Bank Accountability Redux: The Campaign for Compliance and Appeal Mechanisms at the European Development Banks

by Petr Hlobil

Imagine an Azerbaijani oil company coming to Texas to drill for oil in a national park. Imagine the company’s environmental impact assessment is available only in Azerbaijani, with only an executive summary translated into English.

This is the mirror image of how the U.S.-based Frontera Resources has proceeded in Azerbaijan in an oil development project funded by the European Bank for Reconstruction and Development (EBRD).

Frontera’s environmental impact assessment also appears to have been misleading. The environmental audit claimed that “an improvement in the socio-economic situation in the area is anticipated during the upgrade of the facilities. Improvements are likely to occur through the following mechanisms: increased employment of local labor, and additional jobs in support industries such as catering, accommodation providers and taxi drivers.” But oil company representatives confessed in a May 2000 meeting that employment in the oil company had actually decreased from 1,500 to 800 people since Frontera joined the project, with most of those cut being local workers.

In a country where the national authorities are intertwined with the oil companies, where the court system does not work properly, and where corruption is rife, citizens have little recourse to combat such developments. (A joke in Azerbaijan: Why did Transparency International not put Azerbaijan on the top of its list of the most corrupt countries? Because the government managed to bribe them!)

In this context of weak government administrative structures and a government-industry complex committed to oil extraction and largely oblivious to concerns and about transparency, public consultation and accountability, the EBRD assumes a crucial role. The EBRD, an institution funded by European and U.S. taxpayers and the only multilateral development bank with a clear mandate to promote democracy, is the last hope for a citizenry seeking to exert some influence over the course of their nation’s development.

Indeed, the only reason there was any impact assessment documentation and a public consultation at all was that EBRD rules require such measures. At the EBRD’s cousin, the European Investment Bank (EIB), no such standards prevail, and disclosure and public consultation are left to local practice.

But even the EBRD seems primarily concerned with going through the motions of democratic procedures, rather than imbuing them with meaning. The EBRD’s environmental manager of the Azerbaijan project, Terry Thoem, told Azerbaijani environmental groups, “Frontera relied on advice from the EBRD to translate just the executive summary into Azerbaijani.”

“I Am The Compliance Mechanism”

The European Investment Bank was established in 1958 as one of the key European Union (EU) institutions to help build infrastructure to link national economies and provide investment to less developed regions of the EU. Since then, the EIB’s mission and areas of operation have grown substantially. The EIB now has a lending portfolio larger than the World Bank. Operating in more then 150 countries in 2001, it lent $32.4 billion, of which 15 percent ($4.9 billion) was invested outside of the EU.

The EBRD is much younger and smaller. Created in 1991 following the collapse of the Soviet Union and the Eastern bloc, in 2001, the EBRD lent $3.2 billion to 27 countries.

The EU controls both of these institutions. The EIB is owned by 15 member states, and those member states are the majority (56 percent) shareholders in the EBRD. However, the single biggest shareholder country in the EBRD is the United States, which is probably one of the reasons why the EBRD has at least some standards for access to information and environmental procedures.

The Frontera Resources project is in many ways typical of EBRD and EIB projects. Environmentalists say problems include the mis-categorization of projects regarding environmental assessments, failure to release appropriate documents or limiting access to them, ignoring the requirements of international conventions and harassment of critics of the projects by project sponsors or national governments. Both the EBRD and the EIB also lack mechanisms to protect communities and citizens affected by the projects they fund.

Now citizens’ groups in Eastern Europe, such as CEE Bankwatch Network and Friends of the Earth, have started to demand that the EU representatives to these banks establish mechanisms to allow citizens to voice concerns in cases where they are negatively affected by projects financed by the publicly owned banks. They are also seeking mechanisms to hold those institutions accountable to their own policies and procedures, as well as international laws and conventions.

Campaigners are relying on experiences from other, similar institutions to undergird their demand for new mechanisms at the EIB and EBRD. In 1993, for example, the World Bank established an inspection panel which allows people in communities affected by a project to file a complaint arguing it violates one or another of the Bank’s environmental and social policy guidelines. The inspection panel is independent of the Bank, and able to conduct investigations without interference. Its findings have no binding effect on the Bank. The inspection panel developed as a response to a large international campaign against the Sardar Sarovar dam on the Narmada River in India, a project that had devastating human and environmental impacts and violated a number of internal World Bank policies and procedures.

Since then, similar mechanisms have been created in other multilateral development banks: the compliance adviser/ombudsman for the International Finance Corporation and the Multilateral Investment Guarantee Agency (both arms of the World Bank), the investigation mechanism at the Inter-American Development Bank and the inspection committee at the Asian Development Bank.

But no such mechanisms are in place at the EBRD and EIB. Both institutions have been explicit in their desire to avoid public accountability. In 1998, Henry Marty Gauquie, EIB director of communications, said, “We are accountable only to the market,” arguing that the only right of the public is to fund EIB operations — a power which in any case rests even indirectly only with donor country citizens, not those who live in countries where projects are funded.

And at a meeting with nongovernmental organizations in May 2001, EBRD President Lemierre said, “I am the compliance mechanism.”

No Reform, No Money

But pressure to create a compliance mechanism is now growing and beginning to bear fruit. In June 2001, the Parliamentary Assembly of the Council of Europe passed a resolution that encourages the EBRD to “consider the establishment of a body to hear appeals and grievances from the public.”

Recently, the EBRD has begun to prepare a proposal for a compliance and appeal mechanism that would be able to conduct investigations without interference or influence from Bank staff and management, and be allowed access to Bank documents and Bank staff.

“The EBRD is constantly working to refine its governance and management systems,” says Doina Caloianu of the EBRD’s communications department. “In the case of compliance mechanisms, the Bank recognizes that current systems would be enhanced by providing an additional institutional avenue for local communities who are affected by an EBRD-financed project to file complaints directly with the EBRD. In response, in part, to the constructive suggestions by NGOs [nongovernmental organizations], the EBRD has advanced in the reflections and work that could lead to adoption of an improved compliance mechanism for the Bank.”

Still, environmentalists worry that no concrete proposal has yet been presented, and warn that there is no assurance of the quality of the mechanism.

Whatever the shortcomings of the EBRD initiative, the EIB has so far not evidenced a similar willingness to adopt a compliance mechanism. Environmentalists say the EIB has in the past refused to cooperate with the European Ombudsman, which deals with complaints about improper performance by EU institutions. The Ombudsman could theoretically become the compliance mechanism for the EIB if a number of legal and procedural issues were solved. For example, right now only EU citizens can raise complaints with the European Ombudsman. There are other related problems at the EIB, say campaigners for Bank reform. The EIB does not have a robust information policy or environmental procedures that would set up clear standards for projects outside the EU. It also lacks sectoral policies that state its objectives and plans for particular sectors.

The EIB replies that adequate procedures are in place. “Compliance and appeal mechanisms are in place at EIB,” says Yvonne Berghorst, senior information officer with the EIB, “reflecting the Bank’s identity as an EU institution and its position within the Union’s institutional and legal set-up. EIB operates within the well-established body of European law, including the jurisdiction of the Court of Justice of the European Communities. Its ownership makes the Bank accountable to the EU Member States.”

Environmental groups are not satisfied, however. Responding to the EIB’s perceived refusal to move on issues they have highlighted, a broad coalition of more than 30 environmental groups from Europe, including CEE Bankwatch and Friends of the Earth, began a campaign in February 2002 to deny new funding to the EIB unless it changes its policy. The “EIB: No Reform, No Money!” campaign targets EU member countries, which this year are planning to increase the EIB’s capital. The campaign is asking the various EU governments and parliaments to put conditions on that capital increase which would lead to more transparency and accountability from the EIB.

“If the ultimate goal is to achieve increased investment in that region at the cost of environmental and social performance, the EIB is the right choice to be the leading party,” says Magda Stockziewicz, coordinator of the “EIB: No Reform, No Money!” campaign. “It is worrying, however, that the Commission, bound by the EC treaty and its provisions on sustainable development, is so uncritical of the EIB’s performance that it is extending its mandate.”

Compliance mechanisms at both of the European banks, say members of the campaign, would serve the citizens and communities, and could also help the banks to enforce their own policies and procedures, and improve the quality of the projects that they finance.

The Frontera project in Azerbaijan, and the fact that the EIB supported Enron’s overseas projects with taxpayers’ money, they say, show how badly a proper checking mechanism of these institutions is needed.

Petr Hlobil works with the Centre for Energy and Transportation in the Czech Republic. He is international oil and climate coordinator with CEE Bankwatch Network.