HOW CHINA’S POLICY BANKS CAN SUPPORT SUSTAINABLE FOREIGN INVESTMENT · 2017-11-29 · How China’s Policy Banks Can Support Sustainable Foreign Investment Global Environmental

HowChina’sPolicyBanksCanSupportSustainableForeignInvestment

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HOWCHINA ’S POL ICY BANKS CANSUPPORT SUSTA INABLE FORE IGN INVESTMENT

AUTHORS:PENGREN,LIWENZHANG,RONGZHU,JINGWEIZHANG

AGEIResearchReport

August2017


TableofContents

AbbreviationsandAcronyms...................................................................................................................1

Foreword...................................................................................................................................................1

1.China’spolicybanksand“goingout”strategy.....................................................................................31.1Policybanksandforeigninvestment............................................................................................................31.2Policybanksandtheenvironmentalandsocialchallengesofforeigninvestment.....................................6

2.Bankpoliciesforthepreventionandcontrolofenvironmentalandsocialimpactsandrisksininvestmentactivities.................................................................................................................................82.1EnvironmentalandSocialPoliciesoftheExport-ImportBankofChina.......................................................92.2TheEnvironmentalandSocialPoliciesoftheChinaDevelopmentBank...................................................142.3TheEnvironmentalandSocialPoliciesoftheWorldBankandtheInternationalFinanceCorporation...172.4TheEnvironmentalandSocialPolicesoftheJapanBankforInternationalCooperation..........................24

3.AcomparisonofenvironmentalandsocialpoliciesbetweenChina’spolicybanksandinternationalfinancialinstitutions...............................................................................................................................293.1WeaknessesoftheenvironmentalandsocialpoliciesofChina’spolicybanks.........................................293.2ProgressivenessoftheenvironmentalandsocialpoliciesofChina'spolicybanks...................................33

4.Casestudies:Roleofpolicybanksinthepreventionandcontrolofenvironmentalandsocialrisks.................................................................................................................................................................424.1AboutSriLanka............................................................................................................................................424.2Case1:CMCandSouthernRailwayproject(EPCmode)............................................................................454.3Case2:CHECandTheColomboPortCityproject(PPPmodel).................................................................49

5.Synthesizedanalysisandsummary....................................................................................................52

6.Appendix:KeyDefinitionandIntroductionofPolicyBanks..............................................................56


GlobalEnvironmentalInstitute August,20171

ABBREVIATIONSANDACRONYMS

ADBC AgriculturalDevelopmentBankofChina

BRI BeltandRoadInitiative

CBRC ChinaBankingRegulatoryCommission

CCER ChineseCertifiedEmissionReduction

CDB ChinaDevelopmentBank

CDM CleanDevelopmentMechanism

ChinaEXIMBank TheExport–ImportBankofChina

EHS Environmental,HealthandSafetyGuidelines

EIA EnvironmentalImpactAssessment

ESF EnvironmentalandSocialFramework

ESIA EnvironmentalandSocialImpactAssessment

ESMS EnvironmentalandSocialManagementSystem

GEI GlobalEnvironmentalInstitute

IDA InternationalDevelopmentAssociation

IFC InternationalFinanceCorporation

JBIC JapanBankforInternationalCooperation

M&A mergersandacquisitions

MIIT MinistryofIndustryandInformationTechnology

SAFE StateAdministrationofForeignExchange

WB WorldBank

WTO WorldTradeOrganization



FOREWORD

Sincethe“goingout”strategywaslaunched,China’sforeigninvestmenthasenjoyedrapidgrowth.In2015,China’sforeigndirectinvestmenthitUSD145.67billion,a54-foldincreaseoverthatof2002.Duringthe“goingout”process,Chineseenterprises,byexpandingoverseasmarketsanddeepeningtechnologyexchanges,havenotonlyimprovedtheirinternationalcompetitiveedgebutalsoinjectedneweconomicdynamicsintothehostcountries.Encouragedbythesmoothdevelopmentofthe“goingout”strategy,theChinesegovernmentproposedtheBeltandRoadInitiative(BRI),settingcross-bordereconomicbeltsastheprimarystrategyforforeigneconomicdevelopment.TheinitiativeplanstoadvancetheinfrastructureconstructioninWestChinaandcountriesalongthe“SilkRoadEconomicBelt”andthe“21stCenturyMaritimeSilkRoad”,inanefforttopromoteregionalconnectivityandeconomicdevelopment.

Althoughtheoverallimplementationof“goingout”strategyhasachievedmajoroutcomes,theenvironmentalandsocialrisksandimpactsofsomeinvestmentprojectshavebecomeincreasinglyprominent,causingdisputesinthehostcountryandtheinternationalcommunityandposingobstaclestothedevelopmentoftheseprojects.TheBRIhasopenedanewwindowofopportunityforChina’sforeigninvestment.WhileChina’soverseasinvestmentwillhavestrongerinfluenceoneconomy,environment,andsociety,italsofacesmoreenvironmentalandsocialrisks.Howtoeffectivelypreventandcontroltheserisksandthenegativeimpactsiskeytothesustainabilityofoverseasinvestmentprojects.

TheGlobalEnvironmentalInstitute(GEI),asaChinesenon-governmentalandnon-profitorganizationspecializedinenvironmentalissues,hasbeencommittedtoaddressingsustainableoverseasinvestmentissuessinceitsinception.Basedonourfieldvisitandresearch,GEIhasproposedtheChinesegovernmenttolaunchenvironmentalpoliciesonoverseasinvestmentsandbuildhostcountry’scapacityinenvironmentalgovernance,andprovidedenvironmentalandsocialadviceforoverseasinvestmententerprises.Inthepastdecade,GEIhasinitiatedandparticipatedinthecompilationofanumberofpolicypapers,includingAGuideonSustainableOverseasSilviculturebyChineseEnterprisesandGuidelinesforEnvironmentalProtectioninForeignInvestmentandCooperation,andpaidcloseattentiontothedevelopmentandimplementationofChina’sforeigninvestmentenvironmentalpolicies.

Throughlong-termobservationandresearch,wefoundthatbanks,asessentialcreditorandinvestorofoverseasdevelopmentprojects,havethemandatetoregulateandguideenterprises’environmentalandsocialbehavioursbyformulatingandimplementingrelatedpolicies,andreducingcreditandinvestmentriskscausedbyenvironmentalandsocialproblems.



In2012,ChinaBankingRegulatoryCommission(CBRC)launchedtheGreenCreditGuidelines,stipulatingthatbanksshouldeffectivelyidentifyandcontroltheenvironmentalandsocialrisksincreditbusiness,improverelevantcreditpoliciesandworkflowmanagement,andensurethatcreditwillbegrantedtothosewhowillcomplywithenvironmentalprotection,health,andotherrelevantlawsandregulationsofthehostcountry,andfollowrelevantinternationalpracticesorstandards.InAugust2016,thePeople’sBankofChina,alongwiththeMinistryofFinanceandfiveotherministries,issuedtheGuidelinesforEstablishingtheGreenFinancialSystem,suggestingbankingandfinancialinstitutionsdevelopgreencreditandstrengthenenvironmentalriskmanagementoftheprojectsundertheBRIandotherinvestmentframeworksandpromotegreenforeigninvestment.

AsChina’spolicybanks,theExport-ImportBankofChinaandtheChinaDevelopmentBankareimportantfinancialsupportersofthe“goingout”strategyandBRI.Theyarealsothepioneersingreenfinance.Theenvironmentalandsocialpoliciesadoptedbythesetwobanksnotonlyhavesubstantialinfluenceontheenvironmentalandsocialstandardsofoverseasprojects,butalsoplayanexemplaryroleforotherbanksinChinaindevelopingrelatedstandards.

Throughliteratureanalysisandinterview,onbasisofexaminingthecurrentenvironmentalandsocialpoliciesonoverseasprojectsadoptedbytheExport-ImportBankofChinaandtheChinaDevelopmentBank,andbycomparingthesepolicieswiththemeasurestakenbytheWorldBank,theInternationalFinanceCorporation,andtheJapanBankforInternationalCooperation,thisreportexploresChina’spolicybanks’responsibilityandroleinpromotingenterprises’overseasinvestmentsandgreeninvestments,andprovidessuggestionsforthemonoptimizingenvironmentalandsocialpoliciesforsustainableoverseasinvestments.Itishopedthatthisreportwillbeusefulforthoseinterestedinthistopic.



1.CHINA’SPOLICYBANKSAND“GOINGOUT”STRATEGY

1.1POLICYBANKSANDFOREIGNINVESTMENT

Inthecontextofdeepeningeconomicmarketizationandglobalization,Chinaproposedthe“goingout”strategyandjoinedtheWorldTradeOrganizationorWTOin2001.Sincethen,Chinahasnotonlyopeneditsdoortoforeigncapitalandadvancedtechnologybutalsoencourageditsownenterprisestogoabroadtomakefulluseoftheopportunitiesbroughtbyglobalizationbymakingoverseasinvestments,carryingouteconomiccooperationanddevelopingcross-borderbusinesses.

China’soverseasinvestmentsgohandinhandwithits“goingout”strategy.Drivenbydualincentivesofmarketneedsandpolicyencouragement,China’soverseasinvestmentshaveenjoyedarapidincrease.In2015,China’sforeigndirectinvestmentflowshitarecordhighofUSD145.67billion,accountingfor9.9%oftheworld’stotal,thesecondhighestintheworld.Asoftheendof2015,atotalof20,200domesticinvestorshadopened30,800directforeigninvestmententerprisesin188countries(regions)acrosstheglobe,coveringallsectorsofthenationaleconomywiththetotalassetsofUSD4.37trillion.TheseinvestmentshavenotonlybroughtChina’smoney,technology,productsandequipmenttotherestoftheworldbutalsoenabledtheChineseenterprisestofurtherintegrateintotheeconomicglobalizationthroughmergersandacquisitions(M&A)andgreenfieldinvestments.

Figure1-1:China’sForeignDirectInvestment2002-2015(Unit:billionUSD)

Source:2015StatisticalBulletinofChina'sOutwardForeignDirectInvestment

2.7 2.85 5.5 12.2621.16 26.51

55.91 56.5368.81 74.65

87.8107.84

123.12

145.67

020406080

100120140160

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015



Intheprocessof“goingout”,Chineseenterprisesreceivedessentialsupportfrompolicybankswhichprovidethemwithcapitalandpolicyguidance.In1994,asaresultofthefinancialsystemreform,Chinaestablishedthreepolicybanks,namely,theExport-ImportBankofChina(ChinaEximBank),theChinaDevelopmentBank(CDB),andtheAgriculturalDevelopmentBankofChina(ADBC).Afterthe“goingout”strategywaslaunched,ChinaEximBankwasthefirsttoreceivethedirectivefromthegovernmenttoprovidefinancialsupportfor“goingout”enterprises.In2004,theNationalDevelopmentandReformCommission(NDRC)andChinaEximBankjointlyissuedtheNoticeonGivingCreditSupporttotheKeyOverseasInvestmentProjectsEncouragedbytheState,whichstipulatedthatChinaEximBankshouldarrangeacertainscaleofcreditfundsineachyear'sexportcreditplantosupportkeyoverseasinvestmentprojectsencouragedbytheState.Shortlyafterwards,thankstoitsoutstandingperformanceinfinancingmedium-andlong-termdevelopmentprojects,CDBwasassumedtheresponsibilitytosupportenterprisesininternationalcooperation.In2005,NDRCandCDBjointlyissuedtheNoticeaboutRelevantIssuesonProvidingMoreFinancialSupporttoKeyOverseasInvestmentProjects,whichprovidedthatCDBshouldarrangeaspecialamountofloanfundinitsannualequityloanstosupportkeyoverseasinvestmentprojectsencouragedbythestate.1

Asoftheendof2010,ChinaEximBankhadsupportedmorethan1,300“goingout”projects,coveringmorethan100countriesandregionswiththetotalcontractamountexceedingUSD190billion.2 “Goingout”enterprisescanapplyforexportbuyer’scredit,loansforoverseasprojectcontractingandoverseasinvestment,andothercreditfinancialproductsfromChinaEximBank.In2015,thebanksupportedtheexportofmechanicalandelectronicequipment,high-techproducts,overseascontractingprojectsandinvestmentworthUSD391.2billion.The2015year-endbalancesofoverseasinvestmentloansandinternationalcooperationloanswereUSD30.5billionandUSD84.5billionrespectivelyand84%oftheyear-endbalancesofinternationalcooperationloanswenttooverseascontractingprojects.3 Asidefromsupportingenterprisestogoabroadwiththebank’sordinaryservices,ChinaEximBankalsoprovidespreferentialloansforenterprisesintheiroverseasbusiness.ThetwopreferentialfacilitiesaretheChineseGovernmentConcessionalLoan4 andPreferentialExportBuyer'sCredit.5 Bothfacilitiesmainlyassistborrowingcountriesininfrastructure

1 Zhang Yuzhe. Prospect at China’s financial work meeting: CDB is to be transformed into a commercial bank. Finance [J]. 2007.1.http://bank.jrj.com.cn/2007/01/000001925503.shtml.

2 China Exim Bank reform plan still pending. Shanghai Securities News. http://www.cs.com.cn/yh/02/201103/t20110313_2808722.html

3 Data from the Export-Import Bank of China Annual Report 2015. The USD-CNY exchange rate was 6.764.

4 Chinese Government Concessional Loan includes medium- and long-term low-interest loan in Chinese yuan. Loan funds are raised by China Exim Bank itself, and the government helps subsidize the interest margins. The Loan is operated by the Department of Foreign Assistance under the Ministry of Commerce and the Administration & Law Enforcement Department under the Ministry of Finance.

5 Preferential Export Buyer's Credit aims to promote the economic and trade cooperation between China and key countries and regions. It is provided to foreign entities in the form of export buyer’s credit with certain preferential terms, and is funded by China



constructionprojects,productionprojects,energyresourceprojects,andsocialwelfareprojectssuchasconstructionofhospitalsandschools.Moreover,ChinaEximBankisalsothemajorsponsorofseveralfunds,includingChina-ASEANInvestmentCooperationFundandChina-CentralandEasternEuropeInvestmentCooperationFund,whichfacilitate,invariousformssuchasequityinvestmentandquasiequityinvestment,theprojectsinareasofinfrastructure,energy,andnaturalresourcesintheASEANandCentralandEasternEuroperegions.

WhereasCDBisnotequippedwiththepolicyfunctionforprovidingtheChineseGovernmentConcessionalLoanandPreferentialExportBuyer'sCredit,ithasmovedfasterandfurtherthanChinaEximBankinsupportingenterprisestobuildoverseaseconomiccooperationthroughvigorouslyexpandingdevelopmentfinancialservices.ThebalanceofCDB’sforeignexchangeloansincreasedfromUSD16.2billiontoUSD267billionfrom2005to2015,a15-foldrise,andformanyyearssince2009CDBhasmaintainedthehighestbalanceofforeignexchangeloansamongallChinesebanks.Itmainlysupportsoverseasprojectsintheareasofenergy,mining,infrastructure,equipmentmanufacturingandagriculturalprocessing.Apartfromitscreditbusinesses,CDBalsoprovidesoverseasprojectswithcommonequityinvestmentproductsandstructuredmezzanineinvestmentproductsviamultipleplatformssuchasitssubsidiaryCDBCapital,China-AfricaDevelopmentFund,ChinaandPortuguese-speakingCountriesCo-operationandDevelopmentFund,andPakistan-ChinaJointInvestmentCompany,inanefforttopromotebothbilateralandmultilateraleconomiccooperationbetweenChinaandothercountries,includingAfricanandPortuguese-speakingcountries.

In2013,theChinesegovernmentproposedtheBRItostrengthentheconstructionoftransport,energy,andcommunicationsinfrastructureinthecountriesalongthe“BeltandRoad”,soastorealizeconnectivityandfacilitateregionaltradeandinvestment.TheBRIshowedenterprisesamoredetailedroadmaptogooutandusheredinnewopportunitiesforoverseasprojectcontractingandinvestment.AsChina’spolicybanks,ChinaEximBankandCDBhaveactivelyrespondedtoandsupportedtheInitiative.Attheendof2014,a40-billion-dollarSilkRoadFundwasco-establishedbyChinaEximBank,CDB,StateAdministrationofForeignExchange(SAFE)andChinaInvestmentCorporationtofinanceeconomicandtradecooperationaswellasmultilateralandbilateralconnectivitywithintheBRIframework.Asoftheendof2015,ChinaEximBankhadmorethan1000outstandingloanprojectsinvariousfieldsincludinghighway,railway,electricityandcommunication,withatotaloutstandingloansofmorethanRMB520billion,accountingfor37%ofthebanks’overseasloans.6 ByJuly2016,CDBhadissuedloanstotalingUSD162.1billiontocountriesalongthe“BeltandRoad”,withabalanceofUSD112.2billion,accountingfor35%ofCDB’soverall

Exim Bank itself as a special loan. The loan is provided in USD dollar. It is managed by the Department of Outward Investment and Economic Cooperation under the Ministry of Commerce and the Finance Department under the Ministry of Finance.

6 China Exim Bank’s BRI loans rose by 50% last year, accounting for 37% of its total overseas loans. Reuters. http://cn.reuters.com/article/eibc-loans-idCNKCS0US2ZW20160114



internationalbusinesses.7 AstheBRIhasbeengraduallyputintopractice,bothpolicybankswillkeepexpandingfinancialsupportforoverseasinvestmentprojectsandfacilitatingregionalfinancialintegration.

ThecreditfinancialservicesprovidedbyChinaEximBankandCDBhaveplayedanimportantroleinsupportingandadvancingthe“goingout”ofenterprises,particularlytheoverseasmega-projectsintheareasofenergy,mining,infrastructureandequipmentmanufacturing.Meanwhilebothbankshavekeptimprovingandexpandingtheiroverseasbusinessesandhavegraduallyopenedmoreoverseasoffices.Asoftheendof2015,ChinaEximBankhadestablishedParisBranch,RepresentativeOfficeforSouthernandEasternAfrica(Johannesburg),St.PetersburgRepresentativeOfficeandRepresentativeOfficeforNorthernandWesternAfrica(Morocco).Itsbankingnetworkcoversover160countriesandregionsworldwide.In2005,CDBdispatcheditsfirstoverseasworkinggroup.In10years’time,CDBhasgrownintoChina’sbiggestoverseasinvestmentcooperationbankanddevelopmentfinancialinstitutionwiththelargestsizeofglobalassets.IthasopenedoneoffshorebranchinHongKong,sixrepresentativeofficesandmorethan50workinggroupsinCairo,Caracas,London,Moscow,RiodeJaneiroandVientiane.Itsinternationalbusinessescover115countriesandregions.

1.2POLICYBANKSANDTHEENVIRONMENTALANDSOCIALCHALLENGESOFFOREIGNINVESTMENT

The“goingout”strategyhasbeenwellimplementedandChina’sdirectforeigninvestmenthasgrownconsistently,neverthelessthewaytogoouthasbeenratherbumpy.Accordingtothe2014annualaccountingstatementonoverseasinvestmententerprises,22.8%oftheoverseasenterpriseswererunningintheredintheirinvestmentbusinesseswhiletherest77.2%wereintheblackorbreakingeven.Thelossrateofthe2,000state-ownedenterprises’overseasbusinesseswasevenhigher,standingat25.6%.8 Since2014,thecompletionrateofChineseenterprises’cross-borderM&Aisonly67%,farlowerthantherateofbuyersfromdevelopedmarkets.9

Therearevariousreasonsforfailedforeigninvestment,andenvironmentalandsocialrisksaretwoimportantfactorsamongthem.InSoutheastAsia,theMyitsoneDamproject,ChaeyArengHydropowerprojectandLetpadaungCopperMineprojectwerecalledoffduetoenvironmentalconcernsandresettlement-relatedissues.InAfrica,Chineseminingcorporationswerefrequentlyembroiledinlabourconflictswhichsometimesescalatedintostrikesorviolentriots.InLatin

7 CDB’s BRI loans hit $162.1 bn. China Securities Journal. 2016.9.5. http://finance.sina.com.cn/roll/2016-09-05/doc-ifxvqefm5524387.shtml

8 Wang Shifeng, Liu Jing. Ministry of Commerce: Nearly 80% overseas investment enterprises make profits or break even. China Business News. 2015.9.18.

9 BCG Consulting. Chinese enterprises herald new era of overseas M&A; their capacity needs to be improved. http://www.bcg.com.cn/cn/newsandpublications/news/pressreleases/pressrelease20150924001.html



America,theDragonMartprojectinCancunMexicowascancelledduetoenvironmentalconcerns.DrivenbytheBRI,overseasinvestmentwillinfluencetheeconomy,theenvironment,andthesocietymoreprofoundly,andtheenvironmentalandsocialriskswillbecomemoreprominent,particularlyincountriesandregionswhereenvironmentalgovernanceandsocialsecuritysystemsareweak.Howtoeffectivelypreventandcontroltheserisksandnegativeimpactsiscriticaltothesustainabilityofoverseasinvestment.

TheexacerbationofenvironmentalandsocialproblemscausedbyoverseasinvestmentprojectshasstartedtodrawtheattentionofrelevantChinesegovernmentdepartments,internationalenvironmentalandlabourorganizations,andlocalmediaandcivilsocietyorganizationsinthehostcountriesontheenvironmentalandsocialresponsibilitiesfinancialinstitutionsshouldtakeinsupportingoverseasinvestmentprojects.ChinaBankingRegulatoryCommission(CBRC)launchedtheGreenCreditGuidelinesin2012,stipulatingthatbankinginstitutionsshalleffectivelyidentify,measure,monitorandcontroltheenvironmentalandsocialrisksassociatedwiththeircreditactivities,establishenvironmentalandsocialriskmanagementsystem,andimproverelevantcreditpoliciesandworkflowmanagement.TheGuidelinesalsoprovidesthatbankinginstitutionsshallensuretheowneroftheoverseasprojectsabidebyapplicablelawsandregulationsonenvironment,land,health,safetyofthehostcountry,adoptrelatedinternationalpracticesorinternationalnormsandfollowgoodinternationalpractices.Italsorequiresthatbankinginstitutionsmaketheirgreencreditstrategiesandpoliciespublic,releaserelevantcreditinformationabouttheprojectswithmajorpotentialenvironmentalandsocialrisks,andacceptmonitoringbythemarketandstakeholders.InAugust2016,thePeople’sBankofChina,alongwiththeMinistryofFinanceandotherfivegovernmentalagencies,issuedtheGuidelinesforEstablishingtheGreenFinancialSystem.ThisGuidelinessuggestsfinancialinstitutionstodevelopgreencredit,strengthenenvironmentalriskmanagementofBRIandotheroverseasinvestmentprojects,andpromotegreenoverseasinvestment.

ChinaEximBankandCDBaremajorfinancialsupportersforthe“goingout”strategyandtheBRI.Theirenvironmentalandsocialpoliciesnotonlyplayanimportantroleinrestrictingandguidingtheenvironmentalandsocialbehavioursoftheoverseasprojects,butalsoaffectrelevantstandardsandpracticesinChina’sbankingsector.Policybankscanreducecreditandinvestmentriskscausedbyenvironmentalandsocialproblems,andassistoverseasinvestmententerprisestobetterdealwithenvironmentalandsocialchallengesbystrengtheningtheformulationandimplementationofenvironmentalandsocialpoliciesandstandards.



2.BANKPOLICIESFORTHEPREVENTIONANDCONTROLOF

ENVIRONMENTALANDSOCIALIMPACTSANDRISKSININVESTMENT

ACTIVITIES

Theinternationalfinancialcommunityhasagreedthatfinancialinstitutionshavetheresponsibilitytoreview,assess,preventandcontroltheenvironmentalandsocialimpactsandrisksarisingfrominvestmentandfinancingactivitiessupportedbythem.Thisunderstandingstartedtotakeforminthe1860swhentheenvironmentalissuesenteredtheeyesofthepublic.In1969,theWorldBank(WB)appointedthefirstenvironmentaladvisor.In1970,WBestablishedtheOfficeofEnvironmentalAffairs.InJune1972,theUnitedNationsConferenceontheHumanEnvironmentwasheldinSweden’scapitalStockholmwheremorethan1,300representativesfrom113countriesandinternationalinstitutionsconvenedforthemeeting.Environmentalissueswereofficiallyincludedinglobalgovernanceagenda.

TheWorldBankandtheInternationalFinanceCorporation(IFC)areglobalpioneersandleadersindevelopingenvironmentalandsocialpoliciesandstandardsforfinancialinstitutions.In1987,forthefirsttime,WBlaidoutrequirementsonenvironmentalassessmentfortheprojectsitsupportedandgraduallydevelopedaseriesofpoliciesforenvironmentalandsocialprotectionandriskpreventionandcontrolsincethen.Thepoliciescovernaturalhabitats,pestmanagement,forests,safetyofdam,involuntaryresettlementandindigenouspeoples.In1997,WBintegrateditscoreenvironmentalandsocialpoliciesintotheframeworkoftheSafeguardPolicies,requiringallsupportedprojectstocomplywiththeprovisionsoftheSafeguardPolicieswhileabidingbythelawsandregulationsoftheirhostcountries.Thisrequirementensuresthatinvestmentanddevelopmentprojectswillliveuptohighenvironmentalandsocialstandardseveniftheirhostcountrieshaveunsoundpoliciesonenvironmentalgovernanceandsocialsafeguard.

ComparedwithWB’sSafeguardPolicies,thePerformanceStandardsonEnvironmentalandSocialSustainabilitylaunchedbyIFCin2006hasexertedamuchmoreprofoundinfluenceuponinternationalfinancialinstitutions.ThePerformanceStandardsprovidedspecificenvironmentalandsocialrequirementsforIFCclients,coveringeightareasincludingassessmentandmanagementofenvironmentalandsocialrisksandimpacts,labourandworkingconditions,resourceefficiencyandpollutionprevention,communityhealth,safetyandsecurity,landacquisitionandinvoluntaryresettlement,biodiversityconservationandsustainablemanagementofbiologicalnaturalresources,indigenouspeoples,andculturalheritage.NotonlydoIFC-supportedinvestmentprojectsneedtocomplywiththeprovisionsofthePerformanceStandards,butthosefinancialintermediariesincollaborationwithIFCalsoneedtoestablishanenvironmentalandsocialassessmentandmanagementsysteminaccordancewithPerformanceStandard1:AssessmentandManagementofEnvironmentalandSocialRisksandImpacts.Bytheendof2016,85financialinstitutionsfrom35



countrieshaveadoptedtheEquatorPrinciples,aframeworkbasedonIFC’sPerformanceStandardsonEnvironmentalandSocialSustainability,toassessandmanageenvironmentalandsocialimpactsandrisksinprojectfinancing.

TheimplementationofeithertheWB’sSafeguardPoliciesorIFC’sPerformanceStandardsshouldmeettherequirementofinformationdisclosure.Bothpolicieshavebeenunderconstantreviewsandrevisionssincetheirbusinessesandclientsareever-changingandpeople’sunderstandingaboutthevalueandvulnerabilityofglobalpublicresourceskeepsimproving.

WhileChina’spolicybankshavefarlessexperienceindoingoverseasbusinessesthantheWBandtheIFC,expectationsfromenvironmentalanddevelopmentagencies,westernmediaandcommunitiesininvestmentrecipientcountriesarenotlowerforChina’spolicybanks’environmentalandsocialperformancesthanthebestpracticesrequiredbytheWB.BycloselyexaminingtheenvironmentalandsocialpoliciesdevelopedbyChinaEximBankandtheCDB,thisreporthasfoundthatgovernmentregulationssuchastheGreenCreditGuidelinesissuedin2012bytheChinaBankingRegulatoryCommission,haveplayedanoverarchingroleinthepolicy-makingprocess.Thetwobankshaveintegratedthemanagementofenvironmentalandsocialrisksandimpactsarisingfromtheirsupportedprojectsintothewholecreditprocessofpre-loaninvestigation,loanreviewandapproval,andpost-loanmanagement.SimilartotheWBandtheIFC,ChinaEximBankandCDBhaveclassifiedandgradedtheprojects’environmentalandsocialrisksandrequiredthatoverseasprojectsshouldmeettheenvironmentalandsocialrequirementssetupbythegovernmentofthehostcountry.

ItshowsthatChina’spolicybankshavemaderapidprogressinenvironmentalandsocialpoliciesoverthepastdecade.However,China’spolicybanksarestillintheearlystageindisclosingenvironmentalandsocialinformation,andconsultingwithmulti-stakeholdersinpolicydeliberationandformulation.Thischapter,therefore,willanalyzetheenvironmentalandsocialpoliciesoftheChinaEximBank,theCDB,theWBandtheIFCtogaindeeperinsightintothedevelopmenthistoryandbasicknowledgeofthepolicieslaiddownbyChina’spolicybanksandinternationalmultilateraldevelopmentinstitutions.SimilardiscussionswillalsobeconductedontheJapanBankforInternationalCooperation(JBIC),whosefunctionsandgoalsaresimilartothoseoftheChina’spolicybanks,inanefforttoprovidecomparativereferencefortheChinesecounterparts.

2.1ENVIRONMENTALANDSOCIALPOLICIESOFTHEEXPORT-IMPORTBANKOFCHINA

EstablishedonJuly1,1994andheadquarteredinBeijing,theChinaEximBankisapolicybankfullyfundedbyChina’sMinistryofFinance,underthedirectleadershipoftheStateCouncil.ThecreditratingsoftheChinaEximBankarecompatiblewithChina’ssovereigncreditratings.ItsoperationalcapitalsareraisedfromthePeople’sBankofChinaintheformofre-lending,aswellasfrombondissuancebothathomeandabroad.Throughfinancialservices,theChinaEximBankhascommittedtoexpandingtheimportandexportofmechanicalandelectronicproducts,packagedequipmentandhigh-techproducts,promotingcompetitivecorporationstomakeoverseascontractprojectand



investment,andadvancingthedevelopmentofChina’sforeignrelationsandinternationaleconomicandtradecooperation.

In2015,differenttypesofloansprovidedbytheChinaEximBanktotaledRMB1077.4billion.Themajortypesareforeigntradeloans,overseasinvestmentloans,internationalcooperationloans,loansforsupportinggreateropenness,governmentconcessionalloanandon-lendingloansfromforeigngovernmentsandinternationalfinancialinstitutions.Amongthem,foreigntradeloans,overseasinvestmentloans,internationalcooperationloansandgovernmentconcessionalloanaremainlyofferedascreditsupportforinternationaleconomiccooperation.

EnvironmentalandSocialPolicies

TheChinaEximBankbegantodevelopenvironmentalandsocialpoliciesin2007whenitsetupthegreencreditstrategyto“encouragegreencreditbusinessdevelopmentandactivelycontrolenvironmentalandsocialrisksincreditgranting”andlaunchedtheGuidelinesofEnvironmentalandSocialAssessmentofLendingProjects.10 InaccordancewiththeGuidelines,theChinaEximBankcontrolsenvironmentalandsocialimpactsbyconductingpre-loaninvestigation,in-loanreviewandapproval,andpost-loanmanagementandsupervision.

Asfordomesticprojects,theChinaEximBank,inthelightofnationalpoliciesofenergyconservation,emissionreductionandindustrialrestructuring,hasreduceditscreditsupportforprojectscharacterizedbyhighpollution,highenergyconsumption,excessivecapacityandoutdatedcapacity.Incontrast,moresupporthasbeendedicatedtocleanproduction,recyclingeconomy,environmentalprotection,andtechnologicaltransformationforenergyconservationandemissionreduction.Incasesofviolationofenvironmentlawsorexcessiveenergyconsumption,newloanwon’tbegrantedtotheborrowerandtheexistingloanwillbegraduallywithdrawn.Apartfromreviewingtheenvironmentalandenergyconsumptionrecords,thebankwillalsoassesstheenvironmentalimpactsofconstructionprojectsinlinewithcommentsfromenvironmentalprotectionauthorities.Anyprojectthatfailedtopasstheenvironmentalapprovalwillnotbeabletogetloans.

Asfortheenvironmentalandsocialimpactsofoverseasprojects,theGuidelinessetenvironmentpoliciesandstandardsofthehostcountryasthebenchmarkforassessment.Whensubmittingloanapplication,theborrowerortheprojectownershouldalsosubmitapprovaldocumentsissuedbytheauthoritiesofthehostcountry,togetherwithanassessmentreportontheenvironmentalandsocialimpactsoftheproject.ChinaEximBankwillgrantloanstoanyprojectthathasfailedtogetapprovalfromthehostcountry.TheGuidelinesalsopointedoutthatifrelatedpoliciesorstandardsarenotinplaceinthehostcountrytoassesstheenvironmentalandsocialimpacts,theprojectshouldrefertoChinesestandardsorinternationalpractices;theprojectshouldrespectlocalresidents’rightstoland

10 Practice Green Finance and Promote Green Development. People’s Daily. 2016.6.24.

http://www.eximbank.gov.cn/tm/medialist/index_26_29111.html



andresourcesandproperlyhandleimmigrationissues;anynegativeimpactscausedbytheprojectshouldholdpublicconsultationattherequestofthehostcountry.

Inpost-loanmanagementandsupervision,theChinaEximBankwillexamineandsupervisetheconstructionandoperationoftheproject,inaccordancewiththeassessmentresultsoftheenvironmentalandsocialimpactsoftheproject.Ifgraveenvironmentalandsocialproblemsemergeintheconstructionandoperationoftheproject,thebankwillrequiretheprojecttotakeremedialorpreventivemeasures,orthebankwillterminatetheloan.

In2015,theChinaEximBankreplacedGuidelinesofEnvironmentalandSocialAssessmentofLendingProjectswithGreenCreditGuidelines.Asthenewestpolicytopromotegreencredit,theGreenCreditGuidelineslaidoutmorecomprehensiveandspecificrequirementsforagreen,low-carbonandrecyclingeconomyandastrongerenvironmentalandsocialriskmanagement.Itcoversarangeofaspectsincludingorganizationalmanagement,policysystem,workflowmanagement,internalcontrolmanagement,andinformationdisclosure.ComparedwiththepreviousGuidelines,theGreenCreditGuidelineshasmadenewregulationsinthefollowingaspects:

- Specifiedcapacitiesofeachdepartmentintheformulationandimplementationofthegreencredit

strategy.

- ClassifiedclientsintoA,BandCthreedifferenttypesinviewofthedegreeofthepotentialenvironmentalandsocialimpactsandrisksarisingfromtheirconstruction,productionandoperation.

Thedynamicclassificationmanagementwillhelpthebankgiveclientsratings,grantloans,reviewandapproveloansandimprovepost-loanmanagement.

- Integratedworkrelatedtoenvironmentalandsocialrisksintoduediligenceofcreditgranting,e.g.landacquisitionandinvoluntaryresettlement,biodiversityconservationandsustainablemanagementofbiologicalnaturalresources.Clientratingandcreditgrantingdepartmentatalllevelsshouldissuewrittenreviewsonenvironmentalandsocialrisksoftheclients.

- Includedenvironmentalandsocialresponsibilitiesintoloancontractsforbothdomesticandoverseasprojects.Loanapplicationrequiresdomesticprojectstosubmitpre-approvalorapprovaloflanduse,

documentsonsafeproductionandhygienic/healthstandards,aswellasenvironmentalimpactassessment(EIA)fromtheenvironmentalauthorities.

- RequiredfixedassetsprojectsclassifiedasTypeAtoestablishcomplaintresponsemechanisms,channelsconducivetocommunicatingwithstakeholders,andemergencyplanstodealwithmajorenvironmentalandsocialrisks.

- Requiredpost-loanreporttoincludeinformationonenvironmentalandsocialimpacts,andhighlighttheassessmentofenvironmentalandsocialimpactsofTypeAandBprojectsinthereport.Incaseofemergentenvironmentalandsocialevents,theborrowerortheprojectownershouldtakemeasurestoeliminatetheimpacts.

- Establishedaninternalreportingandaccountabilitysystem,takingintoconsiderationtheenvironmentalandsocialriskmanagementwhennon-performingloansandbaddebtstakeplace.



- Openedgreencreditexpressservicetoprioritizeclientsingreen,low-carbonandrecyclingeconomyforcreditgranting.

ApartfromtheGreenCreditGuidelines,theChinaEximBankalsodevelopedtailoredcredit-grantingguidanceforseveralindustries.Withthesedifferentialcreditpolicies,thebankhelpsleadenterpriseswithhighenergy-consumptionandhighpollutiontoconserveenergy,reduceemission andrealizeindustrialtransformationandupgrading.Thebankalsoestablishesgreencreditidentificationandstatisticalsystem,soastoimprovethemanagementofgreencreditbusinesses.11Table2-1listedChinaEximBank’skeyenvironmentalmanagementsectionsofloanprojects.

Table2-1:ChinaEximBank’skeyenvironmentalmanagementsectionsofloanprojects

LoanLife-cycle Requirementsforenvironmentalandsocialriskmanagementandcontrol

Pre-loan

investigation

Collectinformationonenvironmentalandsocialrisksofclients’orproject’senergy

consumptionandenvironmentalcompliance.Initiallyclassifyclientsaccordingtoitsenvironmentalandsocialrisktype.

Loanreviewand

approval

Conductathoroughinvestigationintotheenvironmentalandsocialrisksoftheclientor

project.Departmentsresponsibleforcreditrating,grantingandexaminationshouldpresentwrittenreviewsontheenvironmentalandsocialrisksfacedbytheclientinthe

reviewandapprovalreport(includingpre-review).Opinionsontheclient’spotentialenvironmentalandsocialrisks,measurestobetakenbytheclientforthemanagementoftheenvironmentalandsocialrisks(ifapplicable),andclassificationoftheclient’senvironmentalandsocialrisksshouldbeincluded.

Projectsthatfailedtogettheapprovalandenvironmentaldocumentsbythehostcountryshouldnotbegrantedcredit.Clientsinsupportofagreen,low-carbonandcirculareconomyshouldbegiventhepriorityintermsofcreditreviewandapproval.

Contract

management

Includeenvironmentalandsocialresponsibilitiesinloancontracttomonitorandconstraintheborrower’sbehaviours.

RequireprojectsclassifiedTypeAtoestablishcomplaintresponsemechanisms,channelsconducivetocommunicatingwithstakeholders,andemergencyplanstodealwithmajorenvironmentalandsocialrisks.

Loangranting Suspendorterminatetheloanifseverepotentialriskswerefoundduringloangrantingandpaymentreviewprocess.

11 Ditto



Post-loan

Management

Includeinformationontheenvironmentalandsocialimpactsinpost-loanexamination

report.Forprojectsunderconstruction,examinemainlytheactualenvironmentalandsocialimpactsoftheprojects,andmonitortheimplementationofmeasurestocontrolandeliminatethe.Forcompletedprojects,theexaminationshouldfocusonwhetherthe

borrowerortheprojectownerhasobtainedtheenvironmentalprotectionacceptancedocumentsuponcompletionoftheproject.Keeptrackoftheenvironmentalandsocialriskupdatesoftheoperatingprojects.

SupportingMeasuresforGreenInvestment

TheChinaEximBank’ssupportforgreeninvestmentismainlydemonstratedinitsgreencreditstrategies.Ontheonehand,itenhancedsupportforgreen,low-carbonandrecyclingeconomybyestablishingexpressservicesforthereviewandapprovalofgreencredit.Ontheotherhand,itisabletoidentifyandmanagetheenvironmentalandsocialrisksincreditgrantingbyestablishinganenvironmentalandsocialriskmanagementsystem.In2015,domesticandoverseasprojectssupportedbytheChinaEximBankmanagedtoreduceatotalconsumptionof5.0572milliontonsofstandardcoal,emissionof14.0199milliontonsofcarbondioxide,24.1thousandtonsofsulfurdioxideand4,790.29tonsofnitrogenoxides. 12

Apartfromgreencredit,thebankhasalsolaunchedmultipleequityinvestmentfunds,suchastheJapan-ChinaEnergyandEnvironmentConservationFund,topromotethedevelopmentofenergyconservationandenvironmentalprotectionindustriesathomeandabroadintheformoffinancialcooperation.Forexample,morethan55%oftheChina-CEEFund’sinvestmentgoestocleanenergyfieldsuchaswindpowergenerationandphotovoltaicpowergeneration.TheseprojectshavehelpedreduceCO2emissionbynearlytwomilliontonsinPolandandtheCzechRepublic.Also,theMombasa-NairobiRailwayprojectsupportedbytheChinaEximBank,inlinewiththeanimalroutesprovidedbytheKenyaWildnessService,hassetup14specialpathways,600culvertsand61bridgesforanimalstopass.Theconstructionhasbeenflexiblyadjustedtosuitanimals’sleepingtimeandlivinghabits.13

Meanwhile,followingcloselythedevelopmentoftheemissiontradingmarket,theChinaEximBanklaunchedcarbonfinanceserviceswiththefocusoncarbonassetconsultation.ThefinancialintelligenceserviceshelpedenterprisestodevelopCleanDevelopmentMechanism(CDM)intheinternationalmarket,managecarbonassetsanddevelopChineseCertifiedEmissionReduction(CCER)projectsinthedomesticmarket. 14

12 The Export-Import Bank of China. Green Credit. http://www.eximbank.gov.cn/tm/Gcp/index_63.html.

13 The Export-Import Bank of China Promotes the Protection of Global Ecological Environment and Green Development, People’s Daily，2016.6.29，http://blog.sina.com.cn/s/blog_13d4156730102x6fu.html

14 The Export-Import Bank of China. Green Credit. http://www.eximbank.gov.cn/tm/Gcp/index_63.html



2.2THEENVIRONMENTALANDSOCIALPOLICIESOFTHECHINADEVELOPMENTBANK

TheChinaDevelopmentBank(CDB)wasfoundedin1994asadevelopmentandpolicy-basedfinancialinstitution,underthedirectleadershipofChina’sStateCouncil.Itprovidesmedium-andlong-termfinancingfacilitiestoserveChina’smajormedium-andlong-termnationaleconomicdevelopmentstrategies.Domestically,theCDBsupportskeydevelopmentareassuchasinfrastructure,basicindustries,pillarindustries,strategicemergingindustriesandmajornationalprojects.Italsosupportstherebuildingofshantytownsanddevelopment-orientedpovertyreductionprojectstoimprovepeople’slivelihoods.Internationally,itendeavorstohelpChinesecorporationsto“goout”andsupportstheBRIstrategy.

Bytheendof2015,CDB’stotalassetsamountedtoRMB12.3trillion,makingitthelargestChinesebankforforeigninvestmentandfinancingcooperation,long-termlendingandbondissuance,andtheworld’slargestdevelopmentfinanceinstitution.Atpresent,CDBhas40domesticbranches,sixoverseasrepresentativeoffices,andfoursubsidiariesincludingtheChinaDevelopmentBankCapital,theChinaDevelopmentBankSecurities,theChinaDevelopmentBankLeasingandtheChina-AfricaDevelopmentFund.


TheCDBisoneofthefirstbanksinChinatohaveestablishedenvironmentalandsocialpolicies.Asearlyasin2005,itrequiredalllendingprojectstocarryoutEnvironmentalImpactAssessment(EIA)inaccordancewiththelaw. 15 In2006,CDBbecamethefirstChinesefinancialinstitutiontojointheUnitedNationsGlobalCompactandpledgetoabidebyUNCG’s10principlesinhumanrights,labourstandards,environment,andanti-corruption.Inthesameyear,thebankjoinedtheUnitedNationsEnvironmentProgramme–FinanceInitiativeandstartedtotrysustainablefinancepractices. 16Since2007,CDBhasrolledouttheannualWorkingPlanofCDBforLoanstoReducePollutionandEmissions.Byadjustingtheloanstructure,itaimstoreducelendingtoindustrieswithhighenergyconsumption,highpollutionandoutdatedcapacity,andincreasefinancialsupporttomajorenergy-saving,emissionreductionandpollutionpreventionandgovernanceprojects. 17 In2014,theCDBfurtherimproveditsenvironmentalandsocialpoliciesbydevelopingtheGreenCreditWorkPlanandtheInterimMeasuresforGreenCreditManagementandintegratedtheassessmentofenvironmentalandsocialrisksintothewholelendingprocessfromprojectdevelopment,reviewandapprovalforcreditgranting,andpost-lendingmanagement: 18

15 Banktrack, Friends of the Earth. China Development Bank's Overseas Investments: An Assessment of Environmental and Social Policies and Practices.

16 Hu Huaibang: Promote Sustainable Development by Developmental Finance. People’s Daily. 2016.10.21.http://www.cdb.com.cn/xwzx/mtjj/201610/t20161021_3726.html

17 Zeng Jinhua. The China Development Bank’s Overseas Green Credit Promotes Win-win Cooperation. 2016.8.4. http://www.cdb.com.cn/xwzx/mtjj/201608/t20160805_3572.html

18 Shan Shigao. The Pioneer of Green Finance: The CDB’s Practice and Exploration in Zhejiang. Zhejiang Online. 2016.9.1. http://biz.zjol.com.cn/system/2016/09/01/021284917.shtml



- Duringtheprojectpreparationperiod,payhighattentiontothesolutionsintheconstructionplanofpollutioncontrol,health,immigrationandotherissues,andrequiretheprojecttomeettheapplicablestandardsandrequirementsonenvironmentalprotection,emissionreduction,safeproductionandoccupationalsafetyandhealth;

- Duringtheprojectreviewandapprovalperiod,setupaspecialcreditratingindicatorfor

“environmentalbehaviours”,integratethemanagementofenvironmentalandsocialrisksintotheprocessofcreditratingandthereviewforcreditgranting.Forindustriesthatarelikelytocausesevereenvironmentalandsocialimpacts,make“alistofenvironmentalandsocialrisksofmajorclientsintheindustries”andreviewtheprojectrisksinaccordancewiththelist;

- Duringthepost-loanmanagementperiod,buildafeedbackmechanismforthetrackingandpredictionofcreditrisks,tomonitortheenvironmentalrisksoftheprojectandconductactive

preventionandaprioridynamicriskalarmingmanagement.Incaseofenvironmentalrulesandregulationviolationsormajorsafetyaccidents,downgradethecompany’sassetqualityrating. Loanswillbelimitedorterminatedforsevereviolations.

In2015,theCDBlaunchedCircularonworkongreencreditmanagementondomesticRMBloanproject,Proposalonworkconcerninggreencredit2015,andoncontentsofimplementinggreencreditinForeignExchangeLoanContractandthesupplementarycontractandFrameworkdocumentonenvironmentalandsocialrisksmanagementofforeignexchangeloans. 19 Thethreedocumentsmadefurtherrequirementsfortheimplementationofgreencreditpoliciesandthemanagementofenvironmentalandsocialrisksforinternationalcooperationprojects:bothdomesticRMBloanprojectsandinternationalcooperativeforeignexchangeloanprojectsshouldfollowthesamegreencreditprinciplestoevaluatetheenvironmentalandsocialrisks.Itevaluatesall-roundrisksthroughthewholecreditprocessfromloancontractsigning,loanpayment,topost-loanmanagementwithdifferentiatedapproach.


TheCDBpromotesgreeninvestmentmainlybyprovidingcreditsupportforprojectsinthegreen,low-carbonandrecyclingeconomicsectorssuchaspollutioncontrol,renewableenergy,energyconservationandenvironmentalprotection,andmodernagriculture.From2011to2015,theCDBhasissuedloansworthRMB300billiontotherenewableenergyindustryandsupportedmorethan1,000domesticnewenergyprojects. 20 In2013,theCDBformulatedtheCorporateSocialResponsibilitySpecialPlanning,whichlaidoutsustainabledevelopmentmodel,includedenvironmentalprotectionintostrategicallyimportantareas,andcommitteditselftofinancingforsustainableeconomic,socialandenvironmentaldevelopment.In2015,theCDBissuedloansofRMB

19 China Development Bank 2015 Sustainability Report

20 Ditto.



191.9billiontoenergyconservationandenvironmentalprotection,andbytheendof2015,thebalanceofthegreenloansstoodatRMB1.57trillion. 21

TheCDBhastakenthe“planinadvance”approachtoactivelyengagewiththegovernmentindrawingupeconomicandsocialdevelopmentplansandprovidingcorrespondingsupportivesystematicfinancingfornationalgreendevelopmentstrategies.In2015,forexample,theCDBandtheMinistryofIndustryandInformationTechnology(MIIT)jointlyissuedNoticeonRecommendingKeyProjectsforIndustrialEnergyConservationandGreenDevelopmentin2015-2016.Thenoticesingledoutthefollowingkeyareasformainfinancialsupport:technologicalrenovationforindustrialenergyandwaterconservation,digitalenergyefficiencyimprovement,cleanproductiontransformationforkeyindustriesandcorporations,comprehensiveutilizationofsolidwastesandrenewableenergyresources,energyconservationandenvironmentalprotectionindustries.MIITformedtheCatalogueofRecommendedKeyProjectsforIndustrialEnergyConservationandGreenDevelopment,basedontherecommendationsfromallprovinces,autonomousregionsandmunicipalitiesdirectlyunderthecentralgovernment.TheCDBtookthehelmofcreditreviewandapprovaltoprovidefinancingandothercomprehensivefinancialservicesfortheprojectsinthecatalogue. 22

Moreover,theCDBhasalsoactivelydevelopednewtypesofgreenfinancialproductsandtakenaleadingroleinproducinggreenbonds,green“loan-debt-fundportfolio”andotherinnovativefinancingmodels.In2015,theCDBjoinedthenewly-foundedGreenFinanceCommitteeunderChinaSocietyforFinance&Bankingasoneofitsfirststandingmembers.ItformedthefirstteamwiththeIFCandtheIndustrialandCommercialBankofChina(ICBC)toconductresearchinfinancialproductandserviceinnovation.InMarch2016,theCDBwastheleadunderwriterofthecountry'sfirstsinglenon-financialenterprisegreenbonds;inMay,theCDBbecametheleadunderwriterofthefirstgreenperpetualbondinthecountry;andinJuly,theCDBwastheleadunderwriterofthefirstgreenmultilateralbond.InOctober2016,CDBservedastheleadunderwriterofthemedium-termnoteofthe“debt-loan-fundportfolio”fortheWuhanMetroGroupCo.,Ltd.,andservedasthecomprehensivefinancingcoordinatortomanagethesource,disposalandrepaymentofprojectfundsthroughacomprehensiveintegrationofbonds,CDB’smedium-andlong-termloansandCDBDevelopmentFundandCDBCapital’sfunds. 23

21 Zeng Jinhua. The China Development Bank’s Overseas Green Credit Promotes Win-win Cooperation. 2016.8.4. http://www.cdb.com.cn/xwzx/mtjj/201608/t20160805_3572.html

22 MIIT and CDB Jointly Issued the Notice on Recommending Key Projects for Industrial Energy Conservation and Green Development for 2015-2016. China Carbon Emission Trading. 2015.9.16.http://www.tanpaifang.com/zhengcefagui/2015/091647537.html

23 Gao Guohua. China’s First Medium-term Note of “debt-loan-fund portfolio” Is Successfully Launched and CDB has Initiated a New Mode of Financial Service — “Green Finance”. Financial Times. http://www.financialnews.com.cn/yh/yw/201610/t20161026_106545.html



2.3THEENVIRONMENTALANDSOCIALPOLICIESOFTHEWORLDBANKANDTHEINTERNATIONALFINANCECORPORATION

TheWBandtheIFCarebothsubsidiariesoftheWorldBankGroup.Theyserverespectivelyasacreditproviderandamobilizerofinvestmentandfinancingactivities,torealizetheGroup’smissionsof“endingextremepovertyby2030andboostingsharedprosperityinasustainablemanner.”Bothplayanequallyimportantroleinglobaldevelopmentprojects.TheWBandtheIFCarepioneeringfinancialinstitutionstopayattentiontoenvironmentalissues.Theirenvironmentalandsocialpoliciesandstandardssetgoodexamplesforotherfinancialinstitutionstofollowandcreatedprofoundinfluenceamongstfinancialinstitutionsacrosstheworld.

TheEnvironmentalandSocialPoliciesoftheWorldBank

TheWorldBankstartedtopayattentiontoenvironmentalandsocialaffairsinthe1870swhenenvironmentalissueswereplacedonglobalgovernanceagenda.In1969,theWBappointeditsfirstenvironmentaladviserandin1970establishedtheOfficeofEnvironmentalAffairs.In1984,theWorldBanklaunchedOperationalManualStatementonEnvironmentalAspectsofWorldBankWork24,heraldingtheintegrationoftheenvironmentalandsocialimpactsintothebank’soperatingprocedures.In1987,forthefirsttime,theBankformulatedregulationsonenvironmentalassessmentinitsOperationalDirective4.00.Sincethen,asetofoperationaldirectiveshavebeenmade,updatedandamendedbythebanktoevaluateandmanagetheenvironmentalandsocialimpacts.

In1997,theWorldBankproposedtheEnvironmentalandSocialSafeguardPoliciesasitsmajorregulationsforthepreventionandcontrolofadverseenvironmentalandsocialimpacts.TheSafeguardPoliciesaremadeupofOperationalPolicies(OP)andBankProcedures(BP).TheOPlaidoutenvironmentalandsocialrequirementsandBPprovidedguidanceforthebankingstaffonthemeasurestobetakenintheprocessofprojectapproval,preparation,assessment,implementation,andafterprojectcompletion.SafeguardPoliciesarecomposedoffiveenvironmentalpolicies,threesocialpoliciesandtwolegalpolicies,allofwhichareapplicabletotheWB’sinvestmentandloanprojects,DevelopmentPolicyLoans(DPLs)andProgramforResults(PforR). 25 Sinceitsinceptionin1997,theSafeguardPolicieshaveundergoneconstantimprovementsandhavebeeninusetothisday.Amongallthosepolicies,theOP/BP4.01EnvironmentalAssessmentisaprogrammaticdocumentforthepreventionandcontrolofenvironmentalandsocialimpacts.Borrowersshouldnotonlycomplywiththelawsandregulationsofthehostcountry,butalsocarryoutenvironmentalassessmentinaccordancewiththeOP4.01.OP/BP4.01,togetherwiththeotherninesafeguardpolicies,providesprotectionoftheenvironmentandthevulnerablegroups,andminimizestheadverseimpactsoftheprojectsfundedbytheWB(Table2-4).

24 Operational Manual Statement on Environmental Aspects of World Bank Work. 1984.

25 The World Bank’s Safeguard Policies, Proposed Review and Update, Approach Paper. 2012.10.10.



Table2-2:TheWorldBank’sSafeguardPolicies26

PolicyType PolicyTitle MainContent

Environmental OP/BP4.01

Environmental

Assessment27

ThroughtheimplementationoftheOP/BP4.01,theWBaimsto

determinethepotentialenvironmentalandsocialimpactsofits

supportedprojects,makesurewhetherothersafeguardpoliciesshould

beapplied(e.g.theinvoluntaryresettlementpolicy)andpropose

measurestomitigatetheimpacts.Itclassifiestheproposedprojectinto

oneofthefourcategoriesincludingCategoryA,CategoryB,CategoryC

andCategoryFI,dependingonthescaleofitsenvironmentalandsocial

impacts.Theborrowershouldmakeanenvironmentalassessmentin

accordancewiththeenvironmentalpoliciesofthehostcountryandthe

requirementsprovidedintheOP4.01,includingenvironmentalimpact

assessment,alternativeanalysisandplanmakingforenvironmental

management.ForprojectsclassifiedasCategoryAandCategoryB,it

shouldmakepublicconsultationanddiscloserelevantinformationtothe

public.

OP/BP4.04

Natural

Habitats

AccordingtoOP/BP4.04,theWBdoesnotsupportprojectsthatinvolve

significantconversionordegradation–of“criticalnaturalhabitats.” 28

TheWorldBankalsodoesnotsupportprojectsinvolvingthesignificant

conversionofnaturalhabitatsunlesstherearenofeasiblealternatives

fortheprojectanditssiting,andcomprehensiveanalysisdemonstrates

thatoverallbenefitsfromtheprojectsubstantiallyoutweighthe

environmentalcosts.

OP/BP4.09

Pest

Management

TheobjectiveoftheOP/BP4.09istopromotepestmanagement

methodssuchasbiologicaltreatmentandenvironmentaltreatment,and

toreducetheuseofagro-chemicals.Apartfromitssupportforbiological

treatmentforpestmanagement,theOP/BP4.09hasalsoprovided

criteriatoapplytotheselectionanduseofpesticidesinitssupported

projects,requiringthatpesticidesprocuredthroughitsfinancingsupport

26 Safeguard Policies. The World Bank; Serial Report on Belt and Road Initiative and Green Finance: Research on International Experience of Environmental and Social Management Framework for Multilateral Development Banks. WWF. 2015.11.

27 Items for Environmental Assessment: Natural Environment (Air, Water and Land), Human Safety and Health, Society (Involuntary Resettlement, Indigenous Peoples and Cultural Heritage) and Cross-border and Global Environmental Problems.

28 The “Critical Natural Habitats” Defined by the World Bank Include: existing protected areas and areas officially proposed by governments as protected areas, areas initially recognized as protected by traditional local communities, sites that maintain conditions vital for the viability of these protected areas, and sites identified on supplementary lists prepared by the Bank or an authoritative source determined by the Regional environment sector unit.



mustbemanufactured,packaged,labeled,handled,stored,disposedof,

andappliedaccordingtostandardsacceptabletotheWorldBank.

OP/BP4.36

Forests

TheobjectiveoftheOP/BP4.36istoassistborrowerstoharnessthe

potentialofforestsinasustainablemannerandprotectvitalforest

resources.TheWBdoesnotsupportfinanceprojectsthatwouldinvolve

significantconversionordegradationofcriticalnaturalhabitats,

includingprojectsthatinvolvecommercialharvestingrelatedtocritical

forestsorcriticalnaturalhabitats.Ifaprojectinvolvesthesignificant

conversionordegradationofnaturalforestsorrelatednaturalhabitats

thattheBankdeterminesarenotcritical,andtheBankdeterminesthat

therearenofeasiblealternativestotheprojectanditssiting,and

comprehensiveanalysisdemonstratesthatoverallbenefitsfromthe

projectsubstantiallyoutweightheenvironmentalcosts,theWorldBank

mayfinancetheprojectprovidedthatitincorporatesappropriate

mitigationmeasures.

OP/BP4.37

SafetyofDams

TheOP/BP4.37providessafetymeasurestobecompliedwithbythe

projectsthatinvolvenewdams,existingdamsanddamsunder

construction,toensurethatforthelifeofanydam,theborrowertakes

appropriatemeasuresandprovidessufficientresourcesforthesafetyof

dams.Thepolicyhighlightstheroleofanindependentpanelofexperts

ininvestigation,design,constructionandinitialreview.Where

appropriate,aspartofpolicydialoguewiththecountry,WorldBank

staffdiscussanymeasuresnecessarytostrengthentheregulatory

frame-worksfordamsafetyprogramsinthecountry. 29

Social OP/BP4.11

Physical

Cultural

Resources

TheobjectiveoftheOP/BP4.11istopromotetheprotectionofphysical

culturalresourcesandavoidorminimize,asmuchaspossible,the

damagecausedbytheprojectssupportedbytheWorldBanktophysical

culturalresources,suchashistoricalrelicsanduniquenaturalscenery.

Accordingtoitspolicyrequirements,theWorldBankdoesnotfinance

projectsthatinvolvesignificantdamagetophysicalculturalresources,

andwheretheprojectsinvolvephysicalculturalresources,protection

shouldbeprovidedandimprovementbemade.

OP/BP4.12

Involuntary

Resettlement

TheOP/BP4.12appliestoprojectsthatresultininvoluntary

resettlementbecauseofrelocationorlossesofland,assetsorincome

sources.Thispolicyrequiresthatinvoluntaryresettlementshouldbe

avoidedwherefeasible,orminimized.Whereitisnotfeasibletoavoid

29 Chen Yongchang, Zhou Kefa, Wang Xiaohang. Dam Safety Assessment as Provided in the World Bank’s OP 4.37— Safety of Dams. Dam & Safety [J]. 2013.5.



resettlement,theborrowershouldassistdisplacedpersonsintheir

effortstoimprovetheirlivelihoodsandstandardsoflivingoratleastto

restorethem,inrealterms,topre-displacementlevels.

OP/BP4.20

Indigenous

Peoples

AccordingtoOP/BP4.20,TheprojectssupportedbytheWorldBank

shouldbringaboutculturallyappropriatesocialandeconomicbenefits

forindigenouspeoples,andavoid,orifnotfeasible,minimize,adverse

effects.Ifindigenouspeoplesareidentifiedintheprojectarea,or

relationofdependenceisidentifiedbetweenindigenouspeoplesand

theproject,theborrowershouldconductsocialimpactassessmenton

theproject,andineverystageofprojectpreparationand

implementation,provideallrelevantinformationinaculturally

appropriatemanner.TheWorldBankfinancesprojectsonlyafterthe

borrowerhasconductedfree,priorandinformedpublicconsultations

andwonsupportfromaffectedindigenouscommunitiesfortheproject.

Damagesshouldbepaidtotheindigenouspeopleswhohavesuffered

lossesfromtheproject.

Legal OP/BP7.50

Projectson

International

Waterways

TheobjectiveoftheOP/BP7.50istoavoidenvironmentalandsocial

impactscausedtothecountriesalongtheinternationalwaterways

involvedininternationalwaterwayprojects,aswellastheinternational

disputescausedtherefrom.Thepolicyprovidesmeasurestobetakenby

theWorldBankandtheborrowerandamechanismforcommunication

withthecountriesalongtheinternationalwaterways.

OP/BP7.60

Projectsin

DisputedAreas

AccordingtotheOP/BP7.60,onlyifthetwosidestothedisputedarea

havenoobjectiontotheprojectorunderspecialcircumstances,should

theWorldBankwarrantsupportoftheproject.Suchspecial

circumstancesarespecifiedinthepolicy.

ThehighrecognitionofinformationtransparencyandthegreatimportanceattachedtoitbytheWBhelpedtheimplementationofthesafeguardpolicies.AccordingtotheWB,informationdisclosureistheprerequisitetopublicparticipationandsupervisioninensuringthetransparencyofprojects.Itwillnotonlyhelptheprojectidentifypotentialproblems,butalsobringmorecomprehensivesolutionstosolvesuchproblems.Inthissense,informationdisclosurecouldplayakeyroleinstrengtheninggoodgovernance,improvingoperationeffectsandrealizingpovertyreduction.In1994,theWBpublishedthefirstinformationdisclosurepolicy,basedonwhichupdatesweremadein2002and2010toexpandthescopeofinformationtobedisclosed,inanattempttoimprovetheopenness,transparencyandaccountabilityoftheWB.

AccordingtoWorldBankPolicyonAccesstoInformationlaunchedin2010,theWBwillmakepublicalltheinformationinitspossessionthatisnotonitslistofexceptions.Thedisclosedinformation



includesbutarenotlimitedto30:theWB’s“OperationalPolicies”(OP)and“BankProcedures”(BP);“ProjectInformationDocument”(PID)forpendingprojects;“ProjectAppraisalDocument”(PAD)forprojectscurrentlybeingfinanced;the“EnvironmentalAssessmentReports”(EA)accessibletoproject-affectedgroupsandlocalNGOsinaccordancewithOP/BP4.01;“ResettlementInstruments”(RIs)and“IndigenousPeoples’DevelopmentPlans”(IPDPs)submittedbytheborrowerinaccordancewithOP/BP4.12andOP/BP4.20;majordecisionsmadeinprojectdevelopmentandimplementationprocesses,includingdecisionsmadeatprojectconceptreviewconferencesandinprojectsupervisionandmid-termprojectreviews;the“ImplementationCompletionReport”(ICR)availableaftertheprojectiscompleted;the“ProjectPerformanceAssessmentReports”(PPARs)andthe“ImpactEvaluationReports”(IERs)designedforprojectsselectedbyassessmentdepartments.

TheinformationdisclosedbytheWBisavailableonitsofficialwebsiteandmorethan100publicinformationcentersacrosstheworld.Forinformationnotavailableonthewebsites,thepublicmaysubmitonlinerequestandthebankwillconfirmreceiptoftherequestwithinfiveworkingdaysandoffercomprehensiverepliesundernormalcircumstances,oritwillprovideacomprehensiveresponsetorequestswithin20workingdays,incaseofcomplexrequeststhatmayneedadditionaltime.31 TherequestercanfileanappealifheorshecanshowthatthebankhasviolatedthePolicyonAccesstoInformationbyimproperlyorunreasonablyrestrictingaccesstoinformationthatitwouldnormallydiscloseunderthePolicy.

Recognizingthefactorsincludingthechangingborrowerprofiles,increasedawarenessofthevalueandvulnerabilityoftheglobalcommons,changingoperationsofthebankandthegrowingroleoftheprivatesector,theWBlaunchedthereviewandupdateoftheenvironmentalandsocialpoliciesin2012.Thereviewandupdatewasbuiltontheexistingcoreprinciplesofthesafeguardpolicies.Throughunderstandingtheborrowers’needsandconsultingwithabroadrangeofstakeholders,thereviewaimstoestablishacomprehensiveenvironmentalandsocialsafeguardframeworkincludingprinciples,policies,proceduresanddirectives.ItwillfacilitatethegeneralprogressofsustainabledevelopmentpolicydevelopmentinborrowingcountriesandimprovethelendingefficiencyoftheWB.

InAugust2016,theWB’sBoardofExecutiveDirectorsapprovedanewEnvironmentalandSocialFramework(ESF).Theframeworkintroducedcomprehensivelabourandworkingconditionprotectionsandcommunityhealthandsafetymeasuresthataddressroadsafety,emergencyresponseanddisastermitigation.TheresponsibilityoftheWBandoftheborrowerisgivenaclear-cutdistinctionintheframework,whichalsorequiresthestakeholderengagementthroughouttheprojectcycle.TheWBplanstostartapreparationandtrainingperiodfor12-18monthstoprepareforthetransitiontothenewframework,whichisscheduledtogointoeffectinearly2018.The

30 The World Bank Policy on Disclosure of Information. 2002.6; World Bank Broadens Public Access to Information. The World Bank Website. http://www.shihang.org/zh/news/feature/2010/07/01/world-bank-broadens-public-access-to-information

31 World Bank Broadens Access to Information. The World Bank website. http://www.shihang.org/zh/news/feature/2010/07/01/world-bank-broadens-public-access-to-information



currentsafeguardsareexpectedtoruninparalleltonewESFforaboutsevenyearstogovernapprovedprojectsbeforetheeffectivenessdateofthenewESF. 32

TheEnvironmentalandSocialPoliciesoftheInternationalFinanceCorporation

TheIFChasmadestringentenvironmentalandsocialpoliciesandstandardstoregulateinvestmentactivitiesfortheprivatesector,andthesepoliciesandstandardshaveundergoneconstantreviewsandupdates.TheenvironmentalandsocialpoliciesandstandardscurrentlyusedbyIFCwereupdatedin2012andhavethreeparts:theInternationalFinanceCorporation’sPolicyonEnvironmentalandSocialSustainability(SustainabilityPolicy),theInternationalFinanceCorporation’sPerformanceStandardsonEnvironmentalandSocialSustainability(PerformanceStandards),andtheInternationalFinanceCorporationAccesstoInformationPolicy(AccesstoInformationPolicy).

IFC’sPolicyonEnvironmentalandSocialSustainabilityisasetofgoverningpoliciesfortheenvironmentalandsocialmanagementofIFC-supportedprojects.ItpointsoutIFC’seffortstocarryoutinvestmentandadvisoryactivitieswiththeintentto‘donoharm’topeopleandtheenvironment,toenhancethesustainabilityofprivatesectoroperationsandthemarketstheyworkin,andtoachievepositivedevelopmentoutcomes.TheSustainabilityPolicyintroducesthefunctionsandrequirementsofthePerformanceStandardsandtheAccesstoInformationPolicy,andspecifiesIFC’senvironmentalandsocialobligationsandresponsibilities. 33

ThePerformanceStandardslaysouttheenvironmentalandsocialrequirementsforitsclients,andreviewsandmanagestheenvironmentalandsocialrisksandimpacts.Itspecifiesstandardsineightareas,includinglabourandworkingconditions,resourceefficiencyandpollutionprevention,communityhealth,safetyandsecurity,landacquisitionandinvoluntaryresettlement,biodiversityconservationandsustainablemanagementoflivingnaturalresources,indigenouspeople,andculturalheritage.Inthecaseofdirectinvestment(includingprojectandcorporatefinanceprovidedthroughfinancialintermediaries),IFCrequiresitsclientstoapplythePerformanceStandardstomanageenvironmentalandsocialrisksandimpacts,andcomplywithapplicablenationallaws,including internationallawsthatareadoptedandapprovedbyhostcountries. 34

TheIFCwillcarryoutduediligenceagainstthePerformanceStandardsforintendedinvestmentprojects,andwillonlyprovidefinancialsupportfortheprojectsthatareexpectedtomeettherequirementsofthePerformanceStandardswithinreasonabletime.TheIFCwillalsoassistitsclientsinidentifyingopportunitiestoimprovetheirenvironmentalandsocialperformancesandtakingmeasuresinaccordancewiththePerformanceStandardstopreventenvironmentalandsocialimpacts.Forinstance,theGuidanceNotesandtheInterpretationNoteonFinancialIntermediaries

32 Fact Sheet The World Bank’s New Environmental and Social Framework. The World Bank. 2016.8.4.

33 The International Finance Corporation. The International Finance Corporation’s Policy on Environmental and Social Sustainability. 2012.1.1.

34 The International Finance Corporation. The International Finance Corporation’s Performance Standards on Environmental and Social Sustainability. 2012.1.1.



offerguidanceforclientsonhowtoimplementthePerformanceStandards.Throughoutthelifeofaproject,IFCwillmonitortheenvironmentalandsocialperformancesofitsclients.ProjectappraisalconductedbyIFCwillfollowthegeneralandindustry-specificgoodinternationalpracticeslistedinthetechnicalreferencedocumentsoftheEnvironmental,HealthandSafetyGuidelines(EHSGuidelines).WhenhostcountryregulationsdifferfromthelevelsandmeasurespresentedintheEHSGuidelines,projectsareexpectedtoachievewhicheverismorestringent. 35

TheAccesstoInformationPolicyprovidesIFC’scommitmenttotransparencyandspecifiesIFC’spolicyregardingthescopeofinformationthatitmakesavailabletothepubliceitherasaroutinematteroruponrequest.TheinformationIFCmakesavailableinaccordancewiththeAccesstoInformationPolicycanbecategorizedasinstitutionalinformationaboutIFCandproject-levelinformationregardinginvestmentsandadvisoryservicessupportedbyIFC,whichwouldenableitsclients,partnersandstakeholders(includingAffectedCommunities),andotherinterestedmembersofthepublictobetterunderstandIFC’sbusinessactivities,developmentoutcomesandotherimpactsofitsactivities.Foreachproposedinvestment,IFCwilldiscloseaSummaryofInvestmentInformation(SII),whichprovidesbasicinformationabouttheprojectorinvestment,aswellastheenvironmentalandsocialimpactsoftheproject.Forprojectsandinvestmentswithpotentialsignificantadverseenvironmentalorsocialrisksand/orimpacts,IFCwillendeavortoprovideaccesstothedraftEnvironmentalandSocialImpactAssessment(ESIA)preparedbytheclientevenbeforeIFChasstartedthereviewofitsinvestment. 36

ItshouldbenotedthatIFC’senvironmentalandsocialpolicieshaveexertedprofoundinfluenceuponenvironmentalandsocialstandardsadoptedbythefinancialsectorandhavealsobeenwidelyacknowledgedbytheprivatesector.TheIFCrequiresnotonlyitsdirectlyinvestedprojectstoabidebythePerformanceStandards,butalsothosefinancialintermediariesincollaborationwithIFCtodevelopandoperateanEnvironmentalandSocialManagementSystem(ESMS)thatiscommensuratewiththelevelofenvironmentalandsocialrisksintheirportfolioandprospectivebusinessactivities.TheESMSshouldincorporaterelevantprinciplesofthePerformanceStandard1:AssessmentandManagementofEnvironmentalandSocialRisksandImpacts.Bytheendof2016,85financialinstitutionsfrom35countrieshaveadoptedtheEquatorPrinciples,aframeworkbasedonIFC’sPerformanceStandardsonEnvironmentalandSocialSustainability,toassessandmanageenvironmentalandsocialimpactsandrisksinprojectfinancing.TheWB,initsnewlylaunchedEnvironmentalandSocialFramework,hassubstituted10safeguardpolicieswith10environmentalandsocialstandards,amongstwhichthefirsttotheeighthenvironmentalandsocialstandardshaveadoptedtheframeworkofthePerformanceStandards.

35 Ditto.

36 The International Finance Corporation. The International Finance Corporation Access to Information Policy. 2012.1.1.



TheSupportingMeasuresoftheWorldBankandtheInternationalFinanceCorporationforGreenInvestment

Ontheonehand,theWBandtheIFChavebeencommittedtoimprovingtheirenvironmentalandsocialpoliciestopreventadverseenvironmentalandsocialimpactsfromtheirinvestmentactivities,andontheotherhand,theyhavealsodevotedthemselvestosupportinggreeninvestmentbyissuinggreenbondsandgrantingloanstosupportthemanagementofenvironmentalandnaturalresources.

In2016,theInternationalBankforReconstructionandDevelopment(IBRD)issuedUSD3.75billionofloansforthemanagementofenvironmentalandnaturalresources,andtheInternationalDevelopmentAssociation(IDA)issuedUSD1.12billionofloansforthesamepurpose,accountingfor12.6%and7.7%ofthetotalnewloansissuedthatyearbythetwoinstitutionsrespectively. 37 TheIBRDisthepioneerandlargestissuerofgreenbondsandhasissued125greenbondssince2008,raisingUSD9billion. 38 Thefundsaremainlyraisedforadaptationandmitigationprojectstocopewithclimatechange,involvingsolarandwindpowers,energy-efficientbuildingsandsustainableforestmanagement,etc. 39 TheIFClauncheditsgreenbondprogrammein2010,andfrom2010to2016atotalofUSD5.7billionofgreenbondshasbeenissued, 40 raisingfundsforenergyefficiency,renewableenergy,resourceefficiency,cleantechnologyproductionandsustainableforestry. 41

2.4THEENVIRONMENTALANDSOCIALPOLICESOFTHEJAPANBANKFORINTERNATIONALCOOPERATION

AsJapan’spolicybank,theJapanBankforInternationalCooperationactivelydevelopsoverseasbusinessandteamsupwithJapanesecompaniesinoverseasinvestmentprojects.Ithasestablished16overseasrepresentativeofficesincitiessuchasBangkok,Beijing,London,Manila,MexicoCity,NewYork,andSingapore.42 Overtherecentyears,JBIChaspaidmoreattentiontoissuesintheenvironmentalprotectionareaandformulateditsownenvironmentalandsocialpolicieswithreferencetothepoliciesoftheWBandtheUnitedInternationalBank.GraduallyJBICshifteditsoverseaspriorityfinancingareatoenvironmentalprotection.ByMarch2015,JBIC’scapitalhasreachedUSD13.51billion,itsoutstandingloansandequityparticipationhasamountedtoUSD142.71billionanditsoutstandingguaranteehasreachedUSD24.98billion.64%ofthebank’sloans,equityparticipationsandguaranteecommitmentfundsareusedtosupport,maintainandimprove

37 The World Bank Annual Report 2016.

38 The World Bank. World Bank Group Loans Top $61 billion in Fiscal Year 2016. 2016.7.13.

39 The World Bank Green Bond Fact Sheet. 2015.7. http://treasury.worldbank.org/cmd/pdf/WorldBank_GreenBondFactsheet.pdf

40 The International Finance Corporation Website. Overview of IFC’s Green Bonds；The World Bank. World Bank Group Support Tops $61 billion in Fiscal Year 2016. 2016.7.13.

41 IFC Green Bond Impact Report 2015.

42 Ditto.



theinternationalcompetitivenessofJapaneseindustries;33%isusedtopromotetheexplorationandsecurementofimportantoverseasresourcesforJapan;and3%isusedtodevelopoverseasbusinesswiththepurposeofenvironmentalprotectionsuchasglobalwarmingprevention.43


JBIChasbeenstronglycriticizedbeforefortheadverseenvironmentalandsocialimpactscausedbytheprojectsunderitssupport,e.g.theKotopanjanDamprojectinIndonesiaandthewastewatermanagementprojectinSamutPrakarn,Thailandin1990s.JBIC’ssetbacksinthedevelopingcountriescanbeimputabletothelackofclear-cutevaluationstandards,aninformationdisclosurepolicy,aneffectivesupervisionandmonitoringmechanismandarectificationsystem.Havingrealizedtheimportantenvironmentalandsocialimpactsitsprojectscouldexertuponthehostcountries,JBIClaunchedtheJapanBankforInternationalCooperationGuidelinesforConfirmationofEnvironmentalandSocialConsiderations44 (hereafterreferredtoas“EnvironmentalGuidelines”)in2003,totackletheissuesmentionedabove.

TheEnvironmentalGuidelinesstipulatestheassessmentstandardsfortheenvironmentalandsocialimpactscausedbyJBIC-supportedprojects,theenvironmentalandsocialrequirementsthatprojectsshouldmeet,andrelevantoperationalprocedures.ItrequiresallJBIC-supportedprojectstobecarriedoutwiththepurposeofprotectingtheenvironmentandthesociety.InJuly2009,JBICamendedtheEnvironmentalGuidelines,expandingthescopeofinformationavailabletothepublic,specifyingtheinternationalstandardsofenvironmentalandsocialimpacts,andaddingcontentsconcerningecosystemprotection,involuntaryresettlementandindigenouspeoples.Between2013and2014,thesecondroundofreviewontheEnvironmentalGuidelinesbroughtinviewsfromallstakeholdersincludingNGOrepresentatives,relatedindustriesandgovernmentdepartments.ThecurrentEnvironmentalGuidelinescameintoeffectinJanuary2015.

TheEnvironmentalGuidelineshighlightedtheimportanceofcommunicationsamongJBIC,thegovernmentofthehostcountry,borrower,andprojectproponentinordertodeterminetherightmeasuresforenvironmentalandsocialprotectionwiththeengagementofaffectedlocalresidentsandNGOs.Itstressedtheimportanceoftransparencyduringthewholeprocess.TheEnvironmentalGuidelinesrequiresthatbeforedeterminingwhethertosupportaproject,JBICshouldclassifyprojectsintooneofthecategoriesofA,B,CandFIbasedonthedegreeoftheirenvironmentalimpacts,andenvironmentalassessmentshouldthenbeconductedinlinewiththeenvironmentalandsocialrequirementsoutlinedineachcategorytoconfirmwhetherappropriatemeasureshavebeentakentopreventandcontroladverseimpacts(Table2-3).

43 Japan Bank for International Cooperation. The Role and Function of the Japan Bank for International Cooperation. https://www.jbic.go.jp/wp-content/uploads/page/2013/08/43936/jbic-brochure-chinese.pdf.

44 Japan Bank for International Cooperation. Japan Bank for International Cooperation Guidelines for Confirmation of Environmental and Social Considerations. 2003.10.



Table2-3:EnvironmentalCategoriesandAssessmentRequirements45

Category Definition AssessmentRequirements

CategoryA

Aproposedprojectthatislikelytohave

asignificantadverseimpactonthe

environment.

JBICwillassessthepotentialadverse

environmentalandsocialimpactsofaproject

andthecorrespondingmeasuresforthe

preventionandcontrolofsuchimpacts.The

assessmentwillbeundertakenonthebasis

ofthefollowingdocumentssubmittedbythe

borrower:EnvironmentalImpactAssessment

(EIA)reportsandenvironmentalpermit

certificatesissuedbythehostgovernments;

forprojectsthatwillresultinlarge-scale

involuntaryresettlementorprojectsthatwill

requiremeasuresforindigenouspeoples,

resettlementactionplans,livelihood

restorationplansandindigenouspeoples’

plans.

CategoryB

Aproposedprojectthatitspotential

adverseenvironmentalimpactisless

adversethanthatofCategoryA

projects.

JBICwillassessthepotentialadverse

environmentalandsocialimpactsofaproject

andthecorrespondingmeasuresforthe

preventionandcontrolofsuchimpacts.

CategoryBprojectsaresimilartothoseof

CategoryAintermsofassessment,butthe

scopeofenvironmentalreviewsforCategory

Bprojectsisnarrower.Wherean

environmentimpactassessmentprocedure

hasbeenconducted,JBICmayrefertothe

EIAreportsandpermitcertificates.However,

thisisnotamandatoryrequirement.

CategoryC

Aproposedprojectthatislikelytohave

minimalornoadverseenvironmental

impact.

Forprojectsinthiscategory,JBICdoesnot

undertakeenvironmentalreviewsbeyond

screening.

CategoryFI Aproposedprojectthatsatisfiesallof

thefollowing:JBIC’sfundingofthe

JBICchecksthroughthefinancial

intermediarytoseewhetherappropriate

45 Japan Bank for International Cooperation. Japan Bank for International Cooperation Guidelines for Confirmation of Environmental and Social Considerations. 2015.1.



projectisprovidedtoafinancial

intermediary;theselectionand

assessmentoftheactualsub-projectsis

substantiallyundertakenbysuchan

institutionafterJBIC’sapprovalofthe

funding,andtherefore,thesub-projects

cannotbespecifiedpriortoJBIC’s

approvaloffunding(orassessmentof

theproject);andthosesub-projectsare

expectedtohavepotentialimpacton

theenvironment.

environmentalandsocialconsiderationsas

statedintheGuidelinesareensuredfor

projectsinthiscategory.

Toconductenvironmentalimpactassessmentandensureproperenvironmentalandsocialprotectionmeasuresareinplace,JBICreferstonotonlytheenvironmentallaws,regulations,standardsandplansofthehostcountry,butalsoIFC’sPerformanceStandardsonEnvironmentalandSocialSustainabilityandtheWorldBank’sEnvironmental,HealthandSafetyGuidelines.Iftheenvironmentalreviewshowsthattheenvironmentalandsocialprotectionmeasuresaredeficient,JBICwillurgetheprojecttoundertakeappropriateenvironmentalandsocialconsiderations.Iftheprojectfailstotaketheseconsiderations,JBICmightnotmaketheinvestmentorprovidetheloans.

Aftertheloanisapproved,theborrower’sobligationsforenvironmentalandsocialprotectionwillbeincludedinitsloancontract.Forinstance,theborrowershallreporttoJBIConmeasuresandmonitoringrelatedtoenvironmentalandsocialconsiderationsundertakenbytheprojectproponents;ifanyproblemsregardingenvironmentalandsocialconsiderationsarise,theborrowershallmakeeffortsfordiscussionstobeheldbetweentheprojectproponentsandprojectstakeholders.Intheprocessofpost-loanmanagement,JBICwillmonitortheactualimplementationofenvironmentalandsocialconsiderationsforCategoryAandBprojects,soastoensurerelevantconsiderationsareeffectivelyimplemented.IfJBICjudgesthatenvironmentalandsocialconsiderationsarenotappropriatelyimplemented,itmayasktheprojectproponenttotakeappropriateaction.Iftheresponseoftheprojectproponentisinappropriate,JBICmaysuspenditsinvestmentandloans,orrequiretheborrowertorepaytheloansinadvance.

JBICwelcomesinformationprovidedbystakeholders,sothatitmayconductmorecomprehensivereviewsandmonitoringofenvironmentalandsocialimpactsandconsiderations.InaccordancewiththeEnvironmentalGuidelines,JBICdisclosesthename,country,locationandcategoryclassificationoftheproject,andforCategoryAandBprojects,theEIAreportsandpermitcertificates.ForCategoriesA,B,andFIprojects,JBICdisclosesresultsofenvironmentalreviewsandresultsofthemonitoringconductedbytheprojectproponentsaftersigningtheloanagreements.


Ontheonehand,JBIChasconstantlyimproveditsEnvironmentalGuidelinestopreventandcontroladverseenvironmentalandsocialimpactscausedbyJBIC-supportedprojects.Ontheotherhand,



JBICpushesforwardgreeninvestmentprojectsbyprovidingpreferentialloanpoliciesforprojectsthataimtoprotectandimprovetheenvironmentandestablishingspecialmechanismsandbusinessservices.

InApril2008,JBIClaunched“JBICFacilityforAsiaCooperationandEnvironment”(FACE)tostrengthenitssupportforAsiandevelopingcountriestocopewithclimatechange.Threeyearslater,JBICdevelopedandexpandedFACEandtransformeditinto“EnhancedFacilityforGlobalCooperationinLowCarbonInfrastructureandEquityInvestment”(E-FACE),underwhichthebankaimstomobilizeprivatesectorfundingtothelargestextentandpromotestrategicprojectssuchasoverseassystematicallyintegratedinfrastructureprojects

.InMarch2010,JBIClaunchedtheGlobalactionforReconcilingEconomicgrowthandEnvironmentalpreservation(GREEN),inanattempttoworkincooperationwithinternationalorganizationsandlocalfinancialinstitutionsindevelopingcountriestoprovidesupportforprojectswithafocusonenvironmentalconservationandrenewableenergies,suchasthoseanticipatedtomakecontributiontoreducinggreenhousegas.

Sincethereformin2012,asoneofthemainmissionsofJBIC,ithaspromotedthepreventionofglobalwarmingandotheroverseasbusinessesaimedatprotectingtheenvironment.Infiscalyear2014,3%ofitsloans,equityparticipationsandguaranteecommitmentfundsweredevotedtooverseasbusinesswiththepurposeofpreservingglobalenvironment.



3.ACOMPARISONOFENVIRONMENTALANDSOCIALPOLICIESBETWEEN

CHINA’SPOLICYBANKSANDINTERNATIONALFINANCIALINSTITUTIONS

3.1WEAKNESSESOFTHEENVIRONMENTALANDSOCIALPOLICIESOFCHINA’SPOLICYBANKS

AcomparisonoftheenvironmentalandsocialpoliciesbetweentheCDBandtheChinaEximBankandthoseoftheWB,theIFCandtheJBICshowstheimmaturityofChina’spolicybanksandtheneedforthemtodrawexperiencesfromadvancedinternationalpracticesforself-improvement.Themainweaknessesinclude:thereisnoenvironmentalandsocialdepartmentestablished;thereisnotailoredandspecificpoliciesforenvironmentalandsocialissues,andtheadoptedenvironmentalandsocialstandardsarenotstrictenough;thereisnourgeforimprovementduringthepre-loanreviewandnoindependentfieldvisitinprojectmanagementandsupervisionphases;andthereisnocomplaintmechanismwhiletheinformationdisclosuresystemneedsimprovement.Moreover,theCDBhasnotyetfollowedtheinternationalnormstoclassifyprojectsintermsofenvironmentalrisks,andlackedpublicconsultationswiththecommunityaffectedbytheproject.

Nospecificclassificationsfordifferentenvironmentalandsocialissues

Regardingenvironmentalandsocialpolicies,theWBhasmadearelativelydetailedclassificationandstipulationondifferentissues.Itsenvironmentalpoliciesinvolveenvironmentalassessment,naturalhabitats,pestmanagement,forestandsafetyofdams;itssocialpoliciesinvolvephysicalculturalresources,involuntaryresettlementandindigenouspeoples;legalpoliciesinvolveprojectsoninternationalwaterways,andprojectsindisputedareas.ThenewPolicyFrameworkintroducedcomprehensivelabourandworkingconditionprotectionsandcommunityhealthandsafetymeasuresthataddressroadsafety,emergencyresponseanddisastermitigation.Similarly,IFCstipulatesinitsPerformanceStandardsthattheassessmentandmanagementofenvironmentalandsocialrisksandimpactsshouldbemeasuredineightaspects,includinglabourandworkingconditions,resourceefficiencyandpollutionprevention,communityhealth,safetyandsecurity,landacquisitionandinvoluntaryresettlement,biodiversityconservationandsustainablemanagementoflivingnaturalresources,indigenouspeoplesandculturalheritage.TherelevantpoliciesofJBICaremainlyfocusedon:1.people’shealthandsafetyandnaturalenvironmentalissues:air,water,soilpollution,wateruse,ecosystemsandbiologicalcommunities,aswellascross-borderandglobalenvironmentalissues;2.socialissues:humanrightsprotection,involuntaryresettlement,indigenouspeoples,culturalheritage,landscape,gender,childrights,infectiousdiseases,andcommunityhealthandsafety.

Incontrast,theenvironmentalandsocialpoliciesoftheCDBandtheChinaEximBankhaveanarrowerscopeandtheissuesarenotspecificallyclassified.TheenvironmentalandsocialaspectsclearlystatedbyChinaEximBankincludeenergyconservationandemissionreduction(tosupportthenationalindustrialplan),biodiversityconservationandsustainablenaturalresourcemanagement,aswellaslandacquisitionandinvoluntaryresettlement.CDB’senvironmentaland



socialpoliciesaremainlyconcernedaboutissuessuchaspollutionpreventionandcontrol,healthandmigration.

Nospecializedenvironmentalandsocialdepartment

TheWBsetupanOfficeofEnvironmentalAffairsshortlyafterhiringitsfirstenvironmentaladvisorin1969. 46 TheIFChasadedicatedenvironmentalandsocialgovernancedepartmenttohelpclientsunderstandandmanageenvironmentalandsocialrisks.47 JBIC'screditsectorhasalsoestablishedanEnvironmentalAssessmentOffice.However,similararrangementswerenotfoundintheinstitutionalsettingoftheChinaEximBankandtheCDB.Withoutadedicateddepartment,itisimpossibletoensurethedevelopmentandimplementationofenvironmentalandsocialreview,supervisionandevaluation,causingambiguityofauthorityandresponsibility.

Lenientenvironmentalandsocialstandards

TheenvironmentalandsocialstandardsadoptedbytheWB,theIFCandtheJBICincludenotonlylawsandpoliciesofthehostcountrybutalsotheenvironmentalandsocialnormsdevelopedbythemselves.Intheeventthatthestandardsareinconsistent,theWBandtheIFCfollowthestricteroneandadoptthemorestringentstandardofthetwo,andJBICwillalsorefertotheenvironmentalandsocialstandardsfollowedbyWBandIFC.

AlthoughtheCDBandtheChinaEximBank,likeotherinternationalfinancialinstitutions,clearlyrequirethattheprojectsshallabidebyrelevantenvironmentalandsociallawsandpoliciesofthehostcountry,thereisalackoffurtherstringentrequirements.OnlyintheabsenceofsuchstandardswouldChinaEximBankconsiderapplicablestandardsinChinaandinternationalpractice;CDB'senvironmentalandsocialstandardsarealsomainlybasedonthehostcountry’slawsandpolicies.Generallyspeaking,China’spolicybanksadoptamorelenientlendingprinciplethanotherinternationalfinancialinstitutions.

Thepre-loanreviewlackssupporttoimproveproject’senvironmentalandsocialplans

Followingcustomarypracticesintheindustry,China’spolicybankswillconductapre-loanreviewtoassesstheenvironmentalandsocialrisksoftheproject,andliketheIFCandtheJBIC,theywillusethereviewresultsasgaugefortheinvestment.However,theWB,theIFC,andtheJBICalsoincludestepstoimprovetheprojectduringthereviewprocess:theWBwillassisttheprojectwithhugeenvironmentalsocialriskstofindanalternativeandformulateanenvironmentalmanagementplan;theIFCwillhelpclientswithoutcapacitytomanageenvironmentalandsocialriskstoformulateimprovementplans;theJBICwillassesstheproject’senvironmentalandsocialmeasures,givesuggestionstothosewithweakprotectionmeasures,andonlyrefusetoofferinvestmentsorloanstotheprojectsthatfailtomakesuchimprovementsassuggested.Incontrast,theCDBandtheChinaEximBankwilldecidewhethertograntcreditandfinancialsupportdirectlybasedonthereview46 Jeremy J. Warford, Zeinab Parton. Evolution of the World Bank’s Environmental Policy. http://www.cfeph.cn/cfeph/finance.nsf/102009b942ff90464825672e001acac8/1a1ffd7cadc6ff1748256820001f3979

47 International Financial Corporation website. http://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/Sustainability-At-IFC



results,withoutprovidinganyassistanceinimprovingtheenvironmentalandsocialplansoftheproject.

CDBdoesnotclassifyprojectsaccordingtoenvironmentalandsocialrisks

TheChinaEximBank,theWB,andtheJBICclassifytheirclientsaccordingtoenvironmentalandsocialrisks,andsetspecialrequirementsforhigh-riskprojects.TheWBrequiresclassAandBprojectstodopublicconsultationandinformationdisclosure.TheJBICrequiresprojectsinclassA,BandFItoassessenvironmentalandsocialprotectionmeasuresandwillmonitortheimplementationofclassAandBprojects,andestablishanexpertcommitteetoprovideconsultationsandsuggestionsforprojectswithpotentialofsubstantialnegativeenvironmentalimpacts.TheIFC,thoughwithoutexplicitlydefinedclassificationofclientsaccordingtoenvironmentalandsocialrisks,willalsopayspecialattentiontohigh-riskprojects.Forexample,theIFCwillprovidesupportforcommunityatdifferentlevelsanddisclosetheenvironmentalandsocialimpactassessmentspreparedbyclients.SimilartotheWBandtheJBIC,ChinaEximBankalsoconductsspecialenvironmentalandsocialrisksassessmentsonclassAandBprojects,andincludesthepost-loanassessmentsintheinspectionreport.ClassAprojectswillhavetosolicitpublicconsultationasrequiredbythehostcountry,andtheborrowerwillneedtoestablishagrievance-responsivemechanism,acommunicationchannelwithstakeholders,andanemergencyplanforseriousenvironmentalrisks,andcarryoutregularspecialinspectionsduringthelifeoftheproject.

TheCDBhasnotyetdevelopedaspecialprojectenvironmentalclassificationstandards.In2015,theCDBproposedtofollowtheprincipleoftailoredmanagement,integratingenvironmentalandsocialriskmanagementintothecreditratingandcreditassessmentprocess,andmakinga“listofkeyindustryclientswithenvironmentalandsocialrisks”forindustrieswithrelativelybiggerenvironmentandsocialimpact.

Lackingindependentfieldvisitinthemanagementandsupervisionofprojectoperations

LiketheIFCandtheJBIC,theCDBandtheChinaEximBankalsoconductsupervisionduringtheoperationandmanagementoftheprojects.TheWBhasnotyetenactedsuchregulations.TheIFCmonitorsclients’socialandenvironmentalperformancesthroughoutthelifeoftheproject:ontheonehand,theIFCcarriesoutfieldvisitstotheproject;ontheotherhand,clientsarerequiredtosubmitmonitoringreportsonaregularbasis;moreover,thecompliancedepartmentalsoprovidesadditionalsupervision.JBICsupervisestheactualimplementationofclassAandBprojectsbasedonthereportssubmittedbytheborrowers,andwilllaunchinvestigationifnecessary(incaseofreportbyathirdparty).

Incontrast,China’spolicybanksrelyontheinformationandreportsprovidedbyborrowerstoconductsupervisionupontheenvironmentalimpactoftheprojects.TheChinaEximBankconductstheauditoftheborrower'senergyconsumptionandenvironmentalcomplianceatthetimeofthefirstandsubsequentissuanceoftheloanfunds,andinspectsandsupervisestheconstructionandoperationoftheprojectaccordingtotheenvironmentalandsocialimpactassessmentresultsoftheproject.AlthoughtheCDBhassetuparisk-trackingforecastingandfeedbackmechanism,itsenvironmentalimpactassessment(EIA)riskmonitoringisalsoachievedthroughtheborrower'



periodicreportsonenvironmentalandsocialriskmanagementandprevention.48 NeitherpolicybanksofChinahaveformulatedrequirementsforfieldvisitonenvironmentalandsocialimpactsintheirenvironmentalandsocialpolicies.

Relativelyunsoundinformationdisclosuresystemandlackofcomplaintmechanism

TheWB,theIFC,andtheJBIChaveallmadeexplicitprovisionsontheinformationdisclosureintheirenvironmentalandsocialpolicies.Amongthem,theWBandtheIFChavedevelopedspecificinformationdisclosurepolicies.TheWBhasthewidestscopeofdisclosedinformation(anythingthatisnotonitslistofexceptions),followedbytheIFC(includingroutinepublicinformationandinformationrequiredbythepublic),andtheJBIConlyrequiresdisclosureofbasicinformationabouttheprojectandrelateddocumentsandreports.Also,theWBhasthemostdiversifiedchannelsforinformationdisclosure:apartfromitsofficialwebsite,ithasmorethan100publicinformationcentersandpublicapplicationchannels.TheIFCandtheJBICmainlyusetheirofficialwebsitestodiscloseinformation.Inaddition,theWBandtheIFCalsoprovidecomplaintmechanismsforinformationdisclosure.

Incontrast,theCDBandtheChinaEximBankhavenotyetestablishedamatureinformationdisclosuresystemandacomplaintmechanism,andinformationdisclosureismissingintheirenvironmentalandsocialpolicies.Inpractice,thereisnoonlinesearchingfunctionforenvironmentalandsocialinformationanddocumentsoftheprojectsontheofficialwebsitesoftheCDBandtheChinaEximBank.TheCDBevenchoosesnottopublicizemostofitsenvironmentalandsocialpolicydocuments.

CDBlacksopencommunicationandconsultationmechanismswithlocalcommunitiesandstakeholders

AllfivefinancialinstitutionsexcepttheCDBhaveincludedpublicconsultationwiththecommunitiesaffectedbytheprojectintheirenvironmentalandsocialpolicies.TheWBrequiresborrowerstoconductfreeandinformedpublicconsultationinadvanceandonlyprovidesfinancingforprojectsthatarebroadlysupportedbytheaffectedindigenouscommunity.TheJBICrequiresinitsEnvironmentalGuidelinesthattheprojectshouldattachimportancetodialogueswithstakeholdersandtransparentparticipationoftheaffectedindigenouscommunity.TheChinaEximBankrequiresclassAprojectstosolicitpublicconsultationasrequiredbythehostcountry,andrequirestheborrowertoestablishacomplaintresponsemechanismandacommunicationmechanismwithstakeholders.TheCDBhasnotyetpublicizedsuchregulations,norestablishedanyeffectivecommunicationmechanismwithlocalcommunities.Especiallywhenspecificenvironmentalandsocialissuesemergeinthelifeoftheproject,noconsultationchannelwithaffectedcommunitieswillleadtopeople’scomplaints.

48 China Development Bank: “Green Development for Mutual Benefit and Win-win Results – A Record of CDB’s Overseas Green Credit Business”. http://www.cdb.com.cn/xwzx/khdt/201607/t20160707_3493.html



3.2PROGRESSIVENESSOFTHEENVIRONMENTALANDSOCIALPOLICIESOFCHINA'SPOLICYBANKS

ComparedwiththeWBandotherinternationalfinancialinstitutions,China'spolicybanksstillhavealongwaytogotoimproveenvironmentalandsocialpolicies.However,theCDBandtheChinaEximBankhavemadepioneeringattemptstodevelopworld-leadingregulations.Thetwobanks’requirementsforenvironmentalandsocialriskcontrolandfortherelatedreviewdocumentsaremuchclearerandmorestandardized.Theyalsohavestricterpunishmentsforviolatingenvironmentalregulations.Inaddition,theCDBandtheChinaEximBankhavealsotakensomeconstructivemeasuresinsupportofgreeninvestment.

Bettercontrolofenvironmentalandsocialrisks

TheCDBandtheChinaEximBank,liketheirinternationalcounterparts,haveincludedenvironmentalandsocialresponsibilitiesinthecontractstocontroltheenvironmentalandsocialrisksandimpacts.Thecontrolgoesthrougheverysegmentoftheinvestmentprojectfrompre-loantopost-loan,thesamestandardizedprocessasotherinternationalfinancialinstitutions.Infact,China’spolicybankshavemorerefinedproceduresthantheIFCortheJBIC.TheCDBandtheChinaEximBankhavedividedenvironmentalandsocialriskscontrolintospecificandclear-cutsegments,includingpre-loaninvestigation,loanreview,contractmanagement,loanissuanceandpost-loanmanagement.TheyalsorequireanEIAafterthecompletionoftheprojectandtheCDBwentevenfurthertointroduceastandardreviewprocedure,whichismoreadvancedthanthecurrentproceduresoftheWBandtheIFC.49 Incontrast,IFCandJBIChavedefinedtheircontrollingproceduresinarelativelybroadway,thoughcontrolofenvironmentalandsocialrisksgothroughawholeprocessfrompre-loantopost-loanforbothbanks.TheIFCrequiresbothpre-loanandpost-loaninvestigationsandoverallsupervisionofaninvestmentproject.TheJBIConlyrequirespre-loanreviewandpost-loanfollow-uptocontrolenvironmentalandsocialrisks,inshortoffurtherdefinitionandspecification.

Specifiedrequirementsforreviewmaterialsanddocuments

CDB,ChinaEximBankandJBIChaveclearrequirementsforthetypesofdocumentstobesubmittedforprojectreviewandapproval.JBICalsorequiresthatthetypesofmaterialsmightvaryfromprojecttoprojectdependingontheenvironmentalandsocialriskassessmentratings.CDBprovidesthattheborrowermustobtaintheEIAdocumentofficiallyapprovedbythehostcountry(region)beforetheloancontractissigned. 50 ChinaEximBankrequirestheclienttoprovidereviewdocumentsissuedbyrelevantdepartmentsinthehostcountry,environmentalandsocialimpactassessmentreport,andwrittenopinioninthecreditgrantingreviewreportbyrelevantdepartmentspecifyingtheenvironmentalandsocialrisksoftheclient(includingPre-review).JBICprovidesthatclassAprojectsshallsubmitEnvironmentalandSocialImpactAssessmentreportsandenvironmentalpermitcertificatesissuedbythehostgovernmentorotherappropriateauthority.Forprojectsthat

49 Paulson Institute: Profiting from Precaution.

50 China Devlopment Bank: “Green Development for Mutual Benefit and Win-win Results – A Record of CDB’s Overseas Green Credit Business”.



willresultinlarge-scaleinvoluntaryresettlementorlossofmeansoflivelihood,resettlementactionplansshouldbesubmitted,includinglivelihoodrestorationplansandindigenouspeople’splanswherenecessary.ClassFIprojectsshallsubmittheclassificationandassessmentresultsprovidedbyfinancialintermediaries,andclassBprojectsshallsubmitmaterialsvoluntarily.ClassCprojectshavenoneedtoprovidematerialsconcerningenvironmentalissues.AccordingtopoliciesoftheWBandtheIFC,theclientscanvoluntarilysubmitdocumentsandkeyinformationconcerningenvironmentalandsocialassessment.Toconclude,policybanksinChinaandJapanhavestricterandmorespecificrequirementsonthereviewmaterialswhiletheWBandtheIFCaremoreflexible.

Morestringentpunishmentmeasuresforviolationsagainstenvironmentalregulations

Whenitcomestotheresponseandpunishmentmechanismsagainsttheenvironmentalandsocialrisksdiscoveredinthemonitoring,CDB,ChinaEximBank,IFCandJBICwillallissueearlywarningorurgerectificationfirst.Fortheprojectsthatfailtorectifyasrequired,CDB,ChinaEximBankandJBIChavesetfurtherpunishments,amongwhichthetwoChina’spolicybanksaremorestringent.Iftheprojectfailstorectifyasrequired,ChinaEximBankwillstopprovidingcreditsupportandwillconsidertheprojectwithsuchenvironmentalandsocialriskmanagementconditionasnon-performingloansandbaddebts.CDBwilldowngradetheassetlevel,limittheloansandevenstopprovidingloanstotheenterpriseforviolatingenvironmentalregulationsorcausingseveresafetyaccidents.51 JBICwillalsosuspendissuanceoffundforprojectswhoseenvironmentalandsocialmeasuresarenotinplace.Settinguppowerfulpunishmentmeasureshelpsurgeborrowerstofulfilltheirenvironmentalandsocialresponsibilitiesandmitigatenegativeimpacts.

Effortsinsupportofgreeninvestment

LikeWB,IFCandJBIC,bothCDBandChinaEximBankhavespecializedbusinessestosupportgreeninvestmentandprovidepreferentialpoliciesandconvenienceforgreenprojects.CDBprovidescreditsupportforprojectsintheareasofpollutionpreventionandcontrol,renewableenergy,energysavingandenvironmentalprotection,andmodernagriculture,andactivelydevelopsnewtypesoffinancialproductssuchasgreenbondsandgreen"loan,debtandfund"andotherinnovativefinancingfacilities.ChinaEximBankhaslaunchedexpressservicesforgreencreditapproval,energy-savingenvironmentalprotectionfund,andcarbonfinanceservicesfocusedoncarbonassetconsultation,inanefforttostrengthenthesupportforgreenandlow-carbonrecyclingeconomy.TheWBhasissuedalargenumberofgreenbondstosupportclimateinvestmentindevelopingcountriesandestablisheda“GreenBondImpactReport”totrackandstudytheuseofitsearnings.TheIFCalsoprovidespreferentialconditionsforprojectsthatarebeneficialtoenvironmentalprotectionandimprovement,andhassetupspecializedmechanismsandoperationsforgreeninvestmentprojects.

51 Ibid.



Table3-1:AComparisonofenvironmentalandsocialpoliciesamongfivefinancialinstitutions:

ChinaDevelopmentBankExport-ImportBankof

ChinaWorldBank

InternationalFinance

Corporation

JapanBankof

International

Cooperation

Majorfinancing

sectors

Electricity,highway,

railway,petroleumand

petrochemical,coal,post

andtelecommunications,

agriculture,forestryand

waterconservancy,

urbanpublicfacilities,

etc.

Chineseenterprises’

exportofmechanicaland

electricalproducts,

completesetsof

equipment,high-tech

productsexports,foreign

contractedprojectsand

overseasinvestment.

Mainlyinfrastructure

andservicesin

developingcountries.

Financialindustry,

infrastructure

constructionand

agroforestry.

Energyandnatural

resources,infrastructure,

manufacturing,and

environmental

protection.

Theearliest

environmental

andsocial

policies

NoticeoftheGeneral

OfficeoftheState

DevelopmentBankon

ImplementingCredit

PolicyandStrengthening

Environmental

Protection,1995.

TheExport-ImportBank

ofChinaLoanProject

EnvironmentalandSocial

EvaluationGuidance,

2007.

OperationalManual

Statementon

EnvironmentalAspects

ofWorldBankWork,

1984.

IFC’sEnvironmental

AnalysisandReviewof

InternationalFinance

CorporationProjects,

1993

JapanBankfor

International

CooperationGuidelines

forConfirmationof


Considerations,2003.

Current

environmental

andsocial

policies

Aseriesofdocuments

relevanttoGreenCredit

in2015

Export-ImportBankof

ChinaGreenCredit

Guidance,2015

TheWorldBank’s

Safeguardpoliciessince

1997

IFCEnvironmentaland

SocialSustainability

Policy,IFC's


PerformanceStandards,

JapanBankfor

International

CooperationGuidelines

forConfirmationof



IFCAccessto

InformationPolicy,2012


Considerations,2015

Proposed

updatesofthe

policies

N N

TheEnvironmentaland

SocialFramework,2016

(estimatedtobe

enforcedin2018)

N N

The

environmental

andsocial

issuesinvolved

Pollutioncontrol,health,

immigration,etc.

Energyconservation,

landacquisitionand

involuntarymigration,

biodiversityconservation

andsustainablenatural

resourcemanagement,

etc.

Currentpolicycontains

issuesofenvironmental

assessment,natural

habitats,pest

management,indigenous

peoples,physicalcultural

resources,involuntary

resettlement,forests,

safetyofdams,projectsin

disputedareas,projects

onInternational

Waterways.

Thenewframeworkwill

alsoincludeissuesof

comprehensiveprotection

oflaborandworking

conditions,general

principlesofnon-

Environmentalandsocial

risksandimpacts,labor

andworkingconditions,

resourceefficiencyand

pollutioncontrol,

communityhealth,

safetyandsecurity,land

acquisitionandnon-

resourcetransfer,

biodiversityconservation

andsustainable

managementof

biologicalnatural

resources,indigenous

residents,cultural

heritage.

Environmentalimpact

includesimpactonHuman

healthandsafetyaswell

asnaturalenvironment

throughair,water,soil,

waste,accidents,water

usage,ecosystemand

biota.

Socialconcernsincludes

respectforhumanrights,

suchasinvoluntary

resettlement,indigenous

people,culturalheritage,

landscape,gender,

children’srights,

communicablediseases,

workingconditionsand

communityhealthysafety



discrimination,social

healthandsafety

measuresforroadsafety,

emergencyresponseand

disasterreduction.

andsecurity.Andimpact

thatmayleadtotrans-

boundaryandglobal

environmentalproblems.

Processof

environmental

andsocialrisk/

impactcontrol

Projectdevelopment,

creditapproval,contract

management,post-loan

managementetc.

Supervisionwillbe

throughoutthecredit

process.

Pre-loaninvestigation,

loanreview,contract

management,loan

issuanceandpost-loan

management

Projectapproval,

preparation,evaluation,

implementationprocess

andaftertheproject.

Riskcontrolis

throughoutthe

investmentcycle

Pre-loanreview(asearly

aspossiblefromthe

planningstage)andpost-

loanmanagement

The

environmental

andsocial

standards

employed

Referringtolawsand

policiesofthehost

countries.

Evaluationisinlinewith

hostcountries’lawsand

policies,atwhose

absencetheChinese

standardorinternational

practicewillbereferred

to.

Projectsshallmeetboth

therequirementsofhost

countries’lawsand

policiesandOP4.01.

Whenthetwoare

inconsistent,followthe

strictestrulesofthe

standards.

Therequirementsinthe

PerformanceStandard

shallbemet,details

referringtothe

Environmental,Health

andSafetyGuidelines.

Internationalpractices

andlawsinhostcountry

shouldalsobe

considered.When

differentstandardsare

inconsistent,followthe

strictestone.

Hostcountry’slawsand

policiesonenvironment,

IFC'sEnvironmentaland

SocialPerformance

Standards,theWorld

BankGroup

Environmental,Health

andSafetyGuidelines.



Setupan

environmental-

socialsector

N N Y Y Y

Pre-loanreview

asabasisfor

credit

Y Y Y Y Y

Categorize

customers

accordingto

environmental

andsocialrisks

N Y Y N Y

Relevant

environmental

andsocial

documents

required

EIAdocumentofficially

approvedbyhost

countrygovernment.

Theapprovaldocument

ofthecompetent

departmentofthehost

country,theEIAreport,

andawrittenreviewof

theclient'sexposureto

environmentalandsocial

risksintheclient'scredit

review(including

preliminary)report.

Documentscontain


evaluation.

Customersarerequired

toprovidekey

informationaboutasset

andenvironmentalsocial

risksandimpact

management.

ProjectsinCategoryAare

requiredtoprovidetheEIA

report,Government

EnvironmentPermit

Document.Projects

resultinginlarge-scale

involuntaryresettlement

andhavinganimpactonthe

aboriginesshallprovide

resettlementlivelihood

recoveryplanandthe

originalindigenous

program.



FICategoryprojectsare

requiredtoprovidethe

classificationandevaluation

resultsbyfinancial

intermediaries.

Voluntaryprovisionof

relatedmaterialsforB

categoryprojects.

Open

communication

and

consultation

mechanism

withthelocal

community

N Y Y Y Y

Differential

managementof

high-risk

projects

Y Y Y Y Y

Fieldresearch

andsupervision

onenv’tissues

inoperation

N N N Y Y



Riskcopingand

disciplinary

mechanismin

project

implementation

Advanceanddynamic

riskwarningmechanism.

Degradationofasset

quality,loanlimitand

ceaseoflendingfor

enterprisesobserved

violationsofthelawand

majorsecurityaccidents.

Requiretheborroweror

projectownertotake

measurestoeliminatethe

impactintime.Failureto

complywiththe

requirementswillstopthe

creditsupport.

Inadequateenvironmental

andsocialrisk

managementwillalsobe

consideredasnon-

performingloansandbad

debtsidentification.

N/A

Disclosureofcustomers’

violationagainstthe

PerformanceStandard,

andhelpthemidentify

opportunitiestoimprove

theenvironmentaland

socialperformanceof

theproject.

Improper

implementationof


protectionmeasures

requirerectification;if

therectificationisnotin

place,paymentoffunds

willbesuspended.

Specialized

business

supporting

Green

Investment

Y Y Y Y Y

Develop

information

disclosure

policy

N N Y Y Y

Rangeof

Informationto

bedisclosed

Notspecified. Notspecified.

Informationoutsidethe

exceptionlistshallbe

disclosed.

Bothroutinelydisclosed

informationand

informationprovidedto

ProjectsincategoryAand

BshallpublishtheIEA



thepublicbyrequest,

mainlyincludingproject

informationand

expectedenvironmental,

socialanddevelopment

impactetc.

reportandenvironment

permitdocuments.

ProjectsincategoryA,B

andFIShalldisclosethe

environmentalreview

results,andproject

implementationunitsshall

announcethe


protectionmeasurestest

report.

Environmental

information

disclosure

channels

TheWBwebsite,more

than100public

informationcenters,

publicapplicationchannel

andcomplaint

mechanism.

IFCwebsite,public

applicationchanneland

compliantmechanism.

JBICwebsite



4.CASESTUDIES:ROLEOFPOLICYBANKSINTHEPREVENTIONANDCONTROLOFENVIRONMENTALANDSOCIALRISKS

InordertofurtherverifytheeffectofenvironmentalandsocialpoliciesimplementedbyChina'spolicybanksinrealpractice,aresearchteamoffourincludingGEIstaffsandexpertswenttoColombo,capitalofSriLankainMarch2017,andvisitedsomeChineseenterprisesworkingoninvestmentandcontractingprojectsinSriLanka,andinterviewedtheirgeneralmanagersandprojectleaders.Duringthefivedaysvisit,theteaminterviewedrepresentativesfromsixstate-ownedenterprisesandoneprivateenterprise,obtainedfirst-handinformationabouttheenvironmentalandsocialriskstheseenterpriseshadcomeacrossinSriLanka,andconductedin-depthstudiesinthepreventativemeasuresprovidedbybanks’lendingpolicies.ThischapterwilldiscusstwocasesinvolvingtwoprojectscontractedandinvestedbyChineseenterpriseswithfinancialsupportfromChina’spolicybanks:SriLankaSouthernRailwayprojectandColomboPortCityproject.BasedonfieldresearchandinterviewswithrepresentativesfromtheChineseenterprises,thedetailedrecountincludesinformationonthefinancingmodelsoftheprojects,theirenvironmentalimpactassessment,andthecrisesofprojectsuspension.Itwillalsolookintotheimplementationofbank’senvironmentalandsocialpoliciesintheprojectsandanalyzetheremainingchallengesforcurrentpoliciesinpreventingandcontrollingenvironmentalandsocialrisks.

4.1ABOUTSRILANKA

StatisticsonChina’sinvestmentandcontractinginSriLanka

StatisticsfromChina’sMinistryofCommerceshowthatChina’snon-financialforeigndirectinvestmentflowinSriLankawasUSD75.39millionin2014.Asoftheendof2014,China’sforeigndirectinvestmentstockinSriLankastoodatUSD477million.Inthepastfiveyears,Chineseenterpriseshavemadeleap-forwarddevelopmentininvestmentinSriLankaandsignedseverallarge-scaleinvestmentprojects,includingColomboSouthContainerTerminalinvestedbyChinaMerchantsGroup,ColomboPortCityinvestedbyChinaCommunicationsConstructionGroupCo.,Ltd.,andtheAVICAstorialuxuryapartmentprojectinColomboinvestedbyAVICInternationalHoldingHKLtd.Inaddition,investmentbyChineseprivateenterprisesinSriLankahasseenrapiddevelopmentinvariousfieldssuchashotel,tourism,agriculturalproductprocessing,fishery,furnituremanufacturing,textile,feeding,biomasspowergeneration,bicyclemanufacturing,warehousingandlogistics.

AccordingtoChina’sMinistryofCommerce,in2014,thenewlysignedcontractamountofChineseenterprisesinSriLankareachedUSD2,798millionandtheturnoveramountedtoUSD2,191million.1,667Chinesecontractworkersweredispatchedin2014andbytheyearend,therewerealtogether3,350contractworkersinSriLanka.Newlysignedlarge-scaleprojectcontractingprojectsincludetheGin-NilwalaDiversionProjectconstructedbyChinaCAMCEngineeringCo.,Ltd,thePitigalaDamProjectconstructedbySinohydroCorporation,andtheconsultationfortheextensionofSriLanka’sSouthernExpresswaycontractedbyChinaRailwayFirstSurvey&DesignInstituteGroupLtd.



Atpresent,47ChineseenterprisesareregisteredattheEconomicandCommercialCounselor’sOfficeoftheChineseEmbassyinSriLanka,includingChinaHarborEngineering,ChinaStateConstructionEngineering,ChinaGeo-Engineering,SinohydroCorporation,ChinaNationalAero-TechnologyImport&ExportCorporation,ZTECorporation,andChinaNationalCorporationforOverseasEconomicCooperation.Theirbusinessesmainlyincludecontractingprojects,investmentandtradeandothercommercialactivities.

ChineseenterprisesinSriLankaarecommonlyfinancedthroughexportbuyer'screditandthepackagedcross-borderfinancialservicesprovidedbydomesticbanks.

SriLanka’spoliciesonoverseasinvestmentandcontractprojects

TheSriLankangovernmentestablishedaBoardofInvestment(BOI)toencourageforeignenterprisesorgovernmentstoinvestinSriLankaandreviewandapproveoverseasinvestment. 52 SriLanka’smajorareasforforeigninvestmentincludetourismandentertainment,road,bridge,port,electricity,communications,watersupplyanddrainageandotherinfrastructureconstructionprojects,informationtechnology,textile,agricultureandanimalhusbandry,importreplacementindustryandexport-orientedindustry.ThereisnorestrictiononmeansofinvestmentinSriLanka.ForeignenterprisesareencouragedtoparticipateinSriLanka’sinfrastructureconstructionandinvestinanyindustrythroughBOTandPPPexceptforsomerestrictedareas.However,theoverseasinvestmentpoliciesmaybeadjusted,asthegovernmentisstillintransitionafterthepresidentialelectionandparliamentaryelectionin2014.Severallarge-scaleprojectsincludingsomeinvestedandcontractedbyChineseenterpriseshavebeensuspended.ThesituationforforeigninvestmentinSriLankaneedsfurtherobservation.

ForeignenterprisesaremainlyinvolvedinthreetypesofcontractprojectsinSriLanka.Eachtypehasitsprosandconsforforeignenterprises,asshowninTable4-1.

52 Sri Lanka’s Market Access Regulations on Foreign Investment. 2015.08.19. http://lk.mofcom.gov.cn/article/ddfg/201508/20150801085257.shtml



Table4-1ContractprojectsinSriLankaandforeignenterprises’advantages

Types Advantages

1. Projectsfinancedbytheowner;localcompaniesareabletocontract.

Foreignenterprisesarenotforbiddenbythegovernmenttoparticipate,butcomparedwithlocalcompanies,theydonothaveanyadvantageinwinningthecontract.

2. Projectsfinancedbyinternationalinvestmentorindependentgovernmentalfund;localcompaniesarenotabletocontract.

Foreignandlocalcontractorscancompeteinaninternationalbidding.TheSriLankangovernmentencouragesforeignandlocalcontractorstoestablishjointventurestoparticipateinthebiddingandconstruction.Oncesucceeded,theywillenjoypreferentialtaxrates.Bothforeignandlocalenterprisesarerequiredtoparticipateandcompeteaccordingtothebiddingprocedures.

3. Privateprojectsinvestedbyindividualsornongovernmentalentities.

Thebiddingoftheprojectsdependsontheproceduresandregulationsoftheprivateowner.SriLankahasregulationsonforeigncompaniesparticipatingintheprojectbidding.Foreigncompanyshallpassrelevantpre-qualificationsandChinesecompanyshallbecertifiedorrecommendedbytheEconomicandCommercialCounselor’sOfficeofChineseEmbassyinSriLanka.

MostprojectsinSriLankaareconductedthroughinternationalpublicbiddingwhilesomeothercontractorsusefinancingtonegotiatebids,whichisnotopenandcompetitivebecausetheownerandthecontractorreachagreementthroughone-on-onenegotiations.

Investmentrisks

AccordingtotheNationalInvestmentandBusinessFacilitationStatusReport2016issuedbySinoRatingDepartmentofChineseExport&CreditInsuranceCorporation,severalratingagencieshavegivenSriLanka'ssovereigncreditratingin2016belowaverageandanegativeprospectforinvestmentinSriLanka.SriLanka'sCorruptionPerceptionsIndexrankingin2015andtheWorldBankEaseofDoingBusinessIndexrankingin2017werealsoaroundorbelowaverage.Similarly,theCountry-riskRatingofOverseasInvestmentfromChina2016publishedbytheWorldHistoryInstituteofChineseAcademyofSocialSciencesalsoclassifiedSriLankaintoaveragelevel.Thereportemphaticallycitedseveralreappraisedandindefinitelysuspendedcases,includingChina-aidedportproject,astypicaldauntedorfailedinvestments.



Table4-2EaseofinvestmentandbusinessinSriLanka

RatingAgency TimeofRating SovereignCreditRating Prospect

FitchRatings 2016.3 B+ Negative

S&P 2016.3 B+ Negative

Moody's 2016.7 B1 Negative

Sinosure 2016.10 CCC(7/9)Stable

2015CorruptionPerceptionsIndex 83/168

2017WorldBankEaseofDoingBusinessIndex 110/190

4.2CASE1:CMCANDSOUTHERNRAILWAYPROJECT(EPCMODE)

AboutCMC

Foundedin1950,ChinaMachineryImport&Export(Group)Co.,Ltd.(CMC)isChina’sfirstlarge-scalestate-ownedforeigntradecompanyspecializedinimportandexportofmechanicalandelectricalproductsaswellasinternationalengineeringcontractingbusiness.In1998,CMCbecameawholly-ownedenterpriseofChinaGeneralTechnology(Group)HoldingLtd.underthedirectsupervisionofthecentralgovernment.CMC’sinternationalengineeringandcontractingbusinessescovervariousfields,includingenergy,railwaytransportation,chemicals,buildingmaterials,andshipbuilding.Itsbusinessnetworkreaches160countriesandregions,andithasexportedcompletesetsoflargeandmedium-sizedequipmenttomorethan20countriesandregions.Atpresent,thecompanyhasoverseasrepresentativeofficesin13countries,includingPakistan,Bangladesh,France,Germany,Indonesia,Iran,Japan,Malaysia,Myanmar,Russia,SriLanka,TurkeyandVietnam.

CMC’srepresentativeofficeinSriLankaismainlyspecializedinrailway,energy,chemicalindustry,infrastructureconstruction,large-scalecomplete-setequipmentexportandnewenergydevelopment.Meanwhile,theofficeistakingtheSouthernRailwayprojectasanopportunitytomakeitsPhaseIarolemodelprojecttoextendittoPhaseII,PhaseIIIandotherextensionprojects.Theofficeendeavorstodeveloprailwayprojects,energyprojects,watertreatmentprojectsandship,vehiclesandcomplete-setequipmentexportprojectsinanefforttoexpandthescopeofbusinessandmarketshareofthecompanyinSriLanka. 53

Abouttheproject

TheSouthernRailwayinSriLankastartsfromMataraofSouthernProvinceandendsintheKataragamaofUvaProvince,withatotallengthof127km.Theprojectisdividedintothreephases.PhaseI,fromMataratoBeliatta26.7-kmlong,ledbyCMCandco-constructedbyChinaRailwayNo.

53 Official website of China Machinery Import & Export (Group) Co., Ltd 2017.04.26. http://www.cmc.com.cn



5EngineeringGroup.Theprojectwillbuildasingle-trackrailwaypoweredbyaninternalcombustionengine,plusstations,tunnels,bridges,andculvertsalongtherailway.Thedesignspeedofthetrainis120km/h,thefastestinSriLanka’shistory.Itwillbethefirstrailwayconstructedinthepast90yearsinthecountry.ItisexpectedtohelppromotetheupgradingoftheSriLanka’srailwaynetwork,drivethedevelopmentoftourismalongtherailroad,andrevitalizethepost-wareconomyinSriLanka.

TheSouthernRailwayprojectisthefirstrailwayprojectcontractedbyaChineseenterpriseintheformofEPCinSriLanka.CMCsignedanofficialagreementonSouthernRailwayPhaseIwiththegovernmentofSouthernProvincein2010atacontractvalueofUSD278million.Theprojectisfinancedbythe“twopreferentialloans”(ConcessionalLoanandPreferentialExportBuyer’sCredit,seeTable3)providedbyChinaEximBanktoSriLanka’sMinistryofTransport,withUSD200millionintheformofPreferentialExportBuyer'sCreditandtherestUSD78.2millionintheformofChineseGovernmentConcessionalLoan,atanannualinterestrateof2%andarepaymentperiodof20yearsincludingafive-yeargraceperiod. 54

AccordingtoCMC’sdirectorinSriLanka,thecompanyhastriedtoopenmarketsinBangladesh,SriLankaandotherSouthAsiancountriessince2004andalsotriedtopromoteChinaEximBank’s“twopreferentialloans”inresponsetoChina’s“goingout”initiative.Afteryearsofmarketingandinteractionwiththelocalgovernment,CMCfinallysignedanofficialagreementwithSriLankanGovernmentontheSouthernRailwayprojectin2010.In2013,CMCobtainedtheloanfromChinaEximBankandstartedconstructioninAugust2013.

Table4-3Aboutthe“twopreferentialloans”

ChinaEximBankistheonlybankappointedbytheChinesegovernmenttoimplementthe“twopreferentialloans”.ThesetwofacilitiesareanarrangementmadebytheChineseGovernmenttosupportotherdevelopingcountrieswithconcessionalfundingprovidedbypolicybank’spreferentialloans.The“twopreferentialloans”aretheChineseGovernmentConcessionalLoanandPreferentialExportBuyer'sCredit.TheChineseGovernmentConcessionalLoanreferstothemediumandlongterm,lowinterestrateloanfacilitywiththefeatureofgovernmentaidandgrant.PreferentialBuyer’sCreditreferstotheloanfacilitywithconcessionaltermstopromotetheeconomicandtradecooperationbetweenChinaandkeycountriesandregionsapprovedbytheStateCouncil.55 The“twopreferentialloans”aresovereigndebts.Theborroweristhesovereigninstitutionoftheprojectortheentityappointedandguaranteedbythesovereigninstitution.ThesovereigninstitutionreferstotheMinistryofFinanceortheCentralBank.

Suspensioncrisis

InJanuary2015afterMaithripalaSirisenacameintoofficeasSriLanka’snewPresident,severallarge-scaleprojectsendorsedbytheformergovernmentandinvestedandconstructedbyChineseenterpriseswerecalledoff,includingtheSouthernRailwayproject.InAugust2015,theSriLankanGovernmentdeclaredthatCMCdidnotbidontheprojectandthecostoftheprojectwasbeyondestimate,insinuatingitwasrelatedtothecorruptionallegationsagainstformerPresidentMahindaRajapaksa.Accordingly,SriLanka’sExternalResourcesDepartmentlaunchedaninvestigationintoseveralproceduraldocumentsincludingfeasibilityresearchandenvironmentalimpactassessment,

54 China will provide loan and support for Sri Lanka Railway. Reuters. 2013.03.05. http://cn.reuters.com/article/cn-loan-sri-lanka-rrl-idCNCNE9240AU20130305

55 On China’s “Going Out” Strategy and ChinaEximBank’s Two Preferential Loans. 2015.10.08. http://www.ntfec.gov.cn/rcpx/contents/2396/14843.html



causingasuspensionofmorethansixmonthsfortheproject.Thecontractperiodwasprolongedaccordingly. 56,57 Theprojectwasoriginallyscheduledtobecompletedby2016,yetbyMarch2017whentheGEIteamvisitedtheconstructionsite,theconstructionofPhaseIwasrushingtocompletion.TheprojectwasnowexpectedtocompletebytheendofSeptember2017.

Oneofthereasonsforthesuspensionisconcernedaboutenvironmentalimpactassessment.ChinaEximBankspecifiedthatwhenapplyingfor“twopreferentialloans”thegovernmentoftheborrowercountryshouldsubmitafeasibilityresearchreport(proposal)andanenvironmentalimpactassessmentreport.ThefeasibilityresearchandenvironmentalimpactassessmentoftheSouthernRailwayprojectwereconductedbytheSriLankangovernment.CMC,asthecontractoroftheproject,wasnotdirectlyinvolvedintheenvironmentalimpactassessmentprocessbutwasonlyresponsibleforurgingthegovernmenttocompletetheenvironmentalimpactassessmenttofacilitateChinaEximBank’sloanapproval.Similarly,theSriLankangovernment,astheowneroftheproject,alsohandledlandacquisition,resettlementandotherissuestakingplaceduringtherailwayconstructionwhileCMC’srolewastoprovidetechnicalsupport.

AccordingtotheCMCdirector,thegovernmentandthepeopleofSriLankahavehighawarenessofenvironmentalprotectionandhighrequirementsforenterprisestofollowrelevantrules.Forexample,theSriLankangovernmentestablishedCentralEnvironmentalAuthority,oneofwhichfunctionsistoapprovelarge-scaleprojectsbasedontheenvironmentalimpactassessmentconductedbyoneofitsdepartments.58 Thehigh-handedsystemimposeshighenvironmentalandsocialrequirementsontheenterprises.CMChassetupaDepartmentofEnvironmentalHealthandSafety(EHS)fortheSouthernRailwayproject,responsibletoworkwiththeEIAdepartmentoftheCentralEnvironmentAuthorityandimplementingmeasuresproposedintheEIAreport,suchascleaningtheconstructionvehiclesbeforedriving,stoppingconstructionbefore7p.m.everydaytoavoidaffectingsurroundingresidents,andconductingmonthlysoundtests,drainagesamplecollectionandsoilcollection.Inaddition,SriLanka'sengineeringdesignandconstructionfollowsrelativelystringentBritishstandards,andtheprojectsupervisorisdirectlyemployedbytheprojectownertoensurestrictimplementationoftheengineeringstandards.59 Thereforewithinformationathandfromtheinvestigation,noobviousproblemswerefoundconcerningtheproject’senvironmentalaspect,andithadcausednofurtherobstacletotheprogressoftheproject.

Infact,compliancewiththehighstandardsadoptedbySriLankaandothersimilarcountrieswillposechallengesforChineseenterprises,suchasslowprogressoftheprojectandconsequentlyhighercostthanexpected.Apartfromthesix-monthsuspension,thedelayoftheSouthernRailwaywasalsocausedbytheunpreparednessforthestrictrequirementsbytheSriLankangovernment.TheywerebeyondtheexpectationoftheCMCwhosedomesticandoverseasexperiencesseemlessthanusefulinthiscase.Forexample,localworkerswerenotabletoworkonnightshiftlikeChineseworkersdo,andsomepartsoftheconstructionwererequiredbylocalsupervisortoberedesignedandrebuiltbecausetheywouldnotrecognizeChineseconstructionstandardsandexperience.WhilealltheserequirementsledtoChineseenterprises’timeandrevenueloss,thesearestillimportant56Sri Lanka says Indian, Chinese railway projects cost too much. EconomyNext.com. 2017.04.28. http://www.economynext.com/Sri_Lanka_says_Indian,_Chinese_railway_projects_cost_too_much-3-2577-.html

57 Interviews with CMC in field research. 2017.03.26.

58 Environmental Impact Assessment (EIA) Procedure in Sri Lanka. Central Environment Authority. 2013.11.14. http://www.cea.lk/web/index.php/en/environmental-impact-assessment-eia-procedure-in-sri-lanka

59 Interviews with CMC in field research. 2017.03.26.



measurestoensurethequalityoftheprojectandcontroltheenvironmentalandsocialrisks.Forenterprisesandfinancinginstitutions,thesemeasurescanpreventtheprojectfrombeingquestioned,boycottedorevencalledoff.

ChinaEximBankandtheenvironmentalandsocialriskmanagementoftheproject

AsrequiredbyChinaEximBankandtheSriLankangovernment,theenvironmentalimpactassessmentoftheSouthernRailwayprojectwasthedutyoftheSriLankangovernmentwhiletheenterprisewasplayingasupportingandsupervisoryrole.TheconsiderationbehindChinaEximBank’srequirementthatthegovernmentisresponsibletocarryoutenvironmentalimpactassessmentismorewithconsiderationofavoidingenvironmentalandsocialrisksinaformofgovernmentwarranty.However,inthecaseoftheSouthernRailwayproject,eventhoughthegovernmenthastakentheresponsibilityforconductingenvironmentalimpactassessmentandsolvingrelocationandotherrelatedcommunityissues,itdidnothelpmitigateenvironmentalandsocialrisksfortheenterprise,butinsteadputtheChineseenterpriseintoapassiveposition.Astheenterpriseisnotthemajorimplementeroftheenvironmentalimpactassessment,relocationandotherissues,itwasunabletorespondinatimelyandprofessionalmannerwhentheywerequestionedbythepublicbutpassivelysufferedtheeconomiclosscausedbytheprojectsuspension.Moreover,environmentalandsocialissuesmayprovokethelocalcommunitytoboycotttheenterprise,harmtheirsocialreputation,andproducepotentialnegativeimpactontheirfuturebusinessdevelopmentinthelocalcontext.Withthepurposeofprotectingenterprise’sinterestsandeffectivelypreventingandcontrollingrisks,itwillbemorehelpfulifbanksrequiretheenvironmentalimpactassessmentbeconductedbytheenterpriseitselforathirdparty,andadoptahigherstandardthanthatofthehostcountry.Itwillhelptheenterprisetogaincontroloverthepublicdiscoursewhenquestionedorthreatenedtobecalledoff,andprotectitslegitimateinterestsandavoidlosses.

Ontheotherhand,ChinaEximBankonlyrequirestheborrower'sgovernmenttocompletetheenvironmentalimpactassessmentwhenprovidingthe"twopreferentialloans",butitdoesn’tverifyormonitoritscontentandquality,soitisnotpossibletopreventorcontrolpotentialenvironmentalandsocialrisks.Intermsoforganizationalstructure,ChinaEximBankdoesnothaveaspecializedenvironmentalimpactassessmentdepartmentorpersonnellikeJBICdoestoaccesstheEIAwork,thereforeChinaEximBankisnotplayingasubstantialroleinpractice.Intermsofinformationdisclosure,ChinaEximBankdoesnotdiscloseinformationaboutthetypesofenvironmentalrisksortheenvironmentalimpactassessmentoftheloanprojectsonitsofficialwebsiteoranyotherpublicplatforms,whichmaycausecomplaintsanddistrustamongthehostcountrycommunitiesandotherstakeholders.Theymayinterpretthenon-disclosureofinformationasirresponsibilityoftheChineseenterpriseandfinancialinstitution.

Howeverintermsofengagementoflocalcommunitiesinaproject,ChinaEximBankplayedanactiverole.ItrequiresClassAprojectstoholdpublicconsultation,requiringprojectswithpotentialimpacttothecommunitytoconductpublicnegotiationandcommunication.Theinvolvementofthecommunitystakeholdersintoenvironmentalimpactassessmentatanearlystagecanhelpalleviatethequestioningandresistancefromlocalcommunitieswhenproblemsoccur,asinthecaseoftheSouthernRailwayproject.



4.3CASE2:CHECANDTHECOLOMBOPORTCITYPROJECT(PPPMODEL)

AboutCHEC

ChinaHarborEngineeringCo.,Ltd.(CHEC)wasestablishedinthe1980s,andisasubsidiaryofChinaCommunicationsConstructionCo.,Ltd.(CCCC),oneoftheworld’stop500enterprises.ItaimsatexpandingoverseasmarketsonbehalfofCCCC.Ithasmorethan70subsidiariesandofficesacrosstheglobe,coveringmorethan80countriesandregions,withacurrentcontractamountexceedingUSD19billionandemployingmorethan10,000peoplearoundtheworld.CHECismainlyengagedininfrastructureconstructionincludingmarineengineering,dredgingandreclamation,roadandbridgebuilding,railwayandrailtransportation,aviationhubsandrelatedequipmentsupplyandinstallation.Itprovidesintegratedservicesincludingcontractedconstructionandinvestment.60

In1998,CHECofficiallyenteredtheSriLankanmarketbycontractingafishingportproject.Sincethen,CHEChascontinuedtocontractseveralotherframeworkprojectsincludingthetributaryportproject,theSouthernHighwayproject,andtheHambanatotaPortproject.In2011,CHECestablisheditsregionalcompanyinSriLankatochasetheColomboPortCityprojectinresponsetotheCHECheadquarter’sproposaltotransitionandupgradefromengineeringcompanytoinvestmentcompany.OnSeptember17,2014,ChinesePresidentXiJinpingvisitedSriLanka,andlaunchedthePortCityprojecttogetherwithSriLanka’sPresidentMahindaRajapaksa. 61

Abouttheproject

TheColomboPortCityprojectisalargelandreclamationprojectaimingtobuildanurbancomplexintegratingfinance,businessandresidence.AdjacenttothecentralbusinessdistrictofColomboandtheinternationalcontainerport,thePortCityisdesignedtocoveranareaofmorethan5.3millionsquaremeters.Thereclamationof276acresoflandwillbecompletedinthreeyears,thecitywilltakeshapeinfivetoeightyears,andtheconstructionwillbefullycompletedin20to25years.62

TheColomboPortCityprojectwasjointlydevelopedbyCCCCandSriLankaPortsAuthority.Asawholly-ownedsubsidyofCCCC,CHECiscommittedtoexpandingoverseasmarketsonbehalfofCCCCandconstructingtheproject.CHECraisedUSD1.4billioninitsdirectinvestmentforprojects,broughtUSD13billionofsecondarydevelopmentinvestmentandcreatingmorethan83,000jobs.Differentfromotherlarge-scaleprojectsmanagedbystate-ownedenterprisesinSriLanka,theColomboPortCityisnotaprojectunderinter-governmentalagreementbutisinvestedandfinancedintheformofpublic-privatepartnership(PPP).CHECisresponsibleforinvestmentandfinancing,planning,constructionandoperationwhiletheSriLankangovernmentisresponsibleforprovidingvariouslicensesonenvironment,planningandconstruction.70%ofitsfundscomesfromthecommercialloanprovidedbyCDB.ThisprojectisbyfarthelargestforeigndirectinvestmentprojectinSriLanka’shistoryandoneofthemostimportantprojectsundertheBeltandRoadInitiative.Itis

60 Website of China Harbor Engineering Co., Ltd. 2017.05.05. http://www.chec.bj.cn/tabid/686/Default.aspx

61 Zhang Xiaoqiang. My 15 years in Sri Lanka. Asia Pacific Daily. 2014.11.24. http://cn.apdnews.com/srilanka/quyugongsi/118280.html

62CHEC and Sri Lanka co-build Colombo Port City: A USD 1.4 billion landfill project. Guanchacn. 2014.09.16. http://www.guancha.cn/Neighbors/2014_09_16_267496.shtml



alsooneimportantstepinCHEC’stransitioneffortfromanengineeringcontractortoaninvestmentcompany.

Suspensioncrisis

InMarch2015,thesimilarsuspensioncrisisalsohappenedtotheColomboPortCityproject.ThenewSriLankangovernmentcontendedthatsomeoftheprojectsendorsedbythepreviousgovernmenthadnotundergonecompleteinternalproceduresandsuspendedtheColomboPortCityprojectthroughtheCabinetmeeting,requiringCHECtoprovideallrelevantlicenses.ThelocalpublicopinionmainlyfocusedontheenvironmentalimpactassessmentofthePortCity.AccordingtotheCHECdirector,thePPPmodelandthesignedcontractrequiredtheSriLankangovernmenttoberesponsiblefortheenvironmentalimpactassessmentandprovidetheresultoftheassessmenttotheenterprise.Whentheprojectwassuspended,theenterpriseshadobtainedalltheEIAlicenses,writtennoticeofconstructioncommencement,andotherrelevantdocuments.63

Accordingtothecontract,CHECshouldnotbeartheconsequencesofthesuspensionandtheSriLankangovernmentalsoclarifiedthattheresponsibilityshouldnotlieinCHEC,yetthesuspensionstillcreatednegativeimpacttothecompanyandtheproject.Theprojectsufferedaone-yearsuspension,causingalossofasmuchasUSD380,000perdayandworseningthelivelihoodsofmorethan5,000projectworkers.Infact,morethanathousandworkersoftheprojectheldrallyonMarch10,2015inprotestagainstthegovernment’ssuspension.64

InMarch2016,theSriLankangovernmentliftedthesuspensionafterayear.InAugust,thegovernmentannouncedanagreementwiththeCHECthatthelatterhadwithdrawnitsUSD140millioncompensationclaim,andthegovernmentallocatedanother2hectaresoflandtoCHECinreturn.Asidefromthat,theSriLankangovernmentalsodecidedtocancelthefreeholdofthe20hectaresoflandbytheChinesesideinthepreviousagreement,andchangedtheleaseperiodofallthelandusedbytheChinesesideinto99years.TheSriLankangovernmentwasreportedtoadmitthatthenewPresidentMaithripalaSirisenasuspendedtheprojectandchangedtheperpetuityintoa99-yearleasebecauseofthepressurefromIndiaanditsconcernaboutSriLanka’ssovereignty.65

CDBandtheenvironmentalandsocialriskmanagementoftheproject

ThecorereasonsforthesuspensionoftheColomboPortCityproject,similartothatoftheSouthernRailwayproject,wereanewroundoftussleforbenefitsincurredafterthechangeofSriLankangovernmentanditsprudencetostrikeabalancebetweenbigpowersundertheinfluenceofgeopolitics.Theproceduralproblemintheenvironmentalimpactassessmentservedasthedirectreasonforthesuspension.TheCHECdirectorinSriLankamentionedthattheenvironmentalimpactassessmentwasunquantifiableandtheapprovaloftheEIAreviewdidnotmeantheEIAreportwas

63 Colombo Port City incident: China’s footsteps and China’s protection. Shanghai Shipping. 2015.09.18. http://news.hsdhw.com/147868

64 A Guide on Overseas Investment in Sri Lanka 2016. “Going Out” Public Service Platform under the Ministry of Commerce. 2017.05.08. http://fec.mofcom.gov.cn/article/gbdqzn/upload/sililanka.pdf

65 US media: Indian pressure behind Sri Lanka’s halt of Chinese port city project in Sri Lanka. Reference News. 2016.08.06. http://www.cankaoxiaoxi.com/world/20160806/1258709.shtml



comprehensive,reasonableandeffective.66 Inthiscase,theenvironmentalandsocialrisksbecamepartofthepoliticalrisks,andtheassessmentandpreventionofprojectrisksshouldtakebothfactorsintoaccount.Enterprisesandfinancialinstitutionsneedtoregulateandimprovethewholeoperationprocessofenvironmentalimpactassessmentagainstthepossibilityofbeingusedasexcusestoinstigatepoliticalcrisis,becomingthetargetofpubliccriticismandleadingtootherpotentialrisks.

Asacontractproject,ColomboPortCitytakesapublic-privatepartnership(PPP)mode.Theenterpriseandthehostcountrygovernmentagreedthattheenvironmentalimpactassessmentshallbeconductedbythegovernment.SimilartotheEIAinEPCinvestment,thePPPmodelcanhelptheenterprisesavecostsandavoidpotentialenvironmentalandsocialrisks.IncasesofprotestsorsuspensionagainsttheEIA,theenterprisewillnotbearanylossesasstipulatedinthecontract.TheCDB,thefinancingbankofthisproject,clearlystipulatesthattheborrowermustobtaintheEIAdocumentofficiallyapprovedbythelocalgovernmentbeforesigningtheloancontract.Thestrictrequirementsoftheproceduresanddocumentscanserveasevidenceforenterprisesinfaceofsimilarrisks.

AttemptstosearchinformationandnewsabouttheColomboPortCityprojectshowthattheCDBdisclosedlimitedinformationabouttheproject,andthekeydocumentssuchasfeasibilitystudyorenvironmentalimpactassessmentreportwerenotavailableonitsofficialwebsite.Duringourinterview,CMCdirectorsaidthattheCDBwouldregularlyconductpost-loanexaminationandduediligenceinvestigation, 67 howeversuchinformationcannotbefoundinanypublicdocumentsornewsrecords.ThereforeitfailedtoprovetowhatextenttheCDBhasplayeditsroleofcontrollingandmonitoringenvironmentalandsocialimpacts.Asidefromthat,theCDB,likeChinaEximBank,hasnotsetupanyspecializedenvironmentalandsocialdepartmentorpersonneltokeeptrackontheenvironmentalandsocialimpactsoftheproject,makingithardtoassessandsupervisetheenvironmentalimpactseffectively.ThatisoneoftheweaknessesofChina’spolicybanksinenvironmentalandsocialpolicies.

66 Interviews with CHEC in field research. 2017.03.28

67 Ibid.



5.SYNTHESIZEDANALYSISANDSUMMARY

BycloselyexaminingtheenvironmentalandsocialpoliciesofCDB,ChinaEximBank,WB,IFCandJBIC,andcomparingthesimilaritiesanddifferencesoftheenvironmentalandsocialstandardsandproceduresbetweenChina’spolicybanksandinternationalfinancialinstitutions,thereportsummarizedthestrengthsandtheweaknessesofChina’spolicybanks’policiesandsystems.TobetterunderstandtheactualroleChina’spolicybanksplayinenvironmentalandsocialriskmanagementofoverseasprojects,thereportdedicatedlastchaptertointroduceanddiscussthetwocasesinSriLankavisitedandinvestigatedbytheGEIteam.TheSouthernRailwayprojectisanEPCcontractprojectfinancedbyChinaEximBankwith“Twopreferentialloans”andtheColomboPortCityprojectisaPPPinvestmentprojectsupportedbytheCDB.Althoughfinancinginstitutionsandprojectmodelsaredifferent,thetwoprojectsencounteredsimilarissuesandsufferedenormousenvironmentalandsocialrisksagainstthepoliticalbackdropofgovernmentchangeinSriLanka.

Across-checkonthepoliciesofthefivefinancialinstitutionsandthetwoprojectcasesshowsthatChina’spolicybankshavestandardizedandimproveddocumentcomplianceandproceduralsetting,andsomepoliciesarebetterdesignedthantheirinternationalcounterparts.However,theystillfacechallengesinenvironmentalandsocialriskmanagementandneedtocontinuouslyoptimizetheenvironmentalandsocialpoliciestoimprovetheabilitytorespondtotheserisks.Itissuggestedthatmoreeffortsshouldbemadeinthefollowingaspects:

Institutionalsetting

Establishspecializedenvironmentalandsocialdepartmenttoundertakecorrespondingresponsibilitiesandimplementthereview,supervision,managementandassessmentoftheproject’senvironmentalandsocialimpactswithclearresponsibilityandauthority.NeitherChinaEximBanknorCDBestablishedspecializedenvironmentalandsocialdepartment.ThetwocasesofSriLanka’sSouthernRailwayprojectandColomboPortCityprojectunderscoredtheweaknessoftheorganizationalstructure.TheabsenceofthedepartmentmakesitdifficultforthebanktooverseetheunfoldingoftheEIAandreviewingofitscontent,coordinatethepublicconsultationandcommunicationwiththelocalcommunityandotherstakeholders,helptheprojecttoimprovetheenvironmentalandsocialimpacts,andkeeptrackofsubsequentimplementation.Thebankwillalsonotbeabletotimelyfollowtheenvironmentalandsocialrisksandtakeeffectivepreventativemeasures.ThereforeestablishinganindependentenvironmentalandsocialdepartmentisameasureworthconsideringforChina’spolicybankinordertoimprovetheenvironmentalandsocialaspectsofitswork.

Policycontent

Formulateindependent,strictandfeasibleenvironmentalassessmentstandards.ChinaEximBankandCDBrequireoverseasprojectstoadoptenvironmental,socialandlegalpoliciesofthehostcountry,becausethetwoChinesepolicybankshavenotsetupasetofstrictandindependentenvironmentalstandardsoftheirown,unliketheWB,IFCandJBIC.EvenifthehostcountryhashighenvironmentalawarenessandrelativelyhighstandardslikeSriLankadoes,andtheenvironmentalandsocialimpactscanbecontrolledtoacertainextentbyadoptingtheirstandards,itisinsufficient



tosafeguardtheprojectfromlatentenvironmentalandsocialrisksanditislikelythattheprojectwillbequestionedandprotestedbylocalresidents,NGOsandotherstakeholders.Becauseitisthegovernmentofthehostcountrywhodoestheenvironmentalimpactassessment,theChineseenterpriseshavenosaywhenfacedwiththecrisiscausedbyenvironmentalissuesandtendtosufferuncontrollableeconomiclosses.Assuch,inordertoprotecttheenterprises’interests,banksmayrequiretheprojecttorefertooradopttheenvironmentalandsocialstandardshigherthanthoseofthehostcountry.InvestmentprojectsmayusethePPPmodeladoptedbyColomboPortCityprojectasanexampleforreference:whileclarifyingtheresponsibilityofthehostcountryforenvironmentalassessment,banksandenterprisesshouldalsogetinvolvedinthesupervisionoftheassessmentprocessandkeeprecordofsupervisionforpossiblequestioningsinthefutures.

Furtherenrichandrefinetheenvironmentalandsocialissuesinthepoliciesandformulatespecificregulationsaccordingtodifferentissues.China’spolicybankshavepaidhighattentiontopollutionpreventionandcontrol,biodiversityconservation,naturalresourcesmanagement,landacquisition,resettlementandotherenvironmentalandsocialissues,asreflectedintheirenvironmentalandsocialpolicies.However,comparedwiththeirinternationalcounterparts,theseregulationscanbefurtherspecifiedandrefined.Thegeneralizationoftheenvironmentalandsocialissueswillrestrainthefeasibilityofthepoliciesandwaterdowntheireffectiveness.CBDandChinaEximBankcanrefertothetypesofenvironmentalandsocialissuesclassifiedbyWBandIFC,addingcontentsoflabourprotection,sustainabledevelopmentofcommunities,climatechange,indigenouspeoples,andculturalheritageamongothers.Theycanalsosetupspecificregulationsandstandardsfordifferenttypesofnaturalresourcesandpollutions.

Projectprocedures

Strengthenthepre-loanreviewoftheenvironmentalandsocialplanandproposesuggestionstorectifyweaknesses.Itisunderstoodthatenterprises’maininterestinaprojectdoesn’tlieinsolvingenvironmentalandsocialissues.Nothighlymotivatednorequippedwiththeexpertiseandtechnologies,theymayrelyonthefinancinginstitutionstoimprovetheenvironmentalandsocialplans.WB,IFCandJBICmakefulluseoftheirprofessionalknowledgetoimprovethepre-loanenvironmentalandsocialplansfortheclients.Forprojectswithhighenvironmentalandsocialrisks,toovercometheweaknessesintheenvironmentalandsocialplansdevelopedbytheenterprise,thebankswilltrytofindanalternative,formulateenvironmentalmanagementplan,orbringforwardimprovementsuggestionsandmakeimprovementplans.

TheinvestigationbyGEIteamshowsthatChinaEximBankandCDBwerenotmuchinvolvedintheenvironmentalassessmentanddidnotcontroltheenvironmentalandsocialplansgiventhatSriLanka’senvironmentalstandardswererelativelystrict.Inotherdevelopingcountrieswhereenvironmentalstandardsarenotasstrict,financialinstitutions,asthethirdpartyindependentoftheenterpriseandthehostcountrygovernment,shouldplayamoresignificantroleinsupervisionandassistance.China’spolicybanksneedtoprovidemoreprofessionalservicestourgetheborrowertoimproveitsenvironmentalandsocialperformanceinoverseasprojectandreduceenvironmentalandsocialrisks.Apartfromtheenvironmentalandsocialrequirementsimposedontheprojectinthedecision-makingprocess,thebankscanalsoprovideprofessionalconsultationstopushforimprovementsontheenvironmentalandsocialplansandsetfeasiblepreventativeandcontrolmeasuresforrisksandimpacts.



Paymoreattentiontofieldvisitinpost-loanmanagementandsupervision.InthetwocasesofSriLanka’sSouthernRailwayprojectandColomboPortCityproject,althoughtheCDBandtheChinaEximBankestablishedofficesinSriLanka,thestaffmembersarenotresponsiblefortheinvestigationandsupervisionoftheenvironmentalandsocialimpactsoftheprojectandtheyrarelyinterveneintheprojectoperation.Theirmainsourcesofinformationonenvironmentalandsocialrisksareperiodicalreports.Incomparison,theenvironmentalandsocialpoliciesoftheinternationalinstitutionsandJBICallprovidethatfieldvisitandinvestigationshouldbeconductedwhennecessary.China’spolicybanksshouldlearnfromthisarrangementtostrengthentheeffectivenessofsupervision.Fieldvisitcanhelpthebankstoplayamoreactiveroleinoverseasprojectsandenhancetheirimageofbeingenvironmentallyandsociallyresponsible.Inaddition,enlistingthirdpartytoconductinvestigationandassessmentontheenvironmentalandsocialimpactscouldbeanotheroption.

Mechanismbuilding

Strengtheninformationdisclosureandimplementcomplaintmechanism.Strengtheninginformationdisclosureisthetrendofreformininternationalfinancialinstitutions,whereasChina’spolicybanksonlymadethefirststepinthisendeavor.InthetwocasesinSriLanka,noneofthebasicinformationabouttheproject,environmentalriskratingandtheenvironmentalassessmentweremadepublicontheofficialwebsiteofthetwobanks,andtheenterpriseswerenotrequiredtodisclosetheseinformationonotherpublicplatformseither.Missingofprojectinformationonpublicchannelstendtoescalatepubliccomplaintsandquestioningsintheeventofsuspensioncrises.Insufficientinformationdisclosureiscloselyrelatedtotheabsenceofrelevantpolicies.NeitherCDBnorChinaEximBankhasformulatedinformationdisclosurepoliciesordefinedthescopeandchannelsofdisclosedinformation.Withouthardandfastrules,theCDBevenundiscloseditsmainenvironmentalandsocialdocuments.China’spolicybanksthereforeneedtoimprovetheregulationsoninformationdisclosureintheirenvironmentalandsocialpolicies,definethescopeandchannelsforinformationdisclosure,andstrengtheninformationdisclosurewithinthescopeoflaw.Moreover,theycanlearnfromtheWBandIFCtobringincomplaintmechanismtofurtherensurethatallstakeholdersareinformedandengaged.

Buildacommunicationandconsultationmechanismwiththelocalcommunity.ThetwoChineseprojectsinSriLankabothsufferedsomeextraresistancefromthepublic,partlyduetoalackoftransparencyoftheprojectandpartlyduetoalackofcommunicationandinteractionwithlocalcommunitiesmakingitdifficulttoknowpublicattitudes,opinionsandlatentactiontowardstheproject.China’spolicybanksneedtopaymoreattentiontothecommunicationwiththecommunitiesaffectedbytheproject,establishaconsultationmechanism,providechannelstointeractandtalkwiththelocalcommunityandresidents.Communicationandconsultationcanhelpclearupmisunderstanding,mitigateoppositionsentiment,andreducetheunnecessaryresistance.

Insummary,environmentalandsocialriskmanagementisvitalforthesuccessofoverseascontractandinvestmentprojects.Toensuretheorderlyoperationoftheproject,avoidpublicquestioningandboycottandpreventunnecessaryeconomiclosses,banksshouldstrengthenthecontroloffinancingprocessfrompre-loantopost-loan,adopthigherandstricterstandards,setupprofessionalpositionsforsuchjob,provideprofessionalresources,andimproveinformationdisclosureandconsultationwiththecommunity.Particularlyinthehostcountrieswithdiminvestmentprospect,as



manyenterpriseshopetotransformfromprojectcontractingtoinvestment,banksshouldpaymoreattentiontoenvironmentalandsocialriskmanagementtoavoidnegligenceoftheseaspectswhichwillgeneratenegativeimpactsonthereputationofChineseenterprisesandChina’soverseasimage.



6.APPENDIX:KEYDEFINITIONANDINTRODUCTIONOFPOLICYBANKS

Policybank

Apolicybankisanonprofitfinancialinstitutionfoundedorguaranteedbythegovernmenttoimplementthenationalindustrialpoliciesandregionaldevelopmentpolicieswithspecialfinancingprinciples.Thedevelopmentprojectssupportedbypolicybanksareimportanttothenationaleconomicdevelopmentandsocialstability,however,theyareusuallycharacterizedbylarge-scale,longlifecycle,sloweconomicreturnsandlongreplenishmentsocommercialbanksarereluctanttofinanceorincapableoffinancingtheseprojects.

China’spolicybankswerefirstlyfoundedin1994whenTheExport-ImportBank(ChinaEximBank),theChinaDevelopmentBank(CDB)andtheAgriculturalDevelopmentBank(ADBC)wereestablished.ThethreebanksareunderdirectleadershipoftheStateCouncilandguidedandsupervisedbythePeople’sBankofChina.Whennewlyfounded,thethreebankshadclear-cutbusinessorientations:theChinaEximBankmainlysupportedforeigntradeandexportofmechanicalandelectricalproducts;theCDBmainlysupportedthenationalinfrastructureconstruction,basicindustry,andpillarindustry;theADBC’smainsupportwenttoagriculturaldevelopmentespeciallyinunderdevelopedareas,andtheproduction,collection,storageandsalesofgrain,cottonandedibleoil.

However,theirbusinessscopehasundergoneconstantadjustmentsinsyncwiththechangingnationalpoliciesandeconomicscenarios.In1990sChina’snationaltreasury,financiallystrained,wasunabletoprovidefinancingandsubsidiesforthepolicybanks.TheCDB,throughbondfinancingandotherself-financingprojects,workedoutitsown“developmentfinancingmodel”,whichcanbesummarizedas“servingnationalstrategy,relyingoncreditsupport,subsidy-free,marketoriented,independentoperation,far-sightednessforlong-term,lowbutsustainableprofit.” 68 Itsbusinesspriorityareashaveshiftedfrominfrastructure,basicindustryandpillarindustrytourbanization,shantytownrebuilding,and“goingout”enterprises.Similarly,ChinaEximBankandADBCalsostartedself-operatingbusinesses.69 ADBChasexpandeditsbusinessfromcollectionandstorageofagriculturalproductstoall-roundsupportfornewruralconstruction.ChinaEximBank’sprioritybusinesshasbeenshiftedfromexportofcapitalgoodstoprovidingpolicycreditandsupport“goingout”enterprisesforforeigncontractingprojectandinvestment. 70

Realizingthatthepolicybankshaveexpandedtheirfinancingchannelssuchasbondfinancingratherthanrelyingonstatetreasuryandopenedself-operatingbusinessesandevencommercialbusinesses,theChinesegovernmentplacedthereformofpolicybanksonitsagendain2007.Then

68 Zhou Xiaochuan talks about reform of policy banks：the core is capital constraint, China Business News. http://finance.ifeng.com/a/20150820/13921101_0.shtml

69 “Self-operating business” refers to self-determined, self-sustaining business at its own risks, but the business still serves the national strategy and policies, so it is different from commercial business.

70 Policy banks’ re-orientation. Caijing Magazine. 2015 Vol.13. http://magazine.caijing.com.cn/20150510/3878980.shtml



ChinesePrimeMinisterWenJiabaopointedoutatthethirdfinancialworkmeetingthatthepolicybankreformshouldfollowprincipleoftargetedguidanceand“onebankonepolicy.”Thereformaimstoredefinetheboundarybetweenpolicybusinessandcommercialbusiness,solvetheproblemsoflowcapitaladequacyratioandhighnon-performingloanratioofChinaEximBankandADBC,inthehopeofthepolicybanksbeingself-operating,self-sustainingattheirownrisks. 71

ThereformstartedwiththeCDB.Inearly2008,theStateCouncilapprovedChinaDevelopmentBankOverallReformImplementationPlan.Bytheendoftheyear,theCDBhastransformedintoalimitedliabilitycompany,fullyimplementingcommercialoperation.ItisadifferentscenariowiththeChinaEximBankandtheADBC,whosereformsweredelayed.In2009,thePeople’sBankofChinatooktheleadinestablishingaworkingteamtopushforwardthereformofChinaEximBank.Theteamagreedthatthebankcanopenself-operatingbusinessesinadditiontoitspolicybusinessesbutrequiredthebanktomanagethetwokindsofbusinessesunderseparateaccounts.It’shopedthatthereformcanhelpthebanksupplementcapital,strengthenpoliciesandimprovegoverningstructure.72

Afterbeingshelvedandrepeatedlydiscussed,ADBC’sreformplanwasfinallyapprovedbytheStateCouncilattheendof2014.Marchnextyear,anotherplantodeepenthereformoftheCDBandtheimplementationplantoreformChinaEximBankwerealsoapproved,whichmarksthefinalizationofreformplansforallthreepolicybanks.Thereformhasclearlyredefinedthebusinessorientationofthethreebanks:theCDBstickstodevelopmentfinancinginstitutionstatuswhileChinaEximBankandADBCcontinuetoperformpolicyfunctions.Thereformaimstoincreasethecapitaladequacyratioofthethreebanks,establishcapitalconstraintmechanism,furtherimprovetheorganizationalandgoverningstructure,improvetheirassetqualityandrealizesteadyandsustainableoperation.InJuly2015,StateAdministrationofForeignExchangeinjectedUSD48billionandUSD45milliontotheChinaEximBankandtheCDBrespectively,successfullyincreasingthecapitaladequacyratioofthetwobanks.

WorldBank

WorldBankGroupisamultilateraldevelopmentinstitutionundertheUNsystem,consistingoffivedevelopmentorganizations:InternationalBankforReconstructionandDevelopment(IBRD),InternationalDevelopmentAssociation(IDA),InternationalFinanceCorporation(IFC),MultilateralInvestmentGuaranteeAgency(MIGA)andInternationalCentreforSettlementofInvestmentDisputes(ICSID).TheWorldBankGroupisdifferenttheWorldBankwhichisaninternationalfinancialinstitutioncomposedofIBRDandIDA.IBRDandIDAhavethesamegoal,thesamestaffandthesameworkplaceandtheyfollowthesameprojectassessmentstandard,buttheyprovidedifferentservicesandtheirfinancingapproachesaredifferent.

71 MinistryofCommerceofPRC,NationalBureauofStatisticsofPRC,StateAdministrationofForeignExchange2015StatisticalBulletinofChina’sOutwardForeignDirectInvestment.

72 Yan Rui, Zhu Xuechen. Li Ruogu：Policy banks won’t commercializ. 英才[J]. 2010(5). http://finance.sina.com.cn/china/jrxw/20100428/10257842428.shtml



IBRD’scapitalcomesfromthepaid-incapitalcontributedbymembergovernmentsandfundsfrominternationalcapitalmarketsthroughbondissues.Itprovidesloans,guaranteesandriskmanagementproductsandconsultationservicestomiddle-incomemembercountryandlow-incomecountrieswithgoodcredittoimprovetheireconomicandsocialdevelopment.Infiscalyear2016,IBRDcommittedUSD29.7billionofnewloansfor114projects,coveringpolicybuilding,energyandmining,transportation,municipalinfrastructureconstruction,industryandtrade,finance,healthandothersocialservices.TheloanbalancestoodatUSD167.6billion.

Figure6-1:Fiscalyear2016mainsectorssupportedbyIBRD

WorldBankGroup

IDA’scapitalcomesfromthecontributionsfromthedevelopedcountriesandmiddle-incomecountries,transferfromtheIBRD,theIFCandreplenishmentsfromborrowercountries.Itprovidesconcessionalloans,donationsandguaranteestopoorestmembercountries.Infiscalyear2016,IDAcommittednewfundsofUSD16.2billion,includingloansofUSD14.4billion,donationofUSD1.3billionandguaranteeofUSD500million,coveringhealthandothersocialservices,policybuilding,energyandmining,transportation,agriculture,fisheryandforestryandinfrastructureconstruction.TheloanbalanceisUSD132.8billion.73

73 IBRD Financial Statements for September 30, 2016. http://siteresources.worldbank.org/EXTABOUTUS/Resources/29707-1280852909811/IBRD_Sep_16.pdf; IDA Financial Statements for September 30, 2016.http://siteresources.worldbank.org/EXTABOUTUS/Resources/29707-1280852909811/IDA_Sep_16.pdf.

publicmanagement,law

andjudicary19%

energyandmining15%

transportation15%

watersupply,sanitationandflood

prevention14%

industryandtrade11%

finance9%

healthandothersocialservices

8%education

6%

agriculture,fisheryandforestry

2%

informationcommunication

1%



Figure6-2:fiscalyear2016mainsectorssupportedbyIDA

WorldBankGroup

TheInternationalFinanceCorporation(IFC)isfundedby184membercountiesandcommittedtoofferingadiversityoffinancingsupportfortheprivatesectorsinthedevelopingcountriesandtheemergingmarkets,includingequityinvestment,long-termdebtinvestment,fundandstructuringfinancing,tohelpthedevelopingcountriesachievesustainabledevelopment.IFC’sbusinesscoversmorethan100countriesintheworld.Itspolicieswereformulatedbyallmembercountries.IFC’smainbusinessesincludeinvestmentandadvisoryproducts.Investmentproductswithlongertenorinclude:directlendingtoprivatesectorcompanies(includingcorporateandprojectfinance);lendingtovarioustypesoffinancialintermediariesaswellasthroughfundsandfacilities;minorityequitystakesincompanies,includinginfinancialinstitutions;andguaranteefacilities,municipalfinance,aswellasinvestmentsmanagedbyIFC’sAssetManagementCompanyoranyotherIFCsubsidiary.Advisoryproductsincludetechnical,financialand/orregulatoryadvice,projectstructuringaswellastrainingtocompanies,industries,andgovernments.74

Infiscalyear2016,IFCmadenewinvestmentofUSD11.1billionto344projectsin78countries.Thoseinvestmentsmainlywenttofinancialsectorfollowedbyinfrastructureconstruction,agricultureandforestry(graphic2-5). 75 IFC’sstrategicprioritiesincluderaisingawarenessofthemarginalmarket,solvingissuesaroundclimatechange,ensuringthesustainabilityofthe

74IFC. International Finance Corporation’s Policy on Environmental and Social Sustainability. 2012.1.1.

75 IFC Annual Report 2016 Experience Matters. http://www.ifc.org/wps/wcm/connect/CORP_EXT_Content/IFC_External_Corporate_Site/Annual+Report.

publicmanagement,law

andjudicary18%

energyandmining16%

transportation13%watersupply,

sanitationandfloodprevention

7%

industryandtrade5%

finance3%

healthandothersocialservices

20%

education8%

agriculature,fisheryandforestry

10%




environmentandthesociety,eradicatingprivatesector’sgrowthconstraintsininfrastructure,health,education,foodsupplychain,developinglocalfinancialmarketandbuildinglong-termpartnershipwithclientsintheemergingmarket. 76 Toachievethestrategicgoals,theIFCwillpaymoreattentiontothepoorestcountriesandconflictareasandincreaseinvestmentstoagriculture,climatechangeandinfrastructure.Infiscal2016,60%ofIFC’sconsultationserviceswereprovidedforthepoorestcountrieseligibleforapplyingforIDAloansandUSD1billionwereinvestedinfragileandconflictareas,a50%increaseoverfiscal2015.

Figure6-3:Fiscalyear2016mainsectorssupportedbyIFC

WorldBankGroup

JapanBankInternationalCooperation(JBIC)isapolicy-basedfinancialinstitutioninJapan,fullyownedbytheJapanesegovernment.In1999,formerExport-ImportBankofJapan(JEXIM)andOverseasEconomicCooperationFund(OECF)mergedintoJBIC.Whenfirstestablished,JBIC’smainbusinesswasprovideJapan’sofficialexportcreditandofficialdevelopmentaid.

JBIChadtwomajorreformsin2008and2012asaresultofchangingJapaneseeconomiclandscapeandforeignaidpolicies.In2008,theJapanesegovernmentremoveddevelopmentaidbusinessfromJBICandmergedJBICwithTheNationalLifeFinanceCorporation(NLFC),TheAgriculture,ForestryandFisheriesFinanceCorporation(AFC)andTheJapanFinanceCorporationforSmallandMediumEnterprise(JASME)intoJapanFinanceCorporation(JFC).JBICwasmainlyresponsibleforthe

76 Into of IFC. IFC website. http://www.ifc.org/wps/wcm/connect/Multilingual_Ext_Content/IFC_External_Corporate_Site/Home_CN.

finance40%

infrastructureconstruction

16%

agricultureandforestry10%

customerandsocialservices9%

manufacturing8%

oil,gasandmining7%


5%

fund5%



internationalfinancialoperations.On2May2011,JapanBankforInternationalCooperationAct(JBICAct)cameintoeffect.JBICbecameindependentfromJFCaccordingtothelaw.

JBIC’smissionssince2012hasbeentocontributetothesounddevelopmentofJapanandtheinternationaleconomybypromotingtheoverseasdevelopmentandsecurementofresourceswhichareimportantforJapan,maintainingandimprovingtheinternationalcompetitivenessofJapaneseindustries,promotingtheoverseasbusinesshavingthepurposeofpreservingtheglobalenvironmentsuchaspreventingglobalwarming,preventingdisruptionstointernationalfinancialorderortakingappropriatemeasureswithrespecttodamagescausedbysuchdisruptions.Infiscalyear2014,64%ofJBIC’sloans,equityparticipationsandguaranteecommitmentfundshavebeenusedtomaintainandimprovetheinternationalcompetitivenessofJapaneseindustries,33%havebeenusedtodevelopandsecureresourcesand3%hasbeenusedtopromoteoverseasbusinesswiththepurposeofpreservingglobalenvironmentincludingpreventingglobalwarming. 77

AsofMarch2015,JBIC’scapitalamountedtoUSD13.51billion.OutstandingloansandequityparticipationsstoodatUSD142.707billion.OutstandingguaranteesreachedUSD24.98billion.Ithasopened16representativeofficesinBangkok,Beijing,London,Manila,MexicoCityNewYork,Singaporeandothercities.Accordingtothesecondmedium-termbusinessplandraftedin2012,JBICwillmainlysupportoverseasinvestmentintheareasofenergyandnaturalresource,infrastructure,manufacturingandenvironment,andmid-tierenterprisesandSMEsintheiroverseasbusinessexpansion.

JBIC’ssupportforJapaneseenterprisesinoverseasinvestmentincludesthefollowingfacilities:exportandimportloans,overseasinvestmentloans,unitedloans,equityparticipations,bridgeloansandguarantees.Sincethereformin2012,JBIChasseenasubstantialincreaseoftheratioofoverseasinvestmentloansinitsannualtotalamountofloans,equityparticipationsandguarantees,from60%in2011to75%in2012,atthesametime,theratiooftheimportloanshasdecreasedannuallyandplummetedtozeroin2014. 78

77JBIC. JBIC’s role and function. https://www.jbic.go.jp/wp-content/uploads/page/2013/08/43936/jbic-brochure-chinese.pdf.

78 JBIC.JBICAnnualReport2015.