Source: Asia Development Bank
A look at how ADB, a financial intermediary (FI) itself, appraises projects and manages them over the project cycle can help give a better understanding of how other FIs manage theirs. Multilateral development banks (MDBs) and governments follow the same logic flow when deciding whether or not to invest.
First, a proposed project should meet the minimal criteria to be eligible for consideration and assessment. ADB has a Prohibited Investment Activity List, which identifies investment activities that do not qualify for ADB financing. Other FIs might have their own list to reflect their priority areas or discouraged investment. If a proposal already fails at technical and financial screening, it will be returned for revision or rejected outright without the need to proceed to environmental–social screening.
Second, after passing the eligibility screening, a project’s technical feasibility and economic–financial viability will be evaluated in the feasibility study. This necessitates development of the project’s technical design, which is also needed to estimate the cost.
The evaluation of environmental sustainability and social acceptability of a project was added in the 1970s and has gradually become stand-alone as the Environmental Impact Assessment (EIA).
The EIA aims to (i) aid decision making (e.g. drop or proceed with a project and conditions; (ii) improve the project design to minimize negative impacts (e.g. by adding pollution treatment); and (iii) mitigate the residual impacts through action plans such as the environmental management plan.
Third, once the feasibility study and EIA show the proposed project meets technical-financial and social-environmental requirements, and related actions can be carried out, the FI (or government) can decide to approve the project and proceed with its execution.
Since these assessments are time- and resource-consuming, their intensity and level of management need to match the level of risks and impacts. Most countries and MDBs classify environmental impacts into high, medium, and low level categories that require corresponding degrees of evaluation—full EIA, simplified EIA, and no assessment—and management. Likewise on the technical aspect, not all projects require a full feasibility study.
Such impact categorization needs to take place during the proposal stage to determine the level of ensuing assessment. How can the impact level (i.e. category) of a proposal be judged? This is one of the major challenges for FIs, which has led to mis-categorization.