By Taimur Ahmad
There was some relief
when World Bank president James Wolfensohn appointed his friend Peter Woicke to head up the IFC, the Bank's private-sector lending arm, in the spring of 1999. Talk was that Woicke might finally be the man to help resolve the tension between two institutions which had spent much of the previous two decades at each other's throats.
Yet now, five years on, it seems at least some of that enmity is still there: early this September, a leaked internal memo from the World Bank's legal department to senior Bank management slammed the IFC for trying to dilute the World Bank Group's longstanding environmental and social assessments attached to its lending, through the IFC's own set of safeguard policies.
The memo said the proposed IFC approach of principles and guidelines rather than strictly enforced standards ?deviated from the clarity attached to the decade-long effort to distinguish mandatory from discretionary action?. It also said the IFC's proposals would result in inconsistent policies being applied to the World Bank's public- and private-sector clients.
The criticism ? which the IFC dismisses as being simply a part of normal peer review to any proposed policy changes ? comes as the Corporation is trying to update its environmental and social safeguards policy ?to make them more robust. We're revising the safeguards of the IFC because we have to stay at the forefront,? says a resolute Woicke.
But the IFC's belief in the soundness of its basic safeguards remains essentially unshaken. Last year, it spearheaded an effort that led to their adoption by a group of 24 commercial banks, including Citigroup, ABN Amro and Barclays. The Equator Principles (as the IFC's safeguards have become known to the commercial banking community) are fast becoming the standard for project finance lending worldwide.
Objectives
The principles consist of guidelines that are meant to help a bank determine the level of risk a prospective project poses to the environment or local communities. They also seek to codify, in one framework, the existing best practices at international banks.
The spur for all this is growing concern over the environmental and social impact of large-scale infrastructure projects, typically oil and gas pipelines and hydroelectric dams, which have all increased reputational risk for project finance lenders and the companies they back.
?The banks came to us and said, ?We are starting to look at this as a very serious risk to our financing,'? says Woicke. ?So we changed our way of thinking and said: by applying the safeguards, we saw them not as an additional investment for the client but really as a competitive tool,? he says, stressing the business rationale for their adoption.
Banks such as Citigroup now say they are making the projects they finance more accountable by including the Equator Principles in their evaluations of potential borrowers. ?This ensures a better outcome, and although it might lead to greater transaction costs, it will ensure smooth and secure investments. It's more upfront work, but it speeds up projects overall by anticipating problems which could be costly to sponsors,? says Chris Beale, managing director in Citigroup's structured corporate finance team, responsible for the Principles.
The Principles establish conditions that project sponsors must meet, and these are incorporated into the loan covenants. The assessments only apply to projects of at least $50 million, which include some of the largest and most contentious projects worldwide, such as the Baku-Ceyhan pipeline and the Camisea gas-pipeline project in Peru.
?It's not just that Sandy Weill [chairman of Citigroup] got hit hard by the NGOs; I think there's a full understanding at Citibank, as in the other Equator banks, that this is good for the future of the business,? says Woicke.
Lingering doubts
But scepticism is rife ? even among the principles' signatories themselves. The extent to which banks have actually adopted the voluntary principles is also unclear.
?The Equator Principles are mostly a non-event,? says the global head of project finance at one bank that's signed up. ?It was just a signing ceremony, with lots of hoopla over something really not that new. I'm hard pressed to think of any project finance loans we've made that have not been in conjunction with a multilateral or bilateral lender which is already largely enforcing such standards.?
He adds: ?If it does improve existing industry practices, it escapes me.? So why did his bank sign on? ?Well, it cost us nothing,? he shrugs.
At the other end of the spectrum, there are still a number of significant project finance banks who haven't bothered signing up to the initiative at all, two leading French banks ? BNP Paribas and Societe Generale ? among them.
?Do I think managing your environmental risk is important? Yes. But we're doing all of those things anyway,? says a project financier at a leading investment bank that has yet to adopt the principles. ?I take the view that we can manage our own position and guidelines; we don't need to be taught what to do by the IFC,? says the banker. ?If we're prudent, we'll still win business.?
The IFC says that one of the initiative's goals is to prevent companies from borrowing from banks with sloppy environmental policies. Yet, according to a leading Equator banker, there are several banks in the market pitching business precisely on the basis that they are not signatories to the Equator Principles.
For a non-signatory, the point is all the more acute: ?Some companies have said it's an impediment because of the rigidity it involves. Others just don't like the cartel aspect of that apparent unity [of banks],? says one banker.
Out of whack?
Woicke, however, is adamant: ?I think these banks [non-signatories] are totally out of whack. Seriously. I would not think that would have happened. To be honest, the business they are going after is not any business the Equator banks would want anyway.?
Current signatories account for three-quarters of the project finance lending community. In short, it's hard to do a deal without involving an Equator bank.
The real test of this will be in deals in emerging markets without either multilateral or Equator bank participation. ?How much compliance will occur then?? asks an Equator banker.
But as Woicke points out: ?Information is available today. Any project can be under the spotlight. But to be under the illusion that you can do a project today without being screened by stakeholders or NGOs I think is pretty naive.?
Still, as the critical World Bank memo points out, the Equator Principles have another serious weakness: they lack an effective enforcement mechanism, although an ombudsman's office in Washington is meant to oversee banks' compliance. ?I think it will be very crucial going forward whether or not the banks are subject to audits,? says Woicke. ?Eventually the banks will have to submit to some kind of audit.?
Woicke, whose legacy may depend on the initiative's success, has only one thing to add: ?The banks have adopted this with great success. I'm very proud of these Equator Principles.?