The Myth of Additionality: A Critical Look at the Policies and Loan Conditions of the Inter-American Development Bank

10 December 2003

Bank Information Center Briefing

April 2003

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The IDB frequently justifies its involvement in large infrastructure projects by asserting that the Bank's involvement brings "additionality"* to a project, by way of its operational policies and loan conditions. The IDB bases this claim on its requirement of environmental studies, mitigation measures, and compensation programs for local affected populations, all in a supposedly participatory framework that actively involves local stakeholders.

The Bank is not shy in asserting the additionality claim in its project documents. For example, the Project Abstract for the Cana Brava Hydroelectric Project in Brazil declares:

"Bank participation in the financing would help to ensure a positive environmental outcome. Bank policies require compliance with higher standards than those prevailing in Brazil. Bank involvement would ensure compliance with international best practice. As a result of the Bank's due diligence on environmental aspects, the Bank has identified a number of environmental impacts and has requested that the Sponsor mitigate them, in accordance with Bank policies." (1)

The IDB is even currently working to adopt an official "additionality framework" for projects carried out by the Private Sector Department (PRI), as IDB President Enrique Iglesias asserted during a May 2002 Additionality Roundtable: "…To become eligible for [IDB Private Sector Department] financing, projects must now pass the test of a 'significant presence' of additionality" in areas such as "finance, regulatory setting, risk mitigation, environment, health and safety standards, catalytic demonstration effect, and improved corporate governance." (2)

However, examining the Bank's own policies and evidence from project case studies shows no causal link between Bank rhetoric and reality. Based on insufficient and vaguely worded policies and inadequate implementation of loan conditions, the IDB's additionality assertion remains elusive.

Weak, non-committal language in IDB Operational Policies

IDB Operational Policies provide what at best could be characterized as bare-bones guidelines for project financing. However, in reality the policies are so vaguely worded and inadequate that they do little to actually hold the Bank accountable to any tangible social or environmental standard. While existing policies pay mere lip service to crucial environmental and social considerations of proposed projects, the complete absence of a policy on Indigenous Peoples undermines the Bank's claim to bring additionality to indigenous peoples through its projects.

The text of the policies offers only qualitative, general and vague statements "guiding" Bank decisions in project financing, open to broad interpretation by Bank staff in their application. They furthermore lack any indication of the tools of measurement or methodology to be employed in assessing environmental impact, evaluating project design or mitigating for damages. For example:

• The Transportation Policy, which guides funding for projects such as roads and pipelines with potentially significant environmental costs, requires only that "…the Bank will take into account that the programs and projects submitted for its consideration will…protect the environment through the adoption of measures to eliminate or reduce the negative effects that project might have…" (3)
• Despite the high environmental risk of energy infrastructure projects, the Energy Policy requires only that "energy projects should be conceived and designed in a manner compatible with environmental protection requirements." (4) But this policy never cites the source of those requirements--national environmental law of the host country, IDB environmental policy, or international standards.
• The Environment Policy does not clearly require more rigorous environmental regulation than the host government already possesses. The Bank fails even to commit to improving national environmental regulation where existing laws are weak in a host country. (5)The policy does not even minimally require the elaboration of an Environmental Impact Report. (6) These policy shortcomings imply a passive posture by the Bank on environmental issues, compounded by a narrow required window of Bank action. For example, one criterion requires only "That the design of specific projects incorporates environmental factors adequately, and provides for monitoring to avoid adverse impacts." (7) But there is no commitment here by the Bank to act in case adverse impacts do result. Beyond the direct area of influence of a project, the Bank suggests only "That adequate consideration is given to the regional environmental impact of a project." (8)
  

The vagueness of IDB Operational Policies is compounded by a poorly articulated policy framework. Each Operational Policy, as available to the public on the internet, begins with a disclaimer stating, "Many policies have not been updated since they were originally issued, and a few reflect emphases and approaches of earlier years which have been superseded by specific mandates of the Banks' Governors, the most recent being the Eighth [Capital] Replenishment mandates of 1994." However, the Eighth Replenishment Mandates document does not clearly specify any new criteria for the Operational Policies. For example, on environmental standards, the Eighth Replenishment document merely outlines, "During the course of the Eighth Replenishment, the Bank will ensure that its environmental guidelines are extended…The Bank will continue to update its internal guidelines on an ongoing basis." (9) But the text does not lay out concrete revisions to the corresponding Environmental Policy that would definitively commit the Bank to undertaking certain activities or refraining from undertaking certain others.

IDB policies are furthermore inadequate in scope, especially regarding the social impacts of Bank-financed projects. The following examples show a serious lack of Bank commitment to the supposed "additionality" of social development opportunities:

• The only Operational Policy specifically addressing social compensation is the Involuntary Resettlement policy, which applies only to people that are physically displaced by a project. The policy fails to acknowledge indirect, less physically apparent effects to a population in the area of influence of a project, including socioeconomic impacts as well as changes to public health (such as epidemics) and land use strategies.
• As previously noted, there is no Operational Policy addressing the especially delicate position of indigenous peoples and other ethnic minorities in the development process. The IDB promises in its Eighth Replenishment mandates to "step up its efforts to obtain additional financing for programs benefiting indigenous groups in order to adequately address their needs." (10) However, nine years after the Eighth Replenishment went into effect, the promised increase in investment for indigenous peoples is still not informed or guided by a specific Operational Policy.
  To recap, the lack of tangible, quantifiable language in its overall weak policy framework makes it difficult to show concretely that IDB participation has brought additionality to a project. If an objective observer wanted to argue that higher environmental and social standards would be achieved if the IDB finances a project, that observer would be hard pressed to cite the source of the additionality, given the weak and insufficient IDB operational policies, which are unclearly superseded by the even more vague Eighth Replenishment mandates.

The ineffectiveness of loan conditions

Neither can special loan conditions clearly be shown to add social or environmental value to a given project. Rather than deny funds outright to a project with significant social and environmental impacts, the IDB frequently places contractual clauses in loan documents outlining specific corrective or mitigating actions as conditions for funds disbursal. However, as shown in the examples below, loan conditions often inadequately address indirect or long-term impacts and are inconsistently implemented.

The Santa Cruz-Puerto Suarez Corridor Project

The Santa-Cruz Puerto Suarez Corridor Project in Bolivia clearly illustrates the result of inadequate loan conditions. The project entails upgrading approximately 600 kilometers of an already existing primitive road connecting the lowland Bolivian city of Santa Cruz de la Sierra with the town of Puerto Suarez, on the border with the Brazilian city of Corumbá. When completed, the improved road will for the first time link the Pacific ports in Chile with the Atlantic ports in Brazil, fueling international commerce and the further expansion of agro-industry, timber, and mining operations throughout lowland Bolivia. In a gesture to provide for additionality, the IDB approved two loans for the project in April of 2002, one to finance the first phase of highway construction and the other intended specifically to address the numerous social and environmental impacts and long-term induced changes to the region that will invariably result. The disbursement of funds for the first aforementioned loan is contingent upon the execution of the second loan.

However, the second "Environmental and Social Protection" loan contradicts the Bank's additionality rhetoric, providing insufficient mitigation for the complex set of direct and especially indirect impacts, many irreversible, that the Bank itself acknowledges will be caused by this major infrastructure project:

• The project's Strategic Environmental Assessment (SEA), conducted in July 2000, cautioned that significant short and long term changes to the physical and social landscape of southeastern Bolivia will invariably result from improved access to the region, (11) and recommended over $81 million in social and environmental protection and compensation programs to adequately mitigate these changes. However, due to a variety of political factors and insufficient financial backing, the SEA's accompanying Operations Plan was not approved by the Bank. Yet instead of backing away from project financing given the uncertain investment climate and the significant environmental and social risks of the project, the IDB commissioned multiple new studies to trim down the $81 million figure. The resulting Social and Environmental Protection loan provides for a mere $26.5 million, compared with the $90 million loan approved to finance the first phase of the actual construction of the highway.
• The loan document acknowledges that "new greater accessibility will increase land value…as well as exacerbate conflicts and the impact on society and the environment" in both direct and indirect areas of influence due to the influx of new settlers and economic interests. The document also recognizes the uncertain land tenure status existing in much of the region, especially for indigenous groups. (12) However, the loan disappointingly requires and provides funding for the completion of the land titling process only in the area of direct influence.
• Furthermore, the loan document requires that the land titling process in the area of direct influence be complete before road construction can begin. (13) However, the same document states that land clearing in preparation for road construction was already underway at the time the loans were approved, opening the area to colonizers before land titles were secure.
• Only about $5 million of the $26.5 million loan will be disbursed through foundations that are independent of the government. (14) Given that government agencies entrusted to oversee and implement the social and environmental protection programs do not always have political credibility as fair and efficient project implementers, nor the political will to act, (15) this undermines the possible benefits of many of the programs.
  

The Cana Brava Hydroelectric Project

Yet another example debunking IDB additionality claims is the Cana Brava Hydroelectric Project. Financed by $160 million in loans from the IDB's Private Sector Department (PRI), the project consists of the construction, operation, and maintenance of a 450 mega-watt hydroelectric power plant and a 50 km 203-kV transmission line located on the Tocantins River, in the Brazilian state of Goiás. The dam is the first of a series of 27 large dams planned by the Brazilian government for the Araguaia-Tocantins river system. The IDB approved the loan in August of 2000, attaching conditions for mitigation measures to address human displacement and environmental damages.

Frustratingly, both the loan document and the accompanying Social and Environmental Management Plan have been classified "confidential" by the Bank and are not available to the public. This lack of transparency alone effectively negates IDB claims to project additionality, as it is impossible to prove IDB participation is responsible for social and environmental benefits of a project because the IDB itself will not release sufficient information to determine the causal link. However, it can be shown that implementation of mitigation measures has again been untimely and insufficient:

• Although the project received the IDB's "Best Project Team" award for "outstanding work with civil society" in October 2001, to date less than 300 of the more than 1,000 affected families have received any compensation at all.
• The Environmental and Social Impact Report outlined a resettlement plan to displaced rural populations that would include at minimum a viable agricultural plot with basic housing, services, and infrastructure. (16) However, in many cases, the company has offered resettlement on lands of poor quality.
• In April of 2002, the Tocantins River unexpectedly flooded the reservation of the avas-canoeiros people, despite studies conducted by the company that showed the Tocantins would not overrun its banks. Additional displaced populations have not been compensated.
• Due to inadequate scope and implementation of compensation measures, in May of 2002 citizen groups in Brazil filed for an investigation of the Cana Brava project by the IDB's Independent Investigation Mechanism. However, as of March of 2003, there is still no clear timeline for how the investigation will be conducted.
• Plans for numerous additional hydroelectric dams in the Araguaia-Tocantins river system are in the works, yet the IDB makes no mention of this important regional context in its "additionality" programs for the Cana Brava dam.

The two projects highlighted here are by no means isolated examples showing the inadequacy and poor execution of IDB loan conditions. In fact, the mere existence of conditionality clauses in a loan document implies Bank acknowledgement of significant social and/or environmental impacts that that project will cause. By consciously financing socially and environmentally problematic projects, the Bank is putting itself in a position of responsibility to ensure that its conditions are fulfilled. And the examples here show that the Bank has not always fulfilled its own conditionality requirements in a way that would lead to project additionality as intended.

US Government actors seem to agree about the un-reliability of loan conditions in providing additionality. In a December 2002 meeting with interested members of the US Senate, NGOs, the Export-Import Bank, the IDB, Treasury and Global Legislators Organization for a Better Environment (GLOBE, an international organization aiming to enhance international cooperation between parliamentarians on global environmental issues), several Government members raised concerns that even World Bank involvement in large-scale pipeline projects has not concretely improved social and environmental project outcomes in the ways that are promised in loan conditions. As the World Bank sets standards for the international financial institutions and cannot apparently deliver on its loan conditions, the claim of IDB additionality is therefore even less certain.

The Camisea Natural Gas Pipeline Project in Peru

Based on the preceding analysis of the IDB's policy framework and its historically poor execution of loan conditions in other large-scale environmentally destructive projects, the future participation of the IDB in the controversial Camisea Natural Gas Project in Peru is unlikely to result in measurable, clearly attributable additionality to that project either. In fact, the IDB is already setting itself up for disaster by repeating mistakes made in above project examples.

For example, the loan proposal for the Environmental and Social Management component of the Camisea project, similar to the Social and Environmental Protection Loan for the Santa Cruz-Puerto Suarez road in Bolivia, designates responsibility for environmental surveillance, supervision, and compliance with national law to various agencies within the Peruvian government. (17) However, the loan proposal itself acknowledges the "gap between the skills and capacities the State agencies have and those they must have for proper, consistent supervision and inspection." (18) To account for this incapacity, the loan proposes institutional strengthening programs for the various agencies.

However, this approach overlooks the role that political will, rather than institutional capacity, plays in successful project oversight by national government agencies. The Peruvian government furthermore has shown a distinct lack of political will to enforce its own environmental laws. For example, in 1989, the government of Peru established the Nahua-Kugapakori Reserve to protect this vulnerable indigenous Amazonian group. However, when the large Camisea natural gas deposits were discovered within the Reserve, the Peruvian Government authorized drilling and transport activities within the Reserve. Today, about seventy-five percent of the Camisea project production wells are located inside the Reserve. (19) Clearly, the political will to uphold legal commitments to environmental and indigenous rights was less than the political will to authorize the exploitation of enormous hydrocarbon reserves. How can the Peruvian government be entrusted as overseer of the social and environmental management component of the Camisea loan, then, given its track record on these issues? This blind view to the political reality in which the Bank operates undermines the credibility of the Bank's stated commitment to social and environmental due-diligence and claim to bring additionality.

Even an optimistic outlook on the willingness of the Peruvian government to undergo institutional restructuring to improve environmental management does not account for the poor timing of such proposed programs given the already advanced stage of pipeline construction. As of April 2003, the construction of the pipeline is reportedly approaching 70% completion. As such, numerous irreversible environmental and social impacts are already being felt in the region, including substantial erosion, construction of numerous access roads, the contacting of isolated indigenous peoples, and the rapid spread of epidemics through vulnerable native populations. However, meaningful institutional strengthening of the Peruvian government is, by all accounts, a long-term process that requires the re-shaping of management cultures and the even slower building up of public trust in the legitimacy of political institutions. The IDB also proposes trust funds for conservation and indigenous development to mitigate the direct and long-term impacts to the region. However, neither can trust funds reverse the significant damages that are already done, nor adequately address the issues arising from increased access to the region by colonizers or other industries. By financing a problematic project already in advanced stages of construction, the IDB significantly limits the potential of any additionality that could possibly be accrued.

No public disclosure of project evaluation documents

The lack of available information about the implementation of IDB loan conditions furthermore undermines the credibility of additionality claims. The Bank does not have adequate mechansims and procedures for reporting publicly on how it monitors and enforces its loan conditions and what the results of its monitoring are. (20) As an IDB official in the External Relations Department admitted, the unavailability of current project monitoring reports does not enable high-level confidence in speaking to the public about the IDB's success in delivering "development." An official at the US Treasury Department agreed that efforts to defend the IDB's good work are challenged by the current level and quality of information being received from the field. With no clear documentation of loan condition execution, the IDB cannot argue persuasively that it is even aware of exactly what or how additionality is being brought to a project by its loan conditions.

In conclusion, an objective observer cannot trace a linear connection between IDB project participation and resulting additionality. Therefore, the IDB's additionality argument to justify its participation in the ill-fated Camisea project should be strongly questioned. In turn, the IDB should provide concrete evidence of better environmental and social outcomes its investments have brought about, if it has any.

*Notes*

* Bringing additionality means causing better social and environmental outcomes than would be had if solely private capital were invested, i.e. "adding value" to a project.

1. Project Abstract, Cana Brava Hydroelectric Project, September 11 2000.
2. Enrique Iglesias, from opening address at the IIC/IFC Inter-Agency Roundtable on Additionality of Private Sector Programs and Operations supported by the International Development Institutions, Washington, DC, May 23-24, 2002.
3. OP-731 TRANSPORTATION, Basic Criteria, emphasis added. Inter-American Development Bank.
4. OP-733 ENERGY, Basic Criteria. Inter-American Development Bank.
5. "The Bank will consider providing technical cooperation to help member countries establish or strengthen their institutional framework to promote environmental improvement." Technical Cooperation (section 3), emphasis added. OP-703 ENVIRONMENT, Inter-American Development Bank.
6. "The Bank…will also consider the financing of an environmental analysis of capital and technical cooperation projects when applicable." Developmental and Technical Cooperation Projects (section 2), emphasis added. OP-703 ENVIRONMENT, Inter-American Development Bank.
7. OP-703 ENVIRONMENT, Inter-American Development Bank.
8. Ibid.
9. "Report on the Eighth General Increase in Resources of the Inter-American Development Bank." Chapter II, section 2.43.
10. "Report on the Eighth General Increase in Resources of the Inter-American Development Bank." Chapter II.
11. Strategic Environmental Assessment of the Santa Cruz-Puerto Suarez Corridor, Bolivia (Project No. TC-9904003-BO), Final Report, Executive Summary, 2-4.
12. Environmental and Social Protection in the Santa Cruz-Puerto Suarez Corridor (BO-0033), section 1.36.
13. Environmental and Social Protection in the Santa Cruz-Puerto Suarez Corridor (BO-0033), section 1.52, 1.63.
14. Environmental and Social Protection in the Santa Cruz-Puerto Suarez Corridor (BO-0033), section 1.56-1.58, 1.64.
15. Hammerschlag, Kari and Maria Vargas Ríos, "The Santa Cruz-Puerto Suárez Transportation Corridor Project: A Case Study," July 2001. http://www.bicusa.org/mdbs/idb/TransportationCorridor.htm
16. Environmental and Social Impact Report, Cana Brava Hydroelectric Power Plant (BR-0304), p. 48.
17. Program for Institutional Strengthening and Environmental and Social Management Support for the Camisea Gas Project (PE-0233), Section 1.26. Inter-American Development Bank.
18. Ibid., section 1.49.
19. Martinez, Nadia, Jon Sohn and Atossa Soltani, "U.S. Public Banks Back in the Spotlight Over Financing for Camisea Gas Project in Peru's Amazon Heartland", Press Release, 25 February 2003.
20. The IDB produces Project Performance Monitoring Reports and Project Completion Reports for each project, but does not disclose these reports to the public.