FROM: Vice President and Corporate Secretary

OFFICIAL USE ONLY SecM2009-0367 July 14,2009 FROM: Vice President and Corporate Secretary First Year Review of Implementation of Incremental Scaled-Up Program to Pilot Use of Country Systems to Address Environmental and Social Safeguard Issues in Bank-Supported Projects 1. Attached for information is the report entitled "First Year Review of Implementation of Incremental Scaled-Up Program to Pilot Use of Country Systems to Address Environmental and Social Safeguard Issues in Bank-Supported Projects". 2. Questions on the report may be addressed to Mr. Lintner (ext. 32508) or Mr. Himberg (ext. 89099). Distribution: Executive Directors and Alternates President Bank Group Senior Management Vice Presidents, Bank, IFC and MIGA Directors and Department Heads, Bank, IFC and MIGA This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content may not otherwise be disclosed without World Bank Group authorization.

Report to the Executive Directors First Year Review of Implementation of Incremental Scaled-Up Program to Pilot Use of Country Systems to Address Environmental and Social Safeguard Issues in Bank-Supported Projects June 2009 Background and Purpose of This Report 1. Based on Management s Evaluation Report of the initial phase of the Pilot Program on Use of Country Systems (UCS) for Environmental and Social Safeguard Issues, the Board agreed in January 2008 to Management s proposal to incrementally scale up the initiative from the project to the country level. The objectives of this expanded approach are to engage a greater range of borrowers and other development partners to achieve economies of scale, apply a greater range of safeguards and build borrower capacity on a more sustainable basis than is feasible at the project level. This expanded approach to UCS will continue to be guided by Operational Policy/Bank Procedure 4.00 (OP/BP 4.00) Piloting the Use of Borrower Systems to Address Environmental and Social Safeguard Issues in Bank-Supported Projects (including Table AI, Equivalence Matrix) that was approved by the Board in March 2005; and by the basic analytical methodology developed to implement the policy, the Safeguard Diagnostic Review (SDR). However, it will expand application of OP 4.00 and SDR to the full range of the Bank s investment vehicles as well as to the national, sub-national and para-statal agencies involved in project implementation. 2. Among the factors that limited the number and scope of pilots supported during the initial phase of the program3 was the lack of dedicated funding to support an innovative approach to safeguards, which requires initial costs for analytical work that would not normally be undertaken under a traditional safeguards approach. This includes desk and field work to conduct a full inventory and analysis of borrower country policies, laws, regulatory and, in many cases, judicial decisions, corresponding to the Objectives and Operational Principles of applicable and corresponding Bank safeguards as articulated in OP 4.00 Table AI. Extensive fieldwork, including site visits to Bank and non-donor funded projects, is also necessary in order to conduct a thorough and credible assessment of the Acceptability of borrower institutional capacity, processes, outputs and outcomes. Evaluation of the Initial Phase ofthe Pilot Program for Use of Country Systemsfor Environmental and Social Safeguards: Lessons Learned and Management Proposal for an Incremental Scale Up of the Program, January 9, 2008. Board approval of OP 4.00 was based on a discussion of the accompanying issues paper, Expanding the Use of Country Systems in Bank-Supported Operation: Issues and Proposals, March 9, 2005. Details of the pilots initiated during the first and second phases of the pilot program are included in the Table in Annex 1.

2 Aggregate Results to Date 3. Incentive Funds: To address the funding gap, which was recognized by the Board, Management allocated base budget support to a program of Incentive Funds that provided up to $50,000, from the Operational Policy and Country Services Vice Presidency, for pilots initiated under the second phase of the program. All six regions have availed themselves of these funds, and all have supplemented the program with project support from regional safeguards budgets, with the result that, unlike the first phase of the program, all the regions are actively participating in the second phase. To date, $343,000 has been disbursed from the Incentive Funds to support seven piloting exercises. In addition, $100,000 has been made available to the Legal Department (LEGEN) to support fieldwork and the engagement of local legal specialists. 4. Characteristics of Pilots Initiated During the Second Phase: Consistent with the proposal that Management made to the Board for the projects in the first phase, nine pilots have been formally initiated (using Incentive Funds) during the second phase, with at least one in each region. Both the East Asia and Pacific (EAP) and Latin America and Caribbean (LCR) Regions are well represented, which was not the case in the first phase of the pilot program. SDRs have been conducted for a diversity of Bank lending instruments at various levels, from the country to the specific investment loan (SIL) level, with various intermediate levels of analysis and implementation, consistent with the proposal for incremental scaling up of the pilot program. The portfolio of pilots initiated under the second phase of the pilot program is summarized in Annex 1 of this report. Additional pilots and follow on activities have been proposed for the remainder of fiscal year (FY) 2009 and early FY 20 10. 5. Two SDRs, in Croatia and Mauritius, are being conducted at the country level, which is considered appropriate for small countries with projects identified that would be piloted based on the outcomes of the SDR process. A third country-level SDR is in preparation in Bhutan, based on a previous Country Environmental Safeguard Analysis completed at the request of the Government of Bhutan as Economic and Sector Work (ESW) during the first phase of the pilot program; the SDR is being updated to reflect new framework legislation and expanded to include Involuntary Resettlement. 6. A sector-level SDR has been completed and disclosed for the Second Water Sector Investment Project (PISEAU 11) in Tunisia; an SDR is underway in Brazil at the sub-national level (Sa0 Paulo), with a second at the Financial Intermediary level (Caixa Economica Federal) in the solid waste management sector. In two states in India (Gujarat and Uttar Pradesh), state-level Involuntary Resettlement policies are being piloted in preparation for regulatory reforms pursuant to India s pending Land Acquisition Amendments and Resettlement and Rehabilitation Act. Three SDRs are being conducted at the project level, one in Bhutan pursuant to the Country Environmental Safeguard Analysis mentioned above, one in Lao PDR in the rural transport sector, and a third that is about to be initiated in the water supply and sanitation sector in Morocco. 7. Although Development Policy Lending (DPL) is not subject to safeguard operational policies, under OP 8.60 the Bank is required to determine whether specific

3 country policies supported by the operation are likely to result in significant effects on the country s environment, forests, and other natural resources, and in this case, to assess in the Program Document the borrower s systems for reducing such adverse effects and enhancing positive effects, drawing on relevant country-level or sectoral environmental analysis. If there are significant gaps in the analysis or shortcomings in the borrower s systems, the Bank describes in the Program Document how such gaps or shortcomings would be addressed before or during program implementation, as appropriate. Accordingly, DPLs for policies with significant environmental effects can be conducive to the type of analysis that takes place during the SDR process for subsequent SILs. A DPL currently underway for the solid waste sector in Morocco and a prospective engagement in the energy sector in South Africa, respectively, generated useful data and analysis concerning borrower systems that provide a strong basis for conducting formal SDRs with the prospect of piloting country systems for subsequent and forthcoming SILs for borrowers in these countries and sectors. Summary and Status of Spec@c Pilots Initiated During the Second Phase 8. Croatia: Country Level SDR: Croatia was selected as a pilot country for the Europe and Central Asia (ECA) Region for several practical reasons: it is a European Union (EU) candidate country (and can serve as a model for other candidate c~untries);~ the Government expressed willingness in principle to participate in the pilot program; and the Country and Sector Management Units are supportive. The results of the SDR, if favorable for piloting UCS, are likely to be applied to the water sector and/or ports subsector. It is currently envisaged that six of the safeguard policies will be included in the SDR. With regard to Environmental Assessment, Croatia has been undertaking major efforts to bring its environmental legislation into alignment with relevant EU Directives, which have been found to be strongly comparable to the Objectives and Operational Principles of OP 4.00 Table A1 for Environmental Assessment. Preliminary results of the Equivalence Analysis, initiated in early February 2009, suggest, however, that there are significant gaps between Croatian law and corresponding Bank safeguard requirements with respect to Involuntary Resettlement. The results of the draft Equivalence Analysis will be discussed with the Government to determine whether to proceed with the Acceptability Assessment and if so, in which safeguard areas. If the SDR proceeds to its conclusion, the final report (with application to future lending) is expected to be completed before the end of calendar year (CY) 2009. 9. Lao PDR: Lao Transport Sector Project (LTSP): Lao PDR was selected as a pilot country because it has undertaken an impressive effort to establish and implement a modern and comprehensive legal and regulatory system governing Environmental Assessment, protection of Natural Habitats and protected areas, and Physical Cultural Resources. It was also recognized at the outset that the Lao PDR environmental protection and management system is yet to be as comprehensive and complete as it should be to be able to address the numerous environmental challenges facing the country. However, this system has benefitted from the considerable assistance of many 4 Two projects in Romania were approved under country systems during the first phase of the pilot program.

4 donors and this assistance is bearing fruit. So far, the implementation of the environmental and social aspects of the Nam Theun 2 Hydroelectric Power Project (NT2), as well as other projects, has demonstrated the commitment of the Government to enforce its laws and regulations and continue to build capacity for environmental protection and resettlement. 10. The project selected for piloting involves the rehabilitation of existing roads and construction of new ones. Based on the draft SDR, Environmental Assessment, Natural Habitats and Physical Cultural Resources are suitable for piloting under the LTSP. Although they may be potentially triggered, the Involuntary Resettlement and Indigenous Peoples policies were excluded because of differences of approach to land acquisition and compensation, and definition of Indigenous Peoples. Gap-filling measures related to these safeguards would require enactment of new laws by Parliament, which is not deemed feasible during the project cycle. The draft SDR was prepared and discussed with the Government and further submitted to consultation with stakeholders and donors. It is expected that the Government will approve the proposed gap-filling measures to allow finalization and disclosure of the final SDR prior to Appraisal and submission for Board review, as part of the PAD. Gap-filling measures will be approved under the form of an Environmental and Social Operations Manual (ESOM) endorsed by a Ministerial Decision, which at the same time will define mandates and responsibilities of the various institutions in charge of implementation and enforcement. The project is scheduled for Board approval on July 28,2009. 1 1. Brazil: Financial Intermediary (FI) Level: Caixa Economica Federal, a financial intermediary institution, was selected because of high borrower interest in the context of preparation of a new project, the Integrated Solid Waste Management and Carbon Finance Project, which is focused on solid waste management facilities in various municipalities. The SDR will focus on federal and state legislation because, in Brazil, all states and municipalities must follow at a minimum the federal environmental legislation, which can then be complemented by specific legislation, as long as it is as strict as or stricter than federal legislation. The safeguards included in the SDR are Environmental Assessment, Physical Cultural Resources and Involuntary Resettlement. 12. With respect to the Acceptability Assessment, LCR will be focusing on Caixa Economica Federal and two or more entities responsible for providing the environmental licenses for some of the potential new solid waste facilities, of which Siio Paul0 would be one. This would create additional synergies between this exercise and the one described below. 13. Caixa has conducted an internal review of its relevant standards and processes. LCR has contracted a local law firm and an individual consultant to support the elaboration of the Caixa Economica Federal review. A mission was in the field March 23 to 31, 2009, focusing on both equivalence and acceptability aspects of the SDR. A complete draft of the SDR is expected to be completed by early June and public consultation is planned for June 10, 2009 in Brasilia.

5 14. Brazil: Sub-National Level: The state of SZio Paul0 was selected because of: (i) borrower interest; (ii) LCR s growing engagement with and diverse project pipeline in the state; and (iii) the relatively high capacity of state institutions in the area of environmental management. The borrower has asked the Bank to help identify gaps related to all eight environmental and social safeguard policies applicable to UCS (excluding Safety of Dams). An initial mission was in the field March 30 to April 2, and it was agreed with the State Secretary of Environment that the more formal assessment will focus on Environmental Assessment, Natural Habitats, Physical Cultural Resources and Involuntary Resettlement policies. The Acceptability Assessment will cover the Secretariat of Environment, including all departments involved in the environmental licensing process, along with the relevant sector implementing agencies. 15. LCR has prepared an advanced draft of the Equivalence Analysis focused on federal legislation and has contracted the same local law firm and individual consultant being hired for the Caixa SDR to support preparation of the state-level review. It is expected that the SDR will be completed by the end of August 2009. At the present time it is anticipated that the first project to reflect the results of the state-level SDR will be the SZio Paul0 Metro Line Five project that is scheduled for Board approval in April 2010. 16. Tunisia: Second Water Sector Investment Project (French acronym, PISEAU Io: PISEAU I1 is the first pilot project to be prepared for approval by the Board under the second phase of the UCS pilot program. Tunisia was one of the initial countries considered for piloting UCS due to the relatively advanced state of its environmental regulatory framework, institutional capacity and performance as indicated by previous World Bank diagnostic studies. Under the first phase of the pilot program, Tunisia was selected for piloting UCS for a Sustainable Management of Municipal Waste Project (SMMWP). That project is being implemented and supervision by Bank staff revealed implementation to be satisfactory and in full compliance with the terms of the related Loan Agreement. Management and the Government agreed to consider further processing of an additional project under OP 4.00. The water sector was selected for piloting because Tunisia has a good track record in water resources management as is demonstrated by the successful completion of the first Water Sector Investment Project (PISEAU, 2001-2006) and satisfactory implementation to date of the ongoing Urban Water Supply Project, as well as other investments and activities in the water sector, whether supported by donors or not. 17. The project triggered two safeguards, Environmental Assessment and Involuntary Resettlement. As an outcome of the SDR it was agreed to pilot the project under Tunisia s legal, regulatory and institutional framework for Environmental Assessment, with appropriate gap-filling measures, as described in the SDR. Although it is not expected that the PISEAU I1 would result in involuntary resettlement, a Resettlement Policy Framework was prepared for the project under OP 4.12 rather than the Tunisian system due to lack of equivalence with the Objectives and Operational Principles of OP 4.00 Table Al. 18. The SDR was conducted in collaboration with the borrower, the Ministry of Agriculture and Water Resources; the national Environmental Protection Agency; the

6 Ministry of Environment and Sustainable Development; and other mandated agencies, and in close cooperation with other donors including the African Development Bank and the French Development Agency. The draft SDR was the subject of discussions with Government officials and a stakeholder consultation workshop held in Tunis on October 28-30,2008; the results of the discussions and workshop were reflected in the final SDR, which was disclosed in November 2008 and is scheduled for Board approval on May 19, 2009. 19. Mauritius: Country-Level: Mauritius is a small, geographically isolated country with fairly robust legislative systems and environmental and social policies, including good grievance redress systems. The Government of Mauritius initiated the request to the Bank that it be included as a pilot for country systems, for both environmental and social safeguards (as well as for procurement). The Government has requested that the Bank include as many of the eight safeguards as possible that may be piloted under UCS, with the exception of Indigenous Peoples, given that the island was first settled by Europeans and only later populated by other nationalities. The sectors initially targeted for Bank support under UCS would be the infrastructure sectors, including road improvements and expansion, with additional technical assistance components in the water and energy sectors, including the pending $50 million Mauritius Infrastructure Project. 20. A Bank Mission visited Mauritius in the first two weeks of February 2009 and conducted a thorough Equivalence Analysis and Acceptability Assessment, including site visits to projects funded by the Bank as well as to other construction, industrial and conservation projects. Preliminary indications are that the Environmental Assessment process is quite robust, and the Government has taken a particular interest in aligning its environmental protection standards with the new World Bank Group Environmental Health and Safety Guidelines. However, protection of Natural Habitats, including forests, will require additional legal protection and capacity building with particular reference to those located outside of officially designated areas. In this connection, the Bank will build its gap-filling measures around a multi-donor funded but Government-driven project to identify and delineate Environmentally Sensitive Areas and to develop a Protected Areas Network. Public consultation on the draft SDR is scheduled for the week of June 22,2009. 21. Bhutan: Second Urban Development Project (UDP 1.: During the first phase of the pilot program, the Board approved the Second Rural Access Project (RAP 11) for Bhutan following an SDR process and agreement on specified gap-filling measures that enabled the Bank to use Bhutan s Environmental Assessment system for secondary road construction. The Equivalence Analysis was based on Bhutan s Environmental Assessment Act and supportive regulatory framework while the Acceptability Assessment drew on the Bank s recent experience in financing the First Rural Access Project, during which the Department of Roads developed substantial capacity for environmental management through technical assistance from the Netherlands. 22. The SDR for the UDP I1 project follows the same model, while building on the SDR conducted for RAP 11, the Country Environmental Safeguard Review (CESR) conducted subsequent to RAP I1 and the Bank s experience in supporting the First Urban

7 Development Project, which closed in 2006. Whereas UDP I was designed to support the development of urban infrastructure and municipal administration of ten townships under construction in rural areas, UDP I1 is focused on development of Local Area Plans for the capital city, Thimphu. 23. The SDR process for UDP I1 illustrates the limitations of the project-specific approach, as well as the benefits of the scaled up approach used in the CESR. While making substantial use of the findings from the RAP I1 SDR to determine equivalence with respect to Environmental Assessment, the SDR process for UDP I1 requires that the Bank assess the capacity of implementing institutions associated with the project and not involved in RAP 11: the Department of Urban Development and Engineering Services and the Thimphu City Corporation. At the same time, the extensive knowledge of the full range of Bhutan environmental safeguards systems gained from the CESR facilitates analysis and assessment of other environmental safeguards that may be triggered by the project, including Natural Habitats, Forests (both of which exist on the urban periphery of Thimphu), and Physical Cultural Resources. The draft SDR is scheduled for public consultation in June 2009. 24. South Africa: Eskom Investment Support Project: Building on the SDR for the South Africa Global Environment Facility (GEF) project initiated in Phase I of the Pilot Program (see paragraph 25, below and Annex 2), work commenced towards the end of FY 2009 on an SDR for a proposed Single Investment Loan to the Eskom Investment Support Project. The project is designed to support implementation of Eskom s investment program, which aims to address the projected electricity supply-demand imbalance in a sustainable manner through: (a) increased energy efficiency to moderate the growth rate of demand for electricity; (b) efficient expansion and diversification of electricity supply; and (c) mitigating the increase in emissions from the power plants. The SDR would extend the Equivalence Analysis completed for the GEF project to the electricity supply sector and conduct an Acceptability Assessment of Eskom and the regulatory institutions responsible for environmental and social safeguards triggered by project components; those identified to date include Environmental Assessment, Natural Habitats (outside of protected areas), Physical Cultural Resources and Involuntary Resettlement. Related Projects Initiated During the First Phase 25. As part of the scaling up exercise, two SDRs initiated during the first phase have been largely completed during the past year, both providing a rich learning experience in the process of scaling up from the project to the institutional and strategic levels. These projects ranged from a $1 billion loan to POWERGRID Corporation of India for the Fifth Power Systems Development Project (PSDP V) to a $30 million grant from the GEF to the isimangaliso Wetland Park Authority in South Africa (isimangaliso). These pilot projects and the lessons learned from them are summarized in Annex 2 of this report. The Bank committed to undertake this project-level SDR at the request of the Government of Bhutan during the first phase of the pilot program.

8 Outcomes and Lessons Learned from Second Phase Pilots to Date 26. Towards the end of the first phase of the pilot program, Management conducted a retrospective evaluation to glean lessons from the process that could be used to refine the structure of the pilot program. This evaluation formed the basis of Management s presentation to the Board in January 2008 and the Board s response. During the second phase, Management has encouraged the Regions to begin drawing lessons from the pilots on an ongoing as well as a retrospective basis in order to make full use of the knowledge gained during the piloting phase. Some observations that have emerged from this ongoing stocktaking include: The Second Phase of the Pilot Program involved greater participation on the part of the East Asia Region (a pilot in Lao PDR) and the Latin America and the Caribbean Region (where two pilots were launched in Brazil). In some countries, such as EU accession countries, the Environmental Assessment process, although highly prescriptive and rigorous, is structured in a very different way than the World Bank Operational Policy on Environmental Assessment (per OP 4.01/4.00). In such cases, it relies to a greater extent than does the Bank on physical plans, location and construction permits, with these fulfilling many of the functions that would be conducted in the Bank s Environmental Assessment-Environmental Management Plan process, To determine equivalence, there is a need for the Bank to be flexible and look for equivalence of objectives and functions, rather than focusing narrowly on processes and outputs. During the SDR process, there is a need to work closely with national and local authorities, rather than focusing exclusively on the borrower, as well as with other donors and stakeholders. Borrower buy-in is fundamental and that takes time. Also, Bank processes for conducting this exercise should be more flexible to be able to accommodate more of our counterparts interests and needs in improving their systems for environmental and social management. It is essential to ensure that the borrower understands that it is in their interest to be fully candid and transparent concerning known constraints and challenges to their safeguards system rather than relying on the Bank to identify these issues through the SDR process. The requirement for full agreement on gap-filling measures prior to completion of the SDR needs to be communicated to borrowers at the outset of the SDR process. The benefits of scaling up from the project to the country level were evident in the case of Bhutan, Croatia and Mauritius where the broader scope of the SDR work accommodated a greater number of safeguards than would typically be triggered at

9 the project level. In the case of Bhutan, all of the environmental safeguards were included; whereas for Mauritius seven safeguard policies are included.6 Country-level and sector level SDRs provide greater opportunity for cross-support with other Bank analytical work, in particular, Country Environmental Analysis (CEAs) and Strategic Environmental Assessments (SEAS), as well as for multi-donor and borrower-driven input such as CEAs prepared by the Asian Development Bank, EC Environmental Profiles, OECD Environmental Policy Reviews, and National Capacity Self-Assessments for Implementation of Multilateral Environmental Agreements conducted under the guidance of UNDP and GEF. Way Forward and Challenges 0 As SDR becomes more of a country-level diagnostic tool, and other Multilateral Development Banks begin to implement their own UCS mandate^,^ there will be a corresponding need for coordination and harmonization among donor agencies involved in these activities. The Multilateral Financial Institutions-Working Group on Environment (MFI- WGE) and OECD-DAC Network on Environment and Development Cooperation (ENVIRONET) are proving to be useful venues for such enhanced collaboration. 0 As the portfolio of projects continues to expand, all Regions of the Bank need to take greater ownership of the Bank s commitment to pilot UCS for environmental and social safeguards. The Africa, Middle East and North Africa and South Asia regions are the most advanced in this regard. 0 To realize the full benefits of the incremental scaling up of the SDR process for the Bank s project pipeline, project task teams will need to learn how to apply the findings and recommendations of country-level SDR in project preparation. Implementation of this approach is beginning in Bhutan, where a country level Environmental Safeguards Review (undertaken as in informal exercise during Phase I of the Pilot Program) is being applied to the Second Urban Development Project. 0 Teams assigned to project supervision of safeguards usually involve staff that may not have been involved in the SDR process and may not be fully familiar with the UCS pilot program. Such teams should be fully informed and trained, as necessary, to support safeguards supervision under country systems. The safeguard policy on Indigenous Peoples is not applicable to Mauritius where none of the population exhibits the defining characteristic of Indigenous Peoples per OP 4.00 Table A1 (or OP 4.1 1). The Inter-American Development Bank adopted a provision for UCS as part of its 2006 Environmental and Safeguard Strategy. The Asian Development Bank s proposed Safeguard Policy Update, scheduled for final Board review on July 15, 2009, includes a detailed provision for use of Country Safeguard Systems at the country level, with a methodology modeled closely on World Bank Operational Policy 4.00. * This SDR is also building on the findings of a Phase I SDR conducted for the Second Rural Access Project.

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~~ Annex 2: Additional Pilot Projects Initiated During the First Phase of the Pilot Program 1. India: Fifth Power Systems Development Project: In India, the most ambitious SDR undertaken to date was completed in support of a proposed $1 billion loan for the Fifth Power Systems Development Project (PSDP V) to be implemented by POWERGRID Corporation, India s (and one of the world s) largest electrical power transmission company. From 1998 through 2005, the Bank had supported successive loans to POWERGRID under a designated safeguard framework, POWERGRID s Environmental and Social Policy and Procedure (ESPP), which was developed to better align POWERGRID S safeguards with the safeguard policies of various donors including the World Bank and the Asian Development Bank, while incorporating Indian national and state legal requirements and policy prescriptions. 2. Based on POWERGRID s strong performance in implementing its ESPP, which went well beyond Indian legal requirements in many respects, POWERGRID and the Bank agreed to include the Corporation s anticipated fourth loan request under the UCS program. However, the loan request was processed as additional financing on an accelerated schedule that was not conducive to the in-depth review required for SDR purposes. The SDR process was therefore applied to POWERGRID s next loan request, the Fifth Power Sector Development Project. 3. The SDR involved a detailed comparison of POWERGRID s 2005 ESPP and the Indian laws that it incorporated with the Objectives and Operational Principles of six of the eight World Bank safeguards triggered by POWERGRID s operations. Not only was the number of safeguards triggered unprecedented for a UCS pilot, it was also the first UCS pilot project to include both social safeguards - Involuntary Resettlement and Indigenous Peoples - within the scope of the analysis. The Equivalence Analysis, which was conducted by a Bank lawyer with assistance from local counsel, found a very high degree of correspondence between PO WERGRID s Environmental Assessment process and the Objectives and Operational Principles of OP 4.00, in spite of significant gaps in Indian law with respect to the application of the 2006 Environmental Impact Assessment Notification regulations to the electrical transmission sector.2 Substantial equivalence was also found with respect to Natural Habitats3 and Forests as applicable to POWERGRID s operations. Although India s national legal framework for land acquisition and resettlement is significantly limited,4 pending enactment of a proposed Resettlement and Rehabilitation (R&R) Bill, POWERGRID has adopted the Indian Government s R&R These included Environmental Assessment, Natural Habitats, Forests, Physical Cultural Resources, Involuntary Resettlement and Indigenous Peoples. Although the Environmental Impact Assessment Notification itself was developed with support from the World Bank and is closely aligned with OP 4.01 in many respects, it does not include electrical transmission among the sectors for which an environmental assessment is required. Notwithstanding this exemption, POWERGRID applies a thorough Environmental Impact Assessment process to its transmission lines and substations. With respect to Natural Habitats the main gaps in the ESPP relate to incomplete references to Indian laws pertaining to various categories of protected areas and related judicial decisions. 4 The current legal fiamework is based solely on the Land Acquisition Act of 1894, which does not address resettlement and rehabilitation issues.

15 Policy, issued in 2003 and updated in 2007 as an integral part of the ESPP. The R&R Policy is strongly equivalent to the Objectives and Operational Principles of OP 4.00 Table A1 with respect to Involuntary Resettlement and its major proposals are expected to have the force of law following the current session of the Indian parliament. With respect to Physical Cultural Resources, gaps in equivalence were the result of lack of specificity in the ESPP rather than actual practice and the fact that the WorId Bank safeguards policy on Physical Cultural Resources was issued after the approval of the ESPP in 2005. Similar reasons accounted for gaps in equivalence with respect to Indigenous Peoples; India s landmark legislation, the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act of 2006, was enacted after the ESPP was approved in 2005 as was World Bank OP 4.10 on Indigenous Peoples, which introduced the requirements for free, prior, informed consultation leading to broad community support into the Bank s safeguard system. The ESPP has now been fully revised to bring POWERGRID s system into equivalence with OP 4.00 Table A1. 4. With respect to Acceptability, the Bank reviewed its considerable documentation (Investment Completion Reports and Supervision Reports) on POWERGRID s implementation of Bank safeguards and the ESPP developed throughout its long relationship with POWERGRID. It also interviewed Bank environmental and social specialists who had supervised POWERGRID projects in the field; reviewed documentation provided by the Asian Development Bank for similar projects; and undertook field visits to POWERGRID projects implemented under the ESPP without donor support or supervision. The Bank and POWERGRID also conducted two public consultation workshops during November 2008 in Delhi and Hyderabad on POWERGRID s implementation of the ESPP. Some gaps were found with respect to PO WERGRID s placement of dedicated environmental and social specialists at project sites and in its implementation of its Social Entitlements Framework and monitoring of rehabilitation outcomes. PO WERGRID has agreed to supplement its human resources to address these issues. The SDR, based on the revised ESPP, was disclosed in February 2009, prior to Appraisal of PSDP V in April 2009. PSDP V is scheduled for Board approval on August 6,2009. 5. South Africa: Development, Empowerment and Conservation in the isimangaliso Wetland Park and Surrounding Region. South Africa was an obvious choice for piloting UCS in the Africa Region as it is one of the most advanced countries in the Region in terms of environmental legislation and implementation of regulations. The interest of the borrower, the isimangaliso Wetland Park Authority (the Authority), is to simplify the safeguard procedures needed to work with the Bank, which have been perceived in South Africa as unduly cumbersome and of limited added value, given South Africa s highly developed regulations, in particular with respect to conservation of protected areas. This approach is consistent with the recently approved Country Partnership Strategy that aims at developing a new, borrower-driven dialogue between the World Bank and South Africa. 6. The isimangaliso Wetlands Park, on South Africa s northeast coast, is a natural and cultural asset of local, regional and global significance. It was inscribed on the World

16 Heritage List in December 1999, contains four of the fifteen sites in South Africa registered under the Ramsar Convention and forms the largest and best protected area in the Maputaland-Pondoland-Albany Biodiversity Hotspot. It is therefore an ideal subject for an SDR of South Africa s safeguards related to the World Bank safeguard policies on Environmental Assessment, Natural Habitats and Physical Cultural Resources. 7. The overall objective of the project, which is seeking a $30 million grant from the Global Environmental Facility, is to support the Authority to address the twin challenges of nature conservation and poverty alleviation through a transition from a conservationin-isolation approach which, until recently, was the dominant mode of park management, to a management approach that seeks to balance conservation with socio-economic development. This will require the Authority to make full use of the environmental assessment tools in place in South Africa, including Environmental Impact Assessment under regulations issued in 2006, as well as international best practice in the form of Strategic Environmental Assessment and Integrated Management Planning for the Park. The project was appraised in March 2009 and is scheduled for Board approval in July 2009. 8. Although it focused on the protected areas sector, the Equivalence Analysis for the project, which included detailed analysis of South Africa s laws, regulations and institutional capacity related to Environmental Assessment, Natural Habitats and Physical Cultural Resources, provided a strong basis for a country systems review recently conducted in connection with a pending investment loan for the South African energy sector. This project is scheduled for an SDR in May 2009, Appraisal in July 2009 and Board approval before the end of CY 2009.