Financial Intermediary Lending

World Bank Safeguards WorkshopMay 2013

CATEGORY A

CATEGORY B

CATEGORY C

CATEGORY FIEnv. & SocialImpactRisks

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 FIFI = 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 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” ProjectsWorld 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) BorrowerPrepares 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)

ParticipatingFinancial Intermediary (Second Tier)

World BankGuidance, Capacity Building, Oversight

Guidance, Capacity Building, Oversight

Guidance, Capacity Building, Oversight

Institutional Relationships for Safeguards in FI Lending

Regulatory Authorities Licensing, monitoring, inspection

Reporting

Reporting

Reporting

Borrower Agency (e.g. Ministry of Economic Development)

Accountability, Reporting Oversight

Ultimate implementationresponsibility

Sub-borrower

Environmental and Social “Due Diligence” Through Framework Approach

PROJECT LEVEL: ESMF; RPFPrepared 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, RAPPrepared 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 STANDARDSin PLACE of SAFEGUARD POLICIES

for SOME FIL PROJECTSImplementation 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