Report No. 26373 Extractive Industries and Sustainable Development An Evaluation of World Bank Group Experience (In Four Volumes) Volume I: Overview July 29, 2003 Operations Evaluation Department (IBRD/IDA) Operations Evaluation Group (IFC) Operations Evaluation Unit (MIGA) I N N O TE P O R AT I R N AT I O OR N A C L FINANCE Document of the World Bank Abbreviations and Acronyms ASM artisanal and small-scale mining CAS Country Assistance Strategy (World Bank Group) EA Environmental Assessment EI extractive industries (oil, gas and mining) EIR Extractive Industries Review FY fiscal year (July 1 to June 30) IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund MIGA Multilateral Investment Guarantee Agency NGO nongovernmental organization OED Operations Evaluation Department (World Bank) OEG Operations Evaluation Group (IFC) OEU Operations Evaluation Unit (MIGA) TA technical assistance WBG World Bank Group Definitions Extractive industries for this review include oil, gas, and mining of minerals and metals. Mining for con- struction materials, including cement production and quarries, is not included, nor are indirect invest- ments through financial intermediaries. Sustainable develoument meets the needs of the present without compromising the ability of future gen- erations to meet their own needs. This requires sound environmental and social performance and eco- nomic efficiency. Given that fiscal revenues constitute a major source of net benefits (beyond those for the project sponsors) obtained from the extraction of mineral resources, the interests of future generations can be protected through the efficient utilization of these revenues for people in the host country. Revenue management refers to the collection, distribution, and utilization of government revenues. The World Bank Group includes IDA, IBRD, IFC, and MIGA. In this report, the combination of IDA and IBRD is referred to as the World Bank or “the Bank.” The evaluation units of the WBG are the Opera- tions Evaluation Department (OED) of the Bank, the Operations Evaluation Group (OEG) of IFC, and the Operations Evaluation Unit (OEU) of MIGA. These units are independent of WBG management and re- port to the WBG’s Board through the Director-General, Operations Evaluation. Resource-rich, and EI-deuendent are used interchangeablyin this report to refer to developing countries whose average annual export value of oil, gas, or mineral products exceeds 15 percent of total exports. This standard has been chosen with reference to the WBG’s Poverty Reduction Sourcebook,which states: “A country’s mining sector can play an important role in poverty reduction strategies if the approximate share of the mining sector is.. .greater than 10-25 percent of export earnings.. .” For a list of countries meeting this criterion, see Volume II, Annex B. Director-General, Operations Evaluation Mr. Gregory K. Ingram Operations Evaluation Department, Operations Evaluation Group, Operations Evaluation Unit, World Bank IFC MIGA Mr. Nils Fostvedt, Director (Acting) Mr. William Stevenson, Director Ms. Aysegul Akin-Karasapan, Director Mr. Alain Barbu, Manager, Mr. Roland Michelitsch, Task Manager Ms. Ethel Tarazona, Task Manager Sector & Thematic Evaluations Mr. Andres Iiehenthal. Task Manaeer i Contents ............................................................................................................................... ... Preface 111 Acknowledgments.............................................................................................................. v Summary.......................................................................................................................... vii Background and Objective................................................................................................ 1 Objective o f the Study ................................................................................. 1 M a i n Issues for the Sector ............................................................................ 1 The WBG’s Changing Role in the Extractive Industries ............................. 2 From Economic Benefits to Sustainable Development ................................................... 3 Project Outcomes ......................................................................................... 3 Linking Project Benefits to Overall Country Assistance ............................. 5 Mitigating Environmental and Social Impacts and Beyond ........................ 6 Addressing the Governance Challenge ............................................................................ 9 Recommendations............................................................................................................ 10 Recommendation 1: Formulate an Integrated Strategy ............................. 11 Recommendation 2: Strengthen Project Implementation .......................... 12 Recommendation 3: Engage the Stakeholders ........................................... 13 ...................................................................................... 15 Interim Management Response Chairman’s Summary: Committee on Development Effectiveness (CODE) .............19 Figures Figure 1: Slower Economic Growth with Greater E1Dependence...................................... 1 Figure 2: Worse Country Governance with Greater E1Dependence ................................ 10 ... 111 Preface The extractive industries - oil, gas, and mining - produce essential inputs (energy, metals, and minerals) for the global economy. Demand for these inputs is likely to increase, es- pecially in developing countries, as people seek to improve their living standards. The World Bank Group (WBG) finances only a small fraction o f the investment in the sector, but i t s reach -through i t s access to stakeholders, and the influence o f i t s environmental and social policies, guidelines and procedures, and the demonstration effects o f i t s projects -is potentially greater. However, the WBG’s involvement in the extractive industries has come un- der increased scrutiny in recent years from several sections o f civil society. At the Annual Meet- ings in 2000, some nongovernmental organizations (NGOs) presentedthe WBG with a request to stop supporting the extractive industries because, in their view, the adverse environmental, so- cial, and governance impacts outweigh whatever economic and social benefits may accrue to the domestic economy and the poor from the extractive industries. Climate change resulting from the use o f fossil fuels i s also an important concern.’ Following the 2000 Annual Meetings, WBG management launched the Extractive Indus- tries Review (EIR) to take an in-depth look at the potential future role o f the WBG in extractive industries. The EIR, headed by Prof. Emil Salim, former Minister o f Environment for Indonesia, focuses on consultations with concerned stakeholders.’ I t s findings and recommendations will be presented to WBG management in December 2003. Conducted inparallel with the EIR, this study by the independent evaluation units o f the World Bank, International Finance Corporation (IFC), and Multilateral Investment Guarantee Agency (MIGA), assesses how effective the WBG has been in enhancing the contribution o f ex- tractive industries to sustainable development. The purpose i s to provide an objective assessment o f the results within the context o f the WBG’s overall mission o f poverty reduction and the promotion o f sustainable development. I t s findings and recommendations provide guidance for the WBG’s future strategy in the ~ e c t o r . ~ The methodology o f this evaluation i s outlined in the Approach Paper.4 This Overview (Volume I )highlights the main conclusions and recommendations, drawing from the experience o f three agencies o f the WBG -World Bank (Volume I I ) , (Volume 111), and MIGA (Vol- IFC ume IV). They are based on a review o f the portfolio o f E1projects and EI-related advisory ser- vices; thematic reviews o n revenue management, safeguards compliance, and governance; field 1. Climate change has been covered in other WBG publications and evaluations. See www.worldbank.org/climate change and www.ifc.org/test/sustainability/docs/Climate_Change_IFC.pdf.The WBG’s environmental strategy for the energy sector -Fuelfor Thought (www,worldbank,org/htmv~~energy/eee/FuelforThought.h~) -aims to mitigate the effects o f and vulnerability t o climate change. See Volume 11, para. 2.13 and B o x 2.2 and Volume 111, paras. 27,33, 52, and B o x 4. 2. F o r more information o n the EIR see www.eireview.org. 3. Concurrently, the Compliance AdvisoriOmbudsman (CAO) has been examining the extent to which I F C and MIGA have addressed sustainability concerns in recent extractive industries projects. See www.cao- ombudsman.org. 4. The Approach Paper and other supporting documents for t h i s evaluation study are available o n the Internet (www.ifc,orgloegiEIEvaluatiodeievaluation. html). iv missions to evaluate selected projects and prepare country case studies; and surveys o f stake- holders and WBG staff. The other three volumes contain specific conclusions andrecommenda- tions for the respective agencies o f the WBG. V Acknowledgments Special thanks are due to the members o f our advisory panel, who provided unique per- spectives and advice: 0 James Cooney, General Manager, Strategic Issues, Placer Dome Inc. 0 Cristina Echavarria, Director, Mining Policy Research Initiative, International Development Research Centre (IDRC) 0 Arvind Ganesan, Director, Business and Human Rights, Human Rights Watch 0 Michael Rae, Program Leader -Resource Conservation, WWF, Australia (formerly World Wildlife Fund, now World Wide Fund for Nature) 0 David Rice, Group Policy Adviser, Development Issues, B P Many thanks to all the people we met in the field and in Washington who shared their views about the sector, inparticular to those who told u s about the impacts that oil, gas, and min- ing projects had on them personally. The authors would also like to thank World Bank Group (WBG) staff involved with the evaluated projects - either at appraisal or currently -who took time to respond to our many npar- requests for information and generously shared their knowledge and perspective with us. I ticular we thank Clive Armstrong o f the joint World Bank/IFC Global Product Group for Oil, Gas, Mining, and Chemicals, who coordinated the responses from different parts o f the WBG. Contributors to the specific reports on the World Bank, IFC, and MIGA are separately acknowl- edged in Volumes 11-IV. We also thank William Hurlbut, who provided editorial and document production support on all four volumes. vii Summary H o w effectively has the World Bank Group assisted i t s clients in enhancing the contribu- tion o f the extractive industries (EI) to sustainable development? On the one hand, with i t s global mandate and experience, comprehensive country devel- opment focus, and overarching mission to fight poverty, the WBG i s well positioned to help countries overcome the policy, institutional, and technical challenges that prevent them from transforming resource endowments into sustainable benefits. Furthermore, the WBG’s achieve- ments are many. On the whole, i t s E1projects have produced positive economic and financial results, though compliance with i t s environmental and social safeguards remains a challenge. I t s research has broadened and deepened understanding o f the causes for the disappointing perform- ance o f resource-rich countries. I t s guidelines for the mitigation o f adverse environmental and social impacts have been widely used and appreciated. More recently, it has begunto address the challenge o f country governance with a variety o f instruments. On the other hand, the WBG can do much to improve its performance in enhancing the E1sector’s contribution to sustainable development and poverty reduction. There are three main areas for improvement. Formulate an integrated strategy: The WBG has not devoted enough attention to the developmental needs o f the poorly perfonning resource-abundant countries, many o f which ex- perienced negative growth during the 1990s. T o address this gap, the WBG needs to formulate and implement integrated strategies at the sector and country levels for transforming resource endowments into sustainable development. These strategies should start with the presumption that successful E1projects -whether financed by the WBG or not - should not only provide adequate returns to investors but also provide revenues to governments, mitigate negative envi- ronmental and social effects, and benefit local communities. The strategies will also need to ad- dress governance squarely and help to ensure that E1revenues are effectively usedto support de- velopment priorities. They will require, in addition, much better cooperation across the WBG and with other stakeholders. Strengthen project implementation: The WBG needs to strengthen the implementation o f i t s existing policy framework. Given the potential environmental and social impacts o f re- source extraction and the controversy surrounding the sector, rigorous implementation o f safe- guard policies i s a minimum requirement for it to operate in a world concerned with sustainable development. The safeguard policies and guidelines also need to be adapted in line with evolving good practice, especially where they are inconsistent or incomplete. In addition, in light o f grow- ing concerns about the sustainability o f E1development, the WBG needs to more systematically define, monitor, document, and report on the economic, social, and environmental impacts o f i t s projects. Specifically, the distribution o f benefits, identified as an important issue for the sector by many stakeholders, needs to be explicitly monitored and evaluated. Engage the stakeholders: Often in collaboration with other organizations, the WBG has brought together diverse stakeholders in extractive industries to address issues at the lo- cal, national, regional, and global levels. The WBG’s convening role has been actively sought and has been significant because o f i t s access to all stakeholders, i t s private and public ... Vlll development experience, and i t s ongoing involvement with project investment and technical assistance in the sector. But the WBG has inadequately addressed some areas -notably govemance and revenue management. The WBG’s performance in these areas can be en- hanced through improved consultation with stakeholders, including local communities, and by systematically and transparently reporting on key sustainability indicators. The WBG should also vigorously pursue country- and industry-wide disclosure o f government revenues from extractive industries. Such an approach i s also likely to raise standards and practices for the sector as a whole 1 Background and Objective Objective o f the Study 1. The objective o f this study i s to evaluate how effectively the WBG has assisted its clients in enhancing the contribution o f extractive industries to sustainable development.' The WBG's activities in E1have come under increased scrutiny and criticism fi-om several sections of civil society. Some NGO groups have asked the WBG to stop supporting the extractive industries because, in their view, the adverse environmental, social, and governance impacts outweigh whatever economic and social benefits might accrue to the domestic economy and the poor. Others have been concerned with issues o f poor governance and the failure to effectively use resource rents in support o f sustained economic development. This study responds to these concerns by evaluating the WBG's relevant experience and making recommendations to inform decisions about the WBG's strategy in the sector. Main Issues for the Sector 2. Extractive industries can be important contributors to a country's economic development and often offer the first opportunities for foreign investment and private sector development. They generate government revenues, foreign exchange earnings, and employment, often indepressed and remote areas. However, they also can aggravate or cause serious envi- Figure 1 : Slower Economic Growth ronmental, health, and social prob- with Greater El-Dependence lems, including conflict and war. They provide scope for rent seeking and opportunities for distorting public expenditure policies. Many resource-rich countries perform worse than resource-poor countries in key aspects o f development, in- cluding economic, social, and gov- a -10 ,, f $ ernance.' The relationship3between n (3 EI-dependence and economic -15 ~ " ' I " " ~ " " I ' " ' ~ " " growth for all WBG borrower countries i s shown in Figure 1. 1, This evaluation focuses on the impacts o f extractive industries o n developing countries. I t does not address issues o f downstream consumption, including important global impacts such as climate change, except for climate change impacts related to production, such as gas flaring. 2. This phenomenon -resource-rich countries falling far short o f their developmental potential, and even being worse off than resource-poor countries - has been termed "the paradox o f plenty." 3 . This relationship, which i s statistically significant at the 95 percent confidence level (t-statistic = -2.39), illustrates a conclusion that i s widely accepted inthe literature. N o claim i s made that E1dependence i s the sole determinant o f a country's economic growth. 4. "Borrower" includes a l l countries eligible for borrowing from the WBG with a population greater than 1m i l l i o n as o f 2000, for which data i s available. Whennon-borrower countries are included, the slope i s also statisticallysig- nificant (t-statistic = -2.82), and steeper (-0.038 vs. -0.032). 2 3. M u c h research, at the WBG and elsewhere, has beendone to better understand and address this para do^.^ The emerging consensus i s that the underperformance o f resource-rich developing countries i s not inevitable, because most o f the factors that explain it result from institutional and policy Overall, while the technical requirements for managing volatile and exhaustible revenue flows and investing them for sustainable development are well understood, they are diffi- cult to implement because o f poor governance. Thus, creating good governance i s at the heart o f the institutional and policy changes needed to sustain sound fiscal management and maximize the benefits from the extraction o f mineral resources. The WBG’s Changing Role in the Extractive Industries 4. The WBG provides only a very small share o f the financing for the sector, but i t s reach- through i t s access to all stakeholders, the influence o f i t s environmental and social policies, guidelines, and procedures, and the demonstration effects o f i t s projects -i s potentially much greater. The WBG’s advice on the enabling environment for extractive industries also has a broader effect on the sector than the financing volume would indicate. 5. The World Bank: The Bank’s role has evolved from mainly supporting exploration and production activities (1960s to the early 1980s), to sector policy reform and commercialization o f state-owned enterprises (1980s), to a greater emphasis o n capacity building andprivate sector development (1990s). Also in the 1990s, the Bank began to help transition economies to main- tain production levels, rehabilitate or close uneconomic facilities, and attract foreign investment. Since the mid-1990s, the Bank’s approach has evolved toward greater collaboration with civil society, local governments, and private companies. The share o f extractive industries in the Bank’s overall lending declined from 4 percent in the 1980s to under 2 percent in the 1990s. 6. The International Finance Corporation: IFC has focused on countries where i t s value added -as a catalytic agent and neutral third party between governments and private investors - was greatest. Since 1992, investments in o i l and gas (but not mining) exploration were discontin- ued, mainly because o f poor results and difficulties associatedwith assessing exploration risks. The share o f E1investment in IFC’s total lending portfolio has decreased substantially fkom 15 percent in 1990 to 6 percent today. Since the mid- to late- 1990s, IFC has increasingly focused on sustain- ability, especially environmental, health and safety and social issues, and, most recently, on reve- nue management and distribution. Many o f IFC’s sustainability initiatives (such as SME linkages, IFC Against AIDS) have a particular relevance to, and focus on, the E1sector. IFC’s E1portfolio i s concentrated in o i l and gas (half), gold, and copper (over 10 percent each). 7. The Multilateral Investment Guarantee Anencv: MIGA has supported extractive indus- tries with political risk guarantees and, to a lesser extent, technical assistance and advisory ser- vices, MIGA’s early involvement was heavily concentrated in the mining sector. Between 1990 and December 2002, MIGA provided guarantees for 3 1 projects in EI, most o f them in mining. Throughout the 1990s, there was high demand for MIGA insurance, with large operations in 5. Seminal papers by Gelb (1988), Sachs and Warner (1997), Richard Auty (ed., 2001), and Isham (2002) have dis- cussed the evolution of thinking o n the subject in recent years. See References in Volume 11, Annex D. 6. Analysis in the 1960s focused o n h o w t o manage the macroeconomic impacts o f resource export income, w h i c h raised domestic prices and made other exports less competitive internationally (the so-called DutchDisease). M o r e recent analysis emphasizes poor use of fiscal revenues f r o m resources. 3 countries with higher political risk profiles, Leaming from i t s earlier experience, MIGA has in- creasingly paid more attention to environmental and social aspects o f E1projects (and adopted i t s o w n environmental assessment and disclosure policies in 1999 and its o w n interim safeguard policies in 2002). Due to the l o w volume o f new guarantees in extractive industries projects since 2001, and cancellation and expiration o f MIGA coverage for some projects, the sector’s share in MIGA’s portfolio has continued to decrease and i s now 11 percent. 8. Complementary and Coordinated Roles; The different parts o f the WBG have coordi- nated and complementary roles in their approach to extractive industries and resource-rich coun- tries. The Bank has responsibility for country policy dialogue, and tends to focus on broader structural and social issues, including sector policy reform and institutional capacity building, with a focus on poverty reduction. I F C has focused on attracting private sector investment,par- ticularly in “high-risk” countries, where i t s projects were expected to have a catalytic effect in attracting new investments, and demonstrating sound management o f environmental and social effects. MIGA specializes inproviding political risk guarantees, while at the same time ensuring that the projects it supports comply with applicable environmental and social performance stan- dards. Since the late 1990s, WBG projects and policy work in the extractive industrieshave been coordinated throughjoint Bank-IFC Global Product Groups in the o i l & gas and mining sectors, and joint Bank-IFC-MIGA country assistance strategies (CASs). From Economic Benefits to Sustainable Development Project Outcomes 9. The World Bank: Overall, expost evaluations show that about 80 percent o f the Bank’s E1proj ects7have had moderately satisfactory or better outcomesY8 above the Bank-wide average o f 75 percent. For the investment projects, the benefits derived mainly from increased produc- tion, increased private investment, and improved productivity. Adjustment and technical assis- tance projects, on the other hand, generated economic benefits through private sector develop- ment, improving production levels, institutional capacity building and policy reform, rehabilitation or closure o f uneconomic mines, environmental cleanup, and the integration o f ar- tisanal and small-scale mines into the formal sector. However, the Bank’s documentation and reporting on the economic benefits o f the projects, such as expost economic analyses and other quantitative indicators, has been limited.’ Given the questions that have been raised about the justification for the Bank’s continued involvement in the sector, improved reporting could in- form stakeholders and strengthen accountability. 7. The portfolio o f projects chosen for review consists o f all E1projects approved during or after fiscal 1993, the f r s t full financial year after the WBG adopted revised safeguard policies. OED reviewed 76 Bank projects, comprising 48 closed (24 o i l & gas, 24 mining) and 28 active projects (15 o i l & gas, 13 mining). 8. The Bank’s project completion reports are usually expected to assess economic benefits by calculating an eco- nomic rate o f return or using a cost-effectiveness criterion t o determine whether the project represented the expected least-cost solution t o attain the identified benefits, but only 35 percent o f the completion reports did so. Another 27 percent contained some quantification and valuation o f benefits, but n o analysis o f their cost effectiveness. 9. See Volume 11, Chapter 3. 4 10. The main finding that emerges from the review o f the Bank’s portfolio i s that projects with satisfactory outcome ratings tended to be associated with greater government commitment to project objectives and adequate infrastructure, favorable commodityprices, and a high level o f stakeholder involvement. The less successful projects appeared to be affected by poor govern- ment commitment, and unfavorable economic conditions or commodity prices. 11. The InternationalFinance Corporation: Overall development results inIFC’s E1projects’’ were about the same as in other sectors with 60 percent success. It i s noteworthy that IFC’s E1in- vestments are concentrated in particularly difficult countries, where many development agencies are struggling to achieve positive results,” and are also subject to substantial risks (commodity price fluctuations, geological risks, etc.). About three-quarters o f E1projects had satisfactory eco- nomic returns, with projects in o i l and gas performing better than, and inminingabout the same as those in other sectors. IFC’s E1projects were often among the first investment opportunities inthe country, frequently followed by other investments, notably small and medium-scale enterprises (SMEs). Several projects involved privatization and demonstrated that the private sector tends to operate more efficiently and in a more environmentally sound manner than state-owned enter- prises. Most projects generated large government revenues, sometimes even where investors lost money. But when little or nothing flowed back to local communities this created problems -for local people as well as for investors. The distribution o f benefits, considered one o f the top issues in the sector, was not consistently and sufficiently addressed in IFC projects. Close cooperation within the WBG -inparticular between IFC and the Bank’s country departments -andbetween the WBG and the host government will be needed to effectively address this issue. l2 12. IFC’s E1projects typically created economic opportunities for people -notably direct and indirect jobs, often in remote areas. Many projects improved local roads, water, and power supply, and the best ones tried to maximize economic opportunities for the local community. Re- cently, I F C has increasingly focused on enhancing benefits and opportunities for local communi- ties. For example, IFC’s “SME linkage” program, which tries to increase supply linkages to large projects, was particularly active in extractive industries, and so was “IFC Against AIDS.” I F C has also focused on helping clients improve their community development programs, often using trust funds. The most effective programs identified -through consultations -commu- nity needs, priorities, and aspirations. While overall positive economic effects dominated, there were also adverse consequences. For example, the economic opportunities often attract a large number o f people, and companies and communities found it difficult to deal with this influx, par- ticularly where government capacity was weak. Local people did not always have the requisite skills to take advantage o f the opportunities. They sometimes lost agricultural lands, but, in a few cases, compensation did not restore livelihoods for everyone affected. 10. OEG’s review i s based o n in-depth evaluations o f a random, representative sample o f 22 projects approved incal- endar years 1991-96 (12 o i l & gas, 10 mining), supplemented by “mini” desk-evaluations o f all other projects either approved after fiscal 1993 or s t i l l in IFC’s portfolio. Intotal, OEG studied 45 projects o r companies (23 o i l & gas, 22 mining). Immature projects and projects with insufficient information (usually where IFC had exited early) are not in- cluded in these numbers, but OEG used them also to draw lessons and highlight issues. 11. See for example WBG Work in Low-Income Countries Under Stress: A Task Force Report (World Bank, 2002). 12. See also Volume 111, Annex 4 for the perceptions o f stakeholders outside and inside the WBG. 5 13. The Multilateral Investment Guarantee Agency: All evaluated MIGA p r ~ j e c t shave ’ ~ been ~ ~ reduced their financial adversely affected by the fall in metal prices since the late 1 9 9 0 which and economic returns and sustainability. In most projects, however, economic benefits were above financial rates o f return, due to the benefits accruing from creation ofjobs and provision o f training to the workforce, often in remote and depressed areas. Additionally, these projects (several in low-income, resource-rich countries) generated sizeable revenues to local and central governments, although governments holding equity shares in retum for providing ore reserves were disappointed by lower-than-expected equity returns. Most projects also h d e d community initiatives, including a few that established exemplary community development programs. 14. All evaluated MIGA projects were generally consistent with the private sector strategies o f their host countries. Most were in countries where international private investors had been re- luctant to make large investments because o f either limited experience with new governments or difficulties faced by previous investments in that country or sector. In these instances, MIGA’s political risk insurance was significant in enabling investment flows into the mining sector, and in some cases has led the way for other investments in the host country. Linking Project Benefits to Overall Country Assistance 15. Beyond the generation o f project benefits, the WBG’s involvement inthe transformation o f resource riches into sustainable development has been limited.14A review o f the latest Coun- try Assistance Strategies (CAS)15 inpoorly performing resource-rich countries found that 64 per- cent recognize the special issues associated with the management o f resource rents, but only ina few instances i s the discussion linked to specific interventions. The inadequacy o f linkages be- tween E1sector activities and sustainable development was also highlightedby 47 percent o f the WBG’s E1sector staff who responded to a survey; 50 percent attributed this to inadequate sup- port from the relevant country department/country management unit.I6In addition, the Bank’s overall lending to resource-rich countries experiencing negative growth has been lower than av- erage, with no indication o f compensating non-lending intervention^.'^ 16. A detailed review in a sample o f five resource-rich countries indicates that Bank inter- ventions were only modestly relevant and efficacious in addressing the challenge o f improving fiscal policies and public expenditures, with the quality o f govemance emerging as the key fac- 13. OEU reviewed six previously evaluated projects, a l l in mining (five gold, one cobalt) and conducted two addi- tional in-field case studies o f miningprojects. M o s t o f the projects were underwritten by MIGA inthe early t o mid- 1990s. OEU also reviewed the consistency with safeguard policies o f 12 projects (3 o i l and gas, 9 mining). In total, OEU reviews covered 15 MIGA projects with active o r cancelled contracts o f guarantee (out o f a total o f 3 1 that MIGA guaranteed since 1990). 14. See Volume 11, Chapter 5. 15. The Country Assistance Strategy (CAS) i s the central vehicle for Board review ofthe WBG’s assistance strategy for its borrower countries. The C A S i s expected to (a) describe the WBG’s strategy based o n an assessment o f the priorities in the country, and (b) indicate the level and composition o f assistance based o n the strategy and the per- formance o f the country’s project portfolio. 16. See Volume 111, Annex 4 C for complete results o f the staff survey. 17. See Volume 1 1, Figure 5.2. However, following the launch o f t h e W B G ’ s Low-Income Countries Under Stress (LICUS) program in 2002, additional budget for activities designed to improve the policy and institutional frame- work has been allocated to many o f these countries. 6 tor. This suggests that good govemance i s a prerequisite for enhancing the positive linkage be- tween increased fiscal revenue flows and sustainable development. l* Good govemance was also important for development results and IFC’s investmentresults -both were better where coun- try governance was g00d.l~ 17. Taken together, these findings suggest that, while the WBG i s aware o f the underlying causes for the underperformance o f many resource-rich countries -primarily unsound revenue management and poor governance -i t has yet to formulate and implement viable approaches to address them. If the WBG i s to have a more effective role in poorly performing EI-dependent countries, i t will require government commitment as well as using the WBG’s full influence to achieve sound fiscal management and build a supportive govemance framework. The linkages between resource rents and sustainable development can best be made explicit through CASs, to guide the design o f specific projects and the monitoring and evaluation o f results. Mitigating Environmental and Social Impacts and Beyond 18. Extractive industries tend to have a heavy “footprint” -large, wide-ranging and long- term environmental and social impacts. Effective implementation o f the WBG’s safeguard poli- cies i s therefore particularly important in this sector for sustaining the rationale for continued WBG involvement in a world concerned with sustainable development. 19. The WorZdBank: The assessment o f a sample o f Bank E1projects found the majority to be substantially consistent with applicable safeguard policies, but the degree o f consistency var- ied depending on the environmental category o f the project and the stage o f the project cycle.2o Thus, about 74 percent o f the ‘A’ and ‘Byprojects were assessed to be substantially (or highly) consistent with safeguards at approval, with the share declining to 67 percent during implementation.’l The decline may be associated with the finding that safeguards supervision inputs and reporting had been adequate in only 41 percent o f the projects. Even so, these findings are more positive than those obtained from the survey o f stakeholders, which points to their perception o f a need for improved performance in the environmental and social areas. 20. Most important shortcomings in the Bank’s implementation o f safeguards can be traced to inadequacies at the initial project screening, especially for sectoral adjustment and technical assis- tance projects, where the guidance has been subject to varying interpretations.22Inadequate supervi- 18. See Volume 11, paras. 5.5 ff. 19. See Volume 111, para. 59. 20. The sample o f 38 projects was purposively chosen f r o m the E1portfolio o f 76 projects t o include projects that were likely to have adverse environmental or social impacts, and included 19 o i l & gas and 19 mining projects. See Volume 1 1 , paras. 4Sff. 21. The policy o n Environmental Assessment (OP 4.01) defines project categories as follows: ‘A’: likely to have significant adverse environmental impacts that are sensitive, diverse, o r unprecedented; ‘B’: potential environmental impacts are less adverse than for ‘A’ ‘C’: likely to have minimal o r n o adverse environmental impacts. 22. Inthe absence o f an established approach for assessing a project’s degree o f consistency with safeguards policy requirements, the evaluation has synthesized the policy requirements into a set o f basic criteria and used it for the subject review. The criteria for consistency have been benchmarked against those used by the InspectionPanel re- ports o n E1projects, and discussed with the Quality Assurance and Compliance Unit (QACU) and the Legal De- partment. See Volume 1 1, paras. 4.5 ff. 7 sion and reporting were another important source ofproblems: in only about 30 percent o f the pro- jects inthe sample were environmental or social specialists involved insupervision and fewer than a quarter o f the project completion reports had adequate reporting and discussion o f this subject, 23 21, %le the validity o f these findings i s limited to the sample o f 38 E1projects that was re- viewed (half o f all projects inthe E1portfolio), the results make a strong case for strengtheningthe implementation o f the Bank’s safeguards framework, which i s no different for extractive industries than for other types o f projects. The findings point, in particular, to the need for clearer and more consistent guidance for the EA categorization o f sectoral adjustment and technical assistance pro- jects, the identification o f applicable safeguards at the initial project screening, the appropriate scope and arrangements for monitoring o f safeguards implementation, and the reporting and evaluation o f results at project completion. Improvement would be particularly important for ex- tractive industries, given i t s large share o f sectoral adjustment andtechnical assistance projects, the inadequacies in monitoring and reporting, and the controversy surrounding the sector. 22. The International Finance Corporation: The evaluation o f IFC projects found o i l and gas projects performing significantly better, and mining projects significantly worse than those in other sectors concerning compliance with safeguard policies and guidelines. Judging from the desk review o f portfolio projects, the performance o f miningprojects appears to have improved and i s now in line with the IFC average.24The main problems in mining projects related to the handling o f hazardous materials -where I F C has now developed guidelines -and difficulties in ensuring adequate mine closure. O i l and gas projects featured almost no compliance issues per se, but gas flaring was an issue in many projects, downstream transportation in some. 23. IFC’s supervision o f E1projects was significantly better than average, and IFC’s envi- ronmental and social specialists spent more time on extractive industries (one-third in fiscal year 2002) than o n any other sector. But gaps remain, inpart attributable to insufficient management systems. For example, while proj ect-level supervision was generally strong, there i s no central database identifying which safeguard policies and key issues apply to which project. Clients ex- pressed appreciation for IFC’s environmental and social specialists, who helped improve the en- vironmental and social aspects o f numerous projects. But they cannot replace local monitoring, particularly since I F C usually exits from projects before project closure. Building local monitor- ing capacity - either that o f local consultants or that o f government agencies (through the World Bank) - could help address this issue. Disclosure o f environmental monitoring data would likely improve trust and improve performance -possibly even after IFC’s exit. 24. The Multilateral Investment Cuarantee Agency: The review o f a sample o f MIGA E1pro- ~ ~ ~ that 73 percent were consistent26with MIGA’s (2002) issue-specific interim safe- j e c t found guard policies at the time o f MIGA Board approval. The consistency improved during project implementation (while under MIGA guarantee or at the time o f cancellation o f the MIGA guar- 23. See Volume 11, paras. 4.24 ff. 24. See Volume I11paragraph 26, which also explains the difficulties comparing the t w o data sets. 25. The review o f safeguard policy compliance for MIGA E1projects covered 12 out o f 30 MIGA projects with ac- tive and cancelled guarantees issued since MIGA’s inception. The review was commissioned f r o m an external ex- pert and i s the first of i t s kind for MIGA. 26. The project was rated “consistent” when the policy requirements were generally met, or expected to be met, with only minor shortcomings. 8 antee). Although in at least two cases it played a direct positive role, in other cases these im- provements were not clearly attributable to MIGA. The level o f consistency was not uniform across all applicable safeguard policies. The review noted systemic deficiencies in the applica- tion o f the social aspects o f safeguards in the projects reviewed. OEU found that, in addition to lowering perceived political risks as a guarantee provider, MIGA had the greatest potential to add value with i t s support to environmental and social aspects o f E1projects. 25. The evaluated projects showed an overall improving trend in safeguard policy consis- tency over time, implying institutional learning from experience and strengthened policies and implementation as MIGA expanded i t s operations. However, the shortcomings identified point to a lack o f a proactive approach with i t s clients throughout i t s involvement with the projects to capture opportunities to add value by improving their environmental and social impacts. 26. Need for Continued UDdutinx: The WBG’s safeguard policies, guidelines, “good prac- tice” manuals, and notes have received wide acceptance, even where the WBG i s not involved - some other international financial institutions use them, and recently some o f the largest private project finance banks have committed to adopt them. But some o f them are inconsistent, incom- plete, or lacking. For example, while industry leaders in extractive industries and some govern- ments subscribe to “voluntary principles on security and humanrights,” the WBG has no compa- rable guidance. Given that human rights violations have frequently been alleged in connection with the site security o f E1projects -including some WBG projects -this i s one o f the gaps that needs to be filled.” Another area i s HIV/AIDS, an important issue for the sector, but not covered by guidelinesa2* Given the wide use o f the WBG’s guidelines, it i s particularly important that they be comprehensive yet practical, and regularly updated to reflect lessons and evolving good practice standards. Their standard-setting character points to the potential for the WBG to continue building on i t s global mandate, public and private sector knowledge, and convening power for catalyzing good practice with respect to environmental, social, and other issues. Be- sides improving the results o f WBG-supported projects, this would also help to define a level playing field among international financial institutions, and among different companies. 27. Bevond Safeguards: The WBG’s efforts at “doing good” by addressing pre-existing envi- ronmental conditions and buildingcapacity for the management o f environmental and social im- pacts have yielded mostly satisfactory results. As part o f i t s sustainability initiative IFC has started to focus on improving the impacts o f i t s projects “beyond compliance” (for example, by maximizing linkages with local SMES).~’ These findings point to the continuing potential for the WBG to make a valuable contribution to the development o f the host countries and the extractive industries sector, in an area that the private sector alone cannot 27. See Volume 111, paragraph 34. nthe WBG 28. Halting o r reversing the spread o f A I D S i s one o f the M i l l e n n i u m Development Goals. Initiatives i address HIV/AIDS, but addressing the issue i nspecific EI-projects are not mandatory. See also Volume 1 11, para- graph 25 and B o x 2. 29. See Volume 11, paragraphs 4.32 ff and Volume 111, paragraph 16 and B o x 1. 30. For example, the M a y 15,2002, Toronto Declaration o f the Intemational Council o f Mining and Metals states (on behalf o f the mining industry): “orphan site legacy issues are important and complex. However, they are beyond the ca- pacity o f I C M M to resolve. Governments and international agencies should assume the lead role in addressing them.” 9 Addressing the Governance Challenge 28. Highdependence on revenues from extractive industrieshas been associatedwith corrosive effects on economic and political life in many countries, including rent-seeking and govemment ineffectiveness. Indeed, a review o f the literature and feedback from NGOs suggest that good governance i s central to creating an environment that fosters sustainable and equitable development, and is an essential complement to sound revenue management and safeguard policies. Figure 2 shows the negative association between the quality o f govemance and E1dependen~e.~' 29. Countries such as Botswana and Chile32have successfully leveraged their natural re- source wealth into sustainable growth through investment-friendlypolicies, fiscal discipline, and long-term planning. While the highest quality o f macro and sectoral governance33may not be required for resource extraction to be beneficial to a client country, some minimum conditions should exist to help ensure that the benefits from E1projects are not squanderedand the citizens left with costs that can include environmental damage, health risks, and conflict. 30. At least since the early 199Os, the WBG has been aware o f the importance o f addressing the governance challenge for ensuring the transformation o f resource rents into sustainable devel- opment. But there i s little discussion o f sector-specific govemance issues inthe country strategies o f EI-dependent countries. There are also few cases where a link can be discerned between a diag- nostic assessment o f govemance, a govemance-informed strategic approach to the E1sector set out inthe country strategy, and the design o f E1 Where some links can be observed, such as inPapua New Guinea and Kazakhstan, experience suggests that govemance issues take a long time to address, and working to establish good govemance inparallel with, or after supporting increased investment in EI, i s a high-risk strategy in countries with poor govemance. 3 1. This points to the need for the WBG to tailor i t s support for resource extraction on the basis o f an assessment o f the quality o f govemance. Important indicators o f macro govemance include the quality o f public financial management35 and rule o f law,36as a measure o f the government's ability to address problems through formal institutional reforms. At present, while the Bank's eco- nomic and sector work frequently assesses the quality o f public financial management, it has no diagnostic instrument to evaluate the rule o f law or the quality o f sectoral governance. These gaps need to be addressed. This governance analysis then has to inform the risk assessment, structuring, and investment or underwriting decision. Recognizing that fiscal revenues may be misused in countries with poor governance, IFC has developed a position paper outlining possible steps to ad- 3 1. Here again, this relationship is statistically significant at the 95 percent confidence level (t-statistic = 2.44) and illustrates a conclusion that i s widely accepted in the literature. N o claim is made that E1dependence i s the sole determinant o f a country's quality o f govemance. 32. In Figure 2, Chile and Botswana are shown at the top o f the graph, near the center and toward the right, respectively. 33. F o r a definition o f macro and sectoral governance, see Volume 11, paragraphs 6.22-23. 34. See Volume 11, paras 6.27 ff. 35. Corruption, one particular public financial management shortcoming, i s a possible p r o x y measure. 36. That is, the use o f public power in accordance with the law. 10 dress this risk.37 To date, MIGA Figure 2: Worse Country Governance has not yet addressed the issue of with Greater El-Dependence revenue management from ex- tractive industries in a similar > 20 O way. 32. The promotion o f trans- parency i s an essential tool for building good governance, and the WBG has long played a role, mainly in conjunction with i t s environmental assessment (EA) policy,38 but also through institu- tion building and policy reform 0 20 40 60 80 100 efforts aimed at improving the enabling environment for the I Average El Exports I Total Exports, 1990-99 (%) * “Composite” GRICS (Governance Research Indicator Country Snapshot) sector. About 15 percent o f Bank ranks are a simple average of individual GRICS rankings for 2000/2001 for E1 projects have provisions for Voice and Accountability, Political Stability, Government Effectiveness, disclosure and dissemination o f Regulatory Quality, Rule of Law and Control of Corruption. Source: http://www.worldbank.org/wbi/governance/pdf/2OOl kkzcharts.xls project information beyond the requirements o f the EA policy, but with the exception o f the re- cent Bank/IFC Chad-Cameroon Pipeline projects, the WBG has not required disclosure o f fiscal revenues from EI, even though i t sometimes recommends it. A few companies operating in the sector have started disclosing government revenues and some global initiatives advocate disclo- sure.39 While some govemments currently make such disclosure illegal, and companies are con- cemed that unilateral disclosure could harm them, industry overall appears to be in favor -if a level playing field can be ensured. Recommendations 33. With i t s global mandate and country development perspective, combined with public and private sector experience, the WBG i s well positioned to help countries transform resource riches into sustainable development. The Bank’s research has broadened and deepened the understanding o f the “paradox o f plenty” and the WBG has led or participated in numerous initiatives to address E1issues. Inmost dimensions, the WBG’s E1projects appear to perform at least as well or better than projects in other sectors, but much more needs to be done to improve implementation and monitoring o f compliance with existing policies, and to address governance, transparency, and 37. At this point, the position paper (www.ifc.org/test/sustainability/docs/Revenue-Distri_hlgmt.pdf)focuses only o n projects generating substantial revenues compared t o the country’s overall fiscal revenues, and the suggested steps are optional, not mandatory. 38. F o r a l l EA category A projects, the borrower i s expected t o consult project-affected groups, localNGOs, etc. and disclose relevant material in a timely and culturally appropriate manner. The requirements are somewhat more rig- orous for ‘A’ than for ‘B’ projects, and IFC requires public consultation o n l y for some category B projects. 39. The “Extractive Industries Transparency Initiative” and an NGO campaign -“Publish What Y o u Pay” advo- cate disclosure. 11 revenue management issues. Unless the WBG improves i t s performance in these areas, it will not be able to maximize the sector’s contribution to sustainable development and will face continued -and warranted -criticism. The key recommendations are summarized below. Volumes 1 1 1 ,11, and N contain additional specific recommendations for the Bank, IFC, and MIGA.40 Recommendation 1: Formulate an Integrated Strategy 34. The WBG has not devoted enough attention to the developmental needs o f the poorly performing resource-abundant countries, many o f which experienced negative growth during the 1990s. To address this gap, the WBG needs to formulate and implement integrated sector and country-level strategies for transforming resource endowments into sustainable development. Such an integrated strategy will start with the presumption that successfid E1projects -whether financed by the WBG or not - have to provide not only adequate returns to investors but also revenues to governments and benefits local communities, and mitigate negative environmental and social effects. I t will also need to address governance squarely and help to ensure that E1 revenues are effectively used to support development priorities. I t will also require much better cooperation within the WBG and with other stakeholders. (a) Formulate a WBG sector stratem: The WBG needs to design and implement a sectoral strategy that closely integrates resource extraction with sustainable development through the effective management o f E1revenues in support o f developmental priorities and the reliable mitigation o f adverse environmental and social impacts. Where macro and sec- toral governance are weak, the WBG’s assistance should focus on strengthening govern- ance. In such cases, the WBG should carefully assess and report o n the risks that E1fis- cal revenues may not be used for development priorities. The WBG should not support significant sector expansion unless it can adequately mitigate these risks.4’ Where macro governance i s sound but sectoral governance i s weak, the WBG should focus on improv- ing sectoral governance, and should only support the sector in conjunction with adequate provisions to overcome sectoral governance w e a k n e ~ s e s . ~ ~ (b) Address extractive industries in CASs: For all resource-rich countries the WBG should explicitly address extractive industries in the C A S S .The ~ ~ CAS should explicitly discuss 40. Given the size and complexity o f the WBG, and the diversity o f issues that need t o b e addressed, it i s expected that the responsibility for following up on these recommendations will not rest exclusively with the sector special- ists, i.e., the Energy and Mining Sector Board, and the Oil, Gas, M i n i n g and Chemicals Global Product Group. The Management Response i s expected to identify the unit(s) responsible for following up o n each recommendation. 4 1. “Significant” should be consideredboth inabsolute terms and inrelationto total sector production, based o n analy- sis o f past experience, and may vary by country. Supporting increased investment could be either through investments by IFC, guarantees by MIGA, or through W o r l d Bank assistance, e.g., to make the investment code more attractive. A possible mitigating measure could be “ring-fencing” o f fiscal revenues f r o m E1projects for development purposes. MIGA should consider adopting a position o n revenue management and distribution similar t o IFC’s. 42. F o r example, the Bank should help countries establish appropriate laws and regulations to mitigate negative en- vironmental and social effects and build capacity t o enforce them. Private sector projects supported by IFC and MIGA could serve as “role models” for environmental and social performance, transparency and disclosure, and thus raise sector performance. 43. This recommendation also applies t o countries that are expected to become resource-rich, for example, through a large, WBG-supported project. In a l l resource-rich countries, the WBG should also encourage client countries to include E1in their Poverty Reduction Strategy Papers. 12 the sector’s current and potential economy-wide linkages (for example, the importance of government revenues, their management, distribution, and use for development priori- ties) and reference the underlying governance assessment. This should guide future pro- ject design, facilitate monitoring and evaluation, and provide an agreed framework for WBG-wide coordination and collaboration in the E1sector. The different agencies o f the WBG should routinely work together to enhance the development impacts o f E1projects, for example in the form o f public-private partnershipswith respect to community devel- opment programs. Promote governance improvements: The Bank should compensate for the lower level o f lending that may be appropriate for resource-rich countries with weak macro and sectoral g ~ v e r n a n c e by ,~~devoting greater management attention and administrative budget for advisory and analytical activities aimed at improving the policy, institutional, and gov- ernance framework for EI. This would enable the Bank to establish and maintain continuity o f engagement and facilitate responding quickly to opportunities for assistance when they arise.45 (d) Support private sector development and environmental sustainabilitv: In all countries, the WBG should continue i t s support to close uneconomic mines, reform and privatize state-owned enterprises, and mitigate pre-existing environmental and social problems. Where appropriate, the WBG should help integrate artisanal and small-scale mining (ASM) with the formal sector and internalize their environmental and social impacts, while at the same time creating altemative employment opportunities and supporting the consolidation o f ASM activities for greater efficiencies and economies o f scale. Recommendation 2: Strengthen Project Implementation 35. The WBG needs to strengthen the implementation o f projects within i t s existing policy framework. Given the potential impacts o f resource extraction and the controversy surrounding the sector, rigorous implementation o f safeguard policies by the WBG i s a minimumrequirement for it to operate in a world concerned with sustainable development. Inaddition, in light o f grow- ing concems about the sustainability o f development, the WBG needs to more systematically define, monitor, document, and report on the economic, social, and environmental impacts o f i t s projects. Specifically, the distribution o f benefits, identified by many stakeholders as an impor- tant issue for resource extraction, needs to be explicitly monitored and evaluated. (a) ImDrove project screening and monitoring: The WBG should provide clearer and more consistent guidance for the categorization o f the identification o f applicable safeguards at the initial project screening, the appropriate scope and nature o f the EA in- struments, and the reporting and evaluation o f safeguards implementation. This needs to be followed up through the entire implementation framework, from good practice guide- lines to appropriate monitoring and training. 44. In line with the Bank’s performance-based allocation o f IDA credits. 1 7 45. This recommendation i s consistent with the LICUS approach mentioned in footnotes p and 46. F o r example for sectoral adjustment and technical assistance. 13 (b) Involve specialists throuahout: The WBG should provide adequate resources and incen- tives for the participation o f qualified environmental and social specialists at the prepara- tion, appraisal, and supervision o f all projects that are likely to have adverse impacts. This will ensure that such impacts are adequately addressed through the upstream design o f appropriate mitigation strategies or project alternatives, as well as through the retrofit o f timely remediation measures should unexpected impacts materialize during project implementation. Enhance reportin8 of results: The Bank should strengthen reporting o f its results by en- suring that project completion reports include an expost economic rate o f return or net present value or, where that i s not feasible, a cost effectiveness analysis to determine whether the project represented the least-cost solution to attain its objectives. IFC should develop and use a reporting template for environmental and socio-economic sustainabil- ity indicators, building on industry initiatives. MIGA needs to adopt more standardized and timely reporting mechanisms on environmental and social safeguards compliance and ex post development outcomes. The WBG should prepare completion reports for every significant non-lendingguarantee issuance a ~ t i v i t y . ~ ’ (d) Evaluate the sharina ofbenefits: At appraisal and during s u p e r v i ~ i o nthe ,~~WBG should systematically estimate the distribution o f project benefits among different stakeholder groups (government at different levels, private companies, and local communities), evaluate its sensitivity to different scenarios, and discuss the acceptability o f benefit sharing with key stakeholder groups. Recommendation3: Engage the Stakeholders 36. Often in collaboration with other organizations, the WBG has brought together diverse stakeholders in extractive industries to address issues at the local, national, regional, and global levels. The WBG’s convening role has been actively sought and has been significant because ofits access to all stakeholders, private and public development experience, and ongoing involvement with project investment and technical assistance in the sector. But the WBG has inadequately ad- dressed some areas -notably governance and revenue management. The WBG’s performance in these areas can be enhanced through improved consultation with stakeholders, including local communities, and by systematically and transparently reporting on key sustainability indicators. Such an approach is also likely to raise standards and practices o f the sector as a whole. Update policy framework In consultation with its stakeholders, the WBG should peri- odically adjust i t s policy framework for extractive industries to ensure that it remains up- to-date with evolving industry practice. I t should resolve remaining inconsistencies such as those between requirements for different mine types (such as funding for mine clo- sure), onshore versus offshore o i l projects, safety o f dams, and involuntary resettlement. I t should address identified gaps such as those related to consultation and disclosure, community development, social issues o f mine closure, security, hazardous materials management, acid rock drainage, gas flaring, and transportation o f I t should also 47. Such as, for example, advisory w o r k funded by trust funds. 48. F o r example, in project completion reports for the Bank and in project supervision reports for IFC. 49. See Volume I11paragraphs 33-34 for more detail. 14 recognize the expanding awareness o f the humanrights dimension o f WBG policies and projects, and explore possible avenues for addressing the issues, especially where i t lags industry best practice, such as regarding site security. (b) Promote disclosure of fiscal revenues from EI: The WBG should vigorously pursue country- and industry-widedisclosure o f government revenues from E1and related con- tractual arrangements (such as production sharing agreements, concession and privatiza- tion terms)." The Bank should work toward and support disclosure o f E1revenues and their use in resource-rich countries. IFC and MIGA should also strongly encourage (and consider requiring) their private sector clients to publish their payments to governments. (c) Develop and monitor sustainabilitv indicators: Together with other stakeholders, the WBG should develop indicators o f economic, social, and environmental ~ustainability,~' establish baseline data, provide for adequate monitoring over the l i f e o f the project, and report and evaluate the results during supervision and inproject completion reports. The WBG should also encourage more independent outside monitoring, ideally using local capacity (which may have to be developed). (d) Increase local community participation: The WBG should support enhanced community consultation and participation throughout the l i f e cycle o f EI-projects. The WBG should assist countries to increase involvement by local communities in E1 decision-making processes, and ongoing consultation throughout the project life cycle, including closure _________~ 50. Several stakeholders have already sought IMF and WBG assistance in advocating or requiring disclosure and in developing a reporting framework. 5 1. Such indicators could include, for example, health and safety statistics, gas flaring (or greenhouse gas emis- sions), adequacy o f mine closure preparations (including funding) and o i l transportation arrangements, hazardous materials management and emergency response plans, availability o f infrastructure and services (e.g., health and education), and revenues generated for governments. 15 Interim Management Response I.INTRODUCTION This paper presents the initial responses o f the Managements o f the World Bank, IFC, and MIGA to a four-volume evaluation o f the World Bank Group’s activities in the extractive indus- tries (EI): Volume Ii s the overall summary o f a joint OED/OEG/OEU sector review o f the World Bank Group’s activities; Volume I1is OED’s review o f the Bank’s activities; Volume I11 i s OEG’s review of IFC’s activities; and Volume I V i s OEU’s review o f MIGA’s activities. Extractive Industries Review. The reports and responses needto be considered inthe context o f the Extractive Industries Review (EIR),’ an independent consultative exercise with stakeholders about the best future role for the World Bank Group in the extractive industries.Ledby Dr. Emil Salim, the EIR has attracted the active involvement o f a wide range o f stakeholders, but it i s s t i l l ongoing; i t i s scheduled to finish with the delivery o f i t s report to the President o f the World Bank Group in December 2003. Inparallel to the EIR, OED/OEG/OEU carried out i t s evaluation o f the World Bank Group’s activities in the sector. CAO Review. The Office o f the Compliance Advisor/Ombudsman (CAO) has produced a sepa- rate review o f the appraisal process o f eight I F C and MIGA projects (too recent to have been in- cluded in the OEG review).2 The C A O report contains a number o f messages on IFC’s activities in the extractive industries that will be addressed along with those arising from the EIR report. In addition, the CAO’s office has recently delivered to I F C Management i t s final report on its re- view o f I F C safeguards policies in general, which will soon be discussed at CODE.3 How I F C addresses the findings o f the safeguards report will have implications for i t s activities in the ex- tractive industries. FinaZManagement Response. Because the EIR has raised, and i s s t i l l discussing, many o f the issues raised in the World Bank Group’s Sector Evaluation, Management proposes to defer its final response until the EIR report is delivered. At that stage, Management will be able to frame i t s responses, and CODE will be able to judge them, in the broader context o f the OED/OEG/OEU and C A O reviews and the EIR report. 11 REPORT . OVERALL This suite o f reports provides a broad ranging review o f Bank, IFC, and MIGA activities in the extractive industries sector. The reports have added to the World Bank Group’s understandingo f the issues in the sector and o f i t s own perfonnance, and they can contribute to the ongoing EIR process. They show that, on balance, World Bank Group activities in the sector have added value and have generally contributed to the development o f the countries concerned. The reports lay out specific areas for attention and provide important perspectives going forward on key i s - sues for each institution and for the Bank Group as a whole with regard to support to EI. I nview o f the ongoing EIR, it would be premature for World Bank Group Management to set out de- l, See Extractive Industries Review: Progress Report (SecM2003-0266, IFC/SecM2003-003l), June 5, 2003. 2. Extracting Sustainable Advantage-A review o f how sustainability issues have been dealt with in recent IFC and MIGA extractive industry projects. April 2003. 3. A Review o f IFC’s Safeguards Policies, January 2003. 16 tailed responses to these recommendations, and i t will defer i t s full Management Response until the EIR report i s received. 111 MANAGEMENT . INTERIM RESPONSE TO OED REPORT Management welcomes OED’s report, which provides a thoughtful and thorough review o f the Bank’s activities in the E1sector. The report makes a valuable contribution to discussion about future Bank activities in the sector and, together with i t s companion volumes, provides useful input for the recommended construction o f an overall framework for World Bank Group activi- ties in the sector. Report Description. The report focuses on assessing economic effects, environmental and social effects, and governance issues associated with the Bank’s interventions inthe E1sector. More spe- cifically i t evaluates the Bank’s effectiveness in enhancing the sustainable development contribu- tion o f the extractive industries. The evaluation was carried out in two phases. Phase I consisted o f a review o f the portfolio o f World Bank E1projects supplementedby a review o f Country Assis- tance Strategies (CASs) and a literature survey. Phase 1 1, which built on the findings from Phase I , consisted o f three Thematic Studies o f the Bank’s E1portfolio; five country case studies; reviews o f twelve recent Project Performance Assessment Reports (PPARs) in seven countries; and two surveys. I na number o f places the report has noted changes in the Bank’s approach. Classification and Supervision. Using a pilot approach and evaluating the degree o f consistency with safeguards in line with the evolving interpretation o f these policies, the report finds that a number o f projects were wrongly classified with regard to environmental assessment category and thus were poorly supervised. These projects were largely o f the sector adjustment type, for which potential impacts and classification are not always clear-cut. However, Management ac- cepts the recommendations about the need for clearer guidelines o n classification and supervi- sion processes. Implementation Completion Reports. The OED report asserts that the economic evaluations o f E1projects in Implementation Completion Reports are not sufficient. In particular, it calls for more rigorous evaluation o f technical assistance and adjustment projects (which make up over h a l f the E1portfolio)-operations for which quantitative economic evaluations are very difficult and therefore have not normally been undertaken. The recommendations in this respect are probably generally applicable for similar activities across other sectors. Final Management Response. Management will defer i t s full response until the EIR report i s produced. The Management Response to that report will also address the OED recommendations in detail and present an overall World Bank Group approach for the sector. MANAGEMENT IV. INTERIM RESPONSE TO OEG REPORT I F C Management welcomes OEG’s report, which provides a thoughtful and thorough review o f IFC’s activities in the extractive industries sector. The report makes a valuable contribution to discussion about future I F C activities in the sector and, together with i t s companion volumes, provides useful input for the recommended development o f an overall framework for World Bank Group activities in the sector. 17 Report Description. The focus o f the report’s investigation was 22 projects for which detailed evaluations had been performed. Typically these projects were approved at least five years ago and in some respects might not reflect more recent changes in IFC’s approach to the projects i t finances-particularly environmental and social due diligence and IFC’s efforts to enhance and broaden the positive development impact o f the projects it supports. However, to an extent, this was balanced by a review o f 45 other projects approved after FY93 and s t i l l in IFC’s portfolic- a broader set ofprojects that included some more recent projects and confirmed the evolution o f IFC’s approach. In a number o f places the report notes changes in IFC’s approach. O E G vali- dated i t s review o f evaluations through more than a dozen project visits in six countries. PrincipalMessages. The major messages that Management takes from the report are as follows: 0 The extractive industries have contributed to sustainable development, where projects in the sector meet appropriate environmental, social, and economic criteria. The report also provides evidence indicating that the overall World Bank Group approach to date o f supporting the private sector as the most effective vehicle for new investment in the sector has been constructive. 0 IFC’s support for extractive industries projects has generally been effective. Projects have generated revenues for government and opportunities for people and have contributed to I F C as an institution. 0 IFC has added value in the environmental and social aspects o f i t s projects, and i t s safeguards and guidelines been useful to others even when i t is not involved in projects. More recently, I F C has increased i t s focus o n broadening the sustainable impact o f the resource projects i t supports. 0 The report lays out a number o f areas in which I F C can enhance i t s performance and i t s contribution to the sustainable impact o f i t s projects. Final Management Response. Management will defer i t s full response until the EIR report i s produced-and will coordinate and integrate that response with its response to the CAO’s rec- ommendations o n safeguard policies in general. The final Management Response to the EIR re- port will address all the recommendations in detail and will also present an overall World Bank Group approach for the sector. V. INTERIM MANAGEMENT RESPONSE TO OEU REPORT MIGA Management welcomes OEU’s report, which provides a thoughtful review o f MIGA’s activities in the extractive industries sector. It makes a valuable contribution to informing and guiding discussion about future MIGA activities in the sector and, together with i t s companion volumes, provides useful input for the recommended construction o f an overall framework for World Bank Group activities in the sector. In the current ferment o f new models and concepts about how best to facilitate development that i s sustainable and productive at both local and mac- roeconomic levels, this series o f reports will be useful. PrincipaZMessages. The major messages that Management takes from the OEU evaluation, re- cent C A O reports, and i t s o w n evaluation are as follows: 18 0 The extractive industrieshave contributed to sustainable development, when projects in the sector meet appropriate environmental, social, and economic criteria. 0 M I G A ’ s support for extractive industries projects has generally been effective. Projects have generated revenues for government and opportunities for people and have contributed to MIGA’s ability to function effectively and efficiently as an investment insurer. 0 MIGA has added value in the environmental and social aspects o f its projects where those opportunities are available and have been identified, and i t s safeguards and guidelines been useful to other investment insurers and lenders even when MIGA i s not involved in projects. When MIGA issues i t s guarantees even to lenders or minority partners in projects, it has exercised goodjudgment in evaluating projects’ environmental and social soundness and likely ability to produce an overall positive development impact. 0 There are a number o f areas, including areas identified by OEU, in which MIGA can enhance its performance and i t s contribution to the sustainable impact o f i t s work. Final Management Response. Management will defer its f ill response until the EIR report i s produced. The Management Response to that report will also address the OEU recommendations in detail and C A O reports, and will present an overall World Bank Group approach for the sector. 19 Chairman's Summary: Committee on Development Effectiveness (CODE) Background. This joint evaluation was one of the major sector evaluations in OED's FY03 work program. I t was undertaken in parallel with the Extractive Industries Review (EIR), an independent, multi-stakeholder consultative exercise, headed by Mr. Emil Salim, former Minister o f Environment of Indonesia. The EIR focuses on the future role o f the World Bank Group (WBG) in extractive industries (EI, comprising oil, gas, and minerals and metals min- ing). The EIR was launched by Bank Management following the 2000 Annual Meetings in Prague, where a group o f NGOs approached the Management o f the W o r l d Bank with a pro- posal that the WBG should cease i t s support for E1projects, o n the grounds that these pro- jects did more harm than good in developing countries. Management decided to undertake a review o f the WBG's involvement in this sector and the EIR i s i t s response to this commitment. Main Findings and Recommendations.Conducted inparallel with the EIR, the joint evalua- tion by the three WBG independent operations evaluation units assesses the effectiveness o f WBG assistance to clients in enhancing the contribution o f E1to sustainable development. The evaluation report's m a i n message i s that - while there are differences in performance between WB, I F C and MIGA projects -E1projects have produced positive economic and financial results and have contributed to sustainable development where projects meet ap- propriate social, environmental, and economic criteria. While the majority o f WBG projects were in compliance with i t s environmental and social safeguards, the degree o f compliance has been uneven. The WBG i s well positioned to assist countries in overcoming the policy, insti- tutional, and technical challenges to transforming resource endowments into sustainable bene- fits for their people. The OED/OEG/OEU evaluation reports include recommendationsdirected at the Bank, IFC, and MIGA, respectively. The key recommendations for the WBG are that it remain engaged in El and that i t should: (i) for- mulate integrated strategies for the sector and resource abundant countries that address the risk that E1contributions to fiscal revenues may not be used effectively for development priorities; (ii) not support significant sector expansion where the risk that E1fiscal revenues may not be used for de- velopment priorities cannot be adequately mitigated; ( iii) strengthenthe implementation o f the ex- istingpolicy framework, adapt the safeguard policies and guidance to be in line with evolving best practice, rigorously apply safeguard policies, and monitor, document, and report on the social, economic, and environmentaYsafety impacts o f i t s E1 projects and specifically monitor the distributional benefits; and (iv) proactively engage stakeholders with a focus on governance, revenue management, and community development, define and report on key sustainability indicators, and work toward and support disclosure o f fiscal revenues from El. Inits comments on the joint evaluation, the External Advisory Panel supports the recommendations but believes they should be made more comprehensive and binding. Conclusions and Next Steps. The Committee welcomed the report's findings, including the positive perfonnance o f the World Bank Group (WBG) portfolio in EL I t was generally satisfied with the scope and analysis presented inthe OED/OEG/OEU evaluation. The Committee believed that the Interim Management Response (TrvIR) provided was appropriate and also agreed with Man- agement's proposal to formulate a comprehensive Final Management Response (FMR) following completion o f the external EIR (expected in December 2003). The Committee will have a fuller, 20 second-round discussion, focusing on the recommendations and their policy implications, at the time it discusses the FMR and the findings o f the EIR. The Committee agreed with OED's rec- ommendation that the joint evaluation, the IMR, CODE Chairman's Report, and the report o f the External Advisory Panel will be disclosed following this first-round CODE discussion. Governance. The Committee emphasized the importance ofthe Bank addressing govemance and revenue management issues both inresource-abundant and resource-poor countries in a proactive and transparent way. Members supported the evaluation's recommendation on the need to de- velop a WBG strategy for sequencing i t s El interventions taking governance issues into ac- count. They, however, also recognized the difficulty in implementing this in practice and cautioned against a one-size-fits-all approach. Members consideredthat there are questionsabout how issues o f govemance, includingh um a nrights, should, be addressed in El projects. These ques- tions require further attention by all parties. The WBG's involvement in such issues should be consistent with i t s mandate and comparative advantage. At the same time, the approach adopted in each country needs to have local ownership.. Management noted the importance o f govemance issues and agreed to address them, as well as the question o f CAS treatment o f E1issues, in i t s FMR. Revenue Generation from El Projects. The Committee noted that revenue generation from El projects constitutes a particular challenge. Some membersnotedthat when assessingthe impact o f Elthe focus on revenues was too narrow and some underlined the importance o f assessing the f illim- pact o f E1projects on poverty, employment and the environment. The Committee underlinedthe need for the WBG to be even more forthright inits dialogue with clients in addressingthe issue o f dis- closure o f revenues and noted that good models existed from Botswana and Chad-Cameroon pro- ject, Some members noted that they were not convinced by the ''resource curse" arguments pre- sented in the joint review and cautioned that resource-poor countries and non-E1 sectors also have govemance issues. The performance ofresource r i c h countries could, however, b e adversely af- fected by the so-called D u t c h disease problem. They recommended that inclusion o f exam- ples from successful countries would provide a more nuanced understanding o f the relation- ship between the E1sector and macroeconomic performance and were o f were o f the opinion that revenuemanagement should primarilybe addressed within the context o f overall public finance man- agement. Management agreed that i t would be key to address transparency and distribution is- sues related to E1revenue management in i t s FMR Safeguards and Performance o f the Portfolio. Members asked for clarification o f the rec- ommendation that safeguard policies in extractive industries projects be rigorously applied, and inparticular whether there would be a different standard for E1projects. The DGO responded that the recommendation was that existing policies be implemented and that this should apply to all sectors, not just EL Some members noted that the report suggestedthat there were still gaps and over- laps in safeguardpolicies, and that further consideration needs to be given to human rights issues. Management noted that considerable progress had been made by public and private entities in improving environmental management o f E1resources. Report o f the ExternalAdvisory Panel. Members would have likedto have seenmore substan- tiation o f the conclusions o f the OED/OEG/OEU's external advisory panel report. They did not agree with the advisory panel's assessment regarding the limited' value o f a ''rear view ap- proach" and reemphasizedthe importance o f evaluation to the Bank's operations. The DGO clarified that the advisory panels has been used for several major evaluations and that the role o f the panel 21 was to advise OED/OEG/OEU in the development o f the review but stressed that panel com- ments were conveyed to CODE as written by the panel. Scope o f the FinalManagementResponse (FMR). Committee members' provided their expecta- tions regarding the scope o f the FMR. They asked that it provide a framework for WBG involve- ment inthe E1sector and provide a clear assessment o f the recommendations inboth the evaluation and the EIR reports. Members also noted that the WBG should forge partnerships to address rec- ommendations that touched on areas outside o f the W B G s mandate. Communication.The Committee suggested that Management consider a communication to the public explaining the background and process for the two-stage response by Management to the OED/OEU/OEG evaluation. I t was also suggested that WBG Management consider a workshop on the results o f the OED/OEG/OEU study, perhaps inconnection with the EIR process. It was agreed that the Committee Chair would inform the Board concerning the discussion o f the OED/OEG/OEU review and the two-stage process by which Management will respond to it. Finn Jonck Chairman