Gambling People's Lives

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A Report by

Environmental Defense

Friends of the Earth

International Rivers Network

Gambling withPeoples Lives

What the World Banks

New High-Risk/High-Reward Strategy Means

for the Poor and the Environment

S E P T E M B E R 2 0 0 3


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a2

Gambling with Peoples Lives

What the World Banks NewHigh-Risk/High-Reward Strategy

Means for the Poor and the Environment

Authors: Peter Bosshard, Janneke Bruil, Korinna Horta,Shannon Lawrence, Carol Welch

Published by: Environmental Defense, Friends of theEarth and International Rivers Network

Environmental Defense, Friends of the Earth andInternational Rivers Network, 2003

ISBN: 0-913890-00-6

Design: JML Design

Printing: Peake Printers

Cover photos (left to right):

A farmer woman displaced for the Bujagali Dam in Uganda. TheBujagali Project is one of the World Banks latest high-risk projects. It is

riddled with controversy and has prolonged the deadlock in Ugandaspower sector. The people who have been displaced pay the highestprice. (Photo: Lori Pottinger, IRN)

Children from a village for internally displaced persons near an oilterminal to be used for the proposed Baku-Tbilisi-Ceyhan pipeline, a

project the World Bank is considering financing at press time. Many ofthe village residents are skeptical of the projects promised benefits.(Photo: Nino Gujaraidze, Green Alternative)

We will not move! Activists of the Protect the Narmada Movementrefuse to leave the villages that are being submerged by the SardarSarovar Dam in Indias Narmada Valley. Sardar Sarovar is one of theWorld Banks early high-risk projects. (Photo: Narmada Bachao

Andolan)


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G A M B L I N G W I T H P E O P L E S L I V E S

The authors would like to thank Dana Clark(International Accountability Project), NiltonDeza (Ecovida Peru), Steve Herz, BruceJenkins and Nikki Reisch (Bank InformationCenter), Patrick McCully, (International Rivers

Network), Deborah Moore, Femy Pinto (Oxfam America,East Asia Regional Office), Bruce Rich (EnvironmentalDefense), Isaac Rojas (COECO-Ceiba, Friends of theEarth Costa Rica), Keith Slack (Oxfam America),Himanshu Thakkar (South Asia Network on Dams, Riversand People), Antonio Tricarico (Campagna per la Riformadella Banca Mondiale), and Alex Wilks (Bretton WoodsProject) for reviewing and contributing to this report. Thereport also benefited from research and editingassistance provided by Anna Brinsmade and KhadijaZaheer. Generous financial support was provided by theSwedish Society for the Protection of Nature and theCharles Stewart Mott Foundation.

Environmental Defense is a leading U.S.-basednonprofit organization representing more than 300,000members. Since 1967, it has linked science, economicsand law to create innovative, equitable and cost-effectivesolutions to societys most urgent environmentalproblems.

Environmental Defense, International Program1875 Connecticut Avenue NW, Suite 600Washington, DC 20009, USAPhone 1-202-387-3500, Fax 1-202-234-6049

www.environmentaldefense.org

Friends of the Earth International is a federation of 68environmental organizations from all over the world thatcampaign on the most urgent environmental and socialissues of our day, while simultaneously catalyzing a shifttoward sustainable societies. Friends of the Earth US isthe U.S. arm of the federation.

Friends of the Earth InternationalPO Box 19199

100 GD Amsterdam, NetherlandsPhone 31-20-622-1369, Fax 31-20-639-2181www.foei.org

Friends of the Earth US1717 Massachusetts Avenue NW, Suite 600Washington, DC 20036, USAPhone 1-202-783-7400, Fax 1-202-783-0444www.foe.org

International Rivers Network (IRN) supports localcommunities working to protect their rivers and

watersheds. IRN works to halt destructive waterdevelopment projects, to promote sustainablealternatives, and to change the policies of financialinstitutions, governments, and the dam industry.

International Rivers Network1847 Berkeley WayBerkeley, CA 94703, USAPhone 1-510-848-1155, Fax [email protected], www.irn.org

Acknowledgements


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BTC Baku-Tbilisi-Ceyhan (pipeline)CAO Compliance Advisor/OmbudsmanCDD Community-driven developmentDRC Democratic Republic of CongoEA Environmental AssessmentEBRD European Bank for Reconstruction and DevelopmentEI Extractive IndustryEIA Environmental Impact AssessmentEIR Extractive Industries ReviewFY Financial YearGDP Gross Domestic ProductGEF Global Environment FacilityIAG International Advisory GroupIBRD International Bank for Reconstruction and DevelopmentIDA International Development AssociationIFC International Finance CorporationIMF International Monetary FundIRN International Rivers NetworkIUCN International Union for the Conservation of Nature (World Conservation Union)MIGA Multilateral Investment Guarantee AgencyNGO Non-governmental organizationOED Operations Evaluation Department (World Bank: IBRD/IDA)OEG Operations Evaluation Group (IFC)OEU Operations Evaluation Unit (MIGA)TBS Tarun Bharat Sangh (Indian Youth Movement)

UN United NationsUNDP United Nations Development ProgrammeWBG World Bank GroupWCD World Commission on Dams

Acronyms and Abbreviations


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Foreword.............................................................................................................................................................i

Executive Summary .........................................................................................................................................1

Institutional Amnesia: The World Banks Approach to High-Risk Projects.............................................3

Risky Business: Extractive Industries.............................................................................................................9

Alternatives to the World Banks Extractive Industries Investments

The World Bank Risks the Worlds Forests .................................................................................................19 Alternatives to a High-Risk Approach to Forests

The World Bank and Large Dams: Failure to Learn from History..............................................................27

Alternatives: Low-Risk/High-Reward Solutions for the Global Water Crisis

Conclusion: The Poor Track Record of the World Banks High-Risk Projects.........................................37

Recommendations

Bibliography.....................................................................................................................................................44

Boxes:MIGA: An Insurer Against High Risk...................................................................................................................4

The Experience with IFC.....................................................................................................................................6

Chad-Cameroon: A Risk Mitigation Test Case.................................................................................................11

Singrauli: Same Old Story.................................................................................................................................13

The Baku-Tbilisi-Ceyhan Pipeline: Lessons Learned? .....................................................................................14

Ignoring Communities: The Yanacocha Mine...................................................................................................16

Structural Adjustment in Cameroon: Disastrous Consequences for Forests...................................................21

Forest Concessions in Cambodia: A Safe Bet? ...............................................................................................22The Chad-Cameroon Pipeline and Forest Destruction ...................................................................................24

Tarbela: The Grandfather of High-Risk Projects...............................................................................................28

Bujagali: High Risk for Whom?.........................................................................................................................30

Sardar Sarovar: Once Again a High-Reward Investment?............................................................................32

An Alternative Approach...................................................................................................................................35

The Case for Reparations.................................................................................................................................40

Table of Contents


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i

For many countries that need to makemajor infrastructure investments tocomplement management reforms, theBank often become [sic] a reluctant,unpredictable and expensive partner, the

World Banks management asserted in February 2003 ina major new water strategy paper. To be a moreeffective partner, the World Bank will re-engage withhigh-reward/high-risk hydraulic infrastructure, using amore effective business model.1 In October 2002, theBanks Board of Directors also endorsed a high-riskapproach to the forestry sector; the new Forest Policyallows Bank support for commercial logging operationsin rainforests.

The environmental destruction, social upheaval,corruption and repression that are associated with theWorld Banks high-risk projects have created tremendouspublic controversy since the 1980s.2 This is particularlytrue for large dams, for projects that affect tropicalforests, and for investments in the oil, gas and miningsectors. In the 1990s, the World Bank became morecautious and refrained from funding some of the mostcontentious dam, forestry and mining projects. Manynon-governmental organizations welcomed this cautious

approach as one of the few effective environmentalreforms of James D. Wolfensohns presidency at theWorld Bank.

The Wolfensohn presidency is now set to conclude witha renewed focus on high-risk/high-reward projects.This focus, especially for the forestry and water sectors,has been the subject of heated debates within theBanks management and Board of Directors, and inpublic. As the World Bank begins implementing arenewed high-risk strategy, certain questions need to beasked:

What is the World Banks track record in earlier high-risk projects?

Has the World Bank learned from past mistakes? Does it have the necessary instruments to

adequately appraise and implement high-riskprojects?

Who will bear the burden of such projects if theirhigh risks cannot be contained and mitigated? Whowill reap the rewards?

The following report examines these questions at acritical juncture. It analyzes how the World Banksapproach to environmental and social risk has changedover time and evaluates the Banks track record in high-risk projects in the water, forestry, oil, gas and miningsectors. The report presents examples of alternative

development approaches that are marked by low riskand high rewards and culminates with some generalconclusions and a series of recommendations.

Peter Bosshard, International Rivers NetworkJanneke Bruil & Carol Welch, Friends of the EarthKorinna Horta & Shannon Lawrence, Environmental

Defense

September 2003

1 World Bank (2003) Water Resources Sector Strategy: Strategic Directions forWorld Bank Engagement, p. viii.

2 The term World Bank in this report generally includes all financing arms of theWorld Bank Group (IBRD, IDA, IFC and MIGA).

Foreword


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Throughout the 1980s and early 1990s,environmental organizations working withaffected communities produced mountingevidence that the World Bank was financingdevelopment disasters in sectors such as

forestry, water and mining. Road projects opened up theAmazon forests for commercial logging. Large damsdisplaced hundreds of thousands of people withoutadequate compensation, resettlement and rehabilitation.Mining operations caused widespread environmentaldevastation in countries of the Pacific Rim. Such projectsdemonstrated that the Bank was not able to appropriatelyanalyze, contain and mitigate social and environmental risks.

Responding to this body of evidence, the Bank wasremarkably open in acknowledging its responsibility for pastfailures. Regarding the environment, the World Bank hasbeen part of the problem in the past, the Banks PresidentBarber Conable admitted in 1987. Benefits tend to beoverstated, while social and environmental costs arefrequently understated, according to a high-profile 1992investigation of the Banks Sardar Sarovar Dam in India.Assertions have been substituted for analysis, theinvestigation concluded. In 1992, another World Bank taskforce found that the credibility of the Banks appraisal

process is under pressure, and that appraisal becomesadvocacy.

In the face of sustained international criticism, the WorldBank became more cautious in designing and approvingprojects in the 1990s. The Bank created an Inspection Panel a semi-independent body that can hold the institutionaccountable for violations of its own operational policies and participated in an independent evaluation of thedevelopment impacts of large dams. Most notably, the Bankdecided not to finance several contentious megaprojects.

The World Banks cautious approach appears to have come

to an end. Big is beautiful again, and megaprojects are backin style. The Bank recently decided to embark on what itcalls a high-risk/high-reward strategy. It lifted its ban on thefinancing of commercial logging operations in rainforests,announced that it will renew its support for contentious largedams, and is considering support for massive oil, gas, andmining projects in high-risk environments.

At this critical juncture, Gambling with Peoples Livesconsiders the following questions: What is the World Bankstrack record with high-risk projects in the water, forestry andextractive industries sectors? Has the Bank learned lessons

from its acknowledged failures of the past? Has it improvedits capacity to deal with environmental and social risks, forexample, by strengthening its operational policies? Who isexposed to the high risks the Bank is prepared to accept,and who is likely to reap the rewards?

The report finds that the World Banks earlier high-riskprojects have created a huge legacy of unresolved socialand environmental problems and resulted in an ecologicaldebt owed to the Banks borrowing country citizens. Despiteacknowledging its past failures, the World Bank has notlearned from these mistakes. It has not mainstreamed socialequity and the environment throughout its operations. It hasweakened, instead of strengthened, its crucial operationaland safeguard policies. The Bank still lacks policies onessential issues such as human rights, and fails to analyzethe distributional impacts of its projects. As a consequenceof such gaps and failures, the World Bank is not able toadequately identify, contain and mitigate the risks of theprojects that it finances.

Alternative project options that are marked by lowenvironmental and social risk and high development rewardsare available. Yet the World Bank is not equipped torecognize and support the often slow, decentralized,

participatory and democratic processes that low-riskprojects entail.

Gambling with Peoples Lives concludes that the newhigh-risk/high-reward strategy will wreak havoc on thepoor and on the environment, and will intensify conflicts overWorld Bank projects. Since the Bank has announced itsreturn to a high-risk approach, private investors have pulledout of two of its crown jewels, the Nam Theun 2 Dam inLaos and the Bujagali Dam in Uganda. This is an indicatorthat the new strategy will prolong the deadlock in importantsectors, as well as impede the development of moresustainable alternatives.

The report presents a series of recommendations forchanging the Banks policies and incentive structures tostrengthen the institutions capacity to identify, contain andmitigate risk. It calls on the international community to createsuitable mechanisms for repairing the social andenvironmental damage caused by past projects, and forsupporting decentralized, participatory, low-risk/high-rewardprocesses and projects.

Executive Summary


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It is November 12, 1981. WorldBank President A.W. Clausenhas good news. For a decadenow, the Bank has required, aspart of project evaluation, that

every project it finances be reviewedby a special environmental unit, hereports in a speech. Im pleased tosay that it has been possible toincorporate protective measures inall the projects we have financedover the past decade.1

Throughout the 1980s, theexperience of people affected byprojects in Brazils Amazon region orby transmigration projects inIndonesia exposed PresidentClausens claim as wishful thinking.In May 1987, Clausens successorBarber Conable admitted that theWorld Bank has been part of theproblem in the past, and announceda series of sweeping environmentalreforms. The number ofenvironmental staff was to be greatlyincreased, operational directiveswere going to define policies onissues such as environmental impactassessment and involuntary resettlement, and the WorldBank was going to finance positive environmentalprojects. In 1991, the Bank also adopted a new Forest

Policy Paper that banned further support for commerciallogging in primary tropical moist forests.

Reports about ongoing development disasters, mostnotably the Sardar Sarovar Dam in Indias NarmadaValley, soon demonstrated that the new environmentalpolicies were not being implemented effectively. Inresponse to growing criticism from NGOs andparliaments around the world, President Conable in 1991established an independent commission headed byBradford Morse, a former U.S. Congressman and headof UNDP, to investigate the Sardar Sarovar Project.

The Morse Commissionsindependent review was published inJune 1992. It landed like a bombshelon the Bank. We have discoveredfundamental failures in the

implementation of the Sardar SarovaProjects, the review found. Wethink the Sardar Sarovar Projects asthey stand are flawed, thatresettlement and rehabilitation of allthose displaced by the Projects isnot possible under prevailingcircumstances, and that theenvironmental impacts of theProjects have not been properlyconsidered or adequatelyaddressed.2 The authors concludedthat the history of the environmentalaspects of Sardar Sarovar is ahistory of non-compliance TheBank is more concerned toaccommodate the pressuresemanating from its borrowers than toguarantee implementation of itspolicies.3

The findings of the MorseCommission were all the moredisturbing since the World Bank

considered the Sardar Sarovar Dam to be the moststudied of all of its projects. In March 1993, the Bankwas forced to withdraw from the Sardar Sarovar Project.

The World Banks approval culture

Six months after the release of the independent review,an internal report provided the analytical background toexplain why the World Bank flouted its own policies inprojects like Sardar Sarovar. A task force under outgoingVice President Willi Wapenhans found that a pervasivepressure to lend was undermining the rigor ofappraisals and project quality. According to theWapenhans report, [t]he Task Force found that the

Institutional Amnesia:The World Banks Approachto High-Risk Projects

Protective measures

in all projects?

For a decade now, theBank has required, as part

of project evaluation, that

every project it finances

be reviewed by a special

environmental unit. Im

pleased to say that it has

been possible to

incorporate protective

measures in all the

projects we have financed

over the past decade.

World Bank PresidentA.W. Clausen in a speech

in Washington, DCon November 12, 1981


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T

he Multilateral Investment Guarantee Agency(MIGA) is commonly referred to as theinsurance arm of the World Bank Group. Withthe backing of its member governments andtheir taxpaying citizens,

MIGA provides risk insurance toforeign corporations and banks thatwant to invest in developingcountries. The agency underwritesprivate sector loans and equityinvestments for a host of perceivedpolitical risks including expropriation,war, civil disturbance and currencytransfer. Since its establishment in1988, MIGA has provided more than$11 billion in political risk insurancefor projects in over 80 countries. As

the Bank Groups principal riskinsurer, it seems that MIGA wouldplay an important role in any newBank strategy involving high-riskprojects.

Although it is a public institution,MIGA rarely discloses information tothe public concerning the impacts ofits projects on the surroundingcommunities. Its environmental anddisclosure policies are the weakestamong the World Banks lending

arms. For example, unlike the rest ofthe Bank, MIGA releases no information about Category Bprojects prior to Board approval.4 Strengthening thesepolicies has not been a priority, presumably becauseMIGA is concerned with maintaining good relations withits private sector clients and attracting business.

As part of the World Bank Group, MIGA is supposed tocomply with the Banks mandate of poverty alleviation andsustainable development. Yet many MIGA-guaranteedprojects have had significant negative economic, socialand environmental effects on the very communities itpurports to aid in development. MIGA has drawn heavy

criticism from many environmental and public interestgroups who claim that the agencys commitment tosocially responsible development is highly questionable.5

Their critiques point to MIGAs developmentally dubiouspractices, such as its secretive use of public funds, itssupport for developmentally questionable projects, itsfailure to initiate effective environmental monitoring

programs, and its penchant forinsuring the largest multinationals(rather than small or medium-sizedbusinesses that most analysts believeare crucial to successful developmentefforts in poor countries).

MIGA-backed projects with extremelyquestionable development benefitsinclude guarantees for car dealershipsin Zambia and Mozambique, a yachtclub and luxury marina in Albania, ahigh-end shopping mall in the

Dominican Republic, and an oceantherapy spa in Senegal. AmongMIGA-insured extractive industryprojects are the Omai gold mine inGuyana where a tailings dam brokeand spilled billions of liters ofcyanide-laced effluent into a localriver; Indonesias Grasberg Minewhere rampant human rights abusesby company security forces werealleged; and Papua New GuineasLihir mine where millions of tons oftoxic tailings are dumped directly into

the sea.

MIGAs due diligence for its projects is entirely inadequate.A recent review of MIGAs guarantees in the extractiveindustries found that at Board approval, only one-thirdproperly complied with its resettlement and naturalhabitats policies. None of the relevant projects reviewedincluded the required indigenous peoples plan.6 MIGAsdemonstrated lack of due diligence in ensuringsustainable development has spawned an internationaleffort among concerned groups to make MIGA moresocially responsible, transparent and accountable to itsstakeholders, while others have concluded that MIGA has

no legitimate role within the Bank Group.

MIGA: An Insurer Against High Risk

credibility of the Banks appraisal process is underpressure. Many Bank staff perceive appraisals asmarketing devices for securing loan approval (andachieving personal recognition). Funding agenciesperceive an approval culture in which appraisalbecomes advocacy.7 The task force identifiedinadequate assessments of risks and their impacts on

expected benefits as one of the shortcomings of theappraisal process. Only 17% of the staff interviewedthought that analytical work done during projectpreparation was sufficient to ensure the achievement ofproject quality.8

Officials inspect a giant crack at the MIGA-insured Omai gold mine in Guyana. In 1995, atailings dam broke at the mine, spilling bi llions of

liters of cyanide-laced effluent into a local river.(Photo: Mineral Policy Center)


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The World Banks response to the Morse and theWapenhans reports was twofold. Under pressure fromNGOs, reform-minded Executive Directors and the U.S.Congress, the Bank in 1993 agreed to create a semi-independent Inspection Panel as a means of increasingcompliance and accountability. The Panel was aninnovative mechanism to which project-affected people

could turn if they were harmed as aresult of Bank policy violations. ThePanel could investigate projects andissue recommendations to theBoard, but was not empowered totake direct corrective action. In

August 1995, World Bank PresidentJames D. Wolfensohn withdrewsupport for the Arun III hydropowerproject in Nepal in response to thefirst complaint made to theInspection Panel. The Panel went onto investigate many other projects in

Brazil, India, China and elsewhere. Itsoon met stiff opposition fromconservative Board members andBank management, but remains oneof the few options available todemand some level of accountabilityfrom an international financialinstitution.

Unfortunately, this importantaccountability achievement wasdiminished by Bank managementsdecision to reformat the existing

social and environmental safeguardpolicies into new, simplifiedoperational policies in 1993. NGOscriticized this exercise as a means ofreducing the scope of mandatorypolicies to which the Bank could beheld accountable through complaintsfiled with the Inspection Panel. TheBank denied such charges. Yet in aninternal memorandum, the director ofthe Banks policy department notedon March 15, 1996: For the Bank tobe held accountable for following its policies, as we arenow, it is essential that we be able to distinguishbetween the bottom line of what is mandatory policyand the would it not be nice to have statements ofintention Our experiences with the Inspection Panelare teaching us that we have to be increasingly careful insetting policy that we are able to implement in practice.9

As a consequence, important provisions of what werealways meant to be mandatory policies were turned intowould it not be nice to have statements of intention.

All things to all people

The contradictions between public announcements andactual policy deepened with the arrival of PresidentWolfensohn in 1995. We have to make a choice, amember of the Banks senior management told the new

President in March 1996. Either we treat ourgovernments as clients and webehave like merchant banks, inwhich case we owe it again, toourselves, in the first place, and toour counterparts, second to stoptalking about the environment, aboutwomen in development, aboutpoverty alleviation, and so on, aspriorities. If the government is notour client the client is the peopleof the countries we work with, andthe governments are agencies,instruments, with whom we work to

meet our clients needs.10 YetWolfensohn was not prepared tomake such a choice. In high-profileannouncements, he promised tostrengthen participation and improveproject quality on the ground, butalso to shorten loan-processing timeincrease the volume of lending andstrengthen cooperation with theprivate sector. The new Presidentwas trying to be all things to allpeople, and not choosing amongwhat may be fundamentally

irreconcilable priorities, Bruce Richof Environmental Defenseobserved.11

In 1996, President Wolfensohnstarted an extended, thoroughlyconfusing process of institutionalreforms inside the World Bank. TheBanks operational departments werestrengthened and decentralized, andthe technical departments including the environmental units

were made largely dependent on budgetary allocations

from the operational staff. This weakened theenvironmental units, in that they risked being cut off fromrevenues if they held up projects. As a consequence,Bruce Rich notes, the approval culture that theWapenhans report had criticized was fatallyreinforced.12 Robert Hunter Wade, a professor at theLondon School of Economics who is critical of manyNGO positions, arrives at a similar conclusion. Theorganizational reform of 1997, Wade suggests, can beunderstood as a means to allow the Bank to beresponsive to both the borrower governments and itsnon-borrower governments, especially the United States,

The gap between rhetoric

and action

Informal organization is

the way things get done

around here. Formal

organization is where the

rituals are carried out the consultations with

NGOs that have no effect

on subsequent actions,

the sophisticated regional

environmental strategies

that make no impact on

the choice of projects, the

information collected and

the meetings between the

leaders of the organizationand leaders of world

religions to discuss

unresolvable problems .

Robert Hunter Wade,The US Role in the Malaise at the World

Bank: Get up, Gulliver! August 2001


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by decoupling itself internally so as to allow its parts tosay and do things with different parties that if spotlit allat once would seem inconsistent. The reform, in otherwords, was a way to institutionalize the capacity to behypocritical and get away with it.13

In response to the public-relations disasters of theSardar Sarovar and Arun III projects, the World Bank

began to shy away from controversial dam projects inthe mid-1990s. Most notably, it stayed away from thenotorious Three Gorges Project in China in 1997, afterplaying an active role in preparing the projects feasibilitystudies. The World Bank Group continued to financecontroversial projects in the mining, oil and gas sectors,as well as projects that had negative impacts on forests.

The avoidance of many contentious projects was at leastpartly an opportunistic attempt to keep away from publiccontroversy. It did not reflect a mainstreaming of socialand environmental policies in the Banks operations. In

1996, the Banks Operations Evaluation Department(OED) concluded in two separate reports thatenvironmental assessments (EAs) and povertyassessments were not effective in actually influencingproject design, and that Bank supervision ofenvironmental project components was often lax or non-existent.14 In 2002, yet another OED report found thatthe quality of the EA process [had] deteriorated, and

that the decentralization that was part of PresidentWolfensohns institutional reform had diminished theBanks capacity both to mainstream the environment intocountry programs and to implement its safeguardpolicies effectively.15

Re-emergence of the high-riskapproach

In response to the Bank avoiding certain types ofcontroversial projects, governments particularly from the

T

he International Finance Corporation (IFC), theprivate sector lending arm of the World BankGroup, was established in 1956 to furthereconomic development in its membercountries by encouraging the growth of

private enterprise. The agency lends directly to andinvests in the equity of private sector ventures in thedeveloping world, where private capital is often unwillingto venture. IFC also arranges other private sectorfinancing, playing a catalytic role. As part of the WorldBank Group, IFC is supposed to share the World Bankspoverty alleviation mission.

The largest portion of IFCs investments is in the financialservices sector, followed by infrastructure. Among itscontroversial projects, IFC has provided support for theBujagali Dam, the Yanacocha gold mine and the Chad-

Cameroon project (see Boxes on pages 11, 16, and 30).

In the past several years, IFC has undertaken efforts toaddress critiques and concerns raised by environmentaland social advocates. IFC has revised its safeguardpolicies and launched initiatives aimed at promotinggreater social and environmental sustainability in itslending. Nonetheless, IFC has a long way to go to ensurethat it is proactively supporting sustainable developmentand financing projects that have the greatest sustainabledevelopment impact.

IFC still largely measures its performance and

contribution to development by assessing economicgrowth and revenue generation functions, rather than

sustainable development indicators. IFC does not assesshow costs and benefits are distributed amongstakeholders, indicating that it would not be able todetect situations where local affected communities get abad deal. IFCs dollar-oriented slant is at odds with otherwork within the World Bank Group that claims tomeasure poverty as a function not just of income, but ofempowerment, voice, participation, security andlivelihood.

IFCs policies, though improved, are still insufficient for apublic development institution. The IFC employs a moresubstantive information disclosure policy than doesMIGA. It states, [t]here is a presumption in favor ofdisclosure where disclosure would not materially harmthe business and competitive interest of clients.Nevertheless, business interest concerns allow

considerable leeway to keep business confidentialinformation out of the public domain. IFC also lackspolicies in crucial areas such as security. As oil, miningand gas projects generally involve valuable infrastructureand natural resources deposits, companies often arrangefor security to guard their facilities. These arrangementshave led to volatile relations between local communitiesand the security or police forces, including those of IFCsprivate sector clients. These policy gaps, as well as IFCsfailure to thoroughly assess the distribution of costs andbenefits of projects, will become even more damagingunder a strategy that promotes high-risk projects.

The Experience with IFC


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South and some Bank managers complained that theWorld Bank had become risk averse. By 2001, thisview had become generally accepted within the Banksmanagement and the Board of Directors. In July 2001, atask force prepared a report on the cost of the Bankssafeguard, procurement and financial policies entitledThe Cost of Doing Business. According to the report,

[t]he task force does see some risksthat the Bank faces in withdrawing or being de-facto excluded from important infrastructure sub-sectors such as energy, transport,and urban The Bank has becomeso risk-averse, according to someborrowers, that it would rather do noproject than risk criticism.16

The new report was widely used tojustify a further relaxing of the WorldBanks safeguard policies. The

debate largely ignored the fact thataccording to the report, most delaysand costs (for the Bank and theborrowers) were not caused byenvironmental and social safeguardpolicies, but rather by theinstitutions bureaucraticprocurement and financialaccounting policies. The task forceestimated the incremental cost ofapplying safeguard policies at $36-56 million per year. In comparison, itestimated the incremental cost of the Banks

procurement and financial policies to be almost threetimes higher, at $101-153 million per year.17 One of thetask forces key recommendations was to [i]nitiateassessments of environmental and social impacts at theearliest possible time in project processing.18

The Banks move to discount environmental and socialconcerns was also facilitated by external events. Thearrival of the new Bush administration and the terroristattacks of September 11, 2001 shifted the parameters ofthe international public debate and weakened the rolethat the environment and human rights played within it.In October 2002, the Bank removed the ban on supportfor commercial logging in rainforests in its revised forestpolicy. Narrowly focused risk aversion to engagement istantamount to accepting the destructive practicesprevalent in many of the major forests of the world and intruth, encompasses more risks than engagement for theBank, our client countries and the worlds forests,management argued in the draft of the World BankGroups Revised Forest Strategy.19

In February 2003, conservative factions within the Bankmanaged to obtain an official endorsement for a re-engage[ment] with high reward/high risk hydraulic

infrastructure in the new Water Resources SectorStrategy.20 (Interestingly, the authors avoided the termdam, and preferred instead the euphemism hydraulicinfrastructure.) The authors of the strategy pointed tothe fact that the number of water infrastructure projectsin poor countries is much lower than in rich countries,and asserted that dam projects would go forward

whether or not the World Banksupported them, especially inmiddle-income countries. Withoutquoting any evidence, the authorsclaimed that the performance of damprojects had improved significantly inrecent years, and that it wasimportant for the Bank to be involvedin such projects to acquaint itselfwith best practice. The Strategyasserted that low-cost, oftencommunity based solutions andeasy and cheap options have

been mostly exploited, and as aconsequence re-positioning theWorld Bank vis--vis controversialinfrastructure is a vital, but complexand contentious task.21As theBanks senior water advisorexplained in March 2003, theapproach taken by the new WaterResources Sector Strategy was notonly valid for the water sector, butalso for the forest and miningsectors.22

A few weeks after the Bank approved its new WaterStrategy, a so-called World Panel on Financing WaterInfrastructure chaired by the IMFs former ManagingDirector Michel Camdessus proposed that internationalfinancial institutions resume lending for dams and otherlarge water storage and transfer schemes.23

The formal rehabilitation of so-called high-risk/high-reward projects is noteworthy for at least two reasons:

The Bank has never made an empirical case thathigh-risk projects such as large dams indeedproduce higher rewards than low-risk, community-based alternatives, or that the potential of relativelyeasy and inexpensive options has been exploited.The Bank has never even evaluated the outcome ofits earlier high-risk projects.

On the contrary, evaluations of water sector projectsthat the Bank has carried out came to very differentconclusions. An OED evaluation of the Banks earlierWater Resources Strategy found that scantattention was given to the direct impacts of waterprojects on the poor, that the staff focus was onmeeting disbursement targets, and that the Bank

Lessons from

the past ignored

The lessons from past

experience are well

known, yet they are

generally ignored in the

design of new operations.

This synthesis concludes

that institutional amnesia

is the corollary of

institutional optimism.

World Bank Quality Assurance Group,Portfolio Improvement Program (draft

internal report), April 1997


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8

responded too much to the pressure from influentialsegments of the population rather than to the needsof the poor.24 The report recommended an[i]ncreased emphasis on implementation ofsafeguard policies during project supervision by theBank and the borrower.25An evaluation of theBanks water strategy in India also concluded that

mov[ing] away from new construction andfocusing on making existing infrastructure workefficiently was most appropriate given the povertyalleviation mission of the Bank.26

Institutional amnesia

A global poll in May 2003 found that the share of opinionleaders who thought the World Bank was doing a good

job at fostering environmental sustainability haddropped from 27% to 21% since a 1998 poll. (The shareof people who thought it did a poor job increased from29% to 34%.)27 Only 22% thought the Bank did a good

job in reducing poverty, and only 16% thought the Bankhad been successful in reducing corruption.28 This pollsupports the perception that the Bank is not able tosafeguard the interest of the environment and thecommunities affected by so-called high-risk/high-reward projects.

In April 1997, the World Banks Quality Assurance Groupnoted in an internal draft report: The lessons from pastexperience are well known, yet they are generally ignoredin the design of new operations. This synthesisconcludes that institutional amnesia is the corollary ofinstitutional optimism . [There is a] disconnect

between the usually accurate assessment of the realprospects for the project by the staff and the generallymore optimistic assessment that appears in the appraisalreport. Many factors are at work: pressure to lend; fear ofoffending the client; fear that a realistic, and thusmore modest, project would be dismissed as too smalland inadequate in its impact.29 The observation stillholds true today, and the renewed endorsement of ahigh-risk/high-reward approach can be interpreted as asign of the Banks persistent institutional amnesia.

1A.W. Clausen (1981) Sustainable Development: The Global Imperative, 12

November. For a concise history of the emerging World Bank environmentalpolicies, see Bruce Rich (1994) Mortgaging the Earth.2

B. Morse and T. R. Berger (1992) Sardar Sarovar, The Report of theIndependent Review, p. vii. (Since the World Bank extended both an IBRD loanand an IDA credit for Sardar Sarovar, the Independent Review refers to the damas Projects.)3

Ibid., pp. xxi, 36.4

A proposed project is classified as Category B if its potential adverseenvironmental impacts on human populations or environmentally important areasare less adverse than those of Category A projects. Impacts are site-specific, fewif any of them are irreversible, and in most cases mitigation measures can bedesigned more readily than for Category A projects. See World Bank OperationalManual, Operational Policy 4.01 Environmental Assessment.5 See for example Friends of the Earth US, Campagna per la Riforma della BancaMondiale, and Urgewald (2001) Risky Business: How the World Banks InsuranceArm Fails the Poor and Harms the Environment. Available athttp://www.foe.org/camps/intl/worldbank/miga.html6 Operations Evaluation Department, Operations Evaluation Group, OperationsEvaluation Unit (OED, OEG, OEU) (2003) Extractive Industries and SustainableDevelopment: An Evaluation of the World Bank Groups Experience, Volume IV,World Bank.7 World Bank (1992) Effective Implementation: Key to Development Impact(Wapenhans Report), p. 14.8 Ibid., pp. 14, 16.9

World Bank (1996) Office Memorandum from Myrna Alexander, OPRDR, 15March.10 World Bank (1996) Meeting of President Wolfensohn with Senior Management[internal document], 12 March, p. 17.11 Bruce Rich (2003) The World Bank Under James Wolfensohn, in: Jonathan R.Pincus, Jeffrey A. Winters (eds.), Reinventing the World Bank, p. 26.12 Ibid., p. 53.13 Robert Hunter Wade (2001) The US Role in the Malaise at the World Bank: Geup, Gulliver!, p. 2.14 See Operations Evaluations Department (1996) Effectiveness of EnvironmentalAssessments and National Environmental Action Plans: A Process Study andPoverty Assessment: A Progress Review, World Bank.15 Operations Evaluation Department (2002) Promoting EnvironmentalSustainability in Development: An Evaluation of the World Banks Performance.World Bank, pp. 21, 23.16 World Bank (2001) Cost of Doing Business: Fiduciary and Safeguard Policiesand Compliance, pp. vii., 7.17 Calculated from ibid., pp. 8f.18

Ibid., p. viii.19

World Bank (2002) A Revised Forest Strategy for the World Bank Group, p.23.20

World Bank (2003) Water Resources Sector Strategy: Strategic Directions forWorld Bank Engagement, p. viii.21

Ibid., pp. 1, 50.22

John Briscoe (2003) High Risk/High Reward Water Projects. World Bank,Water Week 2003.23

James Winpenny (2003) Report of the World Panel on Financing WaterInfrastructure. World Bank.24

Operations Evaluations Department (2002) Bridging Troubled Waters,Assessing the World Bank Water Resources Strategy. World Bank, pp. 13, 32,53.25

Ibid., p. 41.26

Operations Evaluations Department (2002) INDIA: World Bank Assistance forWater Resources Management, A Country Assistance Evaluation. World Bank, p29.27

Princeton Survey Research Associations (2003) The Global Poll, MultinationalSurvey of Opinion Leaders 2002. World Bank, p. 53. (Note that half of theinterviewees were selected by the World Bank.)28

Ibid., pp. 42, 55.29

World Bank (1997) Portfolio Improvement Program [draft internal report byQuality Assurance Group], p. 15.


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The World Bank hasinvested heavily in theextractive industries oil, gas, and mining for decades. For

example, from 1993-2001 the WorldBank Group provided more than $11

billion for oil, gas and miningprojects.1 The Banks strategicapproach to these sectors hasshifted alongside its developmentparadigm, evolving from support forstate-led activities to an increasedrole for the private sector.

In a comprehensive review of theBanks experience in extractiveindustries, OED classifies the Bankshistorical involvement with extractiveindustries into several distinctperiods. In the 1960s and 1970s, the

Banks role in natural resourceextraction centered aroundpromoting exploration andproduction, mainly through state-owned enterprises. In the 1980s, theBank began to promotecommercialization and privatizationof state oil and mining companies.The 1980s also saw the rise ofstructural adjustment programs,through which the Bank played amajor role in sector policy reformand liberalization. For example, the Bank promoted

changes to mining codes that facilitated increasedprivate sector investment.

The emphasis on private sector-led developmentcontinued in the 1990s. The establishment of MIGA in1988 gave the Bank another avenue of collaboration withthe private sector. In addition, the dissolution of theSoviet Union and the Republics state-run economiescreated opportunities for the Bank to get involved in theformer Soviet states. The Bank provided technicalassistance in the formation of legislative, institutional andtaxation regimes to attract private investment. It also

financed the closure andrehabilitation of mines andproduction facilities. Since the1990s, the Bank has incorporatedadditional governance-relatedmeasures in extractive projects, suchas capacity building for government

agencies.

2

The Banks support for extractiveindustries development does notappear to have reaped many rewardsfor the countries involved. The WorldBanks own researchers recentlyconceded that countries withsubstantial incomes from miningperformed less well than countrieswith less income from mining.3 Inless euphemistic terms, the reportsfindings reveal that the more acountry depends on mining for its

revenue, the worse its growth in percapita Gross Domestic Product(GDP) is likely to be. Other researchhas found that oil and mineraldependence is strongly associatedwith exceptionally dismal conditionsfor the poor, including lowperformance on a wide array ofhuman development indicators.4Arecent review by the OperationsEvaluation Group (OEG) theevaluation department of the IFC

determines that natural resource-rich countries are less

likely to achieve all but one 5 of the MillenniumDevelopment Goals.6

High risk and poor governance: arecipe for disaster

In response to ongoing criticism concerning its supportfor oil, gas, and mining projects, in 2001 the Bankcommissioned an Extractive Industries Review (EIR) todetermine its future role in these sectors. As part of itscommissioning of the EIR, the World Bank asked OED to

Risky Business:Extractive Industries

Again and again, natural

resource windfalls have

financed presidential

planes and palaces and

entrenched officialcorruption, while

producing very little in the

way of lasting economic

benefits. Countries with

the windfall external

finance provided by

abundant natural

resources, such as Nigeria,

Venezuela, Burma and

Zambia have failed to

progress economically

indeed, in several cases

have fallen back.

Lawrence Summers, U.S. TreasurySecretary, Remarks to the Council on

Foreign Relations, March 1999


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10

assess the Banks experience in the extractive industries.OED paid specific attention to governance, an issue thatvirtually everyone agrees is a crucial determinant ofwhether natural resource development can be executedin a way that alleviates poverty and mitigatesenvironmental damage.

The OED review indicates that goodgovernance is a prerequisite forenhancing the positive linkagebetween increased fiscal revenueflows and sustainabledevelopment.7 The review finds thatthe Bank was only modestlyrelevant and efficacious inaddressing public expenditurepolicies in resource-rich countries.8

According to the review, while theWBG is aware of the underlyingcauses for the underperformance of

many resource-rich countries ithas yet to formulate and implementviable approaches to addressthem.9

Furthermore, OED finds that theBank has no strategy for sequencing governanceinterventions in the extractive sectors or coordinatingthese interventions with work in other sectors. Workingto establish the prerequisites for good developmentoutcomes from [extractive industry] investments inparallel with, or after supporting expansion of the sectorposes a major challenge and is a high-risk strategy in

countries with poor macro and sectoral governance.10

From a governance perspective, rather than promotenew investments in high-risk environments, the OEDreview recommends that the Bank focus its assistanceon strengthening macroeconomic and sectoralgovernance. Sectoral governance is characterized bytransparency, a sound legal and regulatory framework,including effective environmental and social protections,and institutional and capacity development ofgovernment regulatory and oversight bodies.

In fact, OEDs recommendations could be interpreted asan endorsement of a low-risk strategy: the Bank shouldsupport increased extractive industries only in anenvironment of sound macro and sectoral governance.Nevertheless, the World Bank Group has pursued theopposite strategy. According to OEGs review of IFCsexperience with extractive industries, most of IFCsextractive projects have been in high-risk countries withbad governance, and at a higher rate than investments inother sectors.11

Many dimensions of the resourcecurse

Economists have noted a paradox in the economicperformance of resource-dependent societies: countriesthat are blessed with abundant natural resources tend to

grow more slowly than countrieswithout such wealth. Thisphenomenon, known as theresource curse, has been observedin comparative studies of growth,and is recognized as a recurringmotif of economic history.12Acomparative analysis of growth in 97countries found that countries with ahigh ratio of natural resource-basedexports to GDP tended to grow moreslowly than countries with lessresource-intensive economies.13

Societies that rely heavily on fossilfuel and mineral exports also do aworse job of addressing the needs ofthe poor. According to an Oxfam

America study, countries with largeextractive industries have lower standards of living thanthey should have given their per capita incomes. Theyalso have exceptionally high rates of child mortality andlow life expectancy. Mineral-dependent countries tend tohave higher poverty rates and higher rates of incomeinequality. Oil-dependent societies tend to have higherrates of child malnutrition, lower spending levels onhealth care, lower rates of school enrollment and lowerrates of adult literacy.14

Governance in natural resource-rich developing countriesalso appears to be worse than in countries that lackresource wealth. The World Banks own DevelopmentResearch Group has conducted several illuminatingstudies in this area. One study found that oil and mineralexports are strongly associated with authoritarian rule.15

Another study noted the tendency of rebel movementsand civil war to be linked to the capture of naturalresources. The study found that in countries with a highdependency on primary commodity exports, the risk ofcivil war is 23%, compared to 0.5% risk in a country with

no natural resource exports.16

Despite these negative associations, World Bankmanagement envisions a greater role for the Bank in theextractive sectors. The director of the oil, gas, miningand chemicals department at the World Bank toldinvestors last year, [w]hat we see looking forward islarge investments in the oil sector.17 Consistent with thisgoal, the Bank is moving forward with several high-riskprojects without any indication that these projects canescape the resource-curse cycle of corruption, conflictand poor development outcomes. Furthermore, the Bank

It is the devils

excrement. We are

drowning in the devils

excrement.

Juan Pablo Perez Alfonzo, founder ofOPEC, discussing the situation in his

native Venezuela


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T

he Chad-Cameroon Oil and Pipeline Projectis the biggest private investment in sub-Saharan Africa today. It involves the drillingof 300 oil wells in southern Chad and theconstruction of a 1,070

km pipeline to transport the oil fromChad through Cameroon to anoffshore loading facility in the

Atlantic. Oil first began to flow in July2003 (almost one year ahead ofschedule), and Chad will start toaccrue revenues from initial oil salesby end 2003 or early 2004. Atmaximum capacity, production willbe 225,000 barrels per day.ExxonMobil is the projects operator,in partnership with Petronas and

ChevronTexaco. The project isestimated to cost $3.7 billion.

World Bank involvementIn June 2000, the IFC approvedlending for the Chad-Cameroonproject. At the same time, the WorldBank approved InternationalDevelopment Association (IDA)credits for two related capacity-building projects in Chad andCameroon. This supplemented analready approved IDA credit for

revenue management in Chad.

The World Bank Group, while a minor financier, was keyto realizing the Chad-Cameroon project because itreduced the companies exposure and leveraged privatesector financing that would not have been availableotherwise. The Bank presented the project as anopportunity for Chad to address its acute poverty and forCameroon to generate revenue.18As a response topressure from donor governments and NGOs, the WorldBank appointed a high-level International Advisory Group(IAG) to conduct quarterly monitoring visits withparticular attention paid to social and environmental

safeguards.

In 2001 and 2002, local groups in Chad and Cameroonrespectively filed claims with the Banks Inspection Panelcharging that the World Bank had violated its ownpolicies in the implementation of the Chad-Cameroonproject. The Panel confirmed numerous instances ofviolations of the Banks environmental assessment policy,and in the case of Chad, violations of the operationaldirectives on poverty alleviation and economicevaluation.

Key environmental and social concernsDespite assurances by the Bank and the implementationof extraordinary measures such as establishing the IAG,the projects high risks are playing out in a negative way

for local communities. The revenuemanagement plan was promoted asa groundbreaking initiative to ensurethat the Chadian governments oilrevenues would be transparent andlargely spent on social programs topromote poverty alleviation.However, the revenue managementbody is significantly handicapped inits capacity. Legislation and anoperational manual detailing thecommittees power and functionshave not yet been finalized, nor has

the Chadian government shown aclear commitment to sufficientlyempower the committee to carry outits work.

Cameroon has some of the mostbiologically diverse and importantforests in Africa. The pipelinecorridor cuts through Cameroons

Atlantic coastal forest. Project-related upgrading of seasonal roadshas led to logging and illegalpoaching in otherwise inaccessible

areas. Construction has alreadycaused oil spills and pollution of the water system. 19

Although the consortium prepared an oil spill responseplan, the plan has been described as fundamentallyflawed. It fails to offer communities that would beimpacted by an oil spill a legal framework within which tosubmit grievances or file suit for damages.

In Cameroon, thousands of people have had their landsexpropriated, crops and other plants destroyed, andwater sources polluted without adequate compensation.One affected person who summarized his grievancessaid: The pipeline has a negative impact on our lives.

The route crosses a zone in which we practiceagriculture and hunting. And when construction workstarted, our crops and our medicinal plants weredestroyed, without compensation. Game has equallydisappeared.20

The public health impacts of the project have not beeneffectively mitigated. Dust from construction contributesto respiratory problems and illnesses, which are often leftuntreated because of the lack of access to healthservices in the area. Job opportunities have beendisappointing and there is no plan to address the

Chad-Cameroon: A Risk Mitigation Test Case


A "gas station" in Doba, the main oil producingregion in Chad. Despite the region's significant oilresources, it is unclear how and if local peoplewill benefit from the massive Chad-Cameroon

project. (Photo: Korinna Horta, EnvironmentalDefense)


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12

is considering these controversial oil,gas, and mining projects in riskyenvironments such as the BTCpipeline in Azerbaijan, Georgia andTurkey and mining projects in theDemocratic Republic of Congo inspite of the fact that the ExtractiveIndustries Review has yet to reach itsconclusions regarding the Banksrole in these sectors.

The Bank contends that it can helpcountries manage the revenues fromextractive industries and ensure abroader distribution of benefits.However, the evaluation groupsreview of the Banks role in extractiveindustries finds that the Bank fails tomeasure the distribution of costs andbenefits. Interestingly, the reviewnotes that virtually all interestgroups, from industry to affectedcommunities, highlighted theallocation of benefits as a key issue. In fact, interest

groups stated a desire for clear information about thedistribution of benefits, and perceived this information tobe a risk mitigator.23

The OEG review of IFCs experience notes that the IFCsmeasurement of development outcome does not takeinto account the distribution of benefits.24 It furthernotes, IFC has typically not compared the benefits toother EI projects or stated whether it perceives thedistribution of benefits to be reasonable [and] IFC hastypically not calculated shares accruing to different levelsof government or accruing directly to localcommunities.25 Since the extractive industries are

associated with large costs as well as potentially largeprofits, the failure to fully assess the distribution ofrevenues is a particularly acute problem for this sectorand poses unique risks.

The review also finds that the Banks measurement ofeconomic rate of return counts a dollar for the investoras equivalent to a dollar for government or a dollar spenton a social program for the poor.26 Therefore, a projectthat translates purely into profit for the investor, whichcould be a large transnational corporation thatrepatriates most of its earnings, is considered to be

equivalent in impact to a project thatboosts the incomes of the poorestsectors of society. This flawedsystem of calculating project impactskews the measure of developmentoutcome, and leads to overlyoptimistic projections of the Banksextractive projects contribution topoverty alleviation. As a developmeninstitution, the Bank should measureprojects for their specific contributionto poverty alleviation and sustainabledevelopment. Overly optimisticexpectations of project performancealso heighten the risk ofdisappointment with projectoutcomes and the risk of socialdiscontent with a project that fails tobenefit local communities.

High risk of policy gaps

The OEDs extractive industry studyalso examines compliance with the Bank Groupssafeguard policies and notes serious problems withissues such as monitoring and gaps in policy. Theseissues are of profound concern if the Bank moves totake on even riskier projects, where the consequences ofinadequate supervision can be more severe.

The OED review finds that only 41% of the projectsreviewed had adequate supervision and oversight.27 Notsurprisingly, although most projects complied withsafeguard policies at project approval, compliancedeteriorated during implementation. Only about 30% ofthe projects in the study involved environmental or socialsupervision. Less than 25% of project completion reports

had adequate reporting and discussion of safeguardcompliance.28

The review also determines that the World Bank hassignificant gaps in its policies; policies that are crucial tothe appropriate evaluation of extractive industry projects.For example, the Bank has no security and human rightsguidelines, despite the fact that human rights issueshave long been contentious surrounding extractiveindustry projects, and have led to controversies thataffected project outcomes for investors and communities

problems of workers who will be released whenconstruction is finished. The influx of largely male jobseekers into the project area has led to serious socialdisruption of the communities, with prostitution, alcoholabuse and HIV/AIDS all on the increase.21

Corruption is rampant in both countries, and civil societyleaders are subject to harassment and intimidation,which prevents many from openly providing input andconducting effective monitoring.22

The Chad/Cameroon

project is not the help we

asked for or needed. In the

absence of the rule of law

and respect for human

rights and the

environment, financing oflarge-scale oil

development is destroying

the environment and us.

Help!

Archbishop Desmond Tutu in The Chad-Cameroon Oil and Pipeline Project: A Call

for Accountability, 2002


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T

he World Bank considered Singrauli one ofIndias most important centers for coalmining and power generation. It investedheavily to transform Singrauli from a forested,biodiverse farming area into an industrial

zone. In 1977, the Bank helped finance the constructionof the first coal-fired power plant in the region, andfinanced a plant expansion in 1980. The Bank alsohelped finance one of the first open-pit coal mines in thearea in 1985, and in the same year, provided support toconnect the power plants to the electrical grid system.By the mid 1990s, its client, the state-owned NationalThermal Power Corporation (NTPC), was the WorldBanks single largest borrower.

It is estimated that 90% of the local population has beendisplaced, many people multiple times. Large-scale

displacement was first caused by the Rihand reservoir inthe 1960s, later continued by the coal mines, powerplants, industrial complexes, waste disposal sites andrailroad lines. Displaced people were forced intoresettlement colonies or obliged to move away to findlivelihoods elsewhere.29

After intense external pressure, the World Bank andNTPC began to investigate the situation. NTPC promisedto provide oustees with comparable replacement landsand conduct additional environmental and social impactstudies30

On June 29, 1993, the Bank loaned $400 million toexpand two of the power plants. In addition, the loanincluded an environmental action plan that wassupposed to improve environmental management andmonitoring, and address outstanding resettlement issues.

The 1993 loan further threatened residents in the regionwith displacement. Resisting families said that theywould not abandon their lands until they were providedwith a resettlement plan and a rehabilitation package thatwould compensate them for their losses and allow themto recover their standard of living.31 NTPC responded bymoving into the area with a police force and bulldozers

to forcibly evict residents. The Bank claimed thatconflicting reports from its clients and the localpopulation prevented it from taking action to halt theevictions.

The residents eventually filed a claim with the BanksInspection Panel, alleging violations of numerous Bankpolicies, including involuntary resettlement, indigenouspeoples, and environmental assessment.32

In its June 1997 response to the Inspection Panel claim,Bank management acknowledged that it had not fullycomplied with Bank policies and that it had failed toeffectively supervise the project. Bank managementproposed two Action Programs that it pledged wouldbring the project into compliance. Neither plan wasdiscussed with the claimants or with other affectedpeople.33

The 1993 loan closed on March 31, 1999, but the WorldBanks policies and procedures continue to apply toprojects until the loans have been repaid. Accordingly,

the Bank has an obligation to monitor resettlement andenvironmental issues in Singrauli and to ensure that theproject is brought into compliance.

The Singrauli case is illustrative for several reasons. TheJune 1993 loan was approved just prior to the end of theBanks financial year on June 30, during the Banksbunching season, when task managers, under pressureto commit large amounts of lending, rush projectsthrough to the approval process. Though the loansprovisions included redress of outstanding resettlementissues, there was no assessment of NTPCs capacity toimplement this. The Bank also started to promote self-

employment schemes for displaced people, claimingthat no more land or jobs were available. Selfemployment shifts the risk and burden of rehabilitation tothe affected people, even though they never had inputinto the projects conception or initiation in the firstplace. Turning peasants with little experience intoentrepreneurs in a cash-based economy was never trulyviable, yet the Bank has replicated this model elsewhere.Not surprisingly, more than 25 years after the Banks firstcontroversial involvement in Singrauli, people continue tosuffer impoverishment and upheaval.

As noted by a woman in a resettlement camp: What we

have lost, we have not regained here. We lost more andreceived less. There is no comparison between lifebefore and now.34

Singrauli: Same Old Story


alike. HIV/AIDS also regularly surfaces as a social falloutof extractive industry projects. Extractive projects tend tobe associated with a sudden influx of male workershoused at worker camps, which often attracts

prostitution. The Bank has no guidelines to addressHIV/AIDS prevention, and its requirements for mineclosure do not deal with social issues at all.


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T

he IFC is expected to decide in October 2003whether it will finance the Baku-Tbilisi-Ceyhan(BTC) oil pipeline. If constructed, this $3.5billion pipeline will transport oil from theCaspian Sea through

Azerbaijan, Georgia and Turkey to theMediterranean Sea. The BTC pipelineconsortium is led by oil giant BP.

The project is billed by oil industryoperatives as the project of thecentury. Proponents argue that it willsignificantly increase the incomes ofthe countries involved, transform thebusiness environment, and deliver

jobs and investment programs to localcommunities, all while protecting the

environment. Supporters of the projectalso argue that the benefits outweighthe costs and the rewards are worththe risks.

Governance risksThe World Bank is taking a hugegamble that this project will reversethe trend of extractive industryprojects in the developing worlddespite the lack of evidence to justifytaking such a risk. Azerbaijan andGeorgia rank 95th and 85th,

respectively, out of 102 countries inTransparency Internationals Corruption Perception Index.Sectoral capacity is weak. Azerbaijan for example, is theonly Caspian state that does not have an oil spill responseplan. In promoting increased extractive industriesinvestment, the Bank is ignoring the advice of its ownevaluation unit, which recommended against increasedinvestment in the extractive industries in poor governancesituations.

The project poses risks for local governance anddemocratic development as well. The mayor of Borjomi,the center of Georgias mineral water and tourism

industries, was recently ousted by the Georgian Presidentsappointed regional governor. Press reports attributed hisremoval to concerns the mayor raised about the pipelinesrouting.35 In Azerbaijan, the Presidents son appeared onnational television and threatened opponents of thepipeline. He has since been named the countrys primeminister in a rubber stamp vote by the parliament. By allaccounts this move was designed to pass the presidencyfrom ailing father to son.

Economic risksIFC will risk important sectors of the Georgian economy,and its own investments, if it decides to finance thepipeline. The pipeline passes through catchment areas of

Georgias mineral water industry, anindustry that comprises 10% of thecountrys exports and employs morepeople than would the pipeline.Business experts say the pipeline willerode the market prospects and valueof the industry of some of Georgiasbest-known brands, even if an oil spilldoes not occur. The chairman of theDutch Environmental Impact

Assessment Commission stated thatcrossing a water-producing regionwould not be acceptable for Western

Europe we were astonished.36 IFChas invested in the largest of themineral water companies, as well as ina glass bottle factory that supplies theindustry. As such, IFC could sabotageits own investment portfolio bysupporting BTC.

Environmental risksWhile BTCs proponents tout thepipelines bypass of the heavilytrafficked Bosphorus Strait, on whichsits Istanbul, as an environmental

boon, the pipeline would by no meansavoid environmental harm. In Azerbaijan the pipeline wouldcross 21 major rivers, impact a sensitive desert ecosystemthat will take at least 10 years to be fully restored, andtraverse unstable land with high seismic activity. InGeorgia, there are six major river crossings in areas withunstable land prone to landslides. In Turkey the pipelinewould traverse major fault lines, cross six watersheds, andcross two sites protected under national legislation,including a wildlife protection area for a globally threatenedspecies.37 The Georgian environment minister even told BPthat the pipelines route violates Georgian law.

Furthermore, under the projects legal arrangements knownas Host Government Agreements, all three countries areprohibited from establishing any new environmental orpublic health laws that might affect the financial return ofthe pipeline for the next 40-60 years, unless theycompensate the project consortium. In essence, theproject sponsors have transferred the tremendous risks ofthe project to the local populations with these legalarrangements. And through its expected loans and riskinsurance, the World Bank would seal the deal andimmunize the project consortium against much of theprojects risk.

The Baku-Tbilisi-Ceyhan Pipeline: Lessons Learned?


14

On both macro and micro levels, extractiveindustries fail to benefit local communities. InBaku, Azerbaijan, employees of foreign oilcompanies receive discounts at a popular English

pub. (Photo: Carol Welch, Friends of the Earth)


21/52


High risk equals high profit?

Given the high risks of extractive industries, why is theBank Group looking for large investments in thesesectors? One answer may be that from a financialperspective, the IFCs extractive industry projects are

lucrative. A confidential IFC Annual PortfolioPerformance Review for FY2000noted that the oil, gas and miningsector had by far the highest equityreturn (26.6%).38

The OEG review also finds that thefinancial returns and risks forextractive industries are higher thanfor other sectors. The review notesthat though IFCs equity investmentsin extractive projects have the samechance of success as other sectors,the IFC earns particularly large

financial returns from a few keyprojects. IFCs portfolio performanceis carried by a handful of very bigwinners.39

If the Bank operated as a profit-making institution,maybe its high-risk/high-reward strategy would makesense. Perhaps IFC, as an equity investor in privatesector projects, is motivated to a significant degree byprofit motives. However, the Banks mission is to reducepoverty and not to maximize profits; high financialrewards are not indicators of high development impact.Nor is it valid to aggregate a portfolios return on

poverty alleviation, the way financial returns areaggregated to determine portfolio performance. Thesuccesses and failures in increasing the incomes ofimpoverished individuals do not offset each other. TheBank cannot rely on a strategy of a few big winners inpoverty reduction (if those are even likely) and expect toaddress global poverty and sustainable developmentchallenges.

Alternatives to the World BanksExtractive Industries Investments

In April 2000, more than 200 groups from over 50countries called on the World Bank to phase out offinancing fossil fuel and mining projects and to shift itsinvestments into more direct poverty-alleviating andsustainable projects.40According to this wide range ofgroups, extractive industries investments embody anunsustainable model of economic development that hasfailed the worlds poor in the 20th century. Instead, thegroups called on the Bank to work through genuinecitizen participatory processes to identify nationaldevelopment priorities. Among the areas identified as

better examples of pro-poor development was renewableenergy.

Promote renewable energy

While the Bank often justifies its fossil fuel projects as

increasing energy access for the poor, its energy projectsare generally targeted to industrialuse or export, as is the case with theChad-Cameroon and BTC pipelines.Development institutions shouldfocus on the policies andmechanisms that will financeenvironmentally and sociallyappropriate energy services.

The Banks attempts to foster arenewable energy future are woefullyinadequate, largely confined to pilotinitiatives and small-scale programs.While IFC has established specialfunds such as the Renewable Energyand Energy Efficiency Fund andseveral solar funds,41 theseprograms resources are less than

what IFC would lend for just one large fossil fuel project,such as Chad-Cameroon or BTC. At the time of thisreports printing, the World Banks web page on Ruraland Renewable Energy was last updated on June 29,1999, more than four years ago.42 Other renewableenergy and energy efficiency programs, such as theEnergy Sector Management Assistance Program(ESMAP), are limited in scope, offering mainly technical

assistance and some minimal financing.

The Bank needs to redirect its resources away from fossifuel projects towards renewable energy projects such aswind, solar photovoltaic, biomass and geothermal. TheBank should seek out and identify viable projects tosupport. The European Bank for Reconstruction andDevelopment (EBRD) took an important step inidentifying potential projects by commissioning aRenewable Energy Resource Assessment. Thisassessment profiles renewable energy potential in eachof the EBRDs countries of operation. The assessmentnotes a tremendous resource base that has the potential

to meet current electricity demand several times over,and finds technical potential to meet a significant portionof electricity demand in the mid-term. The Bank shouldtake similar steps and also set targets and timetables forincreasing the proportion of renewable energy in itsoverall lending portfolio.

Focus on capacity

The OED review of governance and extractive industriesconcludes that investments in extractive projects in weakgovernance environments lead to negative development

Badly managed oil

resources are a curse, not

a blessing.

Nemat Shafik, World Bank Vice Presidentfor Private Sector Development,Washington Post, March 1, 2002


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O

ne of the largest gold mines in the world, theYanacocha mine in the Peruvian Andes is a251 square km open pit mine located 18 kmfrom the town of Cajamarca. The IFC hasgiven loans totaling $150

million for the development of themine. Furthermore it has an equityinvestment of 5% in MineraYanacocha, S.A., which is a jointventure with Newmont Corporation(U.S.) and Condesa (Peru). Accordingto IFC, its involvement ensuresadherence to the highest social andenvironmental standards, whichmakes Yanacocha an example ofbest mining practice.43 However,according to local people, the region

of Cajamarca would be better servedby investments in tourism, forestsand agriculture.

Environmental health risksA number of rivers and tributariesflow from or through the mine sitearea, providing water for 70% ofCajamarcas citizens. The miningoperation has caused problems withwater contamination,44 fish and frogdisappearance, air pollution, loss ofmedicinal plants and sick cattle.

In one accident in June 2000, a truck carrying mercuryfrom the Yanacocha mine spilled 151 kg of its load whilepassing through the small town of Choropampa. Peoplegathered up the mercury, believing it to be a valuablemetal. Symptoms of mercury poisoning (skin irritation,headaches, diminished eye sight, kidney problems,stomach aches, etc.) emerged a few days later among50-70 local residents, including many children. Several ofthem were hospitalised and one woman became blind.Villagers are still coping with sore eyes, aching backs andsevere skin rashes. Investigation and treatment of the spillhave been inadequate.45

The Choropampa community has called for a seriousevaluation of the spills health impacts, the presence of adoctor to monitor them for 10 years, and economiccompensation for health damages and business lossesafter neighboring communities refused to buy what theyfeared would be contaminated crops.46 Campesinocommunities living close to the mine raised an officialcomplaint, asking for the creation of a fund to clean upthe communitys water. Furthermore, they demanded areclamation and preservation program for medicinalplants, a fish and frog repopulation program and

compensation for former landowners in the form ofequivalent land and funds to re-establish farms.

Many of these measures would cost a fraction of whatthis profitable gold mine earns.However, Yanacochas responseshave not been satisfactory. In April2003, the company published areport of the spill that ignored thedirect impacts on human health. TheIFC commissioned a lengthy dialogueprocess that, after two years, resultedin two studies. These studies, relatedto the water quality and the healthsituation, have yet to be finalized.Meanwhile, the inhabitants ofChoropampa have not received

adequate treatment.

Social disruption anddisempowermentThe Peruvian government establisheda special law to ensure that half ofthe taxes paid by the mine areinvested back into the region.However, since the start of miningoperations in 1993, Cajamarca hasbecome the second poorest districtin Peru.47 While Cajamarcas povertylevel is increasing, a few individuals

benefit tremendously and enjoyexpensive dollar-denominated luxuries.

The unequal distribution of the mines costs and benefitshas caused major conflicts within Cajamarca. Neighborsfight amongst themselves and friends turn into enemies.Everybody here has dealings with the mine in one way oranother, say local residents. The fragmentation amongthe Cajamarquinos is well known throughout Peru andhas resulted in an atmosphere of suspicion and asignificant loss of trust in the mining corporation and inthe IFC.

Farmer families displaced by the mine are moving into thecity of Cajamarca where they have no way of making aliving while the urban migration is tearing thecommunities social fabric. Men are forced to leave hometo find a job, traditional indigenous practices are beingforgotten and families lose their community supportstructures. All this has resulted in a significant increase indomestic violence and other social ills. Cajamarca nowhas a booming prostitution trade, where girls as youngas 14 sell themselves to miners without protection fromHIV and other sexually transmitted diseases.48

Ignoring Communities: The Yanacocha Mine


16

People picking up mercury after a spill in June2000 near the Yanacocha gold mine. Villagers didnot know it was toxic and many became very ill.The response by IFC and Yanacocha was late and

inadequate. (Photo: Friends of the EarthInternational)


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In October 2000, the municipality of Cajamarca issued anintangibility declaration for nearby Mount Quilish,denouncing an expansion of mining to Mount Quilish inorder to protect the citys water sources. Yanacochadecided to fight the declaration and appealed to theconstitutional court. In April 2003, the court ruled that themunicipality has a right to issue a declaration, but also

allowed the possibility of mining if it does not affect theenvironment or Cajamarcas water sources.49 Whatparticularly angers local residents is that despite the citysdeclaration and Yanacochas repeated vows to seek asocial license of operation from the community, thecompany went to court twice to ensure their right toexpand their mining operations.

Corruption risksIn 2001, allegations surfaced that Newmont had bribed aPeruvian judge to rig a 1998 courtruling over ownership of Yanacocha.Newmont and the French mining

company BRGM were involved in a major legal disputeconcerning ownership of half of BRGMs shares inYanacocha. In a videotape, ex-Peruvian PresidentFujimoris intelligence chief Montesinos is shownpressuring a judge to rule in favor of Newmont.Montesinos informed the judge that officials from the U.S.Embassy and the U.S. Under Secretary for Latin America

were interested in seeing the case resolved in Newmontsfavor.50

In a January 2002 letter to Project Underground, anenvironmental organization, IFC announced that it wouldnot investigate these allegations because of insufficientevidence. Although IFC is bound by Bank policy ofzero tolerance for fraud and corruption, it refuses toconduct a full investigation into this matter. The WorldBanks Corruption and Fraud Investigations Unit cited a

lack of jurisdiction over the complaintbecause the Bank was not a directvictim.

outcomes. In poor governancesituations, the Bank should focus noton promoting new investment by theprivate sector in extractive projects,but rather on improving overallgovernance as well as governance inthe sector. Revenue management,environmental monitoring andeffective legal regimes are examples

of areas to be addressed. The reviewalso finds that capacity building forenvironmental and socialmanagement is a relatively low-costand sustainable contribution to thedevelopment of client countries.51

Be more selective immediately

While the World Bank should moveto phase-out fossil fuel and miningprojects, it should immediatelyimplement a ban on new extractiveindustry projects in certain areas. For example, the Bankshould not finance extraction in protected areas. Norshould it invest in areas of civil disturbance and unrest,particularly given the links between conflicts, humanrights abuses and extractive industries. In all projects,security arrangements should be revealed publicly. TheBank should only invest in a project when localcommunities have given prior informed consent for thatparticular project. The Bank should also be moreselective about the processes it supports. For example,the Bank should immediately cease support for miningprojects that involve riverine or submarine tailings

disposal. Finally, the Bank shoulddirect its mining and energy sectorinvestments towards mine closure,

job transition, and environmentalrestoration.

1 Data taken from World Bank submissions to theExtractive Industries Review. Available atwww.eireview.org2

OED, OEG, OEU Extractive Industries andSustainable Development, Volume II, pp. 6-9.3 Monica Weber-Fahr (2002) Treasure or Trouble?Mining in Developing Countries, World Bank, p. 7.4 Michael L. Ross (2001) Extractive Sectors and thePoor, Oxfam America.5 OED, OEG, OEU Extractive Industries andSustainable Development, Volume III, pp. 11.6 The Millennium Development Goals summarize thedevelopment goals agreed on at internationalconferences and world summits during the 1990s. Atthe September 2000 Millennium Summit, worldleaders distilled key development goals and targetsin the Millennium Declaration. Based on thedeclaration, the International Monetary Fund (IMF),the Organization for Economic Co-operation andDevelopment (OECD), the United Nations and the

World Bank devised a set of eight goals, 18 numerical targets and over 40

quantifiable indicators to assess progress. The eight goals are: eradicate extremepoverty and hunger; achieve universal primary education; promote genderequality and empower women; reduce child mortality; improve maternal health;combat HIV/AIDS, malaria, and other diseases; ensure environmentalsustainability; and develop a global partnership for development.7 OED, OEG, OEU Extractive Industries and Sustainable Development, VolumeI, p. 6.8 Ibid., p. 5.9 Ibid., p. 6.10

OED, OEG, OEU Extractive Industries and Sustainable Development, VolumeII, p. 50.11

OED, OEG, OEU Extractive Industries and Sustainable Development, VolumeIII, p. vii.

Perus Yanacocha gold mine, partly financed andowned by the IFC, is one of the worlds largest

gold mines, spanning five mountains. Against theexplicit wish of the local population, Yanacocha

intends to expand the mine to a sixth mountainthat contains important water sources for the

nearby city of Cajamarca. (Photo: SjoerdPanhuysen)


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12Jeffrey D. Sachs and Andrew M. Warner (1997) Natural Resource Ab

Documents

Gambling People's Lives