Sustainability in the Design and Implementation of Projects: - 10.05.2003

 Published in Spanish in Informacion Commercial Espanola Vol 800 June/July 2002 for the Summit in Johannesburg
      

Abstract: Sustainability is not a new concept but the public interest it has generated it requires the project analysts to pay greater attention to the interrelationship among the three pillars of sustainable development - economic, environmental and social acceptance - resulting in the need to extend his his vision across sectors and over time. This implies changes in procedures, in particular reinforce environmental scopingscreening, appraise more fully project externalities and establish constructive partnerships with Non Governmental Organisations (NGOs). Enriching rate of return calculations with additional factors should be avoided when it weakens its significance.
He must also be put into a position to refuse unsustainable propositions and follow projects including after they have become over a longer time period including when it is operatingoperational. These requirements imply revising the principle of "project analysis" as a closed system  reinforcing the capacity of and increasing the number of project analysts in Multinational Development Banks (MDBs). Individual project proposals should be screened by professional investment committees and not by T and revising the role of theirthe MDBs Board of Directors, where conflicts of interest hinder the MDBs' quality controls.

Key words: sustainability, scoping, externalities, rate of return calculations, project analysis, Board of Directors of Multinational Development Banks, environmental units, European Investment Bank.
1. Background: Approach, Definition and Significance.  

1.1. Approach.  This article does not pretend to be academic. It seeks to record a number of practical issues raised by the drive for sustainable development. It is based more on experience in trying to respect environmental and social concerns in project financing and on ex-post evaluations with two Multinational Development Banks (MDBs): the World Bank and the European Investment Bank (EIB) than on academic research. In this respect, the words "design" and "implementation" in the title must be understood to mean "appraisal, supervision and evaluation " of projects submitted for financing by MDBs. Indeed, as the famous Wapenhans report (1992) on the performance of the World Bank showed, project success depends primarily on the promoter's sense of "ownership". Project design and implementation must therefore remain the project promoter's responsibility. Unless the national macroeconomic framework supports sustainable development and promoters are prepared to design and implement their project in line with the new criteria, it is unrealistic to expect MDBs to turn the tide around through "conditionality". Project analysts have improved significantly some project designs. In a number of cases, these changes have been the MDB's main added value for the promoter. Nevertheless, it is felt that promoters must retain ultimate responsibility and that it would be misleading to suggest that MDBs could, as a matter of rule through redesigning or implementing projects improve their sustainability. This implies piling up conditions, which are rarely respected, but to refuse to finance unsustainable investments. This has proven to be valid in developing as well as in industrialised countries. Hence, sustainability depends more directly on the MDB's sound appraisal, supervision and evaluation procedures, than its involvement in designing and implementing projects.

1.2. Definition. In this article, EIB's definition of "sustainability" is adopted : "Sustainability involves an increase in the welfare of the present generation that favours the needs of the poorest members of society, whilst at least maintaining the existing capital stock that provides equal opportunities for future generations." It is in line with that of the Brundlandt Commission and of the European Commission. The integration of the 3 pillars of sustainability - economic, social and environmental - in project analysis are here seen as fundamental warranting a few preliminary comments. Taken literally, "sustainability" is basically common sense: who would want to finance an operation that is not "sustainable" in the sense that it is self-supporting? R. Rostow (5) expects already in1962 that development initiatives to be "sustainable". The conclusion that development that does not respect the environment is unsustainable was already established since the publication of "Limits to Growth" (12).  What is then new in practice for the project analyst? Is "sustainability» a genuinely new approach or is it just one of these new fashions that pretends to turn inefficient development financing into an effective one?
 
1.3. The emphasis on economics is welcome, including its financial implications. G. Riddel (1) and M. Gillis et al. (2) stress that foreign aid can be justified only for productive investments Jean-Michel Severino (9) recalls that political considerations have too often dominated economic fundamentals in development aid. Past misallocation of public aid have contributed to the need to regularly postpone or cancel developing countries' debt. Economic sustainability implies, first of all freer trade by symmetric elimination of trade barriers to create an "open market economy with free competition" (Art 3A2 of the Treaty of the European Union). Sustainability should not alter the plea of developing nations for "more trade not aid". Open economies are shown to grow faster than protected ones, the economy of newly independent Third World countries controlled by interventionist governments stagnated, subsidised agriculture in industrialised countries is one of the main obstacles to development of less advanced countries and no system proved more damaging for the environment than communism. Hence, sustainability rightly considers economic soundness as a central objective.

1.4. Secondly, sustainable development will not be enhanced by infusion of foreign capital as long as domestic capital markets are inefficient. Under-development is characterised by poor governance, largely due to excessive political interference in daily life rather than by inadequate funding. Domestic financial markets are inefficient, suffer from excess liquidities. That local savings reach investment needs has rightly been put as a condition to countries that want to join the European Union (EU). In this respect, attention of the reader is drawn to the EIB evaluation report on the impact of MDB borrowings on the integration of emerging capital markets (6).

1.5. Renewed emphasis on social factors is also welcome: they are the very justification of development financing (1). Giving to all access to fundamental rights - food, drink, education, and health care - is in line with the philosophy of John Rawls (3) and aid to education and health has been among its more successful components. As long as human beings have no access to these basic rights, no privilege or "acquired rights" stand and world economic order will remain unsustainable. One of the benefits deriving from the drive for sustainability in development financing is the renewed attention that MDBs will need to give to social factors when analysing investment projects.  

1.6. Significance.  As can be seen from above and as stated in the proposals by the European Commission, sustainability is largely based on existing concepts that receive new emphasis. Sustainable development essentially reinforces the awareness of the interrelationship among the three pillars and calls for a greater involvement of the civil society, making it no longer possible for MDBs to ignore it. Sustainability focuses attention on the need to adapt past economic development models to avoid consuming our collective ecological, social and public financial capital while eliminating absolute poverty. It requires not only to divert greater resources into sectors like CO2 emission reduction, biodiveristy, preservation of water resources, cross-border pollution control and development of human capital. The project analyst is also asked to pay greater attention to cross-sector effects and to trans-generational effects. His capacity to refuse unsustainable propositions must be strengthened.

2. Procedures.  

2.1. Design and Appraisal.

2.1.1. Scoping.
The EIB's technical Technical Advisory services Services decided begun in the late 1980's to strengthen its environmental screening  by formalising its scoping procedures and widening the consultation of stakeholders. As a result, it started testing an environmental screeningEnvironmental Summary table to grade potential environmental risks for of various aspects of project implementation and operation. The table was thought to be a necessary more appropriate, transparent and comprehensive approach first step beforethan gradting the environmental risks along a single scale. Other MDBs had found that screening along a single scale lead analysts to rate too many projects in the middle categories. EIB'sIt table analyses separately the environmental impact of the project location, construction methods, the type of products produced and the operational conditions. It lists mitigating measures and rates the risks involved. It forms the basis for rating the proposal along 4 classes of environmental risk : acceptable, mild reservations, serious reservations and unacceptable. It has proven to be convenient (Annex 1) for management control of the thoroughness of the environmental screening carried out by the analysts, for subsequent performance rating of the investments and for supervising environmental project aspects during operation. It is adjusted to the specifics of each key sector and adaptable to new developments. The table has become a key part in EIB's environmental screening procedures (Annex 1).

A rating for "sustainability" is so far optional but the table could easily be complemented complementary with criteria related to CO2 emissions, biodiversity or social impact, in combination with existing ones (including economic performance)are being examined to form a global "sustainability" assessment. It will might rate the quality of the Strategic Environmental Impact Assessment (SEIA) as stipulated in the EU Directive on the subject. This type of table, however, must remain simple to give both the analyst and the management a rapid overview of compliance to environmental criteria.

Integrate into project analysis new criteria, such as cross-sectorial externalities or social factors, and extending project life to incorporate trans-generational effects, to assess sustainability raises fundamental issues. By essence, project analysis consists of carving out of reality a carefully defined "system" that is supposed to be largely self-sustained. The art in project analysis consists precisely in identifying those risks and potentials that will most likely determine project outcome. From the onset, analysts are well aware that project outcome is in reality determined by a multitude of factors, of which only a small number can be formalised and quantified into the calculations. Hence, the term "internal" rate of return. Even so, project analysis is inherently subjective and inaccurate: it is synthesising the effects of a large number of elements that are difficult to predict because determined by changing market conditions. It is also oriented towards the long term future, contrary to financial analysis that is based primarily on the promoter's accounts and is therefore more turned toward the past. Broadening this analysis to incorporate new elements, including externalities over a longer-term period cannot happen withouttends to raising reduce by the same token the degree of uncertainty  precision of the whole exercise.  Hence, project analysts will rightly admit that broadening the scope of the analysis for the sake of  verifying project "sustainability" is not without risk and costs.
2.1.2. Internal rate of return (IRR) calculation.

One dilemma for the project analyst is whether or not to insert sustainability criteria into the rate of return IRRanalysis. Some analysts have recommended that environmental, social and other externalities be integrated into the calculation to produce a synthetic criterion that more appropriately reflects these new additional concerns. However, as the attached graph shows (Annex 2), this might first of all increase raise the degree of uncertainty of an already uncertain imprecise criteria and could give a false sense of reliability. By adding new elements that are often difficult to quantify, the angle at which the rate of returnIRR cuts the benchmark could be changed sharpened and the width of the range of possible IRRs widened, blurring the significance of the rate obtainedresult of the calculation. Furthermore, extending project life to take into account trans -generational effects, would, all other factors remaining equal, raise the rate of returnIRR, hereby reducing reducing its usefulness in selecting the most sustainable investmentsselectivity.  Broadly speaking, incorporating "externalities" into the rate of return analysis is not a panacea. Experienced project analysts state that there are two errors not to commit with rates of return: (1) not carry out the calculation, which forces them to identify the relative impact of key risks, in particular through the calculation of switching values (the values of key factors for which the rate of return turns negative), and (2) believe in a final result that is not presented with a realistic range. Ex-post evaluation has demonstrated that actual rates of return were rarely in line with projections, and that the most common error committed at appraisal was to underestimate the range of potential rates of returns. Hence, in practice, it remains unclear what the effect will be if externalities are integrated into the rate of return calculations.

Instead of trying to complicate further a highly subjective analytical tool, it might be more appropriate to follow Dr. Pearce's route in weighing the human, ecological, cultural and financial capitals sacrificed or enhanced by the investment in order to arrive at a "weak" or "strong" sustainability level, depending on whether consumed capital is renewable or not.

In summary, what is the impact of the drive on sustainability on project calculations? First, it enlarges the scope of the analysis by including a wider range of potential effects on project outcome. It also raises the awareness of the fragility of rate of return calculations and should lead to widen the range of potential results. If externalities are included into rate of return calculations, this should be done only after the rate of return and its switching values have been calculated first on the basis of "internal" factors having a direct influence on the outcome.
2.1.3.    Programme versus project financing.

Environmental Non Governmental Organisations (NGOs) have questioned EIB's strict adherence to project financing, including its selection of individual projects out of a national programme that comprises investments that do not meet EIB's criteria. The argument against this procedure is based on funds being fungible and the EIB raising the borrowers' funding capacity for the more marginal and less acceptable investments. Screening individual projects on the basis of the environmental or other criteria is then meaningless because in the end, the EIB also contributes to the financing of less sustainable parts of the investment programme. The EIB argues instead that its severe screening shrinks the total amount finally paid to the recipient government and that this will motivate it to reorient future investments in line with its criteria. It also argues that the governments' political screening would not necessarily favour the better investments in terms of EIB's economic, environmental or social criteria and that its funding of the better investments will accelerate their implementation in case of budgetary restrictions.  

The issue has of course much vaster implications than just on environment and sustainability. But because of the greater public interest in environment, these aspects received greater attention than for instance, procurement or other parts of the EU legislation. Sustainability considerations could exacerbate the debate by further restricting project eligibility. On the other hand, the principles of sustainable development have been accepted in Amsterdam (Treaty Art. 2) Gothenburg and Gothenburg Amsterdam by the EU member States. They should therefore penetrate progressively bring theirnational investment programmes in line with the new criteria and the problem dilemna should recede.  Furthermore, since sustainable development will require an engagement over a longer time period (cf. 2.1.7.), one would expect that a more continuous relationship between the EIB and recipient governments should facilitate the discussions leading to a wider respect of the new investment criteria.

2.1.4. National versus European legislation.

Because the EIB is the financial arm of the EU, it logically applies EU legislation in its investment decisions within the EU and seeks to conform its selection criteria as close as possible to this legislation outside the EU. Since it finances also private sector investments, it is often confronted with private borrowers' obligation to respect only national legislation. When this legislation is less demanding than that of the EU, this poses an obvious problem. Similarly, it is confronted with borrowers who may be less sensitive to cross-border environmental damages with which the EIB is confronted through its multinational activities.

To the extent that the new precepts regarding sustainable development will take time to permeate into the legislation of a number of countries, project analysts will again be confronted with a new source of potential conflicts. Experience has also shown that it took considerable time for some private operators to recognise the usefulness of environmental restrictions; it will probably take more time for a more abstract concept such as sustainability to permeate into private sector practices. They will accept more stringent criteria only if they raise profitabilityit is in their interest.

This issue is symptomatic of the problem of MDBs having often a longer-term perception than many private as well as national public sector operators have.  The management of a private concern that is genuinely concerned over its impact on the environment and its sustainability, shows that it has a long term vision and a sharp sense of ethics. It hereby demonstrates its competence to operate long term projects such as those to which MDB loans are restricted. Hence, borrowers' inclination to limit their environmental obligations to national legislation can be understood, but MDBs can make promoters aware of these longer term implications of their investment decisions by restricting the benefit of their preferential lending rates for investments managed with these longer term perspectives in mind.  
2.1.5. Market Impact.

In 1981, the Board of Governors of the EIB proposed to increase its financial contribution beyond the traditional limit of 50% of investment costs to projects that would incorporate environmental features that would go beyond those required by the current national legislation and take into account foreseeable future requirements. Very few borrowers actually took advantage of this opportunity. Environmental NGOs, however, have regularly recommended to the EIB to be more proactive and to favour investments, for instance, in rail rather than road transport. MDBs, however, lend on market or close to market terms and recipients are expected to repay the loans. Hence, they will wisely lend only to investments that respect market requirements. The literature (1, 5) shows that "second guessing" the market or seeking to initiate a type of development that is not at least nascent, run a fair chance of failure.  

The EIB supported economically justified road as well as rail projects; it has largely contributed to the development of the European TGV network that is more energy efficient than competing air transport, or to natural gas distribution networks and wind energy that profitably replace more polluting fuels. As long as national governments prevent the European rail sector from becoming more profitable it cannot increase substantially its financing toward that sector. This is equally true for countries that hesitate to impose tolls or that too heavily subsidise environmentally friendly investments. Some sectors such as biological agriculture are also beyond reach of MDBs because they are less capital intensive and therefore do not require large capital infusions. They are also - at least within the EU - heavily subsidised. Subsidies depend on political decisions, which are unpredictable, and therefore difficult to reconcile with sustainability criteria.

Hence, MDBs will support the drive for sustainability in certain sectors more actively only in so far that the new criteria are transposed into national legislation and carried by market forces. In this respect, public support for sustainable development is essential. The EIB has for many years been unable to invest in sound tropical forest exploitation, for instance, because none of the potential borrowers were willing to accept felling restrictions recommended at the time by the UN Food and Agriculture Organisation (FAO). Today, eco-labels are gaining market acceptance and the Forest Stewardship Council (FSC) -type labels should help raise the profitability of wood produced under sustainable forest management and hence make these projects more easily "bankable". The development of a market for CO2 emissions will stimulate profitable investments in this area. Favouring loans to companies that produce under eco-labels or receive a proper «sustainability» rating could raise the sustainability of MDBs' investment portfolio by appropriate rating agencies ("Licence to operate", "Investissement Socialement Responsable", Novethic rating of ASPI, ...).
2.1.6. Environmental Projects.

MDB Board members, NGO representatives and the media have tended to rate MDB's environmental performance on the basis of their lending volume for environmental projects. Quite apart from the fact that lending volume is in itself an inappropriate criterion of an MDB's performance in any sector, lending for environmental projects is an inappropriate indicator of an MDB's contribution to rehabilitating or improving the environment. The same will be true for new sectors identified as contributing to sustainability. Instead, the actual respect or enhancement of the environment or of sustainable development in an MDB's overall portfolio is a more relevant criterion.

Environmental projects, such as air pollution filters, waste water treatment plants, solid waste incinerators or solid waste dumps, are all very useful investment but are all part of costly corrective "end of the pipe" measures. In a way, fFacilitating their financing is encouraging pollution, particularly when public charges are subsidised, in particularfor instance, by excluding foregiving repayment of the investment costs. Preventive measures, often cheaper and more effective, included as part of in industrial or infrastructure projects, should be preferred.

Furthermore, aAs indicated earlier, the literature (1,2) suggests that using foreign aid for goals investments that do not directly cannot be demonstrated to contribute to economic growth is not supported justified by any economic models and hence, MDB's should refrain from raising immoderately the share of lending to for environment per se in their overall portfolio. It remains unclear whether the indirect economic benefits resulting from these costly projects accrue in amounts and timing that are compatible with the financial termscosts of the MDB's loans usually contracted at market terms including a foreign exchange risk. As a result, countries with limited financial resources or with over-stretched public finances, should be particularly attentive before embarking on those types of projects.

Finally, ex-post evaluation in the EIB shows that both implementation and exploitation of environmental projects often fall short of expectation. Two EIB evaluation reports on waste water treatment plants, one in the North and one in the South of Europe, suggest that while some of them (those in the North) met environmental standards, several were not sustainable. The investments could not be adapted to new environmental norms and the arrangements for sludge disposal were only temporary.
« All the stations were shown to be making a significant contribution to pollution abatement. .. In terms of sustainability  - based on a combination of the plants' potential to meet the environmental standards which will be progressively applied over the period 1999-2005, and their capacity to continue to dispose of sludge (polluting elements extracted from sewage) and limit odours - a number of structural problems remain to be solved. » (7)

As to those in the South (8)- the evaluation covers both countries in the South and the North of the Mediterranean Sea - performance is so uneven that it confirms that one cannot measure environmental impact - let alone sustainability - of an MDB portfolio in terms of its lending volumes. Some plants were not operational and many that were, did not meet EU waste water norms. Too manyMany of these  environmental projects are were decided on political grounds without adequate consultation of local businesses and citizens who supply the primary (polluted) products to these facilities and pay for the operating costs. Often cheaper and more efficient solutions could might have been found had they been consulted about investment and operational conditions.


It may be here mentioned in passing that project analysts are often confronted with Environmental Impact Assessments that inadequately consult all stakeholders including the local population. Experience shows that this consultation should not be seen as an obligation or administrative formality. It has been demonstrated over and over again, that project specifications could be improved by seeking the advice of the local population including for unpopular investments.

The results of the evaluation of EIB's performance in the energy sector gave mixed results despite EIB's contribution to the design of some projects located outside the EU (13). The study shows, however, that environmental impact is more appropriately measured through the actual environmental impact in sensitive sectors once the projects have become operational.

In conclusion, iIt would be wrong to expect MDBs to support sustainability solely mainly by raising their funding of for "sustainable" projects or of for new sectors identified under this new label. Experience has shown shows that an objective such as sustainable development will be best achieved by MDB focusing " on a small number of problems which pose severe or irreversible threats to the future well-being of European (but presumably also the whole of human) society » (10).  " A major reorientation of public and private investment towards new, environmentally-friendly technologies." (10) is justified only if it focuses on economic and market-supported preventive rather than costly corrective measures.  
2.2. Implementation and Operation.


To be sustainable, a long-term investment does not only need to meet prevailing standards at appraisal.

"Wapenhans said that many of these problems stemmed from the fact that the (World) Bank did ''little to ascertain actual (underlined) flow of benefits or to evaluate the sustainability of the projects during their operational phase. » (12). As illustrated by the case of the wastewater treatment plants mentioned above, the situation is not different at the EIB. Sustainability requires adaptability. Only a management receptive to these changes can ensure the sustainability of the proposition. This observation puts special emphasis on the need for flexibility in the implementation of the investment; a lesson distilled also from the World Bank's ex-post evaluations. The technical description of an investment must be considered at best as indicative of the elements that were used to decide the amount and terms of the loan. They should not be seen as a blue print of the investment to be carried out as such by the promoter.

EIB's scoping table distinguishes the environmental risks during project construction and operation. During implementation, construction works can damage the environment and project specification should include elements that minimise temporary hindrances. It is during the operational stage of an investment, however, that long term environmental effects -on the ecological system or on the social surrounding - become apparent and measurable. Hence, an MDB's actual interest in the sustainability of its loan portfolio will depend on staff time and resources it allocates on supervising and evaluating project implementation and operation. The evaluations of the water projects mentioned above very much stress the need for the EIB to keep controlling its environmental projects once they have become operational and study with their management the measures to be taken to ensure that the investments are adapted to changes.

Sustainable development assumes project adjustments over a long period of time. Loan contracts between the MDB and its borrower, however, are valid only as long as the loan is not cancelled or repaid. MDBs already loose much of their leverage once the loan is fully disbursed. Rarely if ever are loans recalled on the grounds of the promoter's technical, environmental or social shortcomings. Most MDBs impose lending restrictions only when a borrower stops reimbursing its loans threatening its own sustainability. Furthermore, with regards to its obligations to meet EU environmental legislation, the EIB considers that its responsibility is limited to verify that the specifications of the investment itself are compatible with EU legislation. It considers that it cannot be held responsible for the way the investment is utilised. MDBs can assume responsibility for these specifications that they approve and the way they are implemented. They rightly claim that they cannot substitute themselves for the private promoter or public authority that runs the business. As long as these perceptions prevail, MDBs responsibility with regards the sustainability of their investment portfolio will lack the time dimension of sustainability.

Hence, sustainability assumes a different relationship with the promoter (who is not always the borrower). It implies the creation of a client-service relationship with him. MDBs will need to check the extra costs of such a set up against potential benefits. Their responsibility for sustainable development will depend on their capacity to extend their relationship with the client of a specific investment beyond the investment period. It would be misleading for an MDB to subscribe to sustainable development if it limits its intervention only to lend for new - more sustainable - sectors and fails to ensure that the investments financed do not impair the capital left to future generations during project operation.
3. Organisational implications

3.1. Creation of an Environmental Unit.

To meet environmental conditions, most MDBs have created special environmental units. In contrast, until recently at least, the EIB has kept full primary responsibility for environmental screening with the front-line project analysts.  The Head of the Project analyst's service was also responsible for EIB's environmental record as well as its relationship with environmental NGOs and other MDBs on environmental matters.  In 1995, the EIB nominated within the Project General Directorate an environmental specialist, who has recently received further assistance.

The reasons for keeping responsibility for environmental screening with the operational staff and postpone the creation of a special environmental unit were, besides budgetary restraint: (1) the EIB's limited responsibilities in policy decisions that fall under the authority of other European institutions; (2) the complexity and sector specificity of the European environmental legislation that was thought to be more efficiently handled by the project engineer experienced in the sector concerned; (3) the fear of dilution of responsibility regarding the environmental impact of the project during appraisal and supervision (waste-bin management); and (4) consideration for Total Quality Management based on decisions being taken as close as possible to the client.  

The system, however, suffered from variable individual sensibilities to environmental considerations, some analysts accommodating more easily than others the promoters' preferences, the difficulty in verifying cross-sector externalities (the project analysts are organised along sector specialisation) and an uneven application of novelties into ongoing business.

All in all, it is, the author believed believes that the system resulted in a relatively strict application of environmental standards into project design; the dialogue between promoters and project analysts remained in the hands of professionals who spoke the same language. Willing promoters welcomed the international experience of EIB's specialists, their knowledge of EU legislation specific to their business and their capacity to seek practical solutions to environmental issues. The professional analyst was also the best judge of the quality of the Environmental Impact Assessment, which have often proven to be administrative documents aimed at justifying the investment rather than comprehensive and objective analyses after open consultation with all stakeholders. An experienced chemical engineer, for instance, is best capable of gauging the real environmental threat of a chemical product and giving a final opinion on the eligibility of an investment in a chemical plant.

The whole system, however, was based on the authority of these analysts and their capacity to turn down inappropriate investment proposals.  It meant that the whole decision-making process needed to be bottom-up and non-hierarchical. It also became obvious that as the environmental issues became more complex and required greater cross-sector awareness, the set-up needed adaptation. Finally, for the system to work, the "Environment" needs a champion at the top management level, a personality with power to stop environmentally risky projects and who will indefectibly defend project analysts' recommendations regarding environmental issues.  

Since the beginning of 2002, new arrangements address these weaknesses. Today's practical arrangements are still based on the basic responsibility lying clearly with the project analysts, who prepare the "Environmental Summary - Table and Performance Criteria" for each investment proposal. He is supported by an Environmental Steering Committee that sets strategic issues. The Project Directorate has created an Environmental Unit composed of less than a handful of staff for policy and procedure issues. And  individual proposals are informally crosschecked by a cross-directorate Environmental Assessment Group made up of peers of the project analyst and chaired by the Environmental Specialist from the Project Directorate . Basic responsibility, however, is still lying clearly with the project analysts, who prepare the "Environmental Summary - Table and Performance Criteria" for each investment proposal. Contacts with the NGOs has been transferred to the public relations directorate. This should not stand in the way of promoting direct contacts between these NGOs and the professionals who know best the cases discussed. They are assisted by the Environmental Specialist of the Directorate who helps ensure that the criteria remain up to date and develops EIB's general approach to environmental protection and sustainable development. The unit is responsible for translating the recommendations of the European Commission on sustainability into specific EIB criteria. To improve internal coherence among individual analyses and ensure strict adherence to EIB's selection criteria, appraisal reports, which include the full environmental analysis are subjected to a peer review under the control of the environmental specialist.
3.2. Partnership with Environmental NGOs.


Good relations with environmental NGOs are today a key feature of sustainable business, whether private or public. The Technical Advisory Services of the EIB has have traditionally sought to co-operate with NGOs. The drive for sustainable development financing should reinforce this partnership to the mutual benefit of both parties.

For this partnership to be successful, the following rules are considered to be important. First, information should be shared in all transparency as much as bank confidentiality rules permit. The EIB being a public institution, it is bound to publicise, as is today the case, the projects for which it is contemplating making a loan, in order to give all interested parties the opportunity to comment on the proposal. Opacity in this regard only raises unnecessary suspicion; hence, only independently established commercial risks resulting from announcing an investment plan by a private concern may exceptionally justify delay the announcement. In this context, it wasthe Technical Advisory Services found mutually profitable to discuss in advance with some local NGOs their own "environmentally sensitive areas". This helped prepare discussions and site visits of potential investment proposals and avoid subsequent friction or help verify in advance with the promoter some loan conditions that were hereby more easily taken on board by all parties concerned.  

Secondly, regular meeting must be organised with the international environmental NGOs. During these meetings, specific cases and general policy issues are discussed. For specific projects, it is of tantamount importance that the professional competence of the analyst concerned is brought to bear to the mutual benefit of the NGOs who become better aware of technical constraints and of the analysts who become better aware of some of the ecological issues in their sector of activity.

Thirdly, when objections are raised by an environmental NGO on a specific case, it was always found appropriate to have the project specialist respond rapidly, possibly with a site visit . Encouraging project promoters to meet with environmental specialists under the auspices of a neutral MDB authority has been found to have profitable consequences for all parties concerned. Cases in point were controversial forest plantation projects financed by the EIB in two EU member countries.

Adherence to sustainable development will require MDBs to maintain closer partnerships with civil society. Although NGOS have at times presented biased views of the actual needs of the local civil society (the current drive against globalisation, is a case in point), it is believed that closer partnership based on mutual respect and genuine concern for the interests of the local population and its environment will become the cornerstone of sustainable development.
3.3. Staffing

Adherence to the principle of sustainable development implies for MDBs a strengthening of their service responsible for project analysis. A wider range of selection criteria to be analysed at appraisal and a longer period during which selected investments need to be followed, imply additional work for the project specialists. Unless sustainable investment programmes replace traditional sectors and overall lending decreases, it is unrealistic to pretend to adhere to sustainable development principles without raising the MDB's capacity to appraise, supervise and evaluate projects. Although this seems obvious, it is one of the main obstacles in getting the drive for sustainability actually integrated in the MDBs' operational standards. Admittedly, MDBs' lending conditions must remain competitive and they need to limit clients' transaction costs. Transaction costs are here understood to comprise not only the MDB's lending margin but also the administrative costs for the client who needs to collect the additional information that will allow the MDB to determine the sustainability of the proposal. This problem is central to MDBs' capacity to meet the requirements of sustainable development.
3.4. MDB Board of Directors

It is generally admitted that sustainability implies greater selectivity. Traditional criteria, such as economic performance and environmental protection, are reinforced, and new criteria regarding social impact are added. As indicated by these early commentators, sustainability implies for project analysts and MDB management a greater capacity to say "no". In theory, this perfectly matches MDBs natural tendencies, since it is well known that the quality of a banker's portfolio is determined precisely by his capacity to say "no".

In practice, however, MDBs' capacity to be selective is restricted by the composition of their Board of Directors. In commercial banks, the Board of Directors' role is to exercise control over the organisation and management's adherence to a set of objectives. Rules of ethics and good governance prohibit commercial banks from making systematically loans to Board members. In MDBs, Boards of Directors  differ in their composition and culture, but have in common that they comprise representatives of the recipients of its their own loans. Officials of the recipient countries control project submissions and participate in the approval decision. Donor countries who sit on the Board of Directors may have also be vested interested interests in seeing the loans approved, under the concept principle of "just return" by which goods and services supplied for the investments approved should match their contribution to the MDB. They usually check international procurement procedures to verify if this principle is applied, less than to assert that the best possible conditions have been met for the borrower.Commercial banks that abide by the rules of good governance and ethics limit or prohibit lending to Board members and therefore do not face this conflict. Cancellation of outstanding debt of recipient aid recipient countries further aggravates the "moral hazard" stemming from this situation.

The capacity of the « independent » project analyst to refuse proposed investments is undermined by this conflict of interest. Even when Board members raise valid objections against doubtful cases, rare are those that are actually turned down or eliciting negative votes other than for reasons pertaining to the shareholder's particular interest.

If the drive for sustainable development is to make development financing more efficient, MDB's Boards need to forego their practice of approving individual loans. Individual loan approvals must remain strictly under the authority offirst be selected by a professional investment or loan committee. They should concentrate limit their interventions to policy setting and ex-post control over the actual performance of the MDB's lending portfolio in terms of its contribution to the selected policies.

This organisational change will also get MDBs to move away from lending volume considerations and lending targets, which have been identified by the ex-post evaluation unit of the World Bank as the main cause of project failures. This issue clearly exceeds the scope of this paper, but it is at the heart of development financing and unless MDB Board procedures are changed, increasing MDB lending volumes, or for that matter, aid volumes at large, is unlikely to turn development financing into a sustainable proposition.  Political considerations, which have been identified as the main source of inefficiency of foreign aid (9), will continue to dominate the sector and undermine its sustainability.

4. CONCLUSION

This analysis leads to the following practical recommendations:

4.1. Nature of the eligible investments: beyond the reorientation of lending programmes to include new sectors that make development more sustainable, careful consideration for externalities should be taken into account in project appraisals. Economic criteria should retain their pre-eminence, but should be complemented with additional environmental criteria and with new social considerations.

4.2. SCOPING. Investment proposals should be checked against a comprehensive list of environmental sustainable development criteria in a format easily verifiable by management and peer examinators. These documents should rate individual environmental risks during project implementation separately from those during operation. They should indicate mitigating measures for each of the risk.

3. RATE OF RETURN CALCULATION. While cross-sector and trans-generation impacts need be taken into account when selecting those elements that will directly affect project outcome, careful consideration should be given before integrating externalities into rate of return calculation, in the light of the inherent fragility of this indicator and its possible loss of precision and significance by trying to enlarge the factors beyond those that directly affect outcome. The result of the calculation should be weighted against the type of capital consumed (ecological, cultural,.) and whether it is renewable or not.

4. RATING PRODUCTS AND PROMOTERS.  MDBs can usefully bring to bear the international and long-term perception of development, but need to remain attentive to project promoters' obligation to respect market conditions and national legislation. They could usefully integrate eco-labels and the rating of promoters by agencies that establish their adherence to principles of sustainability and ethical governance in their selection criteria.

5. PARTNERSHIPS WITH NGOS. The drive for sustainability emanates mainly from civil society and NGOs that rightly or wrongly  claim to represent its interests. MDBs that subscribe to the principles of sustainability will have little choice but to develop their relationship with NGOs into genuine partnerships by increasing their transparency, developing professional contacts and responding rapidly and professionally to questions regarding individual projects. In this context, it is preferable to maintain responsibility for project-related environmental aspects with the individual project analyst. Central environmental units are needed, however, to handle strategic, policy and procedural issues as well as the focal point for organising  peer quality reviews of the individual screening process. should see their role more as a service to project analysts than as their controller.

6. EXTENDING RELATIONS WITH CLIENTS BEYOND PROJECET  PROJECT IMPLEMENTATION. Sustainability implies preserving capital for the following generations and hence a commitment over a longer period of time. Sustainability also assumes that projects adapt to new requirements, including during their operational period. Hence, it calls for an extension of MDBs responsibilities over time. Project analysts are likely to be required to establish more intense client relationships with project promoters extending over part of the operational period of the accepted investments.
6. STAFFING. Applying criteria of sustainable development will require raising resources assigned to project appraisal and follow-up.

8. MDB BOARD OF DIRECTORS. The drive for sustainable development is unlikely to raise the efficiency of development financing as long as conflicts of interest inherent to the composition of Board of Directors remains unchanged. Responsibility for individual project approval must be fully delegated to professional investment or loan committees.


            Jean-Jacques SCHUL