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The World Bank

The Earth Times
June 30, 1995

The Earth Times
Friday, June 30, 1995
As Congressional budget cutters in Washington prepare to slash US funding for the World Bank by as much as 50 percent, the Bank is desperately trying to polish its tarnished image and rescue its funding.

Hard questions posed by a new report

As Congressional budget cutters in Washington prepare to slash US funding for the World Bank by as much as 50 percent, the Bank is desperately trying to polish its tarnished image and rescue its funding. For the first time in its 50-year history, the World Bank bought advertisements in major US dailies that claimed credit for great economic progress in developing countries, and touted the World Bank as a good investment for US taxpayers-one that provides contracts and jobs for American companies.

The recent ads, which ran several times in New York and Washington newspapers, appear to be just the beginning of a major new public-relations offensive by the World Bank. The campaign is directed by Mark Malloch Brown, the former media consultant and UN official who is now the Bank’s Director of External Affairs. Assisting Malloch Brown is Herb Schmertz, formerly with Mobil Oil, known for his aggressive dealings with the media. According to news reports, they have drawn up an impressive list of advertising companies and communications strategists who will make their pitch to the Bank this summer in the hope of winning fresh contracts.

According to Malloch Brown, the advertising campaign will create a new “global corporate image” for the Bank-a makeover that some say will cost between US $3 million and US $5 million.

(Editor’s note: Mark Malloch Brown did not return calls from The Earth Times in connection with this article. But another World Bank staff member, identifying himself as Peter Stevens, said that the Bank was drafting a response. The Earth Times will publish the response when it is received.)

But the recent ads appear to have backfired. Congress’s efforts to cut funding continue, while environmentalists and other Bank critics (including some in Congress) have condemned the use of tax dollars to finance a public relations battle with lawmakers when the Bank should be using the money to support poverty alleviation. With the World Bank’s first foray into mass media advertising a shambles, the messageto the Bank from Congress and other critics is clear: “your abysmal record of environmental destruction and human suffering can not be whitewashed.”

A portfolio in decline

Since 1982, environment and citizens’ groups from around the world have been monitoring the financial, environmental, and social effects of World Bank lending in the Third World. They have documented the widespread failure of World Bank loans, to alleviate poverty, their devastating environmental, social, and political effects, and their contribution to the Third World’s debt crisis, all of which are now being acknowledged by the US Congress, Canada’s Auditor General, and by the World Bank itself.

In 1992, a World Bank-commissioned report on its ten-year involvement in India’s controversial Sardar Sarovar dam complex was released. Located on the sacred Narmada River, the dam’s reservoir would flood100,000 tribal people from their homes, while its elaborate canal system would destroy the farmlands of another 140,000. This first-ever independent review of a Bank project, known as the Morse Commission review, painted a picture of a massive project gone horribly wrong. It described how those being moved found themselves in abject poverty; it described how the dam would “bring malaria to the doorsteps of villagers”; and it accused the World Bank of “gross delinquency in the handling of environmental matters.” Most damning, however, was the investigator’s conclusion that the problems of the Sardar Sarovar project were not an exception but were indicative of “chronic failings” in the World Bank.

The chronic failings that the Morse Commission documented in India would soon be discovered throughout the Bank’s portfolio by another high-level investigative team. A second damning report on the Bank’s$140 billion loan portfolio by the then vice-president Willi Wapenhans, found that over one-third of the World Bank’s projects were failing, and deterioration of the Bank’s loan portfolio was “steady and pervasive.”

“The portfolio is under pressure,” explained Wapenhans, and “this pressure is not temporary; it is attributable to deep-rooted problems.”

Among the “deep-rooted problems” identified by Wapenhans were the World Bank’s “systematic and growing bias towards excessively optimistic rate of return expectations at [project] appraisal,” and an “approval culture” in which “staff perceive appraisals as marketing devices forsecuring loan approval (and achieving personal recognition).” “Appraisal becomes advocacy,” he observed. Wapenhans also found that the World Bank fails to carry out projects properly; he described borrowers’ non-compliance with loan covenants, especially financial ones, as “gross and overwhelming.”

Countries at risk

To add to the World Bank’s financial woes, a 1992 confidential brief to the board of directors on the ability of the Bank’s, borrowers to repay their loans warned that “the quality of the portfolio has deteriorated significantly” since 1980 and cautioned that “almost half of the projected increase in Bank exposure is to countries that are currently considered to be high risk.”

For the World Bank, these reports could not have been released at a worse time. The Bank had just begun negotiations for an $18 billion replenishment of the International Development Association, whichprovides interest-free loans to developing countries. The reports alerted taxpayers and governments in donor countries to the systematic and far-reaching problems within the Bank, and caused many to start questioning its value as a development institution. Both Canada and Finland cut back their contributions to IDA, while the US Congress threatened not to appropriate any new funds for the World Bank unless it adopted a new, more open information policy and an independent inspection pane to hear the complaints of those who felt they had been harmed by Bank projects. Meanwhile, in his 1992 report, Canada’s Auditor General questioned the value of Canada’s involvement in the World Bank and recommended that Canada and its G-7 partners should undertake a financial assessment of the Bank.

With criticism mounting and its funding threatened, the World Bank scrambled to quiet its critics. Over the next two years, it prepared “Next Steps,” a response to the Wapenhans report which listed 87 specific measures it would implement to address: Wapenhans’ concerns, and created the new independent inspection panel and information policy.

However, its critics were not satisfied. Bruce Rich of the Environmental Defence Fund characterized “Next Steps” as a “plethora of internal bureaucratic conclaves and an avalanche of new paper, almost all of which are not linked to any concrete commitment, target, or indicator of tangible improvement in project quality itself.” The US Congress, whose efforts to hold the World Bank accountable are unparalleled by the legislature of any other donor country, was also not satisfied. It passed legislation in 1994 that withheld 50 percent of the Bank’s funding for fiscal year 1995 until it was assured that the Bank implemented the promised reforms Congress has also targeted the Global Environment Facility for criticism.

Grassroots citizens’ groups, legislators, taxpayers, and international NGOs have been carefully monitoring these most recent World Bank reforms. Two years after the release of the Wapenhans report a consensus is emerging: The reforms are resounding failures. As negotiations for the next replenishment of IDA begin, Congress remains unimpressed by the Bank’s efforts to reform and is once again threatening to cut off funding for IDA. These new reforms like all previous attempts at reform, have failed to make the Bank more open and transparent, or more accountable to the citizens of either borrowing or lending countries. The World Bank after Wapenhans is virtually identical to the World Bank before Wapenhans. Indeed, rather than opening the Bank up to scrutiny, the new policies actually make it more difficult for those harmed by the Bank-funded projects to see justice done.

Bank secrecy

The World Bank’s new information policy was adopted in 1993, primarily in response to criticism from Congress, which was threatening not to appropriate funds for the tenth IDA replenishment. However, after monitoring the policy for more than a year, many critics have concluded that it does nothing to increase the transparency or accountability of the World Bank, and in many cases actually entrenches the powers of Bank staff and borrower governments to keep vital documents secret.

Full access to information, on a timely basis, is fundamental for an informed public debate about the true costs and benefits of development, and for a proper economic and environmental review of projects. But the new information policy ensures that virtually no World Bank documents can be released without the prior approval of borrower governments (many of which are not known to embrace public scrutiny of their own domestic affairs). Although the World Bank says it will encourage the release of Environmental Assessments, Staff Appraisal Reports, and Country Economic and Sector Work Reports, none of these documents are available without borrower permission. Moreover, even if borrower governments choose to release reports, they have ample opportunity to sanitize them by restricting text or data that they deem confidential or sensitive.

Truly important documents, including those that governments and the Bank routinely use to decide whether to proceed with a given project, remain secret: engineering studies of dams, site plans for irrigation systems, and cost-benefit analyses of forestry schemes, for example, are not available to the public. Instead, the new information policy allows for the release of Project Information Documents (PIDs)- short project summaries that expunge any sensitive or confidential information, and provide almost no technical information about a project.

A Himalayan project

Apart from PIDs, the information policy’s other new creation is the Project Information Center (PIC), based in Washington DC and with regional offices in Europe and Japan. The PIC was created by the World Bank ostensibly to facilitate the release of PIDs and the few other documents that borrower governments might agree to make public. Evidence to date is not encouraging. The release of information concerning two recent and highly controversial projects (The Arun III Hydroelectric Project in Nepal and the Mexico Northern Border Environmental Project) has highlighted the arbitrary nature of the process and the ease with which the Bank can withhold important project information.

The Arun III Hydroelectric Project is a $797 million project that, if constructed, will devastate the environment and economies of over 500,000 indigenous people living in the Arun Valley in Nepal. The project consists of a dam and a 120-kilometre access road, both of which are to be located in a diverse and biologically rich forest in the Himalayan range. Citizens’ groups from Nepal and around the world have been opposing the Arun III project for over two years on the grounds that it is uneconomic in the face of cheaper alternatives, and that the World Bank has systematically violated its own policies in the preparation of the Arun loan.

Nepali, British, and American NGOs as well as some Bank staff have consistently been denied basic technical information about the Arun project. Despite repeated requests, information including the executive project summary, draft Staff Appraisal Reports and their annexes, and “Plan B” (a World Bank study on alternatives), were withheld from interested parties for many months, and many of them were not released until after the board of directors’ original date for consideration of the project.

Arbitrary refusals to provide information have also been the norm for Mexico’s Northern Border Environmental Project. NBEP is a $368 million loan to provide various environmental services along the US-Mexican border, including the siting of hazardous waste facilities and transportation and wastewater infrastructure services. In early 1994, environment groups from Texas and Washington made repeated requests to the Public Information Center for the NBEP Environmental Assessment, which they felt was crucial for their efforts to determine the costs and benefits of the project. The World Bank stalled for more than four months, finally releasing the environmental assessment less than four weeks before the board was to approve the project, and much too late for a thorough analysis of the documents by interested groups.

The experiences of citizens’ groups in both the North and South show that the World Bank’s new information policy has failed to make the Bank transparent and accountable. By refusing to release important project documents, and instead providing a few preselected and sanitized pieces of information, the World Bank is making a mockery of the fundamental rules of informed public debate and environmental review.

The Independent Inspection Panel creates illusion of justice

Like the information policy, the World Bank’s new independent inspection panel also fails to make the Bank more transparent or accountable to citizens in either donor or borrower countries. Created in 1993, the inspection panel is supposed to investigate complaints from people directly affected by Bank projects regarding violations of World Bank policy, procedures, and loan agreements. However, it does not provide an adequate check against the World Bank’s powerful and highly politicized board of directors.

In fact, the rules establishing the inspection panel create an illusion of justice while eviscerating the panel’s power and flouting the most basic principles of due process. At no time during the review process do claimants have the right to a hearing to examine or cross-examine the evidence supplied by Bank staff and management. Nor do they have the right to a hearing before the board of directors, which has ultimate power to decide which claims will be investigated and what mitigation measures, if any, will be undertaken to rectify policy violations. Claimants have no right to appeal a board decision to reject a claim or to be told the reasons for that rejection. In practice, after submitting a claim, claimants can be completely shut out of the process. All of the important decisions rest with the World Bank’s board of directors, the very people who approved the loan in the first place.

Full access to information-another important principle of due process-is also absent from the inspection panel. Just as the World Bank’s information policy ensures that virtually all important project documents remain secret unless they are released by the borrower government, so the rules establishing the inspection panel shroud its findings in secrecy. The results of an investigation are not released to either the public or the claimants until the Bank management has responded to the panel’s report and the directors have made a final decision on what action to take. A process so inscrutable provides ample opportunity for both Bank staff and the board of directors to misrepresent and manipulate the inspection panel’s findings to justify continued support of destructive loans and projects.

Even the Morse Commission on the Sardar Sarovar Projects in India, a truly independent and credible body, and one on which the independent inspection panel is supposedly modeled, found it difficult to counter attempts by the Bank staff to misrepresent its findings. Shortly after the release of the Morse report, Bank management provided the board of directors with a “summary” that so contradicted the Commission’s findings and recommendations that its members wrote to Bank President Lewis Preston accusing management of attempting to mislead the board of directors.

This misrepresentation occurred even though the Morse Commission had negotiated independence well beyond that granted the new inspection panel. The Morse Commission retained the copyright for its report, and insisted that its findings be made public at the same time as they were submitted to the Bank’s board. The new inspection panel has neither of these rights and will find it even more difficult to counter the pressures emanating from both Bank staff and the board of directors.

Early evidence from the first claim submitted to the inspection panel, concerning the Arun III project in Nepal, only confirms these concerns. The Arun claimants argue that Bank management is attempting to undermine the inspection process. These charges arose when a memo to the board of directors from Bank vice-president Joseph Wood was leaked to the public. The memo, which purported to summarize the preliminary findings of the inspection process, was at odds with a preliminary report released by the panel members themselves. In a January 5, 1995 letter to Lewis Preston the Arun Concerned Group (one of the claimants) wrote: “We are alarmed with the attempts of the Bank Management to undermine the mandate of the Inspection Panel and the inspection process. We are particularly concerned with the fact that the Management is attempting to misrepresent and misinterpret the preliminary findings of the Panel and derail any further investigation of policy violations by the Bank. We are further disturbed by the lack of disclosure and the confidentiality of the claim process to the claimants and the interested public.”

By shrouding the inspection process in secrecy and severely restricting access to the process by claimants, affected communities, interested NGOs, and the public in both donor and recipient countries, the World Bank has effectively insulated itself from criticism. Though the inspection function is bankrupt of the principles of due process, its findings will likely be used by the World Bank as if they had the weight of a judicial In this way, the World Bank has created a facade of fairness and deflected criticism from its failures, making it even more difficult for those harmed by World Bank loans to see justice done.

The World Bank’s failure to reform

The independent inspection panel, and the new information policy are only the most recent reforms to be adopted by the World Bank. For more than a decade, the Bank has been adding new policies and practices, producing new handbooks and guidelines for staff, and undertaking review after review, all intended to address the ill effects of it’s lending. Like the new policies examined in this study, virtually all of these previous reforms were ineffectual: They failed to stop harmful World Bank projects.

Perhaps the best illustration of the failure of ongoing “reform” within the World Bank is its record on involuntary resettlement. Since 1980, Bank policy has required that people displaced by a project “improve or restore their former living standards.” However, in one internal review after another (there have been six since 1984), the World Bank’s own experts have concluded that the Bank has failed miserably to enforce its own policy. Two of these reviews, conducted in 1990 and 1992, were unable to find a single study or any data on Bank-financed projects in Latin America or Africa which quantifiably demonstrated that a resettled population had been adequately rehabilitated. The most recent and comprehensive review, released in 1994, was equally discouraging. It found that one-half of the projects involving forced resettlement had no documented resettlement plan at all.

The World Bank has claimed that each of these damning reviews is evidence that they are trying to improve their record. With each new study come promises of reform and claims that problems with the old projects are behind them: “That was then and this is now.” However, the Bank’s management and board of directors have been apprised of the Bank’s dismal resettlement record for more than a decade, and have failed to take meaningful action. Such systematic and continued failure has led some Bank critics to question whether the World Bank can be reformed at all, and many have concluded that it cannot.

Decades of experience protesting, calling for reform, and trying to stop harmful projects have shown that the World Bank cannot be held to account for the destruction that its loans visit on the people of the Third World. The Bank’s Articles of Agreement-its constitution-state that all Bank staff are “immune from legal process” with respect to their duties at the Bank, while the immunities granted international organizations like the World Bank by both international and domestic law make legal action against the Bank itself virtually impossible.

Changing the Bank’s Articles of Agreement to make it more accountable is, in practice, politically impossible. Any change would require the approval of three-fifths of the Bank’s members representing 85 percent of the total voting power. But roughly four-fifths of the members are borrower governments who have no interest in seeing further conditions placed on their loans or in granting their populations a voice in the development decisions that arc destroying their communities and rearranging their economies. Any change in the Bank’s articles would also require that all member governments pass identical legislation in their own countries, since legal membership in the Bank is secured by each member government’s adoption of the Articles of Agreement as domestic law. This is politically improbable.

Critics have also learned not to rely on the Bank’s board of directors to spearhead meaningful reform. With only 24 directors representing over 170 member countries, most directors represent both borrowing and lending governments. However, each director can cast only one vote, creating a fundamental conflict of interest in the position.

Unprecedented attention to the World Bank’s activities by environment and citizens’ groups, by legislators, and even by national auditors has spurred some reforms, but they have been superficial and, ultimately, ineffectual. In the final analysis, the World Bank is unaccountable to, and unamendable by, those that it is supposed to serve and those that finance it.

A financial house of cards

Not only are the World Bank’s new reforms failures in their own right, incapable of improving its dismal lending practices, they also fail to address the Bank’s most serious problem: it is not a financially sound institution. Analysis of the World Bank’s financial health has shown it to be a house of cards-one capable of crumbling at the slightest tremor.

The reports, both internal and independent, of the World Bank’s blemished record illustrate clearly that its AAA credit rating is based not on the inherent value of its assets but, as the Canadian Auditor General found in his 1992 Annual Report, on state guarantees and ongoing disguised government bailouts which expose taxpayers of the Bank’s donor countries to significant risks. Any private financial institution with a portfolio as disastrous as the Bank’s would see its credit rating slashed and its investors flee. But the World Bank is unlike any other bank. The tangled and precarious financial arrangements necessary to preserve the illusion of the World Bank’s blue-chip status could cost taxpayers dearly: should a bailout of the World Bank be necessary, the industrialized countries would be responsible for honouring the Bank’s roughly $100 billion in commitments to bondholders, of which US taxpayers alone would be liable for $30 billion.

Since 1992 Congress has tried to make the World Bank accountable by promising to cut off funding if the Bank did not reform. With each Congressional threat, the World Bank has promised to change its ways, while environmentalists and citizen groups from around the world have held their breath in hopes that this time it would really happen. It has not. Clearly, the protests, letter writing, and criticisms of environment and citizens groups have not worked. Nor has Congressional pressure.

For Congress to once again ask the World Bank to reform its policies would be an exercise in futility. Because reform is virtually impossible, because the quality of the loan portfolio remains impaired, and because the risks to the taxpayers of donor countries grow with each passing day, Congress and parliamentarians in all of the World Bank’s donor countries should halt future appropriations of their constituents’ scarce tax dollars to this deeply flawed institution.

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