By Bruce Rich, Environmental Defense

November 17, 1998

A. Introduction and Overview

This background memorandum is an attempt to give an overview from an environmental NGO perspective of a number of the issues associated with proposals for more comprehensive, common, environmental assessment policies, guidelines and standards for OECD Export Credit Agencies (ECAs). It is our belief that over the past decade there has been growing international momentum for improved, common environmental assessment procedures and standards in all areas of economic development, investment and trade. Economic globalization and the spread of new information technologies have changed the world remarkably over the past ten years, facilitating the proliferation of non-governmental organizations and the development of civil society in non-OECD countries. One of the most active areas for this development of civil society has been in the environmental domain. It is no longer possible, we believe, for any major governmental agency operating in the international arena to view its activities in a compartmentalized fashion, insulated from the environmental and social impacts of its decisions and activities. Expectations of greater transparency and accountability in the international economic and trade system are increasingly heard from all quarters. Recent examples where all these issues have come to the fore include ongoing debates over the need for reform of the International Monetary Fund and the international discussions and controversy over environmental and social issues in negotiating the Multilateral Agreement on Investment.

This memorandum takes as a point of departure the July, 1998 statement of David Johnston, Secretary-General of OECD, concerning OECD work on sustainable development:

In this spirit we congratulate the OECD Working Party on Export Credits and Credit Guarantees for opening itself up for the first time to greater exchanges with organizations of civil society. We recognize and appreciate the attempts of the Working Party (formerly Group) to address more fully environmental concerns in its deliberations. But, as is noted in this memorandum, we must register that from the perspective of many observers on the outside progress has been too slow, and the current situation remains seriously inadequate. While there may not be immediate agreement on a number of issues between many ECAs and non-governmental groups concerned with their environmental and social performance, we hope that the door has been opened for more intensive and continuous contacts and exchanges of information in a common learning process. It is our view that the Working Party and OECD as a whole are uniquely well- situated fora to facilitate a proactive approach to constructively addressing the need for greater, multidisciplinary integration of environmental and social considerations into the deliberations of ECAs.

The fundamental position of this memorandum is that there is a need for more rigorous, comprehensive environmental assessment procedures, including common environmental guidelines and standards, for OECD ECAs. There are numerous real world examples of what such procedures, guidelines, and standards might consist of, for example in the World Bank Group and in the environmental guidelines of the OECD Development Assistance Committee (DAC). Many non-governmental organizations around the world are calling for more far-reaching reforms in the practices and approaches of ECAs, as expressed, for example, in the April, 1998 "Call of National and International Non-governmental Organizations for the Reform of Export Credit and Investment Insurance Agencies." This was endorsed by 163 non-governmental organizations from 46 different countries and sent to OECD foreign ministers before last April's OECD Council meeting.

The term 'common' is necessarily vague, but it refers to the fact that without a common approach, one or more ECAs could be put at a competitive disadvantage if they institute more rigorous, comprehensive environmental screening and assessment. Harmonization implies a closer agreement on common approaches, procedures and standards, coherence perhaps a lesser one of mutual consistency. Complete harmonization is a goal that may be difficult to achieve, but surely coherence is attainable.

The outline of the rest of this memorandum is self-explanatory from the Contents: it first examines the developmental and environmental significance of ECA activities from several perspectives: scale of transactions, categories of risk, and makes some tentative observations about the possible consequences of more rigorous environmental procedures for preparation and approval of transactions. The following section examines recent initiatives in the OECD, EU, G7 and among NGOs with respect to improved, common environmental procedures and standards. The next section examines some of the implications of the lack of common, more rigorous environmental assessment procedures and standards, arguing that strengthening of, and coherence among ECA environmental policies and standards is essential. The following section examines a number of common concerns voiced about instituting common, improved environmental procedures and standards in ECA operations.

Our conclusion is that there appears to be growing momentum internationally in a variety of contexts for the adoption of common, or at least coherent, approaches to environmental and social assessment--with corresponding standards and guidelines -- of economic, investment, and trade activities supported by public agencies. There is a parallel and integrally related push for greater transparency and involvement of civil society by public international financial agencies, including ECAs. We believe that ECAs will be increasingly faced with the choice of reacting to outside developments and pressures, or proactively seizing the initiative and leading efforts to address environmental and social concerns in their operations.

B. Developmental and Environmental Significance of Export Credits

1. Scale of financial support for infrastructure projects in developing countries

Thus, ECAs are the single largest public financers of large-scale infrastructure projects in the developing world, exceeding by far the total annual infrastructure investments of multilateral development banks and bilateral development aid agencies. A significant number of the infrastructure projects whose financing is made possible by ECA cover can involve very serious potential environmental and social impacts: e.g., large scale dams and power plants, mining projects, roads in both pristine and densely populated areas, oil pipelines, chemical and industrial facilities, forestry and plantation schemes, to name a few.

Over the past decade, bilateral aid agencies and the multilateral development banks have progressively adopted stronger environmental assessment procedures and increasingly have agreed on common policies and standards. For example, the Development Assistance Committee (DAC) of the OECD has adopted a number of common environmental guidelines, several of which are coherent with World Bank Group policies. The OECD DAC environmental guidelines reflect a voluntary, non-binding, but common understanding of what is accepted international good practice in development finance. The multilateral development banks have formed a working group (the "Multilateral Financial Institutions Environmental Group") that meets to discuss steps for closer cooperation and collaboration in implementing their existing policies and procedures. The environmental role of the ECAs has already been raised informally in meetings of this group.

2. Four kinds of environmental risk

In discussions of environmental risk it is useful to distinguish the ways in which this term is commonly used. First, there is the evaluation of environmental risk as it relates to the physical and financial viability of a project. Evaluation of this aspect of environmental risk is a component of the most basic financial due diligence, which presumably all ECAs should be taking into account. Classic examples include seismic, storm and flood risk for large infrastructure projects subject to catastrophic failure (e.g. dams, bridges.) when the possibility of such events (earthquakes, 50-year floods, hurricanes etc.) are not taken into account in their construction, or, if taken into account tardily can result in large cost overruns from original estimates. Other examples, which frequently have not been taken into account in development financing in past projects before these agencies developed environmental policies and procedures, include accelerated sedimentation of dam reservoirs caused by deforestation of watersheds (reducing power generation capacity and project life- span), and the financial costs and risks associated with accidents and toxic spills associated with certain kinds of operations, e.g. use and transport of cyanide in mining.

The second sense of environmental risk is the one non-governmental groups, civil society, and a growing body of international conventions and accords are concerned with: threats to the environment qua environment, even if a project is technically, physically and financially sound and viable. Such impacts can be to the human environment: e.g. air and water pollution that affects surrounding populations, disruption of ecosystems (forests, agricultural lands) on which rural populations depend. Or they can entail destruction of irreplaceable bio-diversity, threats to endangered species, encroachments on nationally or internationally recognized protected natural areas, excessive contributions to global warming gases, when alternatives are available etc. Often the human and purely natural impacts cannot be separated neatly (except in the most remote wilderness areas) and are combined.

The third category involves social risks related to disruption of the natural environment: examples include forcible resettlement of populations caused by large infrastructure projects (a particularly contentious issue with larger dams), and disruption of the land use and cultural patterns of vulnerable indigenous peoples. In reality, in many developing countries environmental and social issues are hard to separate: air and water emissions become a public health concern affecting most often the poor, impacts on tropical forests of large projects almost inevitably affect adversely indigenous and tribal peoples etc.

Finally there is a fourth category of environmental risk, identified in a relatively recent issue of Project Finance magazine: the delayed risk to project viability -- both financial and physical -- that arises from the social and political discontent that occurs when project proponents and financers neglect to adequately address the other kinds of environmental risk (catastrophic accidents and failures, threats to the environment qua environment, and social disruption ensuing from environmental disturbance). It can be viewed as political risk not initially present that is abetted by the negligence of project sponsors and financers. Many experiences over the past 15 years show that this is both the most financially costly, and sadly, avoidable category of environmental risk. To give and idea of the consequences of this negligence, it is worth citing in full the opening paragraphs of a recent article in Project Finance on the subject:

Many NGOs in both developing and industrialized countries would submit that the ECAs to date are only looking at the first category of environmental risk -- which is often really a question of basic engineering competence -- and not sufficiently at the other three. The issue here is not one of adopting -- or having imposed -- procedures and approaches that undermine the fundamental goals of ECAs (export promotion coupled with adequate assessment of risk and due diligence). But we would argue that the international context has evolved quite rapidly over the past decade such that ECAs will increasingly be doing a disservice to their clients by not taking into account much more fully all four kinds of environmental risk. We also believe that to the extent possible, common, harmonized policies and standards -- in the spirit, for example of the DAC guidelines -- are the most effective way for the ECAs to address this risk. (This issue is discussed in more detail in section D.)

In this regard the conclusion of the article in Project Finance is worth citing:

3. Stopping projects or modifying them?

What would be the consequence of more comprehensive environmental assessment procedures and standards? First, most activities and operations financed by ECAs would not require any environmental assessment or examination, beyond the most cursory screening. These include obvious categories such as aircraft sales, the vast majority of telecommunications investments and sales, etc.

Second, the experience of public agencies supporting private sector investment and trade that already have more comprehensive environmental assessment procedures and standards -- the World Bank IFC and U.S. Exim Bank, for example -- shows that in the vast majority of cases that do require more detailed environmental assessment, more rigorous standards do not stop a project, they contribute to needed modifications in project design that mitigate environmental risk (in the four senses discussed above). Surely mitigating avoidable risk is in the best interest of clients, and should be a duty of public financial agencies -- bilateral or multilateral -- supporting private sector activity in the international arena.

Third, most agencies that have adopted procedures do have a list of categorical prohibitions: for example, the World Bank Group will not finance or support projects that would convert pristine, primary tropical forests, encroach on nationally and internationally projected areas (e.g. national parks, biosphere reserves and World Heritage Sites) etc. So there is a third, small number of projects which by their very nature are so environmentally and socially unacceptable that ECAs should not finance them, unless they can modified so that the unacceptable aspects are no longer present.

C. Evolution of Efforts to Promote Common Environmental and Developmental Standards for ECAs

1. OECD

The recent, April, 1998 OECD Statement of Intent on Officially Supported Export Credits and the Environment has not been made public, which, to say the least, makes it difficult to analyze! This is a case in point on the need for greater transparency, since in response to recent survey questions (see section C. 3 below) several ECAs have cited this non-public Statement as the basis of their improved standards. Nevertheless, from second-hand accounts it would appear that this Statement is rather general and vague, and in no way involves a commitment or movement towards common, harmonized environmental and social policies and standards -- policies and standards that would be truly coherent with the goals of sustainable development.

The Communique of the OECD Council at Minsterial Level, held in Paris April 27-28, 1998, "welcomed the Shared Goals for Action adopted by OECD Environment Ministers at their April meeting." Moreover

As mentioned above, it would appear that the April, 1998 Statement of Intent on Officially Supported Export Credits and the Environment is at best probably a modest step forward in realizing these goals, and hardly sufficient from the standpoint of many outside non-governmental observers.

A 1994 OECD monograph on export promotion and environmental technologies makes the following observations:

Governments have become increasingly conscious of the fact that, while many of their policies and practices are devoted to the protection of the environment, certain other activities may inadvertently be working against that goal. Environmental review and assessment procedures might help reduce such inconsistencies. To this end OECD Ministers in June, 1993 endorsed a procedural guideline on the desirability of conducting environmental reviews of trade policies..

One of the monograph's main conclusions concerns harmonizing environmental review methodologies among ECAs:

Another conclusion concerns "Ensuring Aid and Trade Policy Consistency:"

2. The European Context

An obvious area of inconsistency within EU countries is that taxpayers are supporting bilateral development assistance agencies with sustainable development goals, that there is a trend towards harmonizing procedures and standards to achieve these goals (as in the environmental guidelines of the OECD DAC), while the same governments support export credit agencies that sometimes promote environmentally, socially, and economically unsound projects and investments in the same developing countries where their bilateral aid agencies are operating.

Since 1960 members of the European Community, and subsequent Union, have attempted, and failed, several times to harmonize the terms of their export credit activities, a relatively recent attempt failing in 1995. Although a progressive harmonization of EU export credit criteria was called for by the 1957 Treaty of Rome, the EU Commission noted in 1994 that "the experience of the past thirty years teaches that states are extremely reluctant to renounce even a small part of their independence in matters of export credit insurance." (EU Commission proposal 297 (94), July 13, 1994) Yet, the EU through its Rio Earth Summit, Agenda 21 and Maastricht Treaty commitments has clearly committed itself to harmonizing its export credit policies with its development assistance goals.

On October 30, 1998 a European Commission Workshop on "Sustainable Development: A Challenge for Financial Institutions" explicitly addressed the lack of minimal, common environmental standards and policies among the ECAs. Although no ECA representatives were present, there were numerous representatives from the private sector, private Banks, and EU governments. Two of the four working groups at the workshop ("Sustainable International Funding and Insuring;"" Leading By Example: Good Practice of Policy Makers") recommended that there is a need for harmonized sustainable development standards for ECAs in the EU, and that the European Commission should play a more proactive role in promoting such standards.

Although progress in the EU in achieving greater coherence between ECA policies and sustainable development has been disappointing to date, the advent of a common European currency and ongoing efforts to implement the goals of Maastricht would indicate that there is a growing mandate for such efforts. This state of affairs argues for increased efforts to harmonize criteria concerning ECAS and environmental and sustainable development policies in the framework of the OECD.

Finally, the recent advent of a new government in the Federal Republic of Germany indicates a possible change in approach concerning environmental, social and developmental standards for the German export finance system, particularly the Hermesbuergschaft. The Coalition Agreement drafted by SPD and Green Party leaders following the formation of the new government states the following: "Die neue Bundesregierung wird eine Reform der Au enwirtschaftsf"rderung, insbesondere der Gew,hrung von Exportb?rgschaften (Hermes) nach "kologischen, sozialen und entwicklungsvertr,glichen Gesichtspunkten in die Wege leiten." This translates roughly as "The new federal government will carry out a reform of export promotion, in particular the granting of export guarantees (Hermes), along ecological, social and developmentally sustainable aspects."

3. G7 and United Nations General Assembly Special Session (UNGASS) on the Fifth Anniversary of the Rio de Janeiro Earth Summit

The 1997 Denver G7 Summit Declaration states, under the heading "Environmental Standards for Export Credit Agencies," the following:

Private sector financial flows from industrial nations have a significant impact on sustainable development worldwide. Governments should help promote sustainable practices by taking environmental factors into account when providing financing support for investment in infrastructure and equipment. We attach importance to the work on this in the OECD and will review progress at our meeting next year.

In preparations for the 1998 G7/G8 Summit the issue was raised again, and was raised orally directly by the U.S. President in the closed session of G7 heads of state. It will be on the agenda in preparations for the 1999 Summit. On June 27, 1997 President Clinton at the United Nations General Assembly Special Session on the fifth anniversary of the Rio Earth Summit (UNGASS) also called for harmonization of ECA environmental standards:

"We will do more to encourage private investment to meet environmental standards. The Overseas Private Investment Corporation will now require that its projects adhere to new and strengthened environmental guidelines, just as our Export-Import Bank already does, and as I hope our allies and friends soon will. Common guidelines for responsible investment clearly would lead to more sustainable growth in developing nations."

4. International and National NGO Initiatives

Over the past year and one half there has been growing momentum among NGOs in an increasing number of countries to 1) call for environmental and social reform of the export financing systems of their own countries 2) conduct an increasing number of case study analyses of ECA financed projects, both past and ongoing, that are causing or risk causing unacceptable environmental and social harm; 3) call upon G7 and OECD governments to reach an accord on common, harmonized environmental and social policies and standards for their ECAs and investment insurance agencies.

The most notable expression of growing concern in international civil society for these issues was a declaration of 163 NGOs from 46 different countries sent to the G7 heads of state, finance ministers and sherpas in preparation for the 1998 Birmingham G7 Summit, and to the OECD foreign ministers in preparation for the OECD Council Meeting at Ministerial Level last April 27-28. The declaration, entitled "Call of National and International Non-governmental Organizations for the Reform of Export Credit and Investment Insurance Agencies," calls for greater transparency and public participation in ECA decision making, environmental assessment and screening of ECA commitments, social sustainability (equity and human rights concerns) in appraisal of ECA commitments, and for an international agreement in the context of the OECD and/or G7 and Berne Union on common environmental and social standards. The declaration was drafted at a workshop of 18 environment and development NGOs from 11 different countries that met in Messum, Germany March 29-31, 1998 to coordinate and expand an international research and advocacy campaign to promote higher, harmonized, environmental and social policies and standards for ECAs. A second international workshop, with many more NGOs from more countries, is slated to take place in Washington, D.C. in late February or early March with the purpose of strengthening international research, pressure and advocacy directed at ECAs.

Efforts by NGOs to promote environmental and social reform of export finance are now ongoing in Germany, Japan, Switzerland, Norway, Austria, Australia, Canada, the United Kingdom, Sweden, and the United States. NGOs from several other major exporting countries (e.g. Italy, France) are now mobilizing further resources to research the environmental and social consequences of ECA financing. An international network of about 20 groups is preparing a series of case studies on adverse environmental effects of both past and ongoing ECA supported projects. As of mid-November, 1998, several of these case studies have already been prepared in draft form. Some examples of the case studies under preparation include: the Ilisu dam project in Turkey, the Manantali dam and power project in Mali, Mauretania and Senegal (characterized by Carl-Dieter Spranger, former German Minister for Economic Cooperation, as "an act of economic and environmental non-sense"), the Ocensa oil pipeline in Colombia, the Ratchaburi Power Project in Thailand, the Maheshwar dam project in the Narmada River valley in India, the San Roque multi-purpose dam project in the Philippines, the Urucu Gas and Oil Project in the Brazilian Amazon rainforest, the Central-Northern Multimodal Transport Corridor, Brazil, and a number of existing and proposed mining and extraction projects in Latin America, African and Asia, of which two threaten established World Heritage Convention nature sites. Country studies are also being prepared on environmental and social aspects of ECA support for projects in Indonesia and Russia. In all of these case studies one or more OECD ECAs is the main public bilateral financial agency involved in, or considering involvement in, the project. All of this material is being prepared as part of a coordinated effort to bring the environmental and social consequences of inadequate ECA environmental and social standards to the attention of parliaments, governments, and the international media and press.

In the U.S., the Environmental Defense Fund and World Wildlife Fund worked with Yale University Law School to produce a survey of the environmental standards of 11 ECAs and investment insurance agencies. The conclusion of this report is as follows:

The Yale Law clinic also concludes that

Six months later, in September, 1998, the Washington based Center for International Environmental Law conducted another survey of 20 non-US ECAs, receiving responses from eight, and obtaining information on a ninth from its website, to conclude the following about nine of the twenty ECAs:

1. Consequences of the lack of a common basis for policies and procedures

While recent information exchanges in the OECD Export Credit Group show that most OECD ECAs have begun in recent years to consider in some fashion environmental concerns, it is clear that there is a lack of any common approach or standards, apart from the recent commitment to examine some prospective projects from the standpoint of a 'common line.' It is also clear that the standards and procedures of most OECD ECAs do not have the rigor or comprehensiveness of those that are used by the multilateral development banks for private sector finance, or of the bilateral development assistance agencies. The common line approach, while a welcome step forward, will not in our view be adequate in addressing environmental and social issues in project finance. It will be unsatisfactory in particular if the common lines adopted represent a lowest common denominator that results in ECAs supporting projects that are environmentally, socially, and economically unacceptable when measured against the standards of the World Bank Group or OECD country bilateral development assistance agencies.

Several major implications follow from this state of affairs:

a. Taxpayers' Support for International Private Sector Finance is Working at Cross Purposes

Major exporting countries are financing, guaranteeing, or supporting both the private sector activities of the World Bank (IFC, MIGA, IBRD guarantees etc.) and their own, bilateral export credit and insurance agencies. In some cases the same agencies offer similar financial services and support for project finance with different environmental and social criteria. What would be unacceptable for the IFC or MIGA or IBRD, can be approved by the bilateral agency. Taxpayers' funds are working at cross purposes. Of what use is it for the IFC or MIGA to improve their capacity for implementing World Bank environmental policies, when projects for which they would require environmental mitigation measures will be financed by publicly supported bilateral ECAs without such measures?

b. The Current Situation is a 'Race to the Bottom' in Terms of Environmental and Social Standards

Even when a bilateral ECA adheres to more rigorous standards, the lack of agreed on, harmonized policies penalizes that agency. The most notable recent example was the decision of the U.S. Export-Import Bank in May, 1996 not to finance the China Three Gorges dam unless the project sponsors provided more environmental information . The World Bank was not even approached for financing, because the project sponsors knew that the environmental controversy and perceived risk surrounding Three Gorges made such financing highly unlikely.

c. The Current Situation May Be Undermining the International Environmental Commitments Made at Rio

The lack of minimum, harmonized environmental assessment criteria among bilateral export credit and investment insurance agencies may be undermining the commitments to sustainable development of leading exporting nations under the Climate and Biodiversity Conventions and Agenda 21. For example, bilateral ECAs and investment insurance agencies are supporting large scale expansion of fossil fuel power production without any weighing of the global climate impacts of increased greenhouse gas emissions, or any assessment of environmentally less burdensome alternatives or, in some cases, even a consideration of environmental mitigation options. The President of the World Bank Group has committed the institution to develop a system of greenhouse gas accounting for its projects, starting with power projects.

d. Any bilateral agencies that attempt to set higher standards are at a competitive disadvantage, and risk a backlash from some circles to lower or eliminate their existing standards. In the U.S. this has been the case, where there was a recent, failed effort in the U.S. Congress to strip the U.S. Exim Bank of its environmental standards.

2. Why common, harmonized standards?

In summary, common, harmonized policies and guidelines are needed because of the desirability of coherence among ECAs and between the ECAs as a group and other public bilateral and multilateral financial institutions, and because improved procedures and standards will be hard to achieve if they are not achieved in common so that the competitiveness of any single ECA is not undermined. In addition, potential private sector clients and beneficiaries need predictability, consistency and clarity in making investment decisions. The common line approach poses the risk of an ad hoc, situation based approach for each particular project, even if in the given case common approaches or criteria are agreed on by participating ECAs.

The common approaches agreed upon for a particular hydroelectric dam, for example, will not give much specific guidance to companies concerning what the environmental criteria of ECAs will be for evaluating other dams in other localities. For example, if for a particular dam ECAs agree after a 'common line' discussion that a resettlement plan is needed to compensate and rehabilitate a population that will be forcibly resettled, will this be a requirement for other dams? For other infrastructure projects involving resettlement? Will the requirements and standards for the resettlement plan be the same or different in every case? (e.g.. when the plan is prepared, whether the goal is to put the resettled population at least on the same economic level where it was before resettlement, whether it involves cash compensation or land for land, etc.) Surely it would be better to agree on a common, harmonized guideline -- similar, for example, to the one already adopted on resettlement by the OECD DAC, which in turn is coherent with the World Bank Group policy on resettlement.

Uncertainty, ambiguity, and lack of consistency can complicate and sometimes discourage investment and export decisions, and this is the current situation both within a number of ECAs, that lack written environmental assessment procedures and standards, and among ECAs, each of which have differing approaches and standards. The increasingly frequency of environmental protests by NGOs in developing and industrial countries concerning environmentally controversial projects means that even--or especially--ECAs that claim to have minimal, 'flexible' approaches to environmental review in the name of helping their exporters may be doing them in the long run a disservice by their being forced to delay and reconsider projects where controversy erupts. Recent examples include the ongoing controversy over the Maheshwar dam in India involving the Hermesbuergschaft, and the withdrawal of investment finance and insurance by the U.S. Overseas Private Investment Corporation for the proposed Aginskoe gold mine in Kamchatka, Russia, after initially indicating that the mine did not present environmental problems (the Aginskoe mine is adjacent to a World Heritage Convention nature site). Clear, comprehensive, rigorous policies and standards achieved by ECAs in common will increase the probability of predictable outcomes and will serve exporters better in the export environment of the beginning of the 21^st Century.

E. Certain Commonly Voiced Concerns About More Rigorous, Common Guidelines and Standards

There are a number of commonly voiced concerns related to ECAs developing more rigorous, common guidelines and standards in the environmental area

1. Lack of technical capacity

This is a significant issue, but its importance as an obstacle is sometimes exaggerated. First, experience of some ECAs and investment insurance agencies that have instituted environmental assessment procedures and guidelines shows that a large technical staff is not required. Second, in most OECD countries environment ministries and development cooperation ministries and agencies already have in house the requisite technical staff; presumably in difficult cases the advice and input of this staff could be utilized through an inter-ministry consultative process. In several OECD countries both development and environment ministries have expressed an interest in, or support for, improved environmental review of ECA operations.

Third, within the OECD, directorates and committees dealing with environment and development assistance could help facilitate access to technical advice on how capacity can be built, or borrowed, in a cost-effective, efficient matter. Fourth, lack of capacity per se is not a valid rationale for inadequate attention to critical operational and risk assessment issues. Surely, for example, it would not be acceptable for a government agency to continue inadequate accounting and audit procedures for its financial transactions based on the claim that it did not have enough accountants. We believe that environmental assessment and auditing increasingly will be seen to be as essential for investment decisions in the future as financial audits. An increasing number of private international banks and insurance companies are recognizing this, and have already created internal environmental audit and evaluation units. They recognize that these units have a positive impact on their performance.

2. The role of ECAs in supporting transfer of high quality technology and equipment is in itself already a major contribution to sustainable development that obviates or makes redundant more comprehensive, harmonized environmental policies and guidelines.

This first part of this proposition is certainly correct in many cases, but it does not follow that just because a given project incorporates state of the art technology that it may not pose substantial environmental and social risks. State of the art technology for the construction of a dam or road, for example, helps obviate the first category of environmental risk, that of catastrophic failures or accidents. But the dam may still involve the involuntary resettlement of tens of thousands of people or the flooding of pristine tropical forest inhabited by indigenous peoples, the road may still run through or adjacent to a nationally or internationally protected area etc. Serious environmental and social impacts are often associated with the ecological and social context in which a project is sited, as opposed to the technical specifications of the project per se.

3. Even if OECD ECAs agree on improved, harmonized environmental policies and guidelines, projects in the future will be increasingly financed by Non-OECD ECAs with less demanding standards. The project will go ahead anyway, under even lower environmental standards than the ones currently used by most OECD ECAs.

Ironically, this objection implicitly acknowledges the need not just for OECD harmonization of any higher environmental guidelines but for an overall international harmonization. If all ECAs do not harmonize upward at the same time, the lack of a level playing field simply advantages those with the lower standards outside the OECD. Here a number of the considerations mentioned earlier in this paper apply. First, we would argue that ECAs have a duty to adequately assess the four kinds of environmental risk, simply in the interest of protecting themselves and their clients, and ensuring greater predictability, consistency and clarity in export and investment decisions. For example if a non-OECD ECA finances a large infrastructure project that encroaches on valuable pristine tropical forests or entails forcible resettlement of populations without an adequate resettlement plan, it may risk at a later stage catalyzing local and international protests that can result in project delays and cost overruns. This was the matter addressed in the November, 1997 issue of Project Finance cited above.

Second, we would argue that the public, NGOS and major political parties in OECD countries are increasingly interested in seeing that government supported export credits and guarantees do not work at cross purposes with sustainable development goals espoused by their development assistance agencies and by the multilateral financial institutions that they support -- regardless of what non-OECD ECAs may or may not do. (E.G. the SPD-Green Party Coalition Agreement in Germany)

Third, the behavior of non-OECD parties has not posed obstacles to the negotiation in the OECD of other common agreements, for example on bribery and on premia and interest rates.

Fourth, OECD countries account for the greater part of world exports and world economic production, and of export credits and guarantees. Moreover, developing countries rightly expect the industrialized countries to lead the way in the area of sustainable development and in integrating economic, environmental and social concerns. The OECD Secretary-General himself recently has emphasized OECD's future role in facilitating this leadership. The alternative is a 'race to the bottom' with globally pernicious consequences.

4. ECAs in different countries are quite different in their procedures and approaches for reviewing export credits and guarantees. The different export support systems are not amenable to common policies, guidelines and standards. More rigorous common policies, guidelines and standards, for example, will result in unacceptable delays in processing applications for certain ECAs.

A number of the reasons cited above concerning lack of technical capacity, and competition by non-OECD ECAs, apply, mutatis mutandis, in this case also. Different procedures and timing, for example, in conducting due diligence of infrastructure projects proposed for export credits and guarantees also translates into a lack of technical capacity at a given moment to review environmental assessments. There is a growing international consensus on the need to better integrate economic, environmental and social policies to achieve sustainable development, and thus a modification in some ECAs' procedures may be necessary to achieve these goals. To date a combination of increasing interest by OECD governments and the evolving perceptions of the self-interest of ECAs has already led to progress towards harmonization and coherence on a variety of issues such as premia, interest rates, tied aid, and bribery -- within different export finance systems. Certainly common guidelines can be developed that can be applied in a flexible manner, so long as the ultimate environmental due diligence required is the same.

The experience of the OECD DAC and the efforts of OECD development assistance agencies to promote greater harmonization of their environmental guidelines over recent years could be quite helpful in finding ways elaborate common guidelines for different ECAs.. The development assistance systems of many OECD countries are also quite hetrogeneous, but this has not proven to be an insurmountable obstacle to achieving greater coherence in their environmental policies. Many of these changes have occurred in response to what is a growing body of international best practice, shared experience gathered by governments, bilateral and multilateral institutions, and the private sector. Surely this shared experience should inform the evolving approach of ECAs.

5. More rigorous, comprehensive environmental guidelines and standards will interfere unjustly with the internal affairs of developing nations.

The response of Richard Gerster, formerly Executive Director of the Swiss Coalition of Development Organizations, is worth citing in this regard:

Moreover, when one speaks of a particular developing country -- of any nation, for that matter -- it is important to recognize that the degree of environmental and social concern is not homogeneous and monolithic, or fully represented in many cases by the position of a particular government agency or local project sponsor. The growth over the past ten years of grass roots and national non-governmental organizations concerned with environment and development in many developing countries has been explosive, much greater than that in industrialized countries. The willingness to protest of local populations in many countries adversely affected by the impacts of some projects has also greatly increased. Many of the developing world NGO partners with whom we and EURODAD deal with would argue that the ECAs' relative lack of attention to environmental and social concerns in giving financial support for exports and investments in their countries also, however unintentionally, constitutes an influence on the internal affairs of their societies.

F. Conclusion

There appears to be growing momentum internationally in a variety of contexts for the adoption of common, or at least coherent, approaches to environmental and social assessment--with corresponding standards and guidelines--of economic, investment, and trade activities supported by public agencies. Greatly increased transparency is an essential element in developing and applying needed procedures and guidelines. We believe that ECAs will be increasingly faced with the choice of reacting to outside developments and pressures, or proactively seizing the initiative and leading efforts to address environmental and social concerns in their operations. The issue is not that ECAs alter their primary mission of furthering exports, but that changes in the international system over the past decade require all agencies operating in the international arena to carry out their missions in the context of a multidisciplinary prism that better assesses the environmental and social consequences of their actions.

ENDNOTES