diverse or unprecedented..." OP 4.01 is submitted to a full environmental assessment. A simple envi- ronmental analysis is required for a Category B project. A Category C project is a project which has no adverse impact on the environment and would not be subjected to any environmental analysis or assessment. A fourth category exists - called a Category Fl project which involves in- vestment of Bank funds through financial intermediary in subprojects that may result in environmental assessment. Subprojects under a Fl Category project would have to be categorized individually as category, B or C proj- ects. 21 This comprehensive policy document is the sum of all applicable environ- mental policies including: OP/BP/GP 4.01 on Environmental Assessment (EA); OP 4.04 on Natural Habitats; OP 4.09 on Pest Management; Opera- tional Directive (OD) 4.20 on Indigenous Peoples; OD 4.30 on Involun- tary Resettlement; OP 4.36 on Forestry; OP 7.50 on International Water- way ; and the Operational Policy Note 11.03 on Cultural Heritage. See be- low on some of these policies. See Di Leva, see note 15.

22 Disclosure Policy, 1993. See LF.I. Shihata, The World Bank and Non- Governmental Organisations, 1995; id., The World Bank in a Changing World, Vol. IL, 1995, 237 et seq. 23 This aspect has been tremendously deepened after the establishment of the Inspection Panel in 1993. See LF.I. Shihata, The Inspection Panel, 1994. 24 OD 4.01 on Environmental Assessment served as model for the drafting of various domestic legislation in developing countries, and the principle of environmental assessment has been introduced in the legal system of vari- ous borrower countries to help these countries comply with Bank policy first and expand the scope of EA in development activities. 25 This was the case in the Gafsa Phosphate Project in Tunisia (Loan 1042; app.1974) which is a mining project. Mining operations produced waste such as sludge containing phosphate to be dumped into a seasonal river ba- sin. It was found at appraisal that since the project did not raise any eco- logical issue, the inclusion of any covenant to that effect in the loan agree- ment was not necessary. When the project was completed, some washing of the sludges occurred during the rainy season carrying them downstream. As a result, potential for contamination of groundwater existed at the so- called chott or depression area where the riverbed met the groundwater close to the surface. The problem remained unresolved. 26 See Krueger, see note 9.

z� I.F.I Shihata, "The World Bank and the Environment: Legal Instruments for Achieving Environmental Objectives", in: id., The World Bank in a Changing World, VoI.II, see note 22, 183 et seq. z8 After suffering from criticism for its poor environmental and social track record, especially with allegations that its lending for transmigration in In- donesia, Road building in Brazil and support to large dams building in various countries were accelerating tropical deforestation and impoverish- ing indigenous peoples, the Bank responded by policy development actions designed to prevent its financing from harming the environment or the in- terests of vulnerable groups, including prohibition of financing logging in primary tropical forests (OP 4.36). However, the issue of compliance with Bank's environmental policies is still to be dealt with in a practical and effi- cient manner to ensure the passage from a "do no harm agenda" to a real "sustainable development financing". See below. 29 The Bank established mandatory Environmental Assessment (EA) proce- dures in 1989 through an Operational Directive (OD 4.01). This directive has been issued into a new Operational Policy/Bank Procedure/Good Practices -OP/BP/GP- format. In addition to the EA policy, other Bank's policies with an important environmental content include those related to Indigenous Peoples (OD 4.20 of September 1991); Natural Habitats (OP 4.04 of September 1995); Forest, Water Resources Management (OP 4.07 of July 1993); Pest Management (OP 4.09 of July 1996); Involuntary Reset- tlement (OD 4.30 of June 1990). The bank is currently reviewing and re- issuing major environmental policies including those related to indigenous peoples, involuntary resettlement and forestry. 30 OD 4.01 has been converted to the new OP/BP/GP format as OP 4.01.

3i For a Category A project, an environmental management or mitigation plan is often required. The environmental management plan is an "instru- ment that details (a) the measures to be taken during the implementation and operation of a project to eliminate and offset environmental adverse impacts, or to reduce them at acceptable levels; and (b) the actions needed to implement these measures"- OP 4.01- Annex A. 32 When actions need to be taken before the project appraisal, the Bank will require compliance with them through separate communication with the borrower. The Bank in general communicates through exchange of letters following a pre-appraisal mission or the analysis of the environmental as- sessment documents. In general the Project-appraisal documents will men- tion the borrower compliance with these environmental requirements. When actions have to be taken before negotiations, they are mentioned in the project appraisal document, and the minutes of negotiations would mention the borrower's compliance with them.

33 G. Handl, "The Legal Mandate of Multilateral Development Banks as Agent for Change toward Sustainable Development", AJIL 92 (1998), 642 et seq., (663). 3a See for example Botswana, Shashe Project Loan 776- 1971 (Section 4.08 -a- "The Borrower shall take all action, including enactment of pollution leg- islation and regulations, required to ensure that the operations and emis- sions of the mining Project and of the Project shall be conducted with due regard to public health and the preservation of the environment...". Kenya, Second Forestry Plantation Project, Cr. 565-KE; 1975 (Section 3.06- "The Borrower shall take all reasonable measures to ensure that the execution of the Project is carried out with due regard to ecological and environmental factors...". El Salvador, Ahuachapan Expansion, Loan 1288, 1976 (Section 3.04- "The Borrower shall take all necessary measures, satisfactory to the Bank, to ensure that the Ahuachapan plant is operated with due regard to ecological and environmental factors, particularly with regard to disposal of geothermal effluents...".

3s If the condition referred to is not satisfied, the negotiations can not take place. 36 If such condition is not satisfied, the agreement does not become effective and therefore can not be implemented. 3� In case the condition is not satisfied at a certain point of project imple- mentation, the disbursement of the loan, grant or credit will be suspended. In some case, the suspension of disbursement may affect a specific compo- nent of the project that has been targeted by the conditionality. 3g It is a central issue dealing with project effective implementation. Crucial to the effectiveness of any legal covenant and conditionality is the way all stakeholders, including borrower country officials, executing agencies, project beneficiaries and project affected peoples, have been involved in project design. 39 At that point all covenant and/or conditionality implications are assessed within the social, institutional, political and environmental context of the country.

40 K.W Piddington,"Sovereignty and the Environment: Part of the Solution or Part of the Problem?", Environment 31 (1989), 18-20, 35-39, (18). 41 B. Conable, former President of the World Bank, has declared in a speech at the World Resource Institute, that "[w]e have not yet arrived at the point where, like peace and security, the restoration and preservation of the health of planetary ecosystems is perceived as factor of the highest com- mon welfare ... [and] unless and until the industrialized world is prepared to accept and act upon its own environmental shortcomings, it will be dif- ficult to persuade developing nations that there is such thing as a collective global responsibility for our planet's health", in: International Environ- ment Report (BNA), 1989, 356 and PA. Rodgers, "Looking at Gift in the Mouth, The World Bank and Environmental Accountability", Geo.lnt'l EM�t/.Z,.7!M'. 3 (1990), 457 et seq. 42 Piddington, see note 40. 43 Piddington, see note 40, 18. 44 Y Berthelot, "Are International Institutions in Favor of Environment?", in: L. Campiglio (ed.), The Environment After Rio, 1994, 267 et seq., this author writes: "The developed countries will consider significant transfers to help pay for the "greening'' of developing countries only if those coun- tries undertake economic (and, in some cases, even political) reforms. This attitude is regarded by the developing nations as a clear transgression of their sovereignty. Similarly, the developed countries want to retain control

over any resources which they do transfer, whilst the developing countries prefer to be able to dispose of these resources as they judge best", at 275. a5 K. Ginther, E. Denters and PJ.LM de Waart (eds), Sustainable Develop- ment and Good Governance, 1995, also G. Taylor, Financing Sustainable Development, Report of the 3rd Talloires Seminar on International Envi- ronmental Issues, Tufts University, 1985. 46 F. Falloux, L.M. Talbot, Crisis and Opportunity. Environment and Devel opment in Africa, 1993, which provides an excellent analysis of the Na- tional Environmental Action Plan preparation process in African countries and the role played by the World Bank and donor community. 47 OP 4.02 "Environmental Action Plan'' which states "The Bank encourages and supports the efforts of borrowing countries to prepare and implement an appropriate Environmental Action Plan (EAP) and to revise it periodi- cally..." [ the EAP preparation process "is expected to form an inte- gral part of the overall national development policy and decision making". It should be noticed that this policy has been frequently criticized.

48 It is important to mention here that within developing nations, a real envi- ronmental awareness has been observed, especially in those countries which have suffered from important damage to their environment (India, Brazil, Algeria, South Africa, Sri Lanka). For example, it was a public out- cry by a Sri Lankan-based environmental NGO that led to unprecedented environmental conditionalities and safeguards in a World Bank credit. 49 What have been called "big dam controversies'' have forced the Bank to strengthen its policy on Dam financing, and to impose rigorous conditions on any country. After the controversy over the Sardar Sarovar Dam project in India, the Bank placed a number of substantial conditions on any further support to the project. India, unable to meet those conditions withdrew its request for Bank support and has continued the project on its own.

50 Shihata, see note 14. 51 The latter is mainly used for GEF projects implemented by the World Bank. s2 The levels of emission acceptable to the World Bank are set forth in the Pollution Prevention and Abatement Handbook, 1998. 53 Among these, WHO and FAO standards are widely used in developing countries. 54 The environmental assessment may also recommend alternative emission levels and approaches to pollution abatement for the Project. The World Bank will review the EA to ensure its consistency with its policy and advise the borrower on any issue related to EA implementation. ss Ph. Sands, "International Law in the Field of Sustainable Development: Emerging Legal Principles", in: W Lang, Sustainable Development and International Law, 1995, 53 et seq. One of these covenants and the oldest one reads as follows: the borrower affirms "its commitment to carry out the project with due diligence and due respect for environmental and eco- logical factors". This statement is now widely accepted in international re- lations and is considered as a ground for the development of a general prin- ciple of law.

56 U.S. v. Canada, R1AA Vol.3, 1907. 57 Case Concerning The Gabcikovo-Nagymaros Project (Hungary v. Slova- kia), ICJ Reports 1997, 7 et seq.

58 Shihata, see note 22. 59 J. Meinel, Environmental Covenants in Development Loan Agreements, World Bank Internal Paper, 1987, 2.

60 Sometimes specific measures may include: the demarcation of nature re- serves, a study to determine the need for additional nature reserves, the gazetting of treated land by increased pressure from farmers as forest re- serves and all are partially implemented.

61 This category of projects and the problems it raised is very well known across all regions.

62 Shihata, see note 14. 63 Now, it is more common to have a clear reference to pollution control standards in the legal document. The Pollution Prevention and Abatement Handbook (1998) is a good reference for different types of projects for which it provides good reference standards which the World Bank staff should follow when appraising projects.

64 For all these types of actions, see above the description of the specific envi- ronmental covenants. 65 In the framework of the regional project (Solid and Ship-Generated Waste Management Projects) in the Caribbean Region, 1995 (Antigua & Barbuda, Commonwealth of Dominica, Grenada, St. Kitts & Nevis, St. Lucia and St. Vincent & The Grenadines) the Bank provided a GEF grant and credit or loan for each of these countries. As a condition of effectiveness for each country component, it was agreed that an environmental assessment be completed for landfills to be financed, a legislative framework for waste management be developed and put into effect, including the establishment of an independent waste management unit in each country, and that each country should reach agreement with other funding agencies for parallel- financing of specific project's component.

66 As part of the Structural Adjustment Credit (SAC III), to Cameroon ( 3 August 1998), it was agreed that as a "condition for the release of the sec- ond tranche of the credit" would be that the Government "has adopted regulations" related to forest management and "defined a strategy , satis- factory to the Association, for the delimitation of areas which may be awarded as concessions, taking into account requirement for sustainable forestry land-use management", Annex II to the Credit Agreement. 67 Shihata, see note 14. 68 Environmental conditionalities are sometimes prior conditions to loan, credit or grant effectiveness. A GEF Grant Agreement related to a Biodi- versity Conservation and Management Project states in its article VI that as condition of effectiveness, "the Recipient shall have issued the decree on fauna implementing the Recipient's Forest Law 94-01 ", 22 May 1995. 69 For the same GEF project cited here above, see note 68, a condition of ef- fectiveness has been included requesting the recipient to sign "contracts, satisfactory to the Trustee, with selected non-governmental organizations (NGOs) responsible for Project implementation".

70 These are called "Performance Indicators". 71 These will be found in the Pollution Prevention and Abatement Handbook (August 1998) which succeeded the World Bank Environmental Guidelines that were published in 1988 to provide technical advice and guidance to staff and consultants involved in pollution-related projects. The Handbook comprises three major parts: on "key policy lessons", "implementation of policy objectives" and "detailed requirements" to be taken into account in the preparation of World Bank Group financed or guaranteed projects. The Handbook is specifically designed to be used in the context of the Bank's environmental policies set out in OP 4.01 and related documents. 72 It happened in some cases that compliance with specific environmental covenants was not always successful. In one case the World Bank requested the borrower to prepare a suitable legislation including sanctions and re- quirements of a regular monitoring for an orderly development of the country groundwater resources. It was agreed that the Government would appoint an expert committee to review the issue and that the Committee would submit its proposals for review by the Bank by a certain date. After project completion, an audit has revealed that the Government failed to regulate groundwater exploitation and to draft any legislation on this. The exploitation of groundwater continued in a rather non-rationalized man- ner. 73 Meinel, see note 59. 74 Algeria: Loan Agreement for the Industrial Pollution Control Project 4034 of June 1996, in Schedule 2 annexed to the agreement it was specified, that

the borrower will undertake the following: "Part B. 1. Dismantling and de- contamination of the sulfuric and phosphoric acid plants...; 3. Rehabilita- tion of the gas treatment system in the nitric acid plant...; 4. Installation of a scrubber or a granulator...; 6. Support in the area of plant operation and management, and workers' health and safety standards, ... and Part C. "In- stallation of dust removal systems ... and of suitable door cleaning system in the coke ovens...; 2....equipment for the construction of two wastewa- ter treatment plants and the renovation of the existing biological wastewa- ter treatment plant...; Provision of laboratory equipment to monitor pol- lution...". 7S Section V of the Global Environment Facility Trust Fund Grant Agree- ment related to the Western Indian Ocean Oil Spill Contingency Planning Project, between the IBRD and the Indian Ocean Commission acting on behalf of the member countries to the Victoria Agreement of 10 January 1984 namely, Federal Republic of Comoros, the Republic of Madagascar, Republic of Mauritius and Republic of the Seychelles.

76 In this case the recipient was the Secretariat of an international convention, acting on behalf of seven country members to the Convention and man- dated by them to implement the project. � Section VI lit. (b) of the above-mentioned Agreement in note 75. 8 Although specific environmental actions are often described as part of the Project, remedies have not been used against borrowers who failed to per- form its obligations under a loan agreement. In the case of the Sebou II Development Project (Morocco), sugar factories along the Sebou River were believed to contribute substantially to water pollution. To address the issue of water pollution, the Project provided for a study of existing in- dustrial pollution in the lower Sebou river to be performed and, if justified by such a study, the construction of an effluent treatment plant to prevent pollution by the wastewater of the sugar cane industry. The study was not carried out and the fund allocated for the purpose of building the effluent treatment plant were eventually canceled. A new pollution control project is being prepared to address the Sebou river pollution issue. 79 The Global Environment Trust Fund Grant Agreement related to the Wildlands Protection and Management Project, between the IBRD and the Republic of Congo, dated 4 March 1993, Section 5.01 lit.(c).

so During the project implementation, the government has granted a logging permit for a forest area close to a project site. The World Bank insisted on reviewing the limits of the concession, to make sure that it would not im- pact the core reserve where the project's conservation work has been fo- cusing. 1UCN, which was spearheading the conservation work at that site, has met with the logging company and negotiated a series of safeguard measures to ensure that its activities are consistent with conservation in the core reserve, including support for anti-poaching patrols and an alternative food supply system to minimize the consumption of bushmeat. 81 The project site in question is Dimonika, which has been classified as a bio- sphere reserve by UNESCO and is considered as a high value area for its biological diversity patrimony.

8z In one case, it has been recognized that even though the Government was willing to implement an environmental covenant, this has not happened be- cause the Project does not provide the necessary funding and the Govern- ment lacked funding to finance the agreed measures. It was decided to amend the projects legal document and to transfer resources from another category of activities to fund the necessary environmental actions. 83 This solution is rarely used by the Bank staff who favours the continuation of a constructive dialogue with the borrower to find ways to adjust the situation created by non-compliance with a legal agreement. 84 This path has not been followed due to the negative effects of its use on the Bank's relationship with the borrower involved, cf. LF.I. Shihata, "Imple- mentation, Enforcement and Compliance with International Environ- mental Agreements — Practical Suggestions in Light of World Bank's Ex- perience", Geo.lnt'lEnvtl.L.Rev. 9 (1996/1997), 37 et seq. 85 In such cases, modification and/or amendment to the legal documents may be needed to adjust the obligations of both partners. 86 See above, under IV

S7 Bank Procedure 17.50 on Disclosure of Operational Information, issued in September 1993. It is also appropriate to mention the Good Practices 14.70 on Involvement of Non-Governmental Organizations, in: Bank-supported Activities issued in March 1997. 88 This includes not only a new quality at entry review, but also the review of Bank projects by a Quality Assurance Group and finally the evaluation of all projects by the Operational Evaluation Department, which is an inde- pendent evaluation unit within the Bank. OED's function is to evaluate projects after their completion. OED looks at all aspects of the project in- cluding its environmental features. OED's reports include recommenda- tions and are submitted to the Board. 89 However, the Inspection Panel shall not investigate such complaints with- out the prior approval of the World Bank's Board of Directors. See Memo- randum of the Senior Vice-President and General Counsel — "Role of the Inspection Panel in the Preliminary Assessment of Whether to Recom- mend Inspection" dated 3 January 1995, ILM 34 (1995), 503 et seq. 90 Although this is the general and explicit mandate of the Inspection Panel, the Board of Directors of the World Bank issued a Resolution related to the "Clarifications of Certain Aspects of the Resolution Establishing the Inspection Panel" (17 October 1996) which clarifies the role of the Inspec- tion Panel to review the consistency of the Bank's practice with any of its policies and procedures; see The Inspection Panel, Annual Report 1996-97, 1997, 30.

9i See Di Leva, see note 15, 512-513 and on the same subject Handl, see note 33.

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