Since at least the mid 1980s, civil society groups in many countries have pushed the MDBs, particularly the World Bank, to change their approach to energy lending. Environmental and social advocates have asked that the emphasis on massive central grid projects be shifted to smaller-scale decentralized projects that could be built on an appropriate scale and schedule to be more affordable, and provide energy access to rural poor communities, often far from the grid. Studies had shown, for example, that massive hydroelectric dams and power plants not only took many years to plan and build, but also caused massive relocations of local populations, often without fair compensation, and the resulting power was often exported far away to cities, thus making millions of poor people even poorer.5 After the UNFCCC was signed at the Rio Earth Summit in 1992, the drumbeat for reforms in the MDBs' energy lending grew stronger, with demands that it end subsidies for fossil fuels and other environmentally damaging energy production, consult widely with local communities, require fair resettlement plans, pursue energy efficiency and pollution reduction, and generally pay attention to the climate change and sustainable development consequences of energy projects. By 1993, the World Bank agreed to several of these demands in new policies to be applied to energy lending and advice to client governments.6
But the new energy policies were honoured mostly in the breach, and in 1996 were downgraded to 'good practice' guidelines. Several internal studies recommended reforms but were ignored. In 1998 a report by the Secretariat of the Global Environment Facility concluded that the World Bank had not 'taken meaningful action to reduce its traditional role as financier of fossil fuel power development' (GEF, 1998).
Controversy over MDB-funded energy projects in numerous countries continued to grow throughout the past decade. The World Bank first embraced and then rejected the findings of an independent body called the World Commission on Dams, established to study the social, economic and environmental impacts of large hydroelectric dam projects (World Commission on Dams, 2000). It then launched the extensive three-year Extractive Industries Review (EIR) to study impacts upon the poor of oil and mining projects, which produced a significant body of recommendations based on wide consultation with civil society and business, as well as governments. The findings of the EIR included that the Bank should 'phase out investments in oil production by 2008 and devote its scarce resources to investments in renewable energy, resource development, emissions reducing projects, clean energy technology, energy efficiency and conservation, and other efforts that delink energy use from greenhouse gas emissions' (Extractive Industries Review, 2003). The Bank rejected most of the recommendations, but did commit to increasing lending for renewable energy by 20 per cent each year for five years.7
Meanwhile, the financial role of the MDBs was evolving too. From the 1990s on, private-sector commercial banks, export credit agencies such as the UK Export Credit Guarantee Department and the US Overseas Private Investment Corporation, and sovereign wealth funds of countries such as Singapore, China and Brazil increased the amount of capital investment in emerging economies. The explosion of foreign direct investment (FDI) in the last 15 years, in at least a select list of countries, has dwarfed the amount that the MDBs provide.8
Now, while the poorest countries still do not have access to commercial foreign investment funds, the MDBs can still be significant lenders. But in the emerging economies and middle-income developing countries, the MDBs find themselves in the odd position of competing for the most 'bankable' projects with commercial lenders. Here the MDBs' policy advice and the imprimatur they provide to projects that they approve are often more influential than the funds they can lend.
The MDBs have long been criticized for investing in the expansion of industrial sectors that significantly ratchet up greenhouse gas emissions, without any methodology in place to predict or monitor the consequences or to consider the real costs and benefits of alternatives to either the borrowing countries or the globe. Major projects have been financed to promote fossil fuel extraction, aluminium smelting and agriculture, all primarily for export, that have modest impacts upon host country development or improving local employment levels. So the borrowing countries have been saddled with industries of the past, and with their attendant environmental and social impacts, but relatively little economic development to ease their transition to better livelihoods in a low-carbon future.
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