Safeguards in Financial Intermediary Operations

1. Safeguards in Financial Intermediary Operations Agi Kiss Safeguards Coordinator, Europe and Central Asia Region WB Safeguards Workshop Ankara, March 2010

2. Characteristics of Financial Intermediary Lending (FIL) • WB provides funds to eligible FIs for on-lending (at FI’s risk) to final borrowers • Objectives: (a)  supporting reform programs in the financial sector or related real sectors; (b)  financing real sector investment needs; (c)  promoting private sector development; (d)  helping to stabilize, broaden, and increase the efficiency of financial markets and their allocation of resources and services; (e)  promoting the development of the participating FIs; and (f)  supporting the country's poverty reduction objectives.  FILs are provided in the context of sound analytical work on sector issues, appropriate technical assistance, and, as relevant, development policy operations to address policy issues. • OP 8.30 defines eligibility criteria for FI’s • General WB policy is to avoid “directed credit” to specific sectors but may support it if there are underlying institutional weaknesses or market imperfections preventing flow of capital to those sectors, and the FIL is accompanied by reforms to address these issues

3. Approaches and challenges for applying Safeguard Policies to Financial Intermediary Lending (FIL) • FIL as a type of programmatic lending • FIL as a mechanism for lending to the private sector

4. OP 4.01 “Special Cases” • OP 4.01 procedures mainly designed for straightforward investment lending: investments identified and fully prepared (including EIA) by time of Appraisal • Identifies 4 “special project types” which deviate from this pattern, follow different procedures: Sector Investment lendingSector Adjustment lending Financial Intermediary lendingEmergency Recover projects • Sector Investment Lending: “…normally involve the preparation and implementation of annual investment plans or subprojects as time slice activities over the course of the project.” • Financial Intermediary Lending (under OP 8.30): “the Bank provides funds to eligible participating financial intermediaries (FIs) for onlending, at the FIs' risk, to final borrowers.” OP 8.30 provides eligibility criteria for FI’s, including: adequate profitability, capital, and portfolio quality; adequate managerial autonomy and commercially oriented governance; appropriate capacity, (including staffing) for carrying out subproject appraisal (including environmental assessment) and for supervising subproject implementation

5. OP 4.01: SIL procedures • Implementing Agency = Government body or similar (not an FI as defined in OP 8.30) • IA is responsible for carrying out EA according to requirement of National Law and WB (OP 4.01 and other SG policies). Specifically: Screen subprojects for EA requirements Guide and Assist subproject implementers on EA requirements (including public consultation) Review all findings and results of EAs for individual subprojects Ensure implementation of mitigation measures (including, where applicable, an EMP) Monitor environmental conditions during project implementation • WB appraises capacity of IA to do this; includes capacity building in project if needed • If WB not satisfied IA has the necessary capacity, EA for Category A subprojects (and as appropriate Category B) subject to WB prior review

6. OP 4.01: FIL procedures • FI is responsible for: • screening subprojects • ensuring sub-borrowers carry out appropriate EA (including consultation) • verifying (through its own staff, outside experts, or existing environmental institutions) that the subproject meets all national environmental requirements and is consistent with OP 4.01 and other WB SG policies • WB is responsible for: • reviewing the adequacy of country environmental requirements and the proposed EA arrangements for subprojects, including the mechanisms and responsibilities for environmental screening and review of EA results • evaluating the capacity of each participating FI to fulfill its EA-related responsibilities • where necessary, ensuring the project includes components to strengthen the relevant EA arrangements and/or FI capacity • If WB not satisfied that EA arrangements and/or capacity are adequate, Category A (and as appropriate, Category B) sub-projects are subject to WB prior review

7. PROJECT PREPARATION Nature of sub-projects to be financed is defined, including EA requirements EA arrangements are defined : must result in all sub-projects satisfying both National & WB requirements Project may include component to strengthen EA arrangements PROJECT APPRAISAL WB evaluates EA arrangements IA or FI arrangements & capacity; verifies disclosure and public consultation completed Decision made as to which if any sub-projects require WB prior review PROJECT IMPLEMENTATION screens sub-projects, determines EA requirements IA or FI implements EA arrangements – ensures sub-projects meet EA requirements ensures EA requirements met before approving sub-project/ sub-loan monitors & reports on implementation (in addition to national environmental inspection system) Sub-project implementers/Sub-borrowers carry out EAs, implement EMPs WB applies “due diligence” to fulfill fiduciary responsibility Prior review of sub-projects as needed Supervision includes reviewing implementation of EA arrangements

8. Problem: Can’t prepare EIA in advanceSolution: Environmental Management Framework • EMF not explicitly identified in OP 4.01 as an “EA Instrument” • Developed as a mechanism to meet 3 key needs: • provide a clear summary of proposed EA arrangements to be followed in SIL or FIL operations for Appraisal • provide an “EA instrument” for disclosure and public consultation prior to Appraisal of SIL /FIL operations • provide a convenient summary of agreed EA arrangements for Legal Agreements for SIL/FIL operations (separate presentations on EMF preparation and use)

9. Sub-Borrower Beneficiary Enterprise Financial Intermediary Roles and Responsibilities • Submit subproject concept to FI • Arrange and finance EIA, EMP, EA review, RAP • Obtain required permits/licenses • Obtain clearance from ENV authority • Maintain files documenting safeguard process and selection of experts to do study • Provide technical support for safeguard • screening to borrowers • Review loan application package for safeguard documentation • Maintain safeguard documents for all subprojects • Monitor subproject compliance with • mitigation plans

10. World Bank Project Team & Safeguard Specialists Roles and Responsibilities • Conduct supervision • Provide safeguard enhancement World Bank Safeguard Compliance • Advise Borrower & FI on SG policy compliance • Prior/post review • Review and clear sub-projects according to national/ • local EIA and other regulatory requirements • Issue permits and licenses Ministry of Environment

11. Involuntary Resettlement Policy (OP 4.12) andFinancial Intermediary Lending • Applicability: OP/BP 4.12, Resettlement Source Book do not restrict Policy to land acquisition by Government: applies if private investment can expropriate land • OP 4.12 extends protection to illegal occupants/land users on any land (public or private) • “Willing buyer-willing seller” does not trigger OP 4.12, unless 3rd party is affected • If compensation/assistance to 3rd party is required, who will provide it? (Private seller? Private buyer? Government?)

12. Disclosure and Consultation in FI Operations

13. Lending through and to the Private Sector • Member of WB Group focused on lending to private sector = International Finance Corporation (IFC) • FI lending is typically IFC role WB to be involved when FI lending is combined with important sectoral/policy reform; or when there is significant Govt involvement or Govt guarantee • IFC initially applied WB Safeguards policies; • In 2006 IFC developed/adopted “Performance Standards” tailored to its lending activities

14. IFC Performance Standards:Objectives • Identify & assess positive and adverse environmental and social impacts • Avoid, and where not possible, minimize, mitigate or compensate for adverse impacts on workers, communities, the environment • Ensure affected communities are engaged in matters affecting them • Promote improved social & environmental performance of companies through effective use of management systems

15. P.F. 1: Social and Environmental Management Systems (Equiv. to OP 4.01 ?) • Client to establish a Social and Environmental Management Systemappropriate to the nature & scale of the operation, commensurate with the risk level [focus is on Client, not specific project/investment] • S&EM System should cover: • S&E Assessment Process; • management program; [incl. Action Plan, roughly equiv. to EMP] • organizational capacity, • training, • community engagement, • monitoring, • reporting Red = different from WB

16. Social and Environmental Assessment Process • Consider in integrated manner the potential social & environmental risks and impacts(including labor, health and safety) • Include current S & E baseline data • Consider all relevant S & E risks, including those identified in PS 2-8, and national legislation/regulation • Risks and impacts explicitly analyzed in context of project’s“Area of Influence”(similar to “indirect impacts” i.e., includes off-site and cumulative impacts, does not include impacts which would occur without the project) • All project stages(pre-construction through decommissioning) • Consider role of 3rd parties (e.g. suppliers) which could present a risk to the project, recognizing limits of Client’s influence/control • Impacts of supply chainsconsidered when a resource utilized by project is ecologically sensitive or wherelow labor costis a factor in competitiveness • Consider transboundary impacts, including global (e.g. GHG emissions)

17. Social and Environmental Assessment Process (cont.) • Clientsmaybe required to engage external experts if project technically complex and/or significant potential impacts • Depending on project, may require full E/SIA, limited E/SIA, orstraightforward application of environmental or design standards,or no assessment if identified as no or minimal impact • Projects involving existing facilities may require Audits • Full E/SIA includes analysis of feasible alternatives • SIAidentify people who may be differently or adversely affected due to disadvantaged status, and measures to prevent this, promote equity

18. Management Program(Like EMP but organization-focused, not project-focused) • Based on results of E/SIA—program of mitigation and performance improvement measures to address identified risks • Include operational policies, procedures and practices… organization-wide or site-specific • Favor avoidance & prevention over mitigation * compensation where possible • Level of detail and complexity commensurate with risks and impacts • Define (measurable) desired results to extent possible (performance indicators, targets, acceptance criteria) • Responsive to changes & unforeseen events

19. Management Program (cont) • Action Plan of mitigation measures and actions required to comply with laws and with PS 1-8…describe and prioritize actions, include timelinefor implementation, publicly disclosed, describe schedule and mechanisms for external reporting on implementation

20. Other elements… Client will: • Establish, maintain, strengthen organizational structure for implementing Management Program including Action Plan • Train staff and contractors as required • Engage in on-going engagement with affected community, including timely disclosure of information and grievance mechanism, aimed at building constructive relationship over time • Monitor and measure effectiveness of Mgmt Program, for high risk projects use external experts to verify results, internal and external reporting (to affected communities)

21. Other IFC Performance Standards 2- Labor and Working Conditions (fair treatment, equal opportunity, compliance with national labor laws, protection from child & forced labor, promote safe & healthy working conditions) 3- Pollution Prevention and Abatement (minimize pollution to protect human health and environment; reduce GHG emissions; consider ambient conditions; apply technologies and practices best suited to reduce pollution while remaining technically and financially feasible and cost-effective, consistent with good international industry practice) (refer to current Env. Health & Safety Guidelines, which give “normally acceptable performance levels and measures, or to national legislation – whichever is more stringent)

22. Other Performance Standards (cont.) 4-Community Health, Safety & Security (avoid or minimize risks/impacts to local community (hazardous materials, disease, etc.); ensure safeguarding of personnel and property is carried out in a legitimate manner that avoids/minimizes risks to community’s safety and security (e.g. measures to minimize potential for abuses by security personnel) 5- Land Acquisition and Involuntary Resettlement (applies to physical or economic displacement resulting from expropriation/ compulsory purchase; negotiated settlements with those with recognized claims; provisions for those with no claim similar to those under OP 4.12)

23. Other Performance Standards (cont.) 6- Biodiversity conservation and sustainable natural resource management (protect biodiversity; promote sustainable mgmtof NR through practices that integrate conservation needs and development priorities… focus on major threats including habitat loss (natural and modified), invasive spp., • Sustainable NRM esp. focus on forests, aquatic systems; • use independent certification systems where available • provisions on protection of critical natural habitats are more qualified than in OP 4.04… changes in habitat are accepted if critical functions and endangered spp. or unique resources are preserved

24. Other Performance Standards (cont) 7 Indigenous Peoples (respect culture and practices; ensure development process respects dignity, human rights, aspirations, etc.; offer opportunities and benefits in culturally appropriate manner; establish ongoing relationship with affected IPs throughout project life; foster informed and good faith negotiation for projects on IP lands) (criteria/definition of IP same as OP 4.10) 8- Cultural Heritage (Protect CH, promote equitable sharing of benefits from use of CH in business activities) (removal of CH only when unavoidable and “overall benefits of project outweigh the anticipated CH loss”

25. Should WB adopt IFC-type approach when financing FI’s? • Focus on Partner’s environmental management systems , not on application of SG to specific project • Emphasis on long term relationships and interactions – WB & FI; FI and local communities/affected people • Explicitly target social issues relevant to private sector activities (labor rights more than resettlement)

26. Others’ “Safeguards” Systems • EBRD Env. & Social Policy, 2008 (update of 2003 Environmental Policy) • Asian Development Bank: • Environment Policy (2002) and Environmental Assessment Guidelines (2003) • OM section F1 on environment (2006) • Indigenous Peoples (IP) Policy (1998) and OM section F3 on indigenous peoples (2006) Involuntary Resettlement (IR) Policy (1995) and Handbook on Involuntary Resettlement (1998) and OM section F2 on involuntary resettlement (2006) (In 2006/2007, Operations Evaluation Department recently completed assessments on each of the above policies which are now in process of updating): • The Equator Principles (adopted by Equator Principles Financial Institutions -64 to date) (based on IFC-PF)