Policy Coherence for Sustainable Infrastructure in Developing Countries: The Case of OECD-Country Public Financing for Large Dams

Article excerpt

Public financial institutions (PFIs) provide vital investment for poor countries, and act as catalysts for additional private capital. However, the projects thus financed often have social and environmental side effects. Safeguards systems control such side effects. This article compares the strength of PFIs' safeguards systems. Although the study uses financing for dams as an example, the issue has much larger applicability. In fact, all development project or policy interventions have social or environmental side effects and therefore necessitate safeguards. This article notably finds substantive evidence that safeguards performance substantially differs between different PFIs. It argues that the most important explanations for this finding are differences in coordination mechanisms among different PFIs, and diverging interest group pressure on different PFIs. Finally, the article explores several avenues for future work following from these findings, notably exploring steps to harmonize PFIs' safeguards performance. Keywords: infrastructure finance, developing countries, policy coherence, safeguards, dams.


  In all those years since the building of the dam, this is the first
  time someone knocks on our door to ask how we are coping. And,
  frankly, we are not coping at all.

  --Dona Audona Alegre, who was displaced through the Yacyreta Dam,

  With the money and training received in the resettlement process, I
  have increased my herd from five to 38 cows in barely four years
  time. My life has improved dramatically. Praise the Lord!

  --Don Josefino da Silva, who was displaced through the Cana Brava Dam,

  Water that is allowed to enter the sea is wasted.

  --Joseph Stalin

  The problem is not the dam. It is the hunger. It is the thirst. It is
  the darkness in a township.

  --Nelson Mandela

The building and operating of large dams is among the most controversial development interventions that governments, international institutions, or private firms can undertake. This stems in particular from the immense impact that dams have on surrounding communities (e.g., 1.3 million people had to be resettled for the Three Gorges Dam in China) and on the environment (many large dams lead to the flooding of several hundred square kilometers of land). Dams have given rise to such acrimonious debates that a unique multistakeholder process--the World Commission on Dams--was deemed necessary, spanning three years from 1997 to 2000, to address the difficult trade-offs between the economic, social, and environmental benefits and costs of dams. (1), (2)

The institutions that plan and finance dams and similar large infrastructure projects have therefore been under increasing pressure to control these impacts (3) through "safeguards systems" (4) notably for projects in developing countries, where local capacity for implementing such safeguards is often weak. (5) The starting point of this research is that bilateral aid and multilateral aid differ fundamentally. (6) This dichotomy also exists in large infrastructure finance, with the two main kinds of OECD-country public financing institutions (PFIs, my acronym) involved in financing dams in developing countries being multilateral development banks and Organisation for Economic Co-operation and Development (OECD)-country bilateral PFIs, consisting mostly of export credit agencies (ECAs). In three OECD countries--the United States, Japan, and Germany--the national development financing institution is also heavily exposed to dam financing.

Given that much of the vast amount of capital needed to build large dams in developing countries continues to originate from these OECD-country PFIs, this article asks whether social and environmental safeguards systems are applied with the same degree of stringency by all relevant types of PFIs financed wholly or mostly with OECD-country public money. …