Who’s Safeguard Anyway?

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It’s clear that the world needs development banks both to scale up the level of investment  and to give developing countries better representation in the world of development finance. Yet these new banks need to play another role: championing sustainability as they usher in more development. Will this really happen?

The Asian Infrastructure Investment Bank (AIIB) was proposed by China in 2013 and was  launched at a ceremony in Beijing in October 2014. AIIB was to be fully established by the end of 2015.

AIIB is considered by some as a rival to the IMF, the World Bank and the Asian Development Bank (ADB), which are regarded as dominated by developed countries
like the United States. The United Nations has dubbed the launch of AIIB as ‘scaling up financing for sustainable development’ for the concern of Global Economic Governance.

As of April 15, 2015, almost all Asian countries and most major countries outside Asia had joined the AIIB, except the US, Japan (which dominated the ADB) and Canada. China is a major contributor to AIIB followed by India and Russia.

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It was late in the night in Mumbai. There were sixty people in the banquet room of the  legendary Taj Mahal Hotel having a buffet dinner. Out of the sixty, fifty seven were Ministers of the member countries who represented the newly-formed Asian Investment  Infrastructure Bank (AIIB)

The meeting was chaired by the two Premiers – of course, of China and of India. (China  holds nearly 29% of the stake in AIIB and India enjoys around 9%)

The sixtieth person in the room was my Professor Friend who had recently assumed the  position of the Advisor to AIIB on Environment and Social Safeguards (ESS). He was
sitting next the two Premiers.

I was also around, but was not officially included in the list for obvious reasons. I was  asked to be disguised as a waiter and serve a blend of Chinese and Indian (means Gujarati) food. Fortunately, the members of the AIIB were cooperative and tolerant of such a terrible cuisine combination.

Strict instructions were issued to ensure that there was no American presence inside and  outside of the Taj property. All American tourists in the Taj Mahal hotel were evacuated and sent to hotels in Kabul at discounted rates. This was because Americans were not supporting AIIB and, in particular, the World Bank Group had considered AIIB as a threat.

To sabotage AIIB, I was told, the World Bank had instigated a host of international NGOs to ask AIIB questions on their Environmental and Social safeguards. A special capacity building program for NGOs was launched to this effect, under the Technical Assistance of some Trust Funds. I was told that these funds generally dump money and don’t look at the outcomes.

In an interview to the Wall Street Journal, the President of the World Bank had said that AIIB will be diluting the ESS while funding trillions of dollars of infrastructure projects. This will cause unevenness across development financing institutions of the World and pose risks to the very sustainability of the planet. He sounded concerned.

The management of AIIB strongly disagreed with the President’s statement.

My Professor friend had completed a research investigation and had found that it was in fact the World Bank (WB) that was systematically diluting the ESS over the past two decades. The new draft ESS of the World Bank was a glaring example of how one can make a clever blend of dilution and complexity a maze of ambiguous procedures and of passing the buck when it came to the accountability.

A Chinese version of the Professor’s report was intentionally leaked. This led to a fierce global discussion and arguments on AIIB vs. WB safeguards. Several people undertook lessons in Mandarin just to read and understand Professor’s findings and participate in the debates. The percent of population ‘able to read and speak Chinese’ was in fact expected to increase over the next three months. I was really impressed with Chinese Premier’s strategy. I suggested to my Professor friend that India should also leak this report in the national language Gujarati, Oops! Hindi.

While the dinner was getting served at the round tables, the Premiers opened the meeting. The Chinese Premier introduced the purpose of the meeting and Indian Premier welcomed the members of AIIB. Discussion on AIIB’s environmental and social safeguards was the  focus. My Professor friend presented his investigative report on what’s happening on ESS across institutions like the WB, Asian Development Bank, European Investment Bank, JICA, and KfW etc. It appeared that most of these institutions were (happily) following the WB ESS. WB was the ‘big daddy’.

The first question came from the representative from Russia while he was having Chinese  soup with a dash of Methi. “How do we handle Environmental activist organizations? We want to do what we want to do. But then how do we ensure that these activist organizations remain quiet?”

The Indian Premiere smiled and said “Look, it’s easy. First put all the environmental activist organizations under the scanner of Ministry of Home Affairs. Get their books of accounts checked by the Enforcement Directorate. More than 80% of such organizations would have flouted the rules under Foreign Exchange Regulations Act (FERA) one way or other. Issue notices and freeze their accounts/funds transfer. Once done, no activist organization will raise a voice against what AIIB will do. We have already done this in India and this step has removed all the barriers to the investment flows in India’s infrastructure sector. There is now a queue of international investors. There are no public protests anymore! In fact the other day, leaders of Indian media approached me in despair that there were no more stories to tell about people protesting infrastructure projects even if the projects posed risks to our natural reserves. Media is now asking me for alternate news bytes. I am helping them by exposing some of our own scams and scandals! But that’s another story”.

Member from Russia got convinced.

“How about the process of public consultation and conducting of analyses of alternatives  etc.” The member from Brazil said while sampling Undhiyo. I served another portion of  Undhiyo to the Member to show my appreciation for the pointed question he asked. I also placed a glass of Lassi on his table because I knew he did not know the impact of the spice in Undhiyo.

My Professor friend interjected:

“AIIB will mostly support refinancing of the projects. In refinancing, most of the water  has already flown under the bridge. The project is already halfway so most of the steps of  ESS cannot be executed. There is no public consultation to be done nor are project  alternatives to be explored and evaluated. We will still say that public consultation and alternatives are hallmarks of AIIB’s Environmental and Social Safeguards – but when situations are beyond control and when the interest of the development of the country is to be looked at, we will abide by what is proposed and getting implemented. For the sake of completeness, however, we will conduct an Environmental and Social Due Diligence (ESDD) and if gaps are found we will provide Technical Assistance (TA) to address them and will encourage the borrower to comply”

Wow! I was impressed. This was a great example of avoidance and passing the buck.

“And remember”, the member from Netherlands said, “Let us all continue to focus more  on project preparation (i.e. application of ESS to create documentation) and less on the supervision (i.e. implementation of ESS). We should follow the World Bank here. The WB and most of the development financing institutions spend 70% of the resources in getting project approvals and use 30% or even less sometimes, to check whether ESS is actually implemented in letter and spirit. I like this style as it shows the rigor at the superficial level, provides green jobs to all the (brown) environmental and social consultants and creates employment with hefty pensions to all the Bank staff. We must keep producing smart documents, upload them on our website (anyway hardly anyone reads them) and create records so that we can defend ourselves should anyone question us – of course if at all”

I found this approach really strategic. I decided to add a scoop of chocolate ice cream with Chinese wheatgrass on the gentleman’s plate.

The question & answer session continued further and several bright ideas emerged on AIIB’s comprehensive ESS. My Professor friend was taking meticulous notes. Meet me tomorrow to write down the minutes, he whispered to me while gobbling a piece of crunchy Chinese chicken rolled in amsul sauce.

As the meeting was about to end (and so was the food), the member from Mongolia asked a question.

“How about application of ESS to the Treasury department of AIIB? Will there be any restriction or guidance on where our own Treasury will invest? In order to multiply our own money for infrastructure investments, we will need to put our money in funds of funds that will provide at least 20% of returns and AAA rating. I reckon that investing in funds of funds that may, in turn, invest in mines will be good as the mines today are giving great profits. But will mines be in the exclusion list of AIIB’s investments?”

“What about the environmental and social mess the mines create – how can AIIB invest in  mines?” I was about to ask this question but realizing that I was supposed to be in disguise, simply zipped my mouth.

The Chinese Premiere smiled like Buddha

“Oh, no worries, we will apply the principle of exclusion selectively to the Treasury department. We will keep the money in the funds of funds and won’t go too much downstream to investigate where money will actually be invested. So the downstream projects could well be mines. And my friend – don’t ask this question again”

He then turned to the Professor “Get me details on where does the Treasury of the World Bank, IFC, KfW etc. invest – which sectors, which fund of funds and markets are their favorites and to what extent do they apply Environmental and Social safeguards for their own investment operations. Let us copy their style in toto. We will have to stay consistent. After all, we have to take care of our own safeguards”

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Well, this is just a satire and not the real story!

I would recommend that you visit http://www.wri.org/blog/2015/04/asia%E2%80%99s-investment-bank-new-chapter-sustainable-development

This page poses a number of critical questions to the ESS of Development Financing Institutions and these questions are worth pondering over.

You may also like to read letter to the World Bank by US Senate

http://www.inclusivedevelopment.net/wp-content/uploads/2014/12/Senate-World-Bank-Safeguards-Letter-12-15-14.pdf