House of Commons - International Development

Select Committee on International Development Written Evidence

Memorandum submitted by the Bretton Woods Project

INTRODUCTION

1. The Bretton Woods Project is an independent NGO established by a network of UK-based NGOs in 1995 to take forward their work of monitoring and advocating for change at the World Bank and IMF. See www.brettonwoodsproject.org/about for more details.

2. This year's meetings were seriously marred by the mistreatment of civil society participants. At least 27 accredited participants, including one from the UK, were "blacklisted" by the Singaporean government. By the World Bank's own admission,[1] this constituted a breach of the memorandum of understanding signed between the WB/IMF and the Singaporean hosts. At least a further three dozen individuals who were travelling to parallel events in Singapore and Indonesia were held for questioning and, in some cases, deported. Twenty-two of the 27 blacklisted individuals were reinstated several days after the meetings had begun, however this came after all of them had either cancelled or re-arranged their travel plans. Despite the implications for their individual and organisational reputations of being wrongly accused of posing a security threat, these individuals have not been offered an explanation, an apology or compensation.

3. While we appreciate both HMG and European parliament pressure on the Singaporean authorities, we must ask why HMG who had been notified that there were problems "end August"[2] and the World Bank and IMF who were presumably aware even before this, did not act more quickly to prevent this ugly incident. We have requested that HMG should assist in ensuring the disclosure of the original MoU between the WB/IMF and the Singaporean authorities and the "blacklist", and should release all official communications with both the Singaporean authorities and the WB/IMF over the issue.

4. As outlined in detail below, we believe there is an increasingly important oversight function for the Committee as regards the IMF, particularly in light of its increasing influence in low-income countries. The implementation of the IMF medium-term strategic review over the next two years provides an opportune moment. On aid effectiveness issues—conditionality and good governance are highlighted here—we are encouraged by the government's approach, and are looking for clarification about criteria for the assessment of further progress. Our biggest concern as regards the government's relations with the IFIs remains the gap between stated principles of environmental and social sustainability and the practice which it supports. Finally, we include several suggestions for continued improvement of UK accountability on its actions within the institutions.

DIVISION OF RESPONSIBILITIES BETWEEN THE WORLD BANK AND IMF

5. On 29 March 2006, the World Bank and IMF announced the formation of an external committee to review the collaboration between the World Bank and the IMF, with a view to enhancing their joint work while also eliminating overlap between the two institutions. On this external committee, four of the six members have links with the Bretton Woods Institutions: two former executive directors at the IMF and two former senior level staff at the World Bank. We would expect an independent external review committee would comprise stakeholders from official, civil society, academic and private sectors.

6. A comprehensive review of collaboration would necessitate field work and analysis of case studies of instances where the Bank and IMF have worked closely together at the country level. This committee is not set up or prepared to undertake these types of studies and has only opened an email box for comments from external stakeholders. Simply calling for comments via a web page and an email can not substitute for the interviews and detailed analysis that should be taking place.

7. In view of the lack of development expertise at the IMF, which has a core mandate in the area of macroeconomic policy and its global spillovers, the question of "collaboration" should be more clearly expressed as a division of responsibilities with clearly defined roles for the two institutions. Limiting mission creep was a theme of the recent report of the Treasury Select Committee on the role of the IMF which recommended "a greater focussing of the IMF's work"[3] and that "the IMF should remain within its remit of crisis prevention, not extend its activities into areas of social policy and development it does not appear to be equipped to deal with."[4]

8. Despite the lack of expertise at the Fund, the managing director's strategic review continues to assert a strong role for the IMF in the development path of low-income countries, where its lending programmes often dictate matters of national economic policy (see conditionality section below). We believe that the IMF should strictly limit its work in low-income countries to macroeconomic stability and that the UK would do well to reconsider whether the IMF should continue its lending activities in low-income countries.

Suggested questions:

— How will HMG encourage a clear division of responsibilities between the World Bank and the IMF so that each organisation stays within its core mandate and area of responsibility?

— What will HMG do to encourage a truly independent, transparent and detailed examination and evaluation of collaboration between the two institutions?

REFORM OF IMF GOVERNANCE: FUNDAMENTAL REFORM NEEDED, TINKERING OFFERED

9. It has been recognised by all sides that the future legitimacy of the Fund rests at least partially on fundamental reform of its governance structures. At the spring meetings of the IMF, the IMFC called for the managing director to bring concrete proposals for the reform of the Fund's quota system in advance of the annual meetings. The proposals included three aspects of quota reform: an initial increase in voting power for certain emerging market countries, a commitment to revise the quota formula to make it reflect developments in the global economy, and an increase in the basic votes to increase the voice of low-income countries.

10. The UK Treasury has stated that its aim is to "ensure an effective voice for developing and transition countries at the IMF".[5] Meanwhile DFID's white paper has stated "Developing countries need more influence in the World Bank and the IMF. They are weakly represented on both Boards where voting rights are decided by financial contributions. This balance must change."[6] The white paper unfortunately does not set out any practical ways the UK would help to change the situation, nor discuss potential reforms that would make this happen. We also note that the Development Committee has asked the Bank "to work with its shareholders to consider enhancement in voice and participation in the governance of the Bank".[7] Changes to the governance of the World Bank usually closely match changes at the IMF, so the future of IMF governance is vital to both institutions.

11. The proposals as they are currently being discussed do not meet the goals set out by HMT or DFID. The proposal does nothing to alter the imbalance of power in decision-making at the IMF or to give more "voice" to developing countries. Before the agreement in Singapore, industrial economies held nearly 62% of the voting weight at the IMF. Even if basic votes are trebled, their voting share will only decrease to 59.7%. Meanwhile African countries would see their voting share rise from 5.6 to 6.3%. Furthermore, the revised quota formula may be based almost solely on GDP at market exchange rates which would erode the voting shares of low income countries further, likely reducing it below the pre-Singapore levels. Such a formula would reduce the voting shares of countries like Nigeria, Indonesia, Venezuela, Malaysia, South Africa and nearly every African and low-income country.

12. The Treasury Select Committee (TSC) recommended "that the UK Government should look at whether any more innovative solutions, beyond reform of the quota system, are possible".[8] While HMT supported the reform proposal despite TSC's advocating against it, civil society organisations have asked for a genuinely democratic structure for the IMF, which would satisfy the standards of democracy expected at the national level. To move towards this goal, they proposed the innovative solution of a double-majority voting system. Under this system, decisions by the boards should be made only when both the requisite majority of member governments agree and the decision garners support of the requisite majority of votes. This would ensure that true consensus must be reached and that low income countries would be consulted in decision making. It would promote dialogue in a way that increasing each low income country's quota by a few hundredths of a percentage point though basic vote increases would be ineffective in doing.

13. The TSC report also recognised that governance of the IMF involves more than shares; it also requires amendments to the composition of the executive board, increases in transparency, particularly around the selection of the managing director, the minutes of executive board meetings, and documents of the IMF. Nine development NGOs in the UK have issued an open statement[9] calling for a comprehensive reform package that addresses the inequality in voting, the undemocratic nature of executive board representation, the selection of the managing director, and the transparency of the institution. It is important to note that the European Parliament has also called, in a resolution, for European governments to address the problems of the board by consolidating their representation and making way for developing countries.[10] Any effort to tackle the governance problems at the IMF will require making trade-offs, thus isolating quota reform from the remainder of the problems with IMF governance will not be effective. A comprehensive reform package that addresses all these issues together is needed.

14. Finally, many further technical recommendations can be made that would improve the governance structure of the IMF. These include de-linking the governance structures of the World Bank and the IMF so that each organisation can tailor its governance structure to its role and mandate. For the IMF it would be useful to consider instruments that are "fit for purpose" and not using the quota formula to determine voting power as well as access to resources and financial contributions. There is also need for greater accountability within constituencies on the executive board and from executive board members back to national parliaments.

Suggested questions:

— How will HMG promote and participate in a reduction in the number of seats held by Europeans on the executive board of the IFIs? Will it publicly declare its willingness to give up its appointed chair on the executive boards?

— Will HMG put forward the idea of double-majority decision making for all decisions at the IMF so as to ensure true consensus is reached on all decisions?

CONDITIONALITY: INSUFFICIENT PROGRESS IN CHANGING THE STATUS QUO

15. The Project agrees with HMG's assessment that the World Bank's review of its implementation of new "good practice guidelines" for the use of conditionality does not represent a sufficient departure from the status quo. The review's findings that the principles have been "fully integrated" across the Bank's work contrasts sharply with the findings of NGO shadow reports:

16. On ownership: the Bank concludes that it uses conditionality "in such a way that it does not interfere with internal consensus-building processes." ActionAid finds that Bank staff continue to work with an "extremely narrow definition of country ownership", which in Pakistan has "led to a large dam-building programme being driven forward in the face of public opposition".[11]

17. On customisation: according to the Bank review, sensitive policy reforms, such as privatisation and trade liberalisation, "respect government preferences and take into account government constraints". Research by Brussels-based network Eurodad found that in Mozambique, Uganda, Zambia and Benin, World Bank loans were conditional on privatisation of certain public services—"even though these privatisations were not called for in the government's national development strategies".[12]

18. On criticality: The Bank says that programmes give "clear indications of the actions considered critical by the Bank". The principle of criticality, counters ActionAid, "is regularly being flouted". So-called "non-binding" conditions are being used to push policies which are not high priorities on governments' agendas. A study by Debt and Development Coalition Ireland of 13 Poverty Reduction Support Credits (Bank support for national development strategies) found that in Mozambique, Benin, and Burkina Faso, the Bank was concerned about dwindling commitment to privatisation, so included benchmark conditions to keep up the pressure.[13]

Suggested question:

— Can DFID elaborate the criteria it will use to assess whether satisfactory progress has been made in implementing the recommendations in the 2005 review of World Bank conditionality?

GOVERNANCE AND ANTI-CORRUPTION FRAMEWORK: WORLD BANK ACCOUNTABILITY NEGLECTED

19. We broadly support the UK government's approach to what is an extremely complex issue as articulated by the secretary of state's statement on governance.[14] Due to concerns over both process and substance, we support the board's assertion of its authority over the direction of the paper, and calls to re-examine the effectiveness of governance indicators.

20. Bank president Paul Wolfowitz's cancellation of a number of lending programmes in late 2005 and early 2006 led to a discussion of corruption at the spring meetings 2006. The board, in an attempt to ensure a less ad hoc approach to the issue, urged the creation of an anti-corruption framework by the time of the annual meetings. This timeframe did not allow for sufficient consultation of key stakeholders on such an important issue.

21. In a 31 July letter to Bank president Wolfowitz, NGOs expressed "deep concern at the extremely untransparent and non-participatory manner in which [the anti-corruption framework] is being elaborated."[15] The letter was authored by CIDSE and the African, Latin American and European networks on debt and development. In response, management has proposed follow-up consultations at the country, regional and global levels, importantly on both the "strategic directions" and the implementation of the framework.

22. The NGO networks conducted a survey of opinion with civil society organisations in 24 southern countries, finding that the Bank "lacks credibility in terms of its intentions and capacity to address governance and anti-corruption". The Bank is feared to take a "narrow approach to governance, focusing on the economic policy environment", and to be concerned about macro-economic stability, private sector investment and public financial management, rather than accountability of the state to citizens. Those surveyed agreed the need for contractual obligations in relation to the transparent use of aid, but made a key distinction between this and policy conditions attached to loans or grants.[16]

23. We welcome a number of aspects of the Bank's proposed approach including: the need to harmonise donor action on corruption, in particular recognising each other's sanctions of companies found guilty of corruption; strengthening the Department of Institutional Integrity (INT) and the sanctions process (supporting UK calls for an independent review of INT); and identifying bribe payers as part of the problem.

24. However, we have serious concerns, reflecting those raised in the CIDSE study quoted above, about: the risk of significant mission creep both in terms of imposed governance conditionality and proposed Bank capacity building for the media, the judiciary and civil society (we support UK calls that the framework be "clearer about who is going to do what" and encourage that the Bank should be parsimonious in choosing its role); the appropriateness, objectivity and reliability of the Bank's Country Policy and Institutional Assessments;[17] and the possibility that the newly-adopted Voluntary Disclosure Program may allow corporations guilty of corruption to escape both debarment and public censure.[18]

25. We urge that the importance of improved transparency of the Bank itself to bettering systems of accountability not be lost. The Global Transparency Initiative[19] is calling for the Bank to move away from a checklist approach and towards the presumption of disclosure for all official documents. Government Accountability Project insists that the Bank institute the recommendations of the Vaughn report, specifically procedures to protect staff from reprisal for coming forward to tell of misconduct. Finally, the Publish What You Pay coalition has called on the Bank to revisit the recommendations of the 2004 Extractive Industries Review, and adopt minimum standards in governance, transparency and human rights that must be fulfilled before approving oil, gas and mining projects in institutionally weak countries (see below).

26. Finally, we believe that a critical aspect of eliminating future corruption in World Bank lending is to take responsibility for past complicity in corrupt practices. We are especially heartened in this respect by the recent actions of the Norwegian government to cancel bilateral debts which it has judged to be "odious and illegitimate".[20] The European Network on Debt and Development asserts "that any comprehensive approach to corruption necessarily involves the critical examination of past Bank lending policies and practices and the cancellation of debts found to be fraudulent, corrupt and illegitimate."[21] Indeed the Norwegian Government has set money aside to support World Bank and UNCTAD research into the critical issue of odious and illegitimate debt but so far the Bank has failed to begin this important work.

Suggested questions:

— Will the UK urge the World Bank to review its disclosure policies in light of the principles of the IFI transparency charter of the Global Transparency Initiative?

— Will the UK recommend an independent audit of Bank lending practices to determine what lending has been "odious and illegitimate", thereby contributing to corrupt practices?

CLIMATE CHANGE: DANGEROUS COMPLACENCY

27. Last year the G8 tasked the World Bank to take a leadership role in addressing climate change, and come up with an investment framework for clean energy and development. In response, the World Bank prepared a report for discussion at its annual meetings in Singapore in September 2006. This completes the first phase of the investment framework. A longer term programme of country-level activities and global research is to be completed for the G8 summit in Japan in 2008.

28. Despite some of the laudable rhetoric on climate change and poverty outlined in the document, the World Bank Group continues to invest substantially in large oil and gas projects and conventional energy sources. A recent report by a number of NGOs, including the Bretton Woods Project points out that in FY 2005 "new" renewables and "energy efficiency" made up only 10% of the institution's new lending for energy projects. Sixty per cent of this included large hydropower projects with a capacity over 10 megawatts, including the highly controversial Nam Theun 2 dam in Laos (see below).[22] The World Bank has invested over $25 billion in oil, gas and coal projects since 1992, when the Climate Convention was signed.

29. Numerous parallel concerns regarding the UK's policy have been raised domestically by civil society, parliamentarians and the private sector. A recent report by the Environmental Audit Committee points out that DFID's climate change policy "lacks coherence". On the one hand "it highlights the seriously detrimental impacts of climate change on the most poor". On the other "it is directly and indirectly responsible for very significant emissions of carbon into the atmosphere through the projects it funds". This echoes a joint UK NGO statement issued in July, and discussed at a meeting with representatives from DFID, the Treasury, DEFRA and the FCO, which also raised a number of concerns relating to the World Bank's clean energy investment framework, including its over-emphasis on the carbon market as a mechanism to solve climate change, and its definition of "clean" energy.[23]

30. At last year's evidence sessions, Joan Ruddock MP asked whether there was "an inconsistency between the lending policies of the international financial institutions and the UK's own commitment to climate change policies",[24] pointing out that the World Bank's support for renewables was a mere 6% of its energy lending.[25] The secretary of state responded that "clearly it would be good if there could be faster progress. I agree with you completely about the opportunity to skip the generation of power generation in particular that is very polluting".

31. In April, the UK's Co-operative Bank announced its commitment that it would no longer hold investments in the World Bank's private sector arm, the IFC due to its concern over the IFC's investment in fossil fuel extraction and its failure to provide meaningful investment for renewable energy projects. Industry monitors estimate that in 2005, the IFC was the world's largest multilateral financier of fossil fuel extraction, and that the agency devoted a mere 4% of its total energy lending to renewables.[26]

Suggested questions:

— Will DFID match its practice to its principles, by urging the World Bank to support the Extractive Industry Review recommendation for a phase-out of funding for fossil fuels and an increase in funding for renewable energy by 20% annually?

— Does DFID approve of the World Bank's proposed technologies for the reduction of greenhouse gas emissions, which currently include untested coal technologies, nuclear power and large hydropower projects? Are such "alternatives" in line with the UK's own leadership policies on climate change and renewable and clean energy?

INFRASTRUCTURE: STEPS BACKWARD

32. At the end of June 2006, Paul Wolfowitz announced that the Environmentally and Socially Sustainable Development (ESSD) and Infrastructure departments were to be integrated into a new vice presidency for Sustainable Development, headed by the current vice president for Infrastructure. Such a merger raises serious questions about whether and how the Bank will promote environmental sustainability in its operations. Prior to this merger in June, UK executive director Tom Scholar confided in NGOs that the ESSD played an "essential role". The ESSD vice presidency was established following the Rio Earth Summit. For the first time since then there will no longer be a member of Bank senior management specifically dedicated to championing environmental and social objectives.

33. In its first annual report on the UK and the World Bank, DFID said of the highly controversial Baku-Tbilisi-Ceyhan oil pipeline that "the IFC's involvement would maximise the potential benefits to poor people in the region". Since that time a series of reports have revealed cases of unpaid compensation, prostitution and trafficking,[27] and the UK trade and industry committee has investigated major technical failings. The project has run 32% over budget and has been dogged by construction failures and malpractice.

34. Documents released under the Freedom of Information Act reveal that, according to the British ambassador in Azerbaijan, the Azeri emergency services do not have the capacity to cope with a major rupture to the pipeline: "In a major civil contingency or terrorist attack, apart from the purely military response, there would be no civil command structure, no lead agency and probably no effective communication between relevant ministries and agencies". Azerbaijan's independent Public Finances Monitoring Centre has questioned whether the country's oil boom has provided any jobs outside the energy sector, warning that Azerbaijan stands on the brink of "Dutch Disease"—with investment in the oil sector crowding out that in other sectors of the economy.

35. In this year's report, DFID says it received assurances from the Bank that management would report to the board on the Nam Theun 2 dam every six months. The dam was approved in March 2005, yet there is no mention of the first of such progress reports or whether the UK found it adequate. One year on from approval of the project, NGO International Rivers Network has found that wildlife management and resettlement plans have not been completed and key monitoring arrangements are still not in place.

36. On forestry in the DRC, DFID says it has been "working closely with the World Bank in Washington and in DRC to ensure that their programmes respect the rights and livelihoods of forest dwelling communities". This may come back to haunt DFID. In March 2006, a preliminary investigation by the Bank's own Inspection Panel found that "the Bank claims it was not aware of the existence of `Pygmy' communities in areas that would be affected by its projects, but that it would now develop a plan to ensure that `Pygmy' people are not harmed by new developments funded by the Bank".[28]

Suggested questions:

— Following the dismantling of ESSD, what measures will DFID take to ensure that mainstreaming of environmental considerations is prioritised in Bank operations?

— What follow-up is DFID planning or has already carried out in relation to the Nam Theun 2 dam, the Baku-Tblisi-Ceyhan pipeline and the Bank's involvement in the forestry sector of the DRC?

IFC SAFEGUARD POLICY REVIEW AND DISCLOSURE POLICY

37. In April the IFC concluded its revision of its disclosure, environmental and social lending policies. Analysis by civil society of the new "performance standards" and disclosure policy found that there is an over-reliance on client-generated information, and insufficient requirements for effective and independent project supervision and verification. The standards also make weak statements on minimum binding standards, in particular on human rights and the environment and employ unenforceable language in relation to what is required from the IFC and its client.[29]

38. NGOs in the UK pushed for DFID to honour its rhetoric on the need for stronger safeguards. In a series of letters and meetings with DFID, NGOs detailed how it was not meeting its own policies on principles-based decision making, and a rights-based approach to development and the Extractive Industries Review. Despite NGOs asking for "a considered response to each of the points raised" in their most recent letter of April 2006, DFID's brief and final reply was to point the organisations back to the very documents they were critiquing and to "encourage broad participation in the comprehensive review" of the safeguards that will take place in three years.

39. A recent paper entitled Tarnished Gold: mining and the unmet promise of development,[30] which marks the IFC's 50th anniversary takes a critical look at the institution's involvement in the gold mining industry. The paper examines project examples in Ghana, Guatemala, Peru and Kyrgyzstan, pointing out that the IFC has refused to systematically report on the actual impacts of its projects on poverty reduction. This runs directly counter to the emphasis that donor countries—including the UK—and Paul Wolfowitz have placed on measuring development effectiveness.

40. Currently, the IFC reports on the poverty reduction and development impacts of the projects it finances only on an aggregate, institution or sector-wide basis. What this kind of reporting ignores is that, unlike profits and losses in a financial portfolio, poverty reduction, environmental damage, and impacts on individuals and communities cannot be averaged across the IFC's portfolio. As a public institution with a stated mission of poverty reduction, the IFC should: clearly identify the intended poverty reduction and development impacts of each of its projects; measure the project's performance against those outcomes; and publicly report on it.

Suggested questions:

— Is DFID planning to provide a considered response to each of the points made by UK NGOs in their letter of April 2006 to the secretary of state concerning the IFC performance standards?

— Given DFID's rights-based approach to development, what is its opinion on the scant mention that human rights instruments are given in the IFC's new policies?

— Will DFID be pushing for the IFC, as an institution with a poverty alleviation mandate to: clearly identify the intended poverty reduction and development impacts of each of its projects; measure the project's performance against those outcomes; and publicly report on it?

UK ACCOUNTABILITY IN ITS RELATIONSHIP WITH THE IFIS

41. Over a number of years, we have been pleased to see considerable improvement in UK accountability in its relationship with the IFIs. Annual reports on the World Bank and IMF are produced by DFID and HMT respectively—in the latest edition we particularly welcome DFID's first detailed publication of its contribution to World Bank trust funds;[31] DFID has clarified its objectives for working with the Bank in an Institutional Strategy Paper and established indicators for monitoring progress; and UK objectives for the Development Committee at the spring/annual meetings are now regularly posted at least 10 working days in advance of the meetings.

42. These measures place the UK at the forefront of donor country accountability. However, we believe this is no grounds for complacency.

— As earlier noted, the increased impact of the IMF in low-income countries demands oversight from a development perspective. In this vein, we also note the failure of the chancellor to attend the Committee's annual session on the IMF.

— The absence of an institutional strategy paper means that the objectives of the UK's work with the IMF remain unclear.

— While we applaud DFID's efforts to elaborate an institutional strategy for the Bank, we are concerned by the failure to report on chosen indicators in a timely fashion.

— Finally, we note that in response to chairman Malcom Bruce's call last year for a debate on the DFID annual report on the World Bank, the secretary of state said he would "reflect upon it".

Suggested questions:

— How best should the government establish an oversight body as regards the IMF's development impacts?

— Will HMT meet the standard set by DFID in the preparation of clear objectives and monitorable indicators in its relationship with the IMF? Will UK objectives for the International Monetary and Financial Committee similarly be made available 10 working days in advance of the spring/annual meetings?

October 2006

1 Comments made by Kevin Kellems, acting vice-president external relations World Bank Group, 14 September 2006. Back

2 Comments made by UK Executive Director Tom Scholar in a meeting with UK NGOs 11 September 2006. Back

3 Treasury Select Committee, Globalisation: the role of the IMF, Ninth Report of Session 2005-06, 13 July 2006, para 10. Back

4 Ibid, para 15. Back

5 HM Treasury, The UK and the IMF 2005: Meeting the challenges of globalisation for all, March 2006, para 4.12. Back

6 DFID White Paper, July 2006, para 8.22. Back

7 Development Committee communique«, 18 September 2006, para 12. Back

8 Treasury Select Committee, Globalisation: the role of the IMF, ninth report of the session 2005-06, 13 July 2006, para 20. Back

9 The full statement is available at: http://www.brettonwoodsproject.org/ukimfreform Back

10 European Parliament, European Parliament resolution on the strategic review of the International Monetary Fund, P6_TA(2006)0076, http://www.europarl.eu.int/registre/seance_pleniere/textes_adoptes/definitif/2006/03-14/0076/P6_TA(2006)0076_EN.doc Back

11 What progress? A shadow review of World Bank conditionality, http://www.actionaid.org.uk/100234/our_research.html Back