Financial Intermediary Lending World Bank Safeguards Workshop May 2013

CATEGORY A CATEGORY B CATEGORY C CATEGORY FI Env. & Social Impact Risks Project structure: Multiple subprojects - WB financed by onlending through a Financial Intermediary Subprojects identified/ prepared during project implementation Subprojects can be Category A, B, C

OP 8.30: Financial Intermediary Lending WB lending to clients through an FI FI = Financial entity that makes credit decisions and/or bears credit risk FI Lending often is in form of a Line of Credit For Line of Credit: clients (Sub-borrowers) may be: private sector businesses, households, government entities (including parastatals, municipalities and other sub-sovereign entities)… have obligation to repay, regardless of who is intermediating the funds Activities commonly funded through FIL: industrial and agricultural enterprises, transport and energy infrastructure, public service infrastructure

Objectives of Financial Intermediary Lending Support reforms in the financial sector or related real sectors Finance real sector investment needs Promote private sector development Help stabilize, broaden, and increase efficiency of financial markets and their allocation of resources and services Promote the development of the participating FIs Support the country’s poverty reduction objectives Enables large financial institutions such as WB to support broad economic development by financing a multitude of small to large scale enterprises

Small Grants Program for Small Businesses, implemented by a Community Development Fund National Development Bank credit line for financing private investment in renewable energy production Financing for Municipality through Government Municipal Development Fund for restoration/upgrading of six tourism assets WHICH OPERATIONS WOULD QUALIFY AS FI LENDING? Category FI Category B

Eligibility Criteria for FIs Adequate profitability, capital and portfolio quality, as confirmed by audited financial statements Appropriate capacity to carry out appraisal and supervision of loans Capacity to mobilize domestic resources Adequate managerial autonomy, commercially- oriented governance, and business procedures FIs that do not meet these criteria may participate, provided that they have an institutional development plan with time-bound monitorable performance indicators and a mid-term review of progress

The Challenge of Environmental Quality Assurance in FI Lending Multiple sub-projects, multiple sub-borrowers, multiple sectors, widely scattered, environmentally/socially sensitive investments Indirect application of Safeguards through Environmental and Social Management Frameworks (and/or use of E & S Systems) Sub-projects must comply with both national regulations and WB policies

(OP) 4.01 requires that FILs are subject to the same rigor by the Bank and the same expectations of environmental performance in design and implementation as regular investment projects… …but WB plays a different role:

World Bank and FI share responsibility for ensuring sub-projects are carried out in compliance with WB Safeguard Policies This includes the preparation and implementation of EAs, EMPs and RAPs for subprojects (as required) During sub-project supervision the FI:  Is responsible for assessing the capacity of sub-borrowers to comply with EMPs and more generally to do carry out environmental and social risk management  Performs sub-project site supervision visits to confirm EMP implementation  Consults local environmental authorities for EMP requirements including current permits  Ensures the sub-borrower carries out required public consultations and does it in proper way including reviewing minutes of those consultations  Verifies with sub-borrower the overall environmental performance of the investment including any critical mitigation measure taken and significant environmental incident  Prepares quarterly/annually reports on results of EMP actions

World Bank  Screens and Sets Project EA Category  Advises Borrower on the Bank’s EA requirements  Reviews and gives “No Objection” for EA reports (Due Diligence instruments)  Makes report available in Info shop  Supervises implementation of EA/EMP  Makes mutually agreeable changes during implementation Borrower  Prepares and Implements EA/EMP/EMF in accordance with national laws and WB OPs  Consults project-affected groups and local NGOs  Discloses draft/final documents in country  Responds to Bank and public  Monitors implementation of EMP  Ensures compliance under national laws Responsibilities: Direct Investment Projects

Responsibilities: “Intermediated” Projects World Bank Assigns SG Category to the overall Project (FI, A, B, C) Assesses FI capacity to implement SG Advises FI on on Framework Documents; Gives No Objection to Framework Documents Discloses all SG documents in Infoshop and sends to Board as required Prior and/or Post-review of EAs/EMPs/RAPs Supervises implementation together with FI FI (or other Intermediary) Prepares Framework Documents for the overall Project (Environmental Management Framework; Resettlement Policy Framework) Disclosure and public consultation on Framework Documents Screens, categorizes, evaluates, approves and monitors Sub-projects based on Framework documents (including ensuring preparation of acceptable EAs/EMPs; RAPs) (Sub) Borrower Prepares EA/EMP, RAP* based on guidance from FI Disclosure & public consultation of EMP/RAP Implementation of EMP/RAP * (including selection of contractors; incorporating EMP in contracts; ensuring compliance) * Preparation and/or implementation of RAP might be responsibility of a Government agency Contractual relationship

Primary Financial Intermediary (First Tier) Participating Financial Intermediary (Second Tier) World Bank Guidance, Capacity Building, Oversight Guidance, Capacity Building, Oversight Guidance, Capacity Building, Oversight Institutional Relationships for Safeguards in FI Lending Regulatory Authorities Licensing, monitoring, inspection Reporting Borrower Agency (e.g. Ministry of Economic Development) Accountability, Reporting Oversight Ultimate implementation responsibility Sub-borrower

Environmental and Social “Due Diligence” Through Framework Approach PROJECT LEVEL: ESMF; RPF Prepared and implemented by Project Implementing Agency (e.g., FI) Sets out basic principles, requirements, templates, procedures and responsibilities for preparation, approval and implementation of sub-project EAs/EMPs, RAPs WB gives No Objection; Borrower might or might not formally approve Disclosure and consultation prior to Project Appraisal Subject to Pelosi Amendment if there will be Category A sub-projects One public consultation (usually national level) Referenced in Legal Agreement: Borrower is ultimately responsible to WB; FI responsible for day-to-day implementation WB monitors implementation as part of regular implementation support SUB-PROJECT LEVEL: EA, EMP, RAP Prepared and implemented by Sub-borrower Assesses subproject-specific environmental/social issues and sets out required mitigation and monitoring measures Approval for Borrower prior to subproject approval (if needed): Government Environmental Authority Approval for WB prior to subproject approval: FI and WB (if ESMF/RPF specifies prior review) FI only (if ESMF/RPF specifies post review Disclosure and consultation prior to subproject approval Public consultation at local level (2 for Category A) Covered indirectly in Legal Agreement through ESMF/RPF FI (and WB on spot check basis) monitors implementation

Environmental and Social Management Framework  Provides an environmental and social screening process to allow for identification, assessment and mitigation of potential impacts by proposed works at the time the detailed aspects are known  Provides guidance on process to ensure EAs will be prepared in compliance with national legislation and OP 4.01  Serves as guidelines for the development of sub-project/site-specific Environmental Management Plans (EMPs), Environmental Assessments (EAs), due diligence reports, environmental audits, etc  May be purely process-oriented or include technical details for likely common types of sub- projects  May provide specific guidance regarding preferred or acceptable alternatives (siting, technology, etc.)  Outlines training and capacity-building arrangements needed to implement the EMF provisions  Is an integral part of the project Operational Manual and applicable to all project investments, regardless of funding source or implementing agency

SCOPE OF SUB-PROJECTS: NARROW VS BROAD Process-oriented ESMF General criteria, guidance, Set out processing steps and accountability Substantive ESMF (including project-wide EA; generic model EMPs) Sometimes use generic EMP instead of ESMF Trade-off: narrower scope and more substantive ESMF, less PIU/FI judgement and capacity required Separate presentation on ESMF

OPTION to APPLY WORLD BANK PERFORMANCE STANDARDS in PLACE of SAFEGUARD POLICIES for SOME FIL PROJECTS Implementation based on use of FI and national environmental and social management systems (ESMS) instead of ESMF and RPF, defining outcomes to be achieved rather than procedures to be followed (IFC model) Applicable only if sub-borrower is a private entity (not public sector) (for mixed projects, applies only to activities implemented by private sector sub-borrowers) Responsibilities for identifying, assessing and managing E&S risks must rest solely with the sub-borrowers FI must have demonstrated capacity to assess and manage E&S risks associated with the activities it finances (including assessment of sub-borrower capacity) Sub-borrowers must have demonstrated capacity to identify, assess and manage E&S risks associated with the activities to be financed WB role: review the sub-borrower’s ESMS and ESMPs for consistency with WB Performance Standards and monitors performance. Interim Guidance Note for WB staff is under preparation