Multinational Monitor

MAY 2002
VOL 23 No. 5


East Meets West: European Union Expansion and the Troubled Former Communist Countries
by Tony Wesolowsky

Chernobyl Fallout: The Uncertain Future of Ukraine’s K2/R4 Nuclear Project
by Olexi Pasyuk

Pipeline Dreams: The World Bank, Oil Development and Environmental Protection in Georgia
by Manana Kochladze

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

Fate of the Forests: Will the World Bank Replicate Amazonian Failures in Central and Eastern Europe?
by Jozsef Feiler


Countering the New Masters: Central and Eastern European Workers Struggle to Hold Their Ground in Hard Economic Times
an interview with
Jasna Petrovic


Behind the Lines

Restraints for the World Bank and IMF

The Front
Shredded: Justice for BAT - Enron Associates

The Lawrence Summers Memorial Award

Names In the News


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.

Compliance and Appeal Mechanisms of the European Investment Bank

The European Investment Bank’s Yvonne Berghorst says that “a compliance structure is necessary for good management and control.” Insisting that the EIB has “well developed compliance and control structures in place stemming from its statute (a protocol annexed to the EC treaty) and other internal organizational provisions,” she offers the following details on the EIB’s compliance and appeal mechanisms:

Compliance Mechanisms

Audit Committee – as an independent statutory body, answerable directly to EIB’s Board of Governors, the Audit Committee verifies that the Bank’s operations have been conducted in compliance with the procedures laid down in its Statute and Rules of Procedure and that its books have been kept in a proper manner.

External Auditors – the independent external auditors (currently Ernst & Young) report directly to the Audit Committee, which is kept informed on their work program and on the coordination of their activity with that of the Bank’s Internal Audit.

Internal Audit – catering for audit needs at all levels of EIB’s management and acting with the guarantees of independence and of professional standards conferred upon it by its Charter, Internal Audit examines and evaluates the relevance and effectiveness of the internal control systems and the procedures involved. Under internal procedures to combat fraud, the Head of Internal Audit has authority to conduct enquiries. The Bank may also call upon external assistance of experts in accordance with the requirements of the enquiry, including the services of the European Anti-Fraud Office (OLAF).

Operations Evaluation – this department carries out ex post evaluations and coordinates the self-evaluation in the Bank. It ensures transparency vis-a-vis EIB’s governing bodies as well as interested outside parties, by carrying out thematic, sector and regional/country evaluations of projects financed by the Bank, once they have been completed. Through its work, the department familiarizes external observers with the performance of the Bank and encourages EIB to learn from experience.

As an EU institution, the Bank cooperates with the following EU control bodies:

European Court of Auditors – under Article 248 of the EC Treaty, the Court is vested with the task of examining all revenue and expenditure accounts of the Community. In accordance with the Agreement mentioned in Article 248 (3) of the Treaty and which sets out the arrangements governing the Court’s audit of the use of Community funds managed by EIB under mandate, the Bank provides the Court with all information requested.

OLAF – in accordance with the Bank’s policies and procedures regarding the investigation of cases of suspected fraud or corruption, following the establishment in 2000 of a cooperative relationship with OLAF, the Bank voluntarily provides OLAF with the results of audits of EIB-financed projects on which suspicions have been raised.

European Ombudsman – Pursuant to Article 195 of the EC Treaty, the Ombudsman conducts investigations into alleged instances of maladministration by EU institutions and bodies. The Treaty vests the Ombudsman with full independence in performance of his duties. The Bank’s responses to requests for information or opinions, either in the context of a citizen’s complaint or of an investigation opened at the Ombudsman’s own initiative, demonstrate its compliance with the rules that are binding on EIB.

Appeal Mechanisms

Disputes between the Bank and creditors, debtors or any other person are decided by the EU member states’ competent national courts, save where jurisdiction has been conferred on the Court of Justice of the European Communities.

EIB’s “Code of good administrative behavior for EIB staff in its relations with the public” (Article 16) provides for procedures for complaints from the public. Furthermore, Article 195 of the EC Treaty provides that any citizen from the European Union or any natural or legal person residing or having its registered office in a EU Member State shall be entitled to lodge a complaint against the Bank with the European Ombudsman.


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