How multilateral development banks (MDBs) address environmental and social impacts is a topic on many people’s minds at the moment.

The third round of the World Bank’s environmental and social safeguard review consultations ended in March, and safeguards are also being hotly debated in the new China-led Asian Infrastructure Investment Bank and the New Development Bank operated by the BRICS states, which have just begun operations in 2016.

Safeguards are essentially a special set of rules employed by MDBs that a country must abide by when using MDB resources for a development project. These rules – usually applied over and above the laws and regulations in borrowing countries – are intended to mitigate and remedy adverse project impacts on the environment or vulnerable social groups.  

The problem with safeguards

Although the goals of MDB safeguards are laudable, the current approach is flawed. It was put in place mainly to ease criticisms of MDBs from civil society organisations and domestic legislatures in wealthy non-borrowing countries, and does not address the core developmental problem facing environmental and social oversight: weak legal frameworks and implementation capacity.

Safeguards have numerous weaknesses:

• They require MDBs to bypass national frameworks, and thus have minimal impact on the vast majority of projects, which are not undertaken by MDBs.
• They are imposed over and above national laws, which raises serious questions about sovereignty, country ownership and the degree to which a country has the right to define its own developmental priorities.
• At the major MDBs they are one-size-fits-all, legalistic and inflexible policies, an approach that does not recognise the vastly different quality of legal frameworks and enforcement capacity across developing countries.
• They are time-consuming and expensive, and these costs are borne by the borrower. The average direct financial cost of safeguards on a World Bank project to borrowers is $13.5 million for most projects, according to an internal study, and adds months or even years to project preparation.

As a result, safeguards increasingly lead countries to avoid an MDB altogether. This endangers the relevance and involvement of MDBs, especially in the major infrastructure projects where their financing and knowledge can have very positive impacts.

If MDBs are to stay relevant to borrowers and have a positive influence on environmental and social outcomes, reform is essential.

How banks can better protect environmental and social rights in developing countries

The best way to protect the environmental and social rights is to build on developing countries’ existing legal and regulatory frameworks, not require MDBs to sidestep them. Country systems are strengthened through use.

MDBs have made some efforts to use country systems, but these efforts have largely failed because of resistance from non-borrower MDB shareholders. The ongoing World Bank safeguard reform is a case in point: even modest provisions to use country systems in some limited cases has led to an uproar among NGOs and major shareholder countries.

MDBs should follow national laws and procedures whenever possible, with meticulousness, rigour and transparency, thus encouraging a country to fully respect and thoroughly implement its own rules. Many of the weaknesses in country systems would quickly become apparent, providing a stronger basis for reform, and MDBs should offer generous technical assistance to support these reforms.

Use of country systems should be the default for MDBs, not a rare exception as is the case today. Such a change would have no impact on important accountability mechanisms such as the World Bank Inspection Panel, which should be maintained.

Multilateral development banks need a new approach

The era when the World Bank and other MDBs could dictate to developing countries is gone. MDBs will lose relevance if they are unable to find a way to make the legitimate aspirations of developing countries compatible with environmental and social sustainability.

It is time for MDBs to find a new approach, one that focuses on strengthening the national laws and regulations of developing countries rather than protecting themselves against criticism.