32671 THE WORLD BANK W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T I F C O P E R A T I O N S E V A L U A T I O N G R O U P M I G A O P E R A T I O N S E V A L U A T I O N U N I T Extractive Industries and Sustainable Development An Evaluation of World Bank Group Experience I N N O T E IT A R R AN T O IO P R N O A C L FIN A NCE OPERATIONS EVALUATION DEPARTMENT ENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE AND INDEPENDENCE IN EVALUATION The Operations Evaluation Department (OED) is an independent unit within the World Bank; it reports directly to the Bank's Board of Executive Directors. OED assesses what works, and what does not; how a bor- rower plans to run and maintain a project; and the lasting contribution of the Bank to a country's overall devel- opment. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the Bank's work, and to provide accountability in the achievement of its objectives. It also improves Bank work by identifying and disseminating the lessons learned from experience and by framing recommen- dations drawn from evaluation findings. Operations Evaluation Group (IFC) Contributing to Sustainable Private Sector Development through Excellence in Evaluation The Operations Evaluation Group (OEG) was set up in 1995 as an independent evaluation unit to introduce systematic procedures, a broader evaluative framework, and improved instruments for corporate accountability and learning. It has a broad mandate to review IFC activities, strategies, and policies. Its reports provide inde- pendent review and analysis of mature projects, including those self-evaluated by operations staff. OEG assess- es results and identifies lessons learned. To ensure independence, OEG reports to IFC's Board through the World Bank's Director-General, Operations Evaluation. Operations Evaluation Unit (MIGA) The Operations Evaluation Unit (OEU) was created in July 2002 as the independent evaluation function for the Multilateral Investment Guarantee Agency (MIGA). OEU assesses the contributions of MIGA guarantee proj- ects and advisory and technical services to the development of host countries. The Unit also reviews MIGA's strategies, policies, and procedures. OEU's objectives are to ensure accountability for results and to promote organizational learning, using lessons from past operations. OEU and its staff are independent from MIGA oper- ational departments and report directly to MIGA's Board of Directors through the Director-General, Operations Evaluation. W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T I F C O P E R A T I O N S E V A L U A T I O N G R O U P M I G A O P E R A T I O N S E V A L U A T I O N U N I T Extractive Industries and Sustainable Development An Evaluation of World Bank Group Experience Andrés Liebenthal Roland Michelitsch Ethel Tarazona 2005 The World Bank Washington, D.C. International Finance Corporation Washington, D.C. Multilateral Investment Guarantee Agency Washington, D.C. http://www.worldbank.org/oed http://www.ifc.org/oeg © 2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 All rights reserved. Manufactured in the United States of America 1 2 3 4 08 07 06 05 The findings, interpretations, and conclusions expressed here are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. 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Printed on Recycled Paper Contents vii Acknowledgments ix Foreword x Definitions xi Executive Summary xiii Acronyms and Abbreviations 1 1 Background and Objective 1 Main Issues for the Sector 2 The World Bank Group's Changing Role in the Extractive Industries 5 2 From Economic Benefits to Sustainable Development 5 Project Outcomes 6 Linking Project Benefits to Overall Country Assistance 7 Mitigating Environmental and Social Impacts and Beyond 11 3 Addressing the Governance Challenge 13 4 Recommendations 13 Recommendation 1: Formulate an Integrated Strategy 14 Recommendation 2: Strengthen Project Implementation 15 Recommendation 3: Engage the Stakeholders 17 Annex A: World Bank Group Final Management Response 17 Introduction 17 OED/OEG/OEU Findings 18 Management Comments 18 World Bank Group's Strategy 21 Project Implementation Issues 22 Partnerships for Wider Reach 23 Conclusions 25 A. Recommendations of the Main Report i i i E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T 31 B. Recommendations of the OED Evaluation Report 36 C. Recommendations of the OEG Evaluation Report 43 D. Recommendations of the OEU Evaluation Report 51 Annex B: Chairman's Summary: Committee on Development Effectiveness (CODE) 51 Background 51 Main Findings and Recommendations 51 Conclusions and Next Steps 52 Governance 52 Revenue Generation from EI Projects 52 Safeguards and Performance of the Portfolio 52 Report of the External Advisory Panel 53 Scope of the Final Management Response 53 Communication 55 Operations Evaluation Department: Evaluation of World Bank Experience 57 Annex C: World Bank Experience 57 1 Introduction 59 2 The World Bank's Extractive Industries Role and Portfolio 66 3 Economic Benefits from Bank Projects 70 4 Environmental and Social Impacts and Their Mitigation 80 5 From Resource Revenues to Sustainable Development 88 6 Addressing the Challenge of Governance 95 7 Recommendations 98 Attachment 1: Portfolio of Extractive Industries Projects: FY93­FY02 102 Attachment 2: Extractive Industries­Dependent Countries 105 Attachment 3: OED Evaluation Guidelines 107 Attachment 4: Background Papers 109 Attachment 5: References 111 Operations Evaluation Group: Evaluation of IFC's Experience 112 IFC Approvals at a Glance 113 Annex D: IFC's Experience 113 1 Introduction 114 2 From Economic Benefits to Sustainable Development 117 3 Private Sector Development and Benefits to Investors 118 4 Environmental and Social Issues--From "Do No Harm" to Sustainability 130 5 Disclosure and Consultation 132 6 Governance and Challenges of Managing Revenues from Extractive Industries 136 7 Issues Beyond the Control of IFC and Its Clients Require Effective Cooperation and Action Inside and Outside the World Bank Group 137 8 Conclusions and Recommendations i v C O N T E N T S 141 Attachment 1: Evaluation Approach 143 Attachment 2: IFC's Investment in Extractive Industries 145 Attachment 3A: Summary Results--All EI Projects 146 Attachment 3B: Performance Ratings for Evaluated EI Projects 148 Attachment 3C: Performance Ratings for Studied Oil and Gas Projects 149 Attachment 3D: Performance Ratings for Studied Mining Projects 150 Attachment 3E: Approved Projects Reviewed by OEG--Mining 152 Attachment 3F: Approved Projects Reviewed by OEG--Oil and Gas 154 Attachment 3G: Reasons for Not Rating Projects or Companies 155 Attachment 3H: Evaluation Framework and Rating Guidelines for Studied Projects 157 Attachment 4: IFC's Technical Assistance Trust Fund Activities in EI Projects 159 Attachment 5A: Perceptions of Survey Participants at the EIR Planning Workshop 161 Attachment 5B: Perceptions of Survey Participants at the EIR Regional Workshops 163 Attachment 5C: Perceptions of WBG Staff Surveyed 167 Attachment 6: Relevant IFC Safeguard Policies, Guidelines, and Procedures 169 Attachment 7: Selected Sustainability Guidance Material--Consultation 173 Operations Evaluation Unit: Evaluation of MIGA's Experience 175 Annex E: MIGA's Experience 175 1 Introduction 179 2 Review of MIGA's EI Projects for Consistency with Safeguard Policies 188 3 Development Impacts of MIGA EI Projects 191 4 MIGA's Role in EI Projects: Contribution, Effectiveness, and Staff Perceptions 195 5 Findings and Recommendations 201 Attachment 1: MIGA Guarantee Projects in the Extractive Industries, FY1990­2003 (as of December 31, 2002) 205 Attachment 2: MIGA Extractive Industries Projects Evaluated by OEU 207 Attachment 3A: MIGA Safeguard Policies--Criteria for Consistency at Approval 211 Attachment 3B: MIGA Safeguard Policies--Criteria for Projects under Guarantee 213 Attachment 4: MIGA Safeguard Policy Triggers 215 Attachment 5A: Safeguard Policy Consistency Ratings of MIGA EI Projects at Approval 217 Attachment 5B: Safeguard Policy Consistency Ratings of MIGA EI Projects under Guarantee 219 Endnotes v Acknowledgments S pecial thanks are due to the members of background papers: Ron Anderson, Craig the advisory panel for the study, who pro- Andrews, Henk Busz, Anis Dani, Poonam Gupta, vided unique perspectives and advice: Michael Haney, David Hanrahan, John John- · James Cooney, General Manager, Strategic son, Charles Di Leva, Stephen Lintner, Jean- Issues, Placer Dome, Inc. Roger Mercier, Helga Muller, Kyle Peters, Anwar · Cristina Echavarría, Director, Mining Policy Shah, John Strongman, Rodrigo Suescun, Peter Research Initiative, International Develop- Thomson, and Monika Weber-Fahr. Our partic- ment Research Centre (IDRC) ular thanks go to Clive Armstrong and Paul · Arvind Ganesan, Director, Business and Andre-Rochon, who organized staff and man- Human Rights, Human Rights Watch agement feedback and put it in a coordinated · Michael Rae, Program Leader--Resource Con- framework. servation, WWF, Australia (formerly World The authors also are grateful to the 102 stake- Wildlife Fund, now World Wide Fund for holder representatives and 66 World Bank Group Nature) staff members who responded to the study sur- · David Rice, Group Policy Adviser, Develop- veys, and to the many people they met in the ment Issues, British Petroleum. field who shared their views about the sector and its impacts. We also thank William Hurlbut, who The report benefited immensely from the provided editorial and document production insights of past and present operational staff support for all parts of the report. who kindly agreed to be interviewed and gen- Annex C, on the IBRD and IDA experience, erously shared their insights about their projects: was written by Andres Liebenthal and Eleodoro Mayorga Alba, Natasha Beschorner, Ramachandra Jammi, with input from back- Mohammad Farhandi, Mansour Farsad, Nelson ground papers prepared by Roger Batstone de Franco, Hermann von Gersdorff, Alfred Gul- (Safeguards Study), Melissa Thomas (Gover- stone, Richard Hamilton, Marc Heitner, Heinz nance Study), and Luis Ramirez Urrutia (Rev- Hendriks, Charles Husband, Salahuddin Khwaja, enue Study), and from country case studies Paivi Koljonen, Marie Ange Le, Maria Lister, prepared by Dominique Babelon and Charles Charles McPherson, James Moose, William Porter, Dahan (Ecuador and Equatorial Guinea), Emile Sawaya, Robert Taylor, and Chris Wardell. Richard Berney (Kazakhstan), and Sunil Math- A number of staff in the WBG's global prod- rani (Ghana and Papua New Guinea). Soon- uct groups for oil, gas, and mining; country Won Pak provided administrative assistance. departments; network anchors; regions; and Maria Mar and Alex McKenzie helped set up the IFC's environmental and social department pro- online survey of WBG staff. Aracely Barahona- vided valuable comments, suggestions, and cor- Strittmatter translated two country case studies rections during preparation of the report and into Spanish. v i i E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T Annex D, on the IFC experience, was written Berney, Alberto Pasco-Font, Felix Remy, and by Roland Michelitsch under the general guid- Dale Weigel prepared background papers and ance of Bill Stevenson, director of IFC's Opera- case studies for this evaluation. Photis Bour- tions Evaluation Group (OEG). Other contributors loyannis-Tsangaridis and Brian McKenna pro- include Rex Bosson, Sid Edelmann, and Dennis vided research assistance. Alima Ngoutano-Njoya Long, who also completed project-level evalua- and Karalee Rocker helped to edit and format tions, conducted site visits, and helped prepare this report. the report. Margaret Ghobadi assisted with the analysis of trust fund activities. Linda Morra, Head of Special Studies in OEG, provided valu- Director-General, Operations Evaluation: able advice. Pelin Aldatmaz, Nicholas Burke, Gregory K. Ingram and Sanda Pesut assisted with data analysis and Director, Operations Evaluation Department: presentation. Cesar Gordillo, Yvette Jarencio, Ajay Chhibber and Elvira Sanchez-Bustamante provided essen- Director, Operations Evaluation Group: tial support as program assistants. William Stevenson Annex E, on the MIGA experience, was writ- Director, Operations Evaluation Unit: ten by Roger Batstone , Ethel Tarazona, and Aysegul Akin-Karasapan Stephan Wegner, under the general guidance of Manager, Sector & Thematic Evaluation, OED: Alain Barbu Aysegul Akin-Karasapan, director of MIGA's Task Managers: Andres Liebenthal, Roland Michelitsch, Operations Evaluation Unit (OEU). Richard and Ethel Tarazona v i i i Foreword T he extractive industries--oil, gas, and cerned stakeholders.2 Its findings and recom- mining--produce essential inputs (energy, mendations will be presented to WBG man- metals, and minerals) for the global econ- agement in December 2003. omy. Demand for these inputs is likely to Conducted in parallel with the EIR, this study increase, especially in developing countries, as by the independent evaluation units of the people seek to improve their living standards. World Bank, International Finance Corpora- The World Bank Group (WBG) finances only tion (IFC), and Multilateral Investment Guar- a small fraction of the investment in the sector, antee Agency (MIGA) assesses how effective the but its reach--through its access to stakehold- WBG has been in enhancing the contribution ers and the influence of its environmental and of extractive industries to sustainable devel- social policies, guidelines and procedures, and opment. The purpose is to provide an objec- the demonstration effects of its projects--is tive assessment of the results within the context potentially greater. However, the WBG's involve- of the WBG's overall mission of poverty reduc- ment in the extractive industries has come under tion and the promotion of sustainable devel- increased scrutiny in recent years from several opment. Its findings and recommendations sections of civil society. At the Annual Meetings provide guidance for the WBG's future strategy in 2000, some nongovernmental organizations in the sector.3 (NGOs) presented the WBG with a request to The methodology of this evaluation is outlined stop supporting extractive industries because, in in the Approach Paper.4 This report highlights their view, the industry's adverse environmen- the main conclusions and recommendations, tal, social, and governance impacts outweigh drawing from the experience of three agencies whatever economic and social benefits may of the WBG--World Bank (Annex C), IFC accrue to the domestic economy and the poor. (Annex D), and MIGA (Annex E). They are Climate change resulting from the use of fossil based on a review of the portfolio of extractive fuels is also an important concern.1 energy projects and EI-related advisory services; Following the 2000 Annual Meetings, WBG thematic reviews on revenue management, safe- management launched the Extractive Industries guards compliance, and governance; field mis- Review (EIR) to take an in-depth look at the sions to evaluate selected projects and prepare potential future role of the WBG in extractive country case studies; and surveys of stake- industries. The EIR, headed by Professor Emil holders and WBG staff. Annexes C, D, and E Salim, former Minister of Environment for contain specific conclusions and recommenda- Indonesia, focuses on consultations with con- tions for the respective agencies of the WBG. i x Definitions Extractive industries for this review include of IDA and IBRD is referred to as the World Bank oil, gas, and mining of minerals and metals. or "the Bank." The evaluation units of the WBG Mining for construction materials, including are the Operations Evaluation Department (OED) cement production and quarries, is not included, of the Bank, the Operations Evaluation Group nor are indirect investments through financial (OEG) of IFC, and the Operations Evaluation Unit intermediaries. (OEU) of MIGA. These units are independent of Sustainable development meets the needs of WBG management and report to the WBG's the present without compromising the ability of Board through the director-general, Operations future generations to meet their own needs. Evaluation. This requires sound environmental and social Resource-rich and EI-dependent are used performance and economic efficiency. Given interchangeably in this report to refer to devel- that fiscal revenues constitute a major source of oping countries whose average annual export net benefits (beyond those for the project fin- value of oil, gas, or mineral products exceeds 15 anciers or sponsors) obtained from the extrac- percent of total exports. This standard has been tion of mineral resources, the interests of future chosen with reference to the WBG's Poverty generations can be protected through the effi- Reduction Sourcebook, which states, "A country's cient utilization of these revenues for people in mining sector can play an important role in the host country. poverty reduction strategies if the approximate Revenue management refers to the collection, share of the mining sector is...greater than 10­25 distribution, and utilization of government rev- percent of export earnings...." For a list of coun- enues. tries meeting this criterion, see Annex C, Attach- The World Bank Group includes IDA, IBRD, ment 2. IFC, and MIGA. In this report, the combination x Executive Summary H ow effectively has the World Bank experienced negative growth during the 1990s. Group assisted its clients in enhancing To address this gap, the WBG needs to formu- the contribution of the extractive indus- late and implement integrated strategies at the tries (EI) to sustainable development? sector and country levels for transforming On the one hand, with its global mandate and resource endowments into sustainable devel- experience, comprehensive country develop- opment. These strategies should start with the ment focus, and overarching mission to fight presumption that successful EI projects--whether poverty, the WBG is well positioned to help financed by the WBG or not--should not only countries overcome the policy, institutional, and provide adequate returns to investors but also technical challenges that prevent them from provide revenues to governments, mitigate neg- transforming resource endowments into sus- ative environmental and social effects, and ben- tainable benefits. Furthermore, the WBG's efit local communities. The strategies also will achievements are many. On the whole, its EI need to address governance squarely and help projects have produced positive economic and to ensure that EI revenues are used effectively financial results, though compliance with its to support development priorities. They will environmental and social safeguards remains a require, in addition, much better cooperation challenge. Its research has broadened and deep- across the WBG and with other stakeholders. ened understanding of the causes for the dis- appointing performance of resource-rich Strengthen project implementation: The WBG countries. Its guidelines for the mitigation of needs to strengthen the implementation of its adverse environmental and social impacts have existing policy framework. Given the potential been used and appreciated widely. More environmental and social impacts of resource recently, it has begun to address the challenge extraction and the controversy surrounding the of country governance with a variety of instru- sector, rigorous implementation of safeguard ments. policies is a minimum requirement for it to oper- On the other hand, the WBG can do much ate in a world concerned with sustainable devel- to improve its performance in enhancing the EI opment. The safeguard policies and guidelines sector's contribution to sustainable development also need to be adapted in line with evolving and poverty reduction. There are three main good practice, especially where they are incon- areas for improvement: sistent or incomplete. In addition, in light of growing concerns about the sustainability of EI Formulate an integrated strategy: The WBG development, the WBG needs to define, moni- has not devoted enough attention to the devel- tor, document, and report on the economic, opmental needs of the poorly performing social, and environmental impacts of its projects resource-abundant countries, many of which more systematically. Specifically, the distribution x i E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T of benefits, identified as an important issue for with project investment and technical assistance the sector by many stakeholders, needs to be in the sector. But the WBG has inadequately monitored and evaluated explicitly. addressed some areas--notably governance and revenue management. The WBG's performance Engage the stakeholders: Often in collabora- in these areas can be enhanced by improving tion with other organizations, the WBG has consultation with stakeholders, including local brought together diverse stakeholders in extrac- communities, and by reporting on key sustain- tive industries to address issues at the local, ability indicators systematically and transpar- national, regional, and global levels. The WBG's ently. The WBG also should vigorously pursue convening role has been actively sought and has countrywide and industrywide disclosure of been significant because of its access to all government revenues from extractive industries. stakeholders, its private and public develop- Such an approach is also likely to raise standards ment experience, and its ongoing involvement and practices for the sector as a whole. x i i Acronyms and Abbreviations AAA Analytical and advisory activities AFR Africa Region AMR Annual Monitoring Report ASM Artisanal and small-scale mining ASEAN Association of South East Asian Nations CAE Country Assistance Evaluation CAO Compliance Advisor/Ombudsman (for IFC and MIGA) CAS Country Assistance Strategy (World Bank Group) CDP Community Development Program CODE Committee on Development Effectiveness DGO Director General, Operations Evaluation EA Environmental assessment EAP East Asia and the Pacific Region EAP Environmental Action Plan EBRS Energy Business Renewal Strategy ECA Europe and Central Asia Region EI Extractive industries (oil, gas, and mining) EIA Environmental Impact Assessment EIR Extractive Industries Review EMP Environmental Management Plan EMS Environmental Management System ERL Emergency Rehabilitation Loan ERR Economic rate of return ESW Economic and sector work E&S Extractive Industries and Sustainable Development FDI Foreign direct investment FMR Final Management Response FRR Financial rate of return FY Fiscal year (July 1 to June 30) GDP Gross domestic product GEF Global Environment Facility GHG Greenhouse gas GOPNG Government of Papua New Guinea GPG Global Products Group GRICS Governance Research Indicators Country Snapshot IBRD International Bank for Reconstruction and Development x i i i E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T ICMM International Council of Mining and Metals ICR Implementation Completion Report ID Institutional development IDA International Development Association IDI Institutional development impact IFC International Finance Corporation IMF International Monetary Fund IMR Interim Management Response IPAP Indigenous Peoples Action Plan IPDP Indigenous Peoples Development Plan IPIECA International Petroleum Industry Environmental Conservation Association IPP Indigenous Peoples Plans LAC Latin America and the Caribbean Region MDF Mineral Development Fund MIGA Multilateral Investment Guarantee Agency MMSD Mining, Minerals and Sustainable Development Project MNA Middle East and North Africa Region NGO Nongovernmental organization NPV Net present value OBA Output-based aid OD Operational Directive (World Bank) OED Operations Evaluation Department (World Bank) OEG Operations Evaluation Group (IFC) OEU Operations Evaluation Unit (MIGA) OGP International Association of Oil and Gas Producers OP Operational Policy (World Bank) PNG Papua New Guinea PPAH Pollution Prevention and Abatement Handbook PPAR Project Performance Assessment Report PSC Production-sharing contract PSD Private sector development PSR Project Supervision Report QACU Quality Assurance and Compliance Unit QAG Quality Assurance Group RAP Resettlement Action Plan RP Resettlement Plan SAL Structural Adjustment Loan SAR Staff Appraisal Report SAS South Asia Region SECAL Sectoral Adjustment Loan SIL Specific Investment Loan SME Small- and medium-size enterprise SSM Small-scale mining TA Technical assistance TAL Technical Assistance Loan TI Transparency International UNDP United Nations Development Programme UNEP United Nations Environment Programme WBG World Bank Group x i v 1 Background and Objective T he objective of this study is to evaluate how effectively the WBG has assisted its clients in enhancing the contribution of extractive indus- tries to sustainable development.5 The WBG's activities in EI have come under increased scrutiny and criticism from 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 ben- efits might accrue to the domestic economy and the poor. Others have been concerned with issues of poor governance and the failure to use resource rents effectively in support of 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 strat- egy in the sector. Main Issues for the Sector than resource-poor countries in key aspects of Extractive industries can contribute significantly development, including economic, social, and to a country's economic development and often governance.6 The relationship7 between EI offer the first opportunities for foreign investment dependence and economic growth for all WBG and private sector development. They generate borrower countries is shown in Figure 1.1.8 government revenues, foreign exchange earn- Much research, at the WBG and elsewhere, ings, and employment, often in depressed and has been done to better understand and address remote areas. However, they also can aggravate this paradox.9 The emerging consensus is that or cause serious environmental, health, and the underperformance of resource-rich devel- social problems, including conflict and war. oping countries is not inevitable, because most They provide scope for rent-seeking and oppor- of the factors that explain it result from institu- tunities for distorting public expenditure policies. tional and policy failure.10 Overall, while the tech- Many resource-rich countries perform worse nical requirements for managing volatile and 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T S l o w e r E c o n o m i c G r o w t h w i t h F i g u r e 1 . 1 G r e a t e r E I - D e p e n d e n c e : 1 9 9 0 ­ 2 0 0 2 10 per 8 (%) 6 GDP 4 2 Growth 0 Annual (1990­2002) -2 -4 capita -6 Average -8 0 20 40 60 80 100 Average Annual EI Exports/Total Exports (%) (1990-2002) Source: World Development Indicators; WHO, CONTRADE Database exhaustible revenue flows and investing them maintain production levels, rehabilitate or close for sustainable development are well under- uneconomical facilities, and attract foreign invest- stood, they are difficult to implement because ment. Since the mid-1990s, the Bank's approach of poor governance. Thus, creating good gov- has evolved toward greater collaboration with ernance is at the heart of the institutional and civil society, local governments, and private com- policy changes needed to sustain sound fiscal panies. The share of extractive industries in the management and maximize the benefits from the Bank's overall lending declined from 4 percent extraction of mineral resources. in the 1980s to under 2 percent in the 1990s. The World Bank Group's Changing Role The International Finance Corporation: IFC in the Extractive Industries has focused on countries where its value added-- The WBG provides only a very small share of as a catalytic agent and neutral third party the financing for the sector, but its reach-- between governments and private investors--is through its access to all stakeholders; the influ- greatest. Since 1992, investments in oil and gas ence of its environmental and social policies, (but not mining) exploration were discontinued, guidelines, and procedures; and the demon- mainly because of poor results and difficulties stration effects of its projects--is potentially associated with assessing exploration risks. The much greater. The WBG's advice on the enabling share of EI investment in IFC's total lending port- environment for extractive industries also has a folio has decreased substantially, from 15 percent broader effect on the sector than the financing in 1990 to 6 percent today. Since the mid- to late volume would indicate. 1990s, IFC has focused increasingly on sustain- ability, especially environmental, health and The World Bank: The Bank's role has evolved safety, and social issues, and, most recently, on from mainly exploration and production activi- revenue management and distribution. Many of ties support (1960s to the early 1980s), to sector IFC's sustainability initiatives (such as small- and policy reform and commercialization of state- medium-size enterprise [SME] linkages, IFC owned enterprises (1980s), to a greater empha- Against AIDS) have a particular relevance to, sis on capacity-building and private sector and focus on, the EI sector. IFC's EI portfolio is development (1990s). Also in the 1990s, the concentrated in oil and gas (half), gold, and Bank began to help transition economies to copper (over 10 percent each). 2 B A C K G R O U N D A N D O B J E C T I V E The Multilateral Investment Guarantee Complementary and Coordinated Roles: The Agency: MIGA has supported extractive indus- different parts of the WBG have coordinated and tries with political risk guarantees and, to a complementary roles in their approach to extrac- lesser extent, technical assistance and advisory tive industries and resource-rich countries. The services. MIGA's early involvement was con- Bank has responsibility for country policy dialogue centrated heavily in the mining sector. Between and tends to focus on broader structural and 1990 and December 2002, MIGA provided guar- social issues, including sector policy reform and antees for 31 projects in EI, most of them in min- institutional capacity-building, with a focus on ing. Throughout the 1990s, there was high poverty reduction. IFC has focused on attracting demand for MIGA insurance, with large oper- private sector investment, particularly in "high-risk" ations in countries with higher political risk pro- countries, where its projects were expected to files. Learning from its earlier experience, MIGA have a catalytic effect in attracting new investments increasingly has paid more attention to envi- and demonstrating sound management of envi- ronmental and social aspects of EI projects ronmental and social effects. MIGA specializes in (and adopted its own environmental assessment providing political risk guarantees, while at the and disclosure policies in 1999 and its own same time ensuring that the projects it supports interim safeguard policies in 2002). Because of comply with applicable environmental and social the low volume of new guarantees in extrac- performance standards. Since the late 1990s, tive industries projects since 2001 and cancel- WBG projects and policy work in the extractive lation and expiration of MIGA coverage for industries have been coordinated through joint some projects, the sector's share in MIGA's Bank-IFC Global Product Groups in the oil and portfolio has continued to decrease and is now gas sector and the mining sector, and joint Bank- 11 percent. IFC-MIGA country assistance strategies (CASs). 3 2 From Economic Benefits to Sustainable Development Project Outcomes T he World Bank: Overall, ex post evaluations show that about 80 per- cent of the Bank's EI projects11 have had moderately satisfactory or better outcomes,12 above the Bank-wide average of 75 percent. The benefits from investment projects included increased production, increased private investment, and improved productivity. Adjustment and technical assis- tance projects, on the other hand, generated economic benefits through pri- vate sector development, improved production levels, institutional capacity-building and policy reform, rehabilitation or closure of uneconomical mines, environmental cleanup, and the integration of artisanal and small- scale mines into the formal sector. However, the Bank's documentation and reporting on the economic benefits of the projects, such as ex post economic analyses and other quantitative indicators, has been limited.13 Given the ques- tions that have been raised about the justification for the Bank's continued involvement in the sector, improved reporting could inform stakeholders and strengthen accountability. The main finding that emerges from the The International Finance Corporation: review of the Bank's portfolio is that projects with Overall development results in IFC's EI projects14 satisfactory outcome ratings tended to be asso- were about the same as in other sectors, with ciated with greater government commitment to 60 percent success. It is noteworthy that IFC's project objectives and adequate infrastructure, EI investments are concentrated in particularly favorable commodity prices, and a high level of difficult countries, where many development stakeholder involvement. The less successful agencies are struggling to achieve positive projects appeared to be affected by poor gov- results,15 and are subject to substantial risks ernment commitment and unfavorable economic (commodity price fluctuations, geological risks, conditions or commodity prices. etc.). About three-quarters of EI projects had sat- 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T isfactory economic returns, with projects in oil in a few cases, compensation did not restore and gas performing better than those in other livelihoods for everyone affected. sectors and mining projects performing about the same as those in other sectors. IFC's EI projects The Multilateral Investment Guarantee often were among the first investment oppor- Agency: All evaluated MIGA projects17 have tunities in the country, frequently followed by been affected adversely by the drop in metal other investments, notably in SMEs. Several proj- prices since the late 1990s, which reduced their ects involved privatization and demonstrated financial and economic returns and sustainabil- that the private sector tends to operate more effi- ity. In most projects, however, economic bene- ciently and in a more environmentally sound fits were above financial rates of return, because manner than state-owned enterprises. Most proj- of the benefits accruing from creation of jobs and ects generated large government revenues, some- provision of training to the workforce, often in times even where investors lost money. But remote and depressed areas. In addition, these when little or nothing flowed back to local com- projects (several in low-income, resource-rich munities, this created problems--for local peo- countries) generated sizable revenues to local ple and investors. The distribution of benefits, and central governments, although governments considered one of the top issues in the sector, holding equity shares in return for providing ore was not consistently and sufficiently addressed reserves were disappointed by lower-than- in IFC projects. Close cooperation within the expected equity returns. Most projects also WBG--in particular between IFC and the Bank's funded community initiatives, including a few country departments--and between the WBG that established exemplary community devel- and the host government will be necessary to opment programs. address this issue effectively.16 All evaluated MIGA projects were generally IFC's EI projects typically created economic consistent with the private sector strategies of opportunities for people--notably direct and their host countries. Most were in countries indirect jobs, often in remote areas. Many proj- where international private investors had been ects improved local roads, water, and power sup- reluctant to make large investments because of ply, and the best ones tried to maximize limited experience with new governments or dif- economic opportunities for the local community. ficulties faced by previous investments in that Recently, IFC has focused increasingly on country or sector. In these instances, MIGA's enhancing benefits and opportunities for local political risk insurance was significant in enabling communities. For example, IFC's "SME linkage" investment flows into the mining sector and, in program, which tries to increase supply linkages some cases, has led the way for other invest- to large projects, was particularly active in extrac- ments in the host country. tive industries, and so was "IFC Against AIDS." IFC also has focused on helping clients improve Linking Project Benefits to Overall their community development programs, often Country Assistance using trust funds. The most effective programs, Beyond the generation of project benefits, the identified through consultations, were commu- WBG's involvement in the transformation of nity needs, priorities, and aspirations. While resource riches into sustainable development overall positive economic effects dominated, has been limited.18 A review of the latest CASs19 there were adverse consequences. For example, in poorly performing resource-rich countries economic opportunities often attract a large found that 64 percent recognize the special number of people, and companies and com- issues associated with the management of munities found it difficult to deal with this influx, resource rents, but in only a few instances is the particularly where government capacity was discussion linked to specific interventions. The weak. Local people did not always have the req- inadequacy of linkages between EI sector activ- uisite skills to take advantage of the opportuni- ities and sustainable development also was high- ties. They sometimes lost agricultural lands, and, lighted by 47 percent of the WBG's EI sector staff 6 F R O M E C O N O M I C B E N E F I T S T O S U S TA I N A B L E D E V E L O P M E N T who responded to a survey; 50 percent attrib- The World Bank: The assessment of a sample uted it to inadequate support from the relevant of Bank EI projects found the majority to be sub- country department/country management unit.20 stantially consistent with applicable safeguard In addition, the Bank's overall lending to policies, but the degree of consistency varied resource-rich countries experiencing negative depending on the environmental category of growth has been lower than average, with no the project and the stage of the project cycle.24 indication of compensating nonlending inter- Thus, about 74 percent of the `A' and `B' proj- ventions.21 ects were assessed to be substantially (or highly) A detailed review in a sample of five resource- consistent with safeguards at approval, with the rich countries indicates that Bank interventions share declining to 67 percent during imple- were only modestly relevant and efficacious in mentation.25 The decline may be associated with addressing the challenge of improving fiscal the finding that safeguards supervision inputs and policies and public expenditures, with the qual- reporting had been adequate in only 41 percent ity of governance emerging as the key factor. This of the projects. Even so, these findings are more suggests that good governance is a prerequisite positive than those obtained from the survey of for enhancing the positive linkage between stakeholders, which points to their perception increased fiscal revenue flows and sustainable of a need for improved performance in the envi- development.22 Good governance was also ronmental and social areas. important for development results and IFC's Most significant shortcomings in the Bank's investment results--both were better where implementation of safeguards can be traced to country governance was good.23 inadequacies at the initial project screening, Taken together, these findings suggest that, especially for sectoral adjustment and technical while the WBG is aware of the underlying causes assistance projects, where the guidance has been for the underperformance of many resource- subject to varying interpretations.26 Inadequate rich countries--primarily unsound revenue man- supervision and reporting were other important agement and poor governance--it has yet to sources of problems: environmental or social formulate and implement viable approaches to specialists supervised only about 30 percent of address them. If the WBG is to have a more the projects in the sample, and fewer than a effective role in poorly performing EI-depend- quarter of the project completion reports had ade- ent countries, it will require government com- quate reporting and discussion of this subject.27 mitment as well as use of the WBG's full While the validity of these findings is limited influence to achieve sound fiscal management to the sample of 38 EI projects that was reviewed and build a supportive governance framework. (half of all projects in the EI portfolio), the results The linkages between resource rents and sus- make a strong case for strengthening imple- tainable development can best be made explicit mentation of the Bank's safeguards framework, through CASs, to guide the design of specific which is no different for extractive industries projects and the monitoring and evaluation of than for other types of projects. The findings results. point, in particular, to the need for clearer and more consistent guidance for the environmental Mitigating Environmental and Social assessment (EA) categorization of sectoral adjust- Impacts and Beyond ment and technical assistance projects, the iden- Extractive industries tend to have a heavy "foot- tification of applicable safeguards at the initial print"--large, wide-ranging, and long-term envi- project screening, the appropriate scope and ronmental and social impacts. Effective arrangements for monitoring of safeguards imple- implementation of the WBG's safeguard policies mentation, and the reporting and evaluation of is therefore particularly important in this sector results at project completion. Improvement would for sustaining the rationale for continued WBG be particularly important for extractive industries, involvement in a world concerned with sus- given the large share of sectoral adjustment and tainable development. technical assistance projects, the inadequacies in 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T monitoring and reporting, and the controversy ect implementation (while under MIGA guar- surrounding the sector. antee or at the time of cancellation of the MIGA guarantee). Although in at least two cases MIGA The International Finance Corporation: The played a direct positive role, in other cases these evaluation of IFC projects' compliance with safe- improvements were not clearly attributable to guard policies and guidelines found oil and gas MIGA. The level of consistency was not uniform projects performing significantly better and min- across all applicable safeguard policies. The ing projects significantly worse than those in project review noted systemic deficiencies in other sectors. Judging from the desk review of the application of the social aspects of safe- portfolio projects, the performance of mining guards. OEU found that, in addition to lower- projects appears to have improved and is now ing perceived political risks as a guarantee in line with the IFC average.28 The main prob- provider, MIGA had the greatest potential to lems in mining projects related to the handling add value with its support to environmental of hazardous materials--for which IFC has now and social aspects of EI projects. developed guidelines--and difficulties in ensur- The evaluated projects showed an overall ing adequate mine closure. Oil and gas projects improving trend in the consistency of safeguard featured almost no compliance issues per se, but policies over time, implying institutional learn- gas flaring was a concern in many projects, ing from experience and strengthened policies downstream transportation in others. and implementation as MIGA expanded its oper- IFC's supervision of EI projects was signifi- ations. However, the shortcomings identified cantly better than average better than that of the point to a lack of a proactive approach with its average IFC project, and IFC's environmental and clients throughout its involvement with the proj- social specialists spent more time on extractive ects to add value by improving their environ- industries (one-third more in fiscal year 2002) mental and social impacts. than on any other sector. But gaps remain, in part attributable to insufficient management systems. Need for Continued Updating: The WBG's For example, while project-level supervision safeguard policies, guidelines, good practice was generally strong, no central database iden- manuals, and notes have received wide accept- tifies which safeguard policies and key issues ance, even where the WBG is not involved-- apply to which project. Clients expressed appre- some other international financial institutions ciation for IFC's environmental and social spe- use them, and recently some of the largest pri- cialists, who helped improve the environmental vate project finance banks have committed to and social aspects of numerous projects. But they adopt them. But some of them are inconsistent, cannot replace local monitoring, particularly incomplete, or lacking. For example, while lead- because IFC usually exits from projects before ers in extractive industries and some govern- project closure. Building local monitoring capac- ments subscribe to "voluntary principles on ity--either that of local consultants or that of gov- security and human rights," the WBG has no ernment agencies (through the World comparable guidance. Given that human rights Bank)--could help address this issue. Disclosure violations frequently have been alleged in con- of environmental monitoring data would likely nection with the site security of EI projects-- improve trust and improve performance--pos- including some WBG projects--this is one of the sibly even after IFC's exit. gaps that needs to be filled.31 Another area is HIV/AIDS, an important issue for the sector, The Multilateral Investment Guarantee but one not covered by guidelines.32 Given the Agency: The review of a sample of MIGA EI proj- wide use of the WBG's guidelines, it is particu- ects29 found that 73 percent were consistent30 larly important that they be comprehensive, with MIGA's (2002) issue-specific interim safe- practical, and updated regularly to reflect lessons guard policies at the time of MIGA Board and evolving good practice standards. Their approval. The consistency improved during proj- standard-setting character points to the poten- 8 F R O M E C O N O M I C B E N E F I T S T O S U S TA I N A B L E D E V E L O P M E N T tial for the WBG to continue building on its conditions and building capacity for the man- global mandate, public and private sector knowl- agement of environmental and social impacts edge, and convening power for catalyzing good have yielded mostly satisfactory results. As part practice with respect to environmental, social, of its sustainability initiative, IFC has started to and other issues. Besides improving the results focus on improving the impacts of its projects of WBG-supported projects, this would also "beyond compliance" (for example, by maxi- help to define a level playing field among inter- mizing linkages with local SMEs).33 These find- national financial institutions and among differ- ings point to the continuing potential for the ent companies. WBG to make a valuable contribution to the development of the host countries and the Beyond Safeguards: The WBG's efforts to "do extractive industries sector, in an area that the good" by addressing existing environmental private sector alone cannot address.34 9 3 Addressing the Governance Challenge H igh dependence on revenues from extractive industries has been associated with corrosive effects on economic and political life in many countries, including rent-seeking and government ineffec- tiveness. Indeed, a review of the literature and feedback from NGOs sug- gests that good governance is central to creating an environment that fosters sustainable and equitable development, and is an essential complement to sound revenue management and safeguard policies. Figure 3.1 shows the negative association between the quality of governance and EI dependence.35 Countries such as Botswana and Chile36 have between a diagnostic assessment of governance, leveraged their natural resource wealth into sus- a governance-informed strategic approach to tainable growth through investment-friendly the EI sector set out in the country strategy, and policies, fiscal discipline, and long-term planning. the design of EI projects.38 Where some links can While the highest quality of macro and sectoral be observed, such as in Papua New Guinea governance37 may not be required for resource and Kazakhstan, experience suggests that gov- extraction to be beneficial to a client country, ernance issues take a long time to address, and some minimum conditions should exist to help working to establish good governance in parallel ensure that the benefits from EI projects are not with, or after, supporting increased investment squandered and the citizens left with costs that in EI, is a high-risk strategy in countries with poor can include environmental damage, health risks, governance. and conflict. This fact points to the need for the WBG to At least since the early 1990s, the WBG has tailor its support for resource extraction on the been aware of the importance of addressing basis of an assessment of the quality of gover- the governance challenge for ensuring the trans- nance. Important indicators of macro gover- formation of resource rents into sustainable nance include the quality of public financial development. But there is little discussion of sec- management39 and rule of law,40 as measures of tor-specific governance issues in the country the government's ability to address problems strategies of EI-dependent countries. There are through formal institutional reforms. At pres- also few cases where a link can be discerned ent, while the Bank's economic and sector work 1 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T W o r s e C o u n t r y G o v e r n a n c e F i g u r e 3 . 1 w i t h G r e a t e r E I - D e p e n d e n c e 0 a 20 Rank 40 60 Indicator 80 100 GRICS 2000/2001 120 140 160 "Composite" 180 0 20 40 60 80 100 Average EI Exports / Total Exports, 1990­99 (%) a. "Composite" GRICS ranks are a simple average of individual GRICS rankings for 2000/2001 for Voice and Accountability, Political Stability, Government Effec- tiveness, Regulatory Quality, Rule of Law, and Control of Corruption. Source: http://www.worldbank.org/sbi/governance/pdf/2001 kkzcharts.xls frequently assesses the quality of public finan- building and policy reform efforts aimed at cial management, it has no diagnostic instrument improving the enabling environment for the to evaluate the rule of law or the quality of sec- sector. About 15 percent of Bank EI projects have toral governance. These gaps need to be provisions for disclosure and dissemination of addressed. This governance analysis then has to project information beyond the requirements inform the risk assessment, structuring, and of the EA policy, but with the exception of the investment or underwriting decision. Recogniz- recent Bank/IFC Chad-Cameroon Pipeline proj- ing that fiscal revenues may be misused in coun- ects, the WBG has not required disclosure of fis- tries with poor governance, IFC has developed cal revenues from EI, even though it sometimes a position paper outlining possible steps to recommends it. A few companies operating in address this risk.41 MIGA has not yet addressed the sector have started disclosing government the issue of revenue management from extrac- revenues, and some global initiatives advocate tive industries in a similar way. disclosure.43 While some governments make Promoting transparency is an essential tool for such disclosure illegal, and companies are con- building good governance, and the WBG has cerned that unilateral disclosure could harm long played a role, mainly in conjunction with them, industry overall appears to be in favor-- its EA policy,42 but also through institution- if a level playing field can be ensured. 1 2 4 Recommendations W ith its global mandate and country development perspective, com- bined with public and private sector experience, the WBG is well positioned to help countries transform resource riches into sus- tainable development. The Bank's research has broadened and deepened the understanding of the "paradox of plenty," and the WBG has led or par- ticipated in numerous initiatives to address EI issues. In most dimensions, the WBG's EI projects appear to perform at least as well or better than proj- ects in other sectors, but much more needs to be done to improve imple- mentation and monitoring of compliance with existing policies and to address governance, transparency, and revenue management issues. Unless the WBG improves its performance in these areas, it will not be able to max- imize the sector's contribution to sustainable development and will face con- tinued--and warranted--criticism. The key recommendations are summarized below. Annexes C, D, and E contain additional specific recommendations for the Bank, IFC, and MIGA.44 Recommendation 1: Formulate an sumption that successful EI projects--whether Integrated Strategy financed by the WBG or not--have to provide The WBG has not devoted enough attention to not only adequate returns to investors but also the developmental needs of the poorly per- revenues to governments and benefits to local forming resource-abundant countries, many of communities, and mitigate negative environ- which experienced negative growth during the mental and social effects. They will also need to 1990s. To address this gap, the WBG needs to address governance squarely and help to ensure formulate and implement integrated sector- and that EI revenues are effectively used to support country-level strategies for transforming resource development priorities. They will also require endowments into sustainable development. Such much better cooperation within the WBG and integrated strategies will start with the pre- with other stakeholders. 1 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T Formulate a World Bank Group sector strat- for EI. Doing so would enable the Bank to egy: The WBG needs to design and implement establish and maintain continuity of engage- a sectoral strategy that closely integrates resource ment and facilitate responding quickly to oppor- extraction with sustainable development through tunities for assistance when they arise.49 the effective management of EI revenues in sup- port of developmental priorities and the reliable Support private sector development and mitigation of adverse environmental and social environmental sustainability: In all countries, impacts. Where macro and sectoral governance the WBG should continue its support to close are weak, the WBG's assistance should focus on uneconomical mines, reform and privatize state- strengthening governance. In such cases, the owned enterprises, and mitigate pre-existing WBG should carefully assess and report on the environmental and social problems. Where risks that EI fiscal revenues may not be used for appropriate, the WBG should help integrate arti- development priorities. The WBG should not sanal and small-scale mining (ASM) with the for- support significant sector expansion unless it can mal sector and internalize their environmental and adequately mitigate these risks.45 Where macro social impacts, while at the same time creating governance is sound but sectoral governance is alternative employment opportunities and sup- weak, the WBG should focus on improving sec- porting the consolidation of ASM activities for toral governance and should support the sector greater efficiencies and economies of scale. only in conjunction with adequate provisions to overcome sectoral governance weaknesses.46 Recommendation 2: Strengthen Project Implementation Address extractive industries in Country The WBG needs to strengthen the implementa- Assistance Strategies: For all resource-rich tion of projects within its existing policy frame- countries, the WBG should explicitly address work. Given the potential impacts of resource extractive industries in the CASs.47 The CAS extraction and the controversy surrounding the should explicitly discuss the sector's current and sector, rigorous implementation of safeguard potential economy-wide linkages (for example, policies is a minimum requirement for the WBG the importance of government revenues, their to operate in a world concerned with sustain- management, distribution, and use for devel- able development. In addition, in light of grow- opment priorities) and reference the underlying ing concerns about sustainable development, the governance assessment. This approach should WBG needs to define, monitor, document, and guide future project design, facilitate monitoring report on the economic, social, and environ- and evaluation, and provide an agreed frame- mental impacts of its projects more systematically. work for WBG-wide coordination and collabo- Specifically, the distribution of benefits, identi- ration in the EI sector. The different agencies of fied by many stakeholders as an important issue the WBG should work together routinely to for resource extraction, needs to be explicitly enhance the development impacts of EI projects; monitored and evaluated. for example, in the form of public-private part- nerships with respect to community development Improve project screening and monitoring: programs. The WBG should provide clearer and more con- sistent guidance for the categorization of proj- Promote governance improvements: The ects,50 the identification of applicable safeguards Bank should compensate for the lower level of at the initial project screening, the appropriate lending that may be appropriate for resource-rich scope and nature of the EA instruments, and the countries with weak macro and sectoral gover- reporting and evaluation of safeguards imple- nance48 by devoting greater management atten- mentation. This needs to be followed up through tion and an administrative budget for advisory the entire implementation framework, from good and analytical activities aimed at improving the practice guidelines to appropriate monitoring and policy, institutional, and governance framework training. 1 4 R E C O M M E N D AT I O N S Involve specialists throughout: The WBG access to all stakeholders, private and public should provide adequate resources and incen- development experience, and ongoing involve- tives for the participation of qualified environ- ment with project investment and technical assis- mental and social specialists in the preparation, tance in the sector. But the WBG has addressed appraisal, and supervision of all projects that are some areas inadequately--notably governance likely to have adverse impacts. This will ensure and revenue management. The WBG's perform- that such impacts are addressed adequately ance in these areas can be enhanced by improv- through the upstream design of appropriate mit- ing consultation with stakeholders, including igation strategies or project alternatives, as well local communities, and by systematically and as through the retrofit of timely remediation transparently reporting on key sustainability indi- measures should unexpected impacts material- cators. Such an approach also is likely to raise stan- ize during project implementation. dards and practices of the sector as a whole. Enhance reporting of results: The Bank Update policy framework: In consultation should strengthen reporting of its results by with its stakeholders, the WBG should period- ensuring that project completion reports include ically adjust its policy framework for extractive an ex post economic rate of return or net pres- industries to ensure that it remains up-to-date ent value (NPV) or, where that is not feasible, with evolving industry practice. It should resolve a cost-effectiveness analysis to determine remaining inconsistencies, such as those between whether the project represented the least-cost requirements for different mine types (such as solution to attain its objectives. IFC should funding for mine closure), onshore versus off- develop and use a reporting template for envi- shore oil projects, dam safety, and involuntary ronmental and socioeconomic sustainability indi- resettlement. It should address identified gaps, cators, building on industry initiatives. MIGA such as those related to consultation and dis- needs to adopt more standardized and timely closure, community development, social issues reporting mechanisms on environmental and of mine closure, security, hazardous materials social safeguards compliance and ex post devel- management, acid rock drainage, gas flaring, and opment outcomes. The WBG should prepare transportation of oil.53 It should also recognize completion reports for every significant non- the expanding awareness of the human rights lending/guarantee issuance activity.51 dimension of WBG policies and projects and explore possible avenues for addressing the Evaluate the sharing of benefits: At appraisal issues, especially where it lags industry best and during supervision,52 the WBG should sys- practices, such as regarding site security. tematically estimate the distribution of project benefits among different stakeholder groups Promote disclosure of fiscal revenues from (government at different levels, private compa- EI: The WBG should vigorously pursue coun- nies, and local communities), evaluate its sen- try- and industry-wide disclosure of government sitivity to different scenarios, and discuss the revenues from EI and related contractual arrange- acceptability of benefit-sharing with key stake- ments (such as production-sharing agreements, holder groups. concession, and privatization terms).54 The Bank should work toward and support disclosure of Recommendation 3: Engage the EI revenues and their use in resource-rich coun- Stakeholders tries. IFC and MIGA also should strongly encour- Often in collaboration with other organizations, age (and consider requiring) their private sector the WBG has brought together diverse stake- clients to publish their payments to govern- holders in extractive industries to address issues ments. at the local, national, regional, and global levels. The WBG's convening role has been actively Develop and monitor sustainability indica- sought and has been significant because of its tors: Together with other stakeholders, the 1 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T WBG should develop indicators of economic, Increase local community participation: social, and environmental sustainability,55 estab- The WBG should support enhanced community lish baseline data, provide for adequate moni- consultation and participation throughout the life toring over the life of the project, and report and cycle of EI projects. The WBG should help coun- evaluate the results during supervision and in tries to increase involvement by local commu- project completion reports. The WBG also should nities in EI decisionmaking processes and encourage more independent outside monitor- ongoing consultation throughout the project life ing, ideally using local capacity (which may cycle, including closure. have to be developed). 1 6 ANNEX A: WORLD BANK GROUP FINAL MANAGEMENT RESPONSE Introduction tial commitment of resources by the interna- This paper presents the response of the Man- tional community. In many developing countries, agements of the World Bank, IFC, and MIGA to especially those in sub-Saharan Africa, well- a four-volume evaluation of the World Bank managed development of natural resource Group's (WBG's) activities in the extractive endowments can make a vital contribution industries (EI)--oil, gas, and mining--by their toward reducing poverty and attaining the MDGs. respective independent evaluation units, the Operations Evaluation Department, Operations OED/OEG/OEU Findings Evaluation Group, and Operations Evaluation The joint evaluation report shows that, on bal- Unit (OED, OEG, and OEU).56 The evaluation ance, WBG activities in the EI sector have added was completed in June 2003, and was consid- value and have contributed to the development ered at a meeting of the Committee on Devel- of the countries concerned. Indeed, EI projects opment Effectiveness (CODE) on July 9, 2003. have performed at least as well as projects in At that meeting, Executive Directors agreed that other sectors: nearly 80 percent of IBRD/IDA's Management should delay its response to the EI projects have been at least moderately satis- evaluation pending the receipt of the report of factory. IFC's and MIGA's operations in support an independent Extractive Industries Review of private sector activities in EI were as successful (EIR) consultation. The EIR report has now been as other operations in their development out- received and a draft Management Response to come and financial performance dimensions, it has been prepared. despite the fact that EI investments were typi- cally in more difficult country environments. A Thorough and Timely Review. Manage- Against this background, OED/OEG/OEU's inde- ment welcomes the joint evaluation report. It pro- pendent evaluation lays out specific areas for vides a thoughtful and thorough review of the attention and provides important perspectives on WBG's activities in EI. A particular contribution key issues for each institution and for the WBG of the evaluation was its careful assessment of as a whole with regard to its support for EI the impact of WBG activities through a review development. of a wide range of IBRD/IDA, IFC, and MIGA projects, which included country and project Summary of Key Messages. Management has visits in many cases. The report makes an impor- noted the following key messages from tant contribution to understanding the devel- OED/OEG/OEU's independent evaluation: opment issues that are key for the WBG's · Extractive industries have contributed to sus- activities in the sector, provides a valuable ref- tainable development when projects met erence source, and offers a comprehensive set appropriate economic and environmental cri- of recommendations that can help guide future teria. WBG activities in EI. It is especially timely · The private sector is usually the most appro- because attaining the Millennium Development priate vehicle for new investment. Goals (MDGs) in the poorest countries is a · The WBG's support for EI projects has gen- pressing challenge that will require a substan- erally been effective. 1 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T · The WBG has added value in the environ- Management proposes to wait for the outcomes mental and social aspects of its projects. of ongoing IBRD/IDA and IFC reviews of this · The WBG social and environmental policies issue. However, in the case of EI-specific issues and experience with their implementation such as, for example, use of security forces to have been useful to others and have helped protect private EI project sites, Management set industry standards. proposes to move now to establish appropriate · The WBG should remain engaged across the WBG requirements. whole of the EI sector, in support both of gov- ernments and of private sector investment. World Bank Group's Strategy · In a number of important areas the WBG The OED/OEG/OEU evaluation, the EIR con- can improve its performance and help ensure sultation process and reports, and other recent that its EI activities make a more effective con- documents,57 constitute a major body of work tribution to sustainable development. that reviews trends, issues, and the role of the WBG in the EI sector and provides the founda- Areas of Overlap with EIR. As was expected, tion for the WBG's strategy in the sector. The the EIR covered many of the issues raised by OED/OEG/OEU evaluation, in particular, empha- OED/OEG/OEU, although with different sizes that the WBG should take a broader, more emphases. Notably, the EIR is more broad-rang- integrated approach to its activities in EI that ing in its coverage of human rights and gover- should (a) address the ultimate impacts of proj- nance issues and global environmental concerns. ects in terms of how the revenues from projects The Management Response to the EIR thus com- are used for poverty reduction and economic and plements the Management comments presented social development; (b) ensure that Country below and provides a wider context for the Assistance Strategies (CASs) for resource-rich WBG's strategy. countries explicitly address the sector's econo- mywide linkages and focus on policy and insti- Management Comments tutional capacity development; and (c) continue This section sets out Management comments to support private sector development and envi- on the WBG's strategy, project implementation ronmental sustainability. Across all of these activ- issues, and approach to partnerships with sec- ities, OED/OEG/OEU recommends that WBG tor and project stakeholders--the three broad cat- involvement should be guided by governance egories of recommendations in the capacity at the sector and national levels. OED/OEG/OEU evaluation report. Management broadly accepts the recommendations of the Sector Contribution to Development Goals report in these areas and has already begun and WBG Role. For many developing countries, moving to implement them. Complementing the especially the poorest countries that risk failing comments in this section, the Annex provides to reach the MDGs, the EI are a valuable asset detailed responses to the specific recommen- that can and should generate some of the dations of the overall report and of the individ- resources that are urgently needed to spur ual OED, OEG, and OEU components. poverty reduction and support economic and social development. Because of the important Other Work Under Way. In some cases, the promise that EIs hold for the economic and precise nature of the ultimate WBG response will social development of many poor countries and depend on the outcomes of other processes because each of the WBG's constituent institu- now under way, such as IFC's revision of its safe- tions (IBRD/IDA, IFC, and MIGA) can add sub- guard policies and guidelines, and its review of stantial value in this process, all of the WBG its disclosure policy. In other areas, such as the institutions will aim to remain engaged in EI recommendation that the WBG should give development by providing financing, technical increased attention to the human rights dimen- assistance, and analytic and policy advice in sions of activities benefiting from its support, line with their respective mandates and spe- 1 8 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E cializations. As developing countries succeed to help encourage and facilitate broader and in reducing poverty, their people will increase more sustainable development impacts at the their consumption of goods and services that are community level. produced with EI inputs, enjoying greater warmth, light, and mobility because of their An Integrated Approach. Management agrees access to modern sources of energy. that the WBG needs to take an integrated view of its activities in EI. This will require as a start- Sector Development Vision Based on Pri- ing point that, in all the projects that the WBG vate Sector Financing. In most country cir- supports, Management will always consider their cumstances, the appropriate sector development ultimate impact on communities, the environ- model will continue to be one based mainly on ment, and the macro economy. Management private enterprises, in which all or most invest- will exercise selectivity in this regard: for each ments are financed by private investors and project for which WBG support is proposed, projects operate within an appropriate frame- there should be a strong case for WBG involve- work of government oversight to ensure maxi- ment and a demonstrable value-added in terms mum contribution to the sustainable of enhanced sustainable impact. In addition, development of affected communities and the whenever possible, the WBG will seek to actively country. However, the WBG will support appro- engage with countries to help them address priate public sector projects. Overall levels of their EI issues, even when the WBG is not WBG financing are likely to be broadly in line engaged in EI specifically. Management also with those of recent years, that have accounted agrees that for all its activities, governance issues for less than 5 percent of total WBG financing and risks need to be taken into account during and 3 percent of investments in EI in develop- project design and appraisal. ing countries. The WBG can and should help advance improved industrywide approaches to Criteria for Engagement. The overriding objec- environmental and social practice, making an tive of WBG engagement in EI is to promote impact well beyond the modest investments poverty reduction through sustainable devel- that benefit from the WBG's support. To enhance opment. IBRD/IDA, IFC, and MIGA will refocus its effectiveness in this regard, the WBG will on this objective in their work on project design, leverage its impact by establishing partnerships appraisal, supervision, and reporting. In select- with stakeholders and supporting demonstration ing and implementing projects, the WBG will be projects that test new standards and approaches. guided by its safeguard policies and guidelines, good practice approaches, and its best judg- Emphases in WBG Activities. Because in most ment. While limiting WBG support for EI devel- countries much of the investment for EI devel- opment would not serve the interests of WBG opment can be mobilized from the private sec- clients, the design and implementation of proj- tor, IBRD/IDA's emphasis will be on helping ects in EI need to be fully informed by the governments create appropriate policy frame- national, local, and sector governance risks. The works and build capacity for improved sector assessments of these risks and, where appro- management. Financing of public sector extrac- priate, measures to address them will be an tive industry investments is likely to remain rare. integral part of the criteria the WBG will use to In IFC and MIGA, support for private sector determine the extent and form of its involvement. investment will focus on local, regional, and smaller companies (including service compa- Focus on Governance at the Country Level. nies), gas, and local energy supply projects. As detailed in the Annex, Management will Support for larger projects will be concentrated sharpen its focus on governance issues and risks where WBG involvement can make a significant in countries that are heavily dependent on EI. contribution to sustainability. In all of its oper- In particular, CASs for such countries should ations, the WBG will work with project sponsors identify and consider how best to address key 1 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T EI issues, including related governance issues, Resource Implications. As was stated above, and should also provide an overall framework the overall level of WBG activities in EI is not for any WBG activities in the EI sector. Man- expected to change materially from current lev- agement's proposed approach is to adopt a two- els; new financing commitments in support of tier classification of countries to recognize projects should remain in line with recent expe- differences in terms of resource dependency rience and will be concentrated in IFC and and focus attention on the most resource- MIGA. However, the focus of activities will shift dependent countries where improvement in in accordance with the priorities described in governance promises to have the largest devel- para. 11 and in response to changes in country opment impact.58 demands reflected in new CASs, which set out the amount of financing commitments to a coun- Mitigation of Governance Risks. In large try in view of competing alternatives and prior- projects, the WBG will require that specific ities for WBG engagement. As CASs for measures be put in place to address the risks that resource-dependent countries focus increasingly revenues will not be well used. For smaller proj- on EI issues, WBG activities in EI could ects, WBG's appraisal and decision processes will increase--especially analytic and advisory serv- evaluate and report on the governance risks to ices, economic and sector work, and TA oper- projects; if they are high and cannot be ade- ations to address, for example, management of quately mitigated, the WBG will not support EI revenues and related governance issues. Such the project. Governance risks are more likely to activities will be coordinated with (or often be acceptable in EI projects that generate small directly integrated into) related initiatives in sup- fiscal revenues. In some instances, WBG support port of improved economic policymaking and will be warranted even in weak governance strengthened public financial accountability and environments, if projects are expected to gen- management. erate real benefits. Shift Toward Environmental and Social Sequencing of WBG Assistance. OED/OEG/ Development Expertise. As IFC and MIGA OEU raised concerns about the sequencing of have increased their focus on environmental governance capacity building and emphasized and social issues in recent years, there has been the importance of addressing capacity weak- a significant increase in staff with skills in those nesses at the sector and national levels. While areas. In IBRD/IDA, the number of environ- Management agrees that governance capacity mental and social staff working on policy and building, which is a priority for the WBG, can technical issues has also increased in recent be an uncertain and lengthy process for which years. The major shifts have largely occurred, but the risks need to be weighed and mitigated to stronger focus on ensuring sustainable impacts the extent possible, the WBG also needs to be will require appropriate resources for the WBG able to make judgments based on the specific project teams in particular EI projects. Project circumstances of the country and the project, as teams will often require earlier and more well as likely development outcomes with and extended involvement of environmental and without its engagement. This judgment will be social specialists to ensure implementation of guided by analysis of a country's economic poli- safeguard policies; resources for enhanced dis- cies and institutions, evaluation of quantitative closure and community consultations; and and qualitative indicators of governance capac- resources for appraising and supervising value- ity, and assessment of the performance of ongo- added activities to increase local benefits and par- ing WBG and IMF-supported programs. When ticipation in projects. Whether some or all of the expectations about project outcomes and deci- additional costs can be recovered from clients sions about WBG support depend on such a will depend on the institution and the project. judgment, Management will lay out clearly the Management will ensure that project budgets are rationale for its proposed approach. based on an evaluation of these factors and will 2 0 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E make realistic allowances for the costs of staff last 10 years. In both IFC and MIGA, Manage- involved in more detailed preparations and ment is taking steps to ensure that environ- supervision. mental and social specialists are more productively integrated with investment staff. Project Implementation Issues While maintaining an independent quality assur- OED/OEG/OEU offer challenging recommen- ance function, IFC has also begun to main- dations to enhance the development impact of stream environmental and social responsibility WBG operations in support of EI development. so that investment departments see it as a core Because the vast majority of recent and future part of their activities and responsibilities. In May projects are or will be supported by IFC and 2004, MIGA added environmental and social MIGA, in line with the WBG's strategic empha- staff to its risk management staff, so that a more sis on supporting private sector development, the holistic view will now be possible in assessing following sections are concerned mostly with projects. recent developments and ongoing initiatives in IFC and MIGA. Sustainability Initiatives in IFC. IFC's over- all corporate sustainability initiative has increased Screening and Classification of Projects. staff's focus on sustainability issues. Most EI Management is aware that the implementation sector staff have now taken part in specialized of WBG projects could be improved by carry- sustainability training to enhance their awareness ing out more effective screening and classifica- of issues and best practice. The contribution tion of projects, involving environmentalists and that projects can make in the environmental social specialists throughout the project life, and social arenas, including through enhanced enhancing the reporting of results from projects, local development, has become a key compo- and evaluating the sharing of benefits from proj- nent of IFC's business in EI. Enhanced analysis ects more explicitly. OED's finding that some of the benefit sharing, which will be part of proj- IBRD/IDA projects were incorrectly classified and ect design, will further increase this focus and consequently inappropriately supervised reflects, will be applied in IBRD/IDA and MIGA as well. in part, the process of significant change in the However, the WBG will need to carefully bal- WBG's adoption and implementation of safe- ance attention to social and environmental guard policies and guidelines over the period dimensions against the extra burden such atten- covered by the evaluation. With the lessons of tion imposes on developing country clients and experience and proposed revision of guidelines, the additional supervision and appraisal costs it these problems are being addressed. The close entails. IFC's EI activities already account for a involvement of environmental and social spe- disproportionate share of IFC's budget for envi- cialists in EI projects through the project life cycle ronmental and social specialists. EI operations is a key part of WBG engagement in these proj- are also intensive users of resources for other ects. Management's clear objective will be to development impact-enhancing activities, such ensure that the excellent levels of compliance as small and medium enterprise and corporate noted by OEG in some areas of the IFC's EI activ- governance initiatives. ities become the norm for all WBG activities in the sector. Recent Changes in MIGA. Management under- scores the important changes that have taken Growing Contribution from Environmental place in MIGA since May 1999, when the Board and Social Specialists in IFC and MIGA. In approved MIGA's own specific environmental IFC and MIGA, which account for most of the assessment and disclosure policies and proce- new EI investment projects financed by the dures, and May 2002, when MIGA adopted its WBG, the resources devoted to environmental own interim issue-specific safeguard policies. and social due diligence and additional work Although MIGA's clients have found these safe- with clients have increased considerably over the guard policies to be helpful, Management rec- 2 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T ognizes that further improvements can be made policies and guidelines, and is giving priority to as WBG views evolve. EI-related issues. For example, revised Precious Minerals Mining Guidelines were available in Revision and Updating of MIGA Safeguard draft for public comment from July 2004. The Policies. Management has made a serious effort updated safeguards will be key for sustaining the in the past five years to address a range of catalytic role that IFC has assumed in its impor- widely acknowledged difficulties in determining tant partnership with the Equator Banks. Second, how to apply safeguard policies to private sec- IBRD/IDA's proposed revised policy covering tor investors and what is meant by compliance Indigenous Peoples (OP 4.10) is expected to be with safeguard policies (see, for example, recent considered by its Board by end 2004, and will CAO reports on the subject).59 Differences among contain provisions to help ensure that Indigenous experienced professionals in interpreting and Peoples benefit from development. Finally, the implementing safeguard policies can pose a WBG will work in partnerships with govern- serious challenge, one that is of particular con- ments, industry and civil society to advance best cern to MIGA because of the unique legal and practice and contribute to the sustainable impact financial implications of denying a claim or can- of EI development more broadly in initiatives celing a guarantee for noncompliance. MIGA staff such as the Global Gas Flaring Reduction Part- will work with IFC staff on updating IFC's safe- nership, which set voluntary global standards for guard policies, and will take the opportunity to addressing gas flaring. clarify safeguard policy applicability and imple- mentation issues in MIGA-supported operations. Growing Emphasis on Revenue Trans- Once IFC's updating process is completed, MIGA parency. Transparency about government rev- will revise and update its own safeguard poli- enues and expenditures generally is an important cies in an equivalent manner, in line with the dimension of the macroeconomic policy dialogue commitment MIGA Management made to the between borrowing governments and IBRD/IDA; Board in May 2002. in this respect, a priority area for IBRD/IDA assistance is to help increase government capac- Partnerships for Wider Reach ity and accountability. In the area of trans- OED/OEG/OEU recommended a number of parency about EI revenue, the WBG has joined ways to enhance the impact of WBG activities with the UK Department for International Devel- on industrywide practice, well beyond the small opment (DfID) and other partners to support the number of operations that the WBG supports Extractive Industries Transparency Initiative directly. Management agrees with (EITI), which aims to promote EI revenue trans- OED/OEG/OEU recommendations in this regard. parency at the country level. At the project level, The WBG will seek to use its international con- the WBG will now require disclosure of EI rev- vening power more effectively by making its enues and the key terms of relevant contracts for safeguard policies and guidelines more relevant all large projects that benefit from its support; and accessible, promoting the disclosure of fis- for smaller projects, in two years the WBG will cal revenues, developing and monitoring indi- require disclosure of material EI-related pay- cators of sustainable development with other ments to governments except when there is a stakeholders, and increasing local community compelling reason to not do so. participation in projects through meaningful consultation throughout project life. Reporting on Outcomes. Management recog- nizes the need for enhanced reporting on the Setting Industry Standards in Partnership outcomes of WBG activities in EI and its ration- with Others. A number of important initiatives ale for engagement. In IFC's ongoing review of are under way that will help enhance WBG's its disclosure policy, Management will establish impact on industry practice. First, IFC has begun new requirements for investors to make more the two-year process of revising its safeguard information about projects available to com- 2 2 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E munities, will enhance the reporting on IFC Department which ensures strong links between activities in the sector, and provide for greater IBRD/IDA and IFC, and by the Energy and Min- disclosure of its rationale for supporting new EI ing Sector Board, which ensures links to Regional projects. As a part of this process, IBRD/IDA and and country programs and MIGA. At the coun- IFC will continue to work with other stake- try level, enhanced attention to EI issues in the holders to develop meaningful, consistent indi- CAS will serve to strengthen coordination with cators of the contribution of EI to sustainable the WBG's country assistance programs. development. Tracking Progress in Implementation of the Focus on Community Involvement. Appro- New Approach. Management expects to meas- priate consultation with people who will be ure implementation of the comprehensive set of affected by projects is a core WBG requirement reforms implied by the new approach as follows: for sustainable development, especially for EI projects that take place in remote areas and Short-Term Indicators ­ within one year may have relatively large effects on local com- a. New guidance and processes that address munities. The WBG proposes to adopt use of a EI-specific safeguard issues such as mine clo- process of free, prior and informed consultation sure/decommissioning; use of security forces; with affected communities that leads to broad monitoring and disclosure of environmental, acceptance by the affected community of the social, and economic impacts; transparency project as a condition for its involvement and will requirements for new investments; gas flar- work with investors to promote best practice in ing; acid rock drainage; and HIV/AIDS. this respect, and to generally enhance the b. New guidelines and processes for disclosure involvement of and benefits to communities in of information about WBG-supported EI proj- the context of EI developments that benefit from ects and about activities in EI, including devel- WBG support. opment of sustainability indicators. c. Development of a database for all IFC proj- Conclusions ects that indicates position regarding all key Altogether, the WBG has embarked upon a fun- sustainability indicators (including mine clo- damental change in its approach to EI invest- sure/decommissioning plans, safeguard com- ments. Its past mode of operation presumed pliance, gas flaring, and use of security forces). that expected overall potential benefits to coun- d. Clearer guidelines for WBG environmental cat- tries (energy resource development and rev- egorization of projects. enue generation) justified new investments. In e. CASs for resource-rich countries and countries its new mode of operation, concerns about the with significant resources start to address rel- ultimate developmental impacts, including the evant EI-related issues. management of revenues generated by EI proj- ects and the specific, realizable benefits to com- Three-Year Indicators munities, are regarded as the starting point for f. The extent to which new CASs have dealt with discussions of WBG involvement. In moving extractive industry issues in resource-rich forward, Management will continue to encour- countries and countries with significant age coordination among activities in IBRD/IDA, resources. IFC, and MIGA, with each institution serving its g. Effective implementation of partnership ini- respective clients, pursuing objectives in line tiatives (including GGFR, CASM, and EITI) with its mandate, and using its own business involving civil society, industry, and govern- models and processes. Coordination among the ments, and outcomes of these partnerships in three institutions has already benefited from terms of contributing to the development of preparation of this joint Management Response sector best practice. and will continue to be facilitated by the joint h. Revenue transparency improvement through IBRD/IDA/IFC Oil, Gas, Mining and Chemicals effective implementation of programs in par- 2 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T ticipating countries under the EITI. ii. Mining: coal sector restructuring, TA, and i. Support for sustainable new private sector EI mining sector policy reform. investment at average levels broadly compa- iii. Capacity building for social and environ- rable to those of the recent past. mental monitoring in both sectors j. Continuing levels of IBRD/IDA financing in Management proposes to report on progress line with recent average with a focus on: on its activities in EI every year. It also proposes i. Oil and gas: environmental management, to set up a working level advisory group with rep- TA (especially for transparency, revenue resentative of governments, industry, civil soci- management), and gas industry develop- ety, and other parts of the WBG to provide inputs ment. and perspectives on the WBG's activities in EI. 2 4 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E R e c o m m e n d a t i o n s o f t h e J o i n t A n n e x O E D / O E G / O E U E v a l u a t i o n a n d M a n a g e m e n t R e s p o n s e M a t r i x A. Recommendations of the Main Report Recommendation of the Main Report of the Joint OED/OEG/OEU Evaluation Management Response 1 Formulate a Sector Strategy 1a The WBG needs to design and implement Management accepts this recommendation. The overall a sectoral strategy that closely integrates approach to EI activities, as set out in this Management resource extraction with sustainable devel- Response and in responses to individual recommendations, opment through the effective management provides a framework for the WBG's activities in EI that of EI revenues in support of develop- gives a central place to promotion of good governance and mental priorities and the reliable mitigation increased transparency. Management has identified indicators of adverse environmental and social of implementation progress for its strategy, and it will mon- impacts. Where macro and sectoral gov- itor them. Management will strengthen its efforts to promote ernance are weak, the WBG's assistance use of fiscal revenues for development priorities and to mit- should focus on strengthening governance. igate risks due to poor governance. The ultimate objectives In such cases, the WBG should carefully are sustainable impacts at the local, national and global lev- assess and report on the risks that EI fis- els. The appraisal reports for new EI projects in countries with cal revenues may not be used for devel- weak governance will clearly assess the risks that EI fiscal opment priorities. The WBG should not revenues may not be used for development priorities. See also support significant sector expansion unless responses to OED 1a and OEG 1b. Overall, the level of it can adequately mitigate these risks. activities of the three institutions in EI is not expected to Where macro governance is sound but increase materially and will not demand additional resources. sectoral governance is weak, the WBG Resources are expected to continue to be allocated to EI activ- should focus on improving sectoral gov- ities through the country and regional resource allocation ernance, and should only support the sec- processes on the basis of country and regional priorities. Trust tor in conjunction with adequate provisions funds and partnerships will continue to be an important to overcome sectoral governance weak- source of additional resources for EI activities, especially for nesses. programs outside the scope of single-country programs and specific projects. Address EI Issues in CASs 1b For all resource-rich countries the WBG Management accepts this recommendation and has devel- should explicitly address extractive indus- oped a two-tiered approach to improving the focus of CASs tries in the CASs. The CAS should explic- on relevant EI issues. This approach uses a higher cut off for itly discuss the sector's current and potential resource-rich countries (more than 50 percent of government contribution to sustainable development revenues derived from EI) than that used by the Evaluation (for example, the importance of government (15% of exports) so as to exclude relatively less EI-dependent revenues, their management, distribution, but to include non-exporting countries. With limited staff and and use for development priorities) and country resources and competing priorities, the WBG will reference the underlying governance assess- thus focus on the most resource-dependent countries and on ment. This should guide future project countries where it can have the most impact. The proposed design, facilitate monitoring and evalua- approach already targets more than 50 countries (with sub- 2 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the Main Report of the Joint OED/OEG/OEU Evaluation Management Response tion, and provide an agreed framework for stantial overlap with the evaluation list). CASs for resource-rich WBG-wide coordination and collaboration countries will be expected to address relevant EI issues and in the EI sector. The different agencies of related governance issues. In countries with substantial the WBG should routinely work together to resources (where 30-50 percent of government revenues or enhance the development impacts of EI exports are from EI), the CAS will be expected to identify key projects, for example in the form of pub- EI sector issues and whether and how IBRD/IDA will be lic-private partnerships with respect to com- involved in addressing them. This does not rule out CAS dis- munity development programs. cussion on EI issues in other countries where they are impor- tant, and the thresholds and guidelines will be reviewed in the light of experience. Where possible, IBRD/IDA, IFC, and MIGA will work together as recommended by OED/OEG/OEU. Moreover, IBRD/IDA will encourage resource-rich countries and countries with substantial resources to address relevant EI issues in their own overall development strategies, such as PRSPs. The WBG institutions will work pro-actively in the EI sector to identify opportunities for cooperation. COC will con- tinue effective implementation of major partnership initiatives such as the Gas Flaring Reduction Partnership, CASM, and the EITI, and report on their progress. Governance 1c Promote Governance Improvements: The Management accepts this recommendation. Where the WBG Bank should compensate for the lower is not involved in financing operations but where EI issues level of lending that may be appropriate are important and where governance is weak, the WBG will for resource-rich countries with weak aim to devote greater resources to technical assistance and macro and sectoral governance, by devot- analytic and advisory activities that can, for example, help ing greater management attention and countries manage their resource industries more effectively, administrative budget for advisory and including addressing relevant broader policy, institutional, and analytical activities aimed at improving the governance issues. The CAS for resource-rich countries with policy, institutional, and governance frame- weak macro and sectoral performance will identify the needs work for EI. This would enable the Bank for TA in this area, and will discuss whether and how to establish and maintain continuity of IBRD/IDA should be involved in meeting these needs. Imple- engagement and facilitate responding mentation of this recommendation may require additional quickly to opportunities for assistance IBRD/IDA administrative budget resources for certain coun- when they arise. tries. Including its activities relating to transparency, over the next three years, Management will aim to increase the level of nonlending activities aimed at policy improvements com- pared to the past three. 2 6 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the Main Report of the Joint OED/OEG/OEU Evaluation Management Response Support Private Sector Development and Environmental Sustainability 1d In all countries, the World Bank Group Management accepts this recommendation. There remains an should continue its support to close uneco- important role for IBRD/IDA to assist governments to restruc- nomic mines, reform and privatize state- ture their mining and coal industries, including helping to close owned enterprises, and mitigate pre-existing uneconomic coal mines and to mitigate social and environ- environmental and social problems. mental problems. Much of the world's oil industry is gov- ernment-owned and, where appropriate, IBRD/IDA will consider supporting government efforts to improve the effec- tiveness of these operations, where governments have ruled out privatization for the foreseeable future. 1e Where appropriate, the World Bank Group IBRD/IDA will continue to work with others, particularly should help integrate artisanal and small- through CASM, to develop effective approaches and best prac- scale mining (ASM) with the formal sector tices. Given country differences, the CAS for countries where and internalize their environmental and ASM is important will be expected to consider approaches social impacts, while at the same time cre- that are integrated effectively into overall country and poverty ating alternative employment opportunities reduction strategies. Clearly an important component of any and supporting the consolidation of ASM overall approach is to create better opportunities for those activities for greater efficiencies and involved in other parts of the economy. COC will aim over economies of scale. a three-year period to develop three or more operations that aim to integrate ASM into the broader economy and/or improve its social, environmental, or economic outcomes. 2 Improve Project Screening and Monitoring 2a The World Bank Group should provide WBG will provide updated guidance for the categorization clearer and more consistent guidance for of projects concerned with EI. This guidance will address proj- the categorization of projects, the identifi- ect screening and the use of appropriate assessment instru- cation of applicable safeguards at the ini- ments. Sectoral approaches will be used for periodic reporting tial project screening, the appropriate scope and evaluation of safeguard aspects of EI projects. This infor- and nature of the EA instruments, and the mation will be disseminated through periodic training activ- reporting and evaluation of safeguards ities for staff from the WBG, clients, and other parties. implementation. This needs to be followed up through the entire implementation framework, from good practice guidelines to appropriate monitoring and training. 2 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the Main Report of the Joint OED/OEG/OEU Evaluation Management Response Involve Specialists Throughout 2b The World Bank Group should provide This is agreed and is dealt with more specifically in the adequate resources and incentives for the responses to recommendations of OED (2b), OEG (2a, 2b) participation of qualified environmental and OEU (1b, 2a, and 3c) below. and social specialists at the preparation, appraisal and supervision of all projects that are likely to have adverse impacts. This will ensure that such impacts are adequately addressed through the upstream design of appropriate mitigation strategies or proj- ect alternatives, as well as through the retrofit of timely remediation measures should unexpected impacts materialize during project implementation. Enhance Reporting of Results 2c The Bank should strengthen reporting of its Management accepts this recommendation, as is detailed in results by ensuring that project completion the response to the recommendations of OED (2c) and OEG reports include an ex post economic rate of (2c). As noted in responses to the OEU recommendations (see return or net present value or, where that is 1a, 2a, and 2d below), MIGA is taking steps to implement more not feasible, a cost effectiveness analysis to standardized and timely reporting mechanisms on safeguard determine whether the project represented compliance and development outcomes, especially of Cate- the least-cost solution to attain its objectives. gory A projects. Management will ensure that an "activity com- IFC should develop and use a reporting tem- pletion summary" or equivalent for all significant nonlending plate for environmental and socio-economic EI activities in IBRD/IDA, IFC, and MIGA is prepared. sustainability indicators, building on indus- try initiatives. MIGA needs to adopt more standardized and timely reporting mecha- nisms on environmental and social safe- guards compliance and ex post development outcomes. The WBG should prepare com- pletion reports for every significant non- lending/guarantee issuance activity. Evaluate the Sharing of Benefits 2d Evaluate the sharing of benefit: At appraisal Management agrees that an analysis of the distribution of the and during supervision, the WBG should benefits of extractive industries developments should be part systematically estimate the distribution of of the WBG's project evaluation and supervision work. The project benefits among different stake- appraisal report for EI projects will be expected to assess the holder groups (government at different sensitivity of distribution to different assumptions about key levels, private companies, and local com- project variables. The extent of discussions of benefit-shar- munities), evaluate its sensitivity to differ- ing with key stakeholder groups will need to be considered ent scenarios, and discuss the acceptability carefully in the project and country context, given the role of benefit-sharing with key stakeholder of governments (and sometimes constitutions) in setting the groups. distribution of EI revenues. 2 8 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the Main Report of the Joint OED/OEG/OEU Evaluation Management Response 3 Update Policy Framework 3a In consultation with its stakeholders, the Agreed. See responses to recommendations of OED (3a), OEG WBG should periodically adjust its policy (3a), and OEU (3c) below. framework for extractive industries to ensure that it remains up-to-date with evolv- ing industry practice. It should resolve remaining inconsistencies such as those between requirements for different mine types (such as funding for mine closure), onshore versus offshore oil projects, safety of dams, and involuntary resettlement. It should address identified gaps such as those related to consultation and disclosure, community development, social issues of mine closure, security, hazardous materials management, acid rock drainage, gas flar- ing, and transportation of oil. It should also recognize the expanding awareness of the human rights dimension of WBG poli- cies and projects, and explore possible avenues for addressing the issues, especially where it lags industry best practice such as, for example, regarding site security. Promote Disclosure of Revenues from EI 3b The WBG should vigorously pursue coun- Management accepts this recommendation because increased try- and industry wide disclosure of gov- transparency about resource revenues is an important step ernment revenues from EI and related toward better governance and the use of resources in resource- contractual arrangements (such as pro- rich countries. IBRD/IDA is now actively supporting the EITI duction sharing agreements, concession led by DfID, and in this context, is working in a number of and privatization terms). The Bank should pilot countries. In addition, the WBG will support other ini- work toward and support disclosure of EI tiatives as appropriate, and will work for greater transparency revenues and their use in resource-rich of revenues and expenditures within its country programs. countries. IFC and MIGA should also In the context of new EI investment operations, WBG sup- strongly encourage (and consider requir- port will be conditional on transparency commitments by ing) their private sector clients to publish investors. Disclosure of payments to governments will be their payments to governments. required effective immediately for major projects and will be expected for all projects in two years, when appropriate implementation modalities are expected to have been devel- oped and tested under the EITI and similar activities. Over the next three years, IBRD/IDA will aim to complete five or more EITI pilots with countries and will aim to mainstream the approach to revenue transparency more broadly in the WBG. 2 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the Main Report of the Joint OED/OEG/OEU Evaluation Management Response Develop and Monitor Sustainability Indicators 3c Together with other stakeholders, the Management accepts this recommendation. The WBG will World Bank Group should develop indi- work with stakeholders to define appropriate sustainability cators of economic, social and environ- indicators that can be used to monitor and report on outcomes. mental sustainability, establish baseline OP 4.01 requires the collection of baseline data. IFC has data, provide for adequate monitoring over recently produced a good practice note (Addressing the the life of the project, and report and eval- Social Dimensions of Private Sector Projects) that provides guid- uate the results during supervision and in ance on collection of baseline data; a similar exercise is project completion reports. The World planned for environmental data. These notes can also serve Bank Group should also encourage more to guide IBRD/IDA and MIGA. The development of inde- independent outside monitoring, ideally pendent local capacity for monitoring the impact of EI proj- using local capacity (that may have to be ects is important. Capacity building within governments is developed). already a key objective of IBRD/IDA activities in the sector. Development of community/civil society capacity can help with project monitoring and can often be considered in the project context. In the case of very large projects (such as in the Chad-Cameroon pipeline or BTC pipeline projects), the creation of independent monitoring groups may be practi- cal and effective, and will be considered. In some cases it may be appropriate to develop local capacity to play a role in such forms of oversight. In addition, see the responses to the recommendations of OEG (2a) and (3c) below. Increase Local Community Participation 3d The WBG should support enhanced com- Management agrees with this recommendation. Enhanced munity consultation and participation community consultation and participation in EI projects is a throughout the life cycle of EI-projects. key area of evolving best practice for the WBG. See the The WBG should assist countries to response to recommendation of OEG (3d) for details. increase involvement by local communities in EI decision-making processes, and ongo- ing consultation throughout the project life cycle, including closure. 3 0 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E B. Recommendations of the OED Evaluation Report Recommendation of the OED Evaluation Management Response 1 Formulate a Sector Strategy 1a The Bank, together with other members of Management accepts this recommendation. The overall the WBG needs to design and implement approach to EI activities, as set out in this Management a sector strategy that closely integrates Response and in responses to individual recommendations, resource extraction with sustainable devel- provides a framework for the WBG's activities in EI that opment through the effective management gives a central place to promotion of good governance and of EI revenues in support of developmen- increased transparency. Management has identified indicators tal priorities and the reliable mitigation of of implementation progress for its strategy, and it will mon- adverse environmental and social impacts. itor them. Management will strengthen its efforts to promote Where macro and sectoral governance are use of fiscal revenues for development priorities and to mit- weak, the Bank's assistance should focus igate risks due to poor governance. The ultimate objectives on strengthening macro and sectoral gov- are sustainable impacts at the local, national, and global lev- ernance. In such cases, the Bank should els. The appraisal reports for new EI projects and relevant carefully assess and report on the risks that sector reforms in countries with weak governance will clearly fiscal revenues may not be used for devel- assess the risks that EI fiscal revenues may not be used for opment priorities. The Bank should not development priorities. See also OEG 1b. support significant sector expansion unless it can adequately mitigate these risks. Where macro governance is sound but sectoral governance is weak, the Bank should focus on improving sectoral governance. Address EI issues in CASs 1b For all resource-rich countries the Bank Management accepts this recommendation and has developed should explicitly address extractive indus- a two-tiered approach to improving the focus of CASs on rel- tries in the CASs. The CAS should discuss evant EI issues. This approach uses a higher cut off for the sector's economy wide linkages (such resource-rich countries(more than 50 percent of government as the importance of government revenues, revenues derived from EI) than that used by the evaluation their management, and distribution) and (15% of exports) so as to exclude relatively less EI-depend- reference the underlying governance ent but to include non-exporting countries. With limited staff assessment. This should guide future proj- and country resources and competing priorities, the WBG will ect design, facilitate monitoring and eval- thus focus on the most resource-dependent countries and on uation, and provide an agreed framework countries where it can have the most impact. The proposed for WBG-wide coordination and collabo- approach already targets more than 50 countries (with sub- ration in the EI sector. stantial overlap with the evaluation list). CASs for resource- rich countries will be expected to address relevant EI issues and related governance issues. In countries with substantial resources (where 30-50 percent of government revenues or exports are from EI), the CAS will be expected to identify key EI sector issues and to discuss whether and how IBRD/IDA will be involved in addressing them. This does not rule out CAS discussion of EI issues in other countries where they are important, and the thresholds and guidelines will be reviewed in the light of experience. Where possible, IBRD/IDA, IFC, and MIGA will work together as recommended by 3 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the OED Evaluation Management Response OED/OEG/OEU. Moreover, IBRD/IDA will encourage resource-rich countries to address relevant EI issues in their own overall development strategies, such as PRSPs. The WBG institutions will work proactively in the EI sector to iden- tify opportunities for cooperation, and to develop private-pub- lic partnerships. A good-practice note on EI issues will be prepared and disseminated as part of the guidelines for CASs and engagement in LICUS. Governance 1c Promote Governance Improvements: The Management accepts this recommendation. Where the WBG Bank should compensate for the lower is not involved in financing operations but where EI issues level of lending that may be appropriate are important and where governance is weak, the WBG will for resource-rich countries with weak aim to devote greater resources to technical assistance and macro and sectoral governance by devot- analytical and advisory activities that can, for example, help ing greater management attention and countries manage their resource industries more effectively, administrative budget for advisory and including addressing relevant broader policy, institutional, and analytical activities aimed at improving the governance issues. The CAS for resource-rich countries with policy, institutional, and governance frame- weak macro and sectoral performance will identify the needs work for EI. This would enable the Bank for TA in this area, and will discuss whether and how the WBG to establish and maintain continuity of should be involved in meeting these needs. Implementation engagement and facilitate a quick response of this recommendation may require additional administra- to opportunities for assistance when they tive budget resources for certain countries. Over the next three arise. years, Management will aim to increase the level of nonlending activities aimed at policy improvements (including those related to revenue transparency) compared to the past three. Support Private Sector Development and Environmental Sustainability 1d In all countries, the Bank should be ready Management accepts this recommendation, as there remains to support the closure of uneconomic an important role for IBRD/IDA to assist governments to mines, privatization of state-owned enter- restructure their mining and coal industries, including help- prises, and mitigation of pre-existing envi- ing to close uneconomic coal mines, and mitigating social and ronmental and social problems. environmental problems. Much of the world's oil industry is in state hands and, where appropriate, the Management will consider whether IBRD/IDA should become involved, for example, to help governments improve the effectiveness of these operations, where governments have ruled out priva- tization for the foreseeable future. 3 2 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the OED Evaluation Management Response 1e Where appropriate, the Bank should help IBRD/IDA will continue to work with others, particularly integrate artisanal and small-scale mining through CASM, to develop effective approaches and best prac- (ASM) with the formal sector and inter- tices. Given country differences, the CAS for countries where nalize their environmental and social ASM is important will be expected to consider approaches impacts, while at the same time creating that are integrated effectively into overall country and poverty alternative employment opportunities and reduction strategies. Clearly an important component of any supporting the consolidation of ASM activ- overall approach is to create better opportunities for those ities for greater efficiencies and economies involved in other parts of the economy. COC will aim over of scale. a three-year period to develop three or more operations that aim to integrate ASM into the broader economy and/or improve its social, environmental, or economic outcomes. 2 Improve Upstream Project Screening 2a The Bank should provide clearer and more IBRD/IDA will provide updated guidance for the catego- consistent guidance for the categorization rization of sectoral adjustment and technical assistance proj- of sectoral adjustment and technical assis- ects concerned with EI. This guidance will address project tance projects, the identification of appli- screening and the use of appropriate assessment instruments. cable safeguards at the initial project Sectoral approaches will be used for periodic reporting and screening, the appropriate scope and evaluation of safeguard aspects of EI projects. This informa- nature of the EA instruments, and the tion will be disseminated through periodic training activities reporting and evaluation of safeguards for staff from the Bank, clients, and other parties. implementation. This needs to be followed up through the entire implementation framework, from good practice guidelines to appropriate monitoring and training. Provide for Adequate Specialist Involvement 2b The Bank should strengthen the imple- Is it agreed that project teams should have effective partici- mentation of its safeguard policies by pro- pation of environmental and social specialists at all stages of viding adequate resources for the the project process, particularly for projects likely to have participation of qualified environmental adverse impacts. Project budgets will need to be set adequately and social specialists at the preparation, to ensure this. appraisal, and supervision of all projects that are likely to have adverse impacts. This will ensure that such impacts are ade- quately addressed through the upstream design of appropriate mitigation strategies or project alternatives, as well as through the retrofit of timely remediation meas- ures should unexpected impacts material- ize during project implementation. 3 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the OED Evaluation Management Response Enhance Reporting of Results 2c The Bank should strengthen the imple- It is agreed that project completion reports should provide mentation of its completion reporting these quantitative estimates of impacts wherever possible, and requirements by (i) ensuring that project should state the reasons where this is not possible. An activ- completion reports include the calculation ity completion summary should be prepared for every sig- of an ex-post economic rate of return or nificant non-lending activity. net present value or, where that is not fea- sible, a cost-effectiveness analysis to deter- mine whether the project represented the least-cost solution to attain its objectives; and (ii) preparing an activity completion summary for every significant non-lending activity. Evaluate the Sharing of Benefits 2d At appraisal and project completion, the Management agrees that distribution of the benefits of extrac- Bank should systematically estimate the tive industries developments is important. The appraisal and distribution of project benefits among dif- project completion reports for EI projects will be expected ferent stakeholder groups--government to assess the sensitivity of distribution to different project sce- at different levels, private companies, and narios. The extent of discussions of benefit-sharing with key local communities--evaluate its sensitivity stakeholder groups will need to be considered carefully in to different scenarios, and discuss its the project and country context, given the role of governments acceptability with key stakeholder groups. (and sometimes constitutions) in setting the distribution of EI revenues. See also the response to OEG recommendation 2d below. 3 Update Policy Framework 3a In consultation with its stakeholders, the In the context of the overall WBG approach to these issues, Bank should periodically adjust its policy Management will evaluate and help develop best practice framework for extractive industries to approaches to EI-specific issues. Current opportunities include ensure that they remain up-to-date with the ongoing review of IFC safeguard policies, the revision of evolving industry practice. It should resolve the IBRD/IDA Indigenous Peoples policy, and the consider- remaining inconsistencies within the WBG ation of approaches to human rights by IFC and IBRD/IDA and address identified gaps. It should also (where a Senior Adviser on human rights has been appointed). recognize the expanding awareness of the human rights dimension of Bank policies and projects, and explore possible avenues for addressing the issues, especially where it lags industry best practice. 3 4 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the OED Evaluation Management Response Promote Disclosure of Revenues from EI 3b The Bank should vigorously pursue coun- Management accepts this recommendation because increased try- and industry wide disclosure of gov- transparency about resource revenues is an important step ernment revenues from EI and related toward better governance and the use of resources in resource- contractual arrangements (such as produc- rich countries. IBRD/IDA is now actively supporting the EITI tion sharing agreements, concession and led by DfID, and in this context, is working in a number of privatization terms). It should work toward pilot countries. In addition, the WBG will support other ini- and support disclosure of EI revenues and tiatives as appropriate, and will work for greater transparency their use in resource-rich countries. of revenues, expenditures, and contracts (where feasible and appropriate), within its country and sector programs. Notably, AAA such as public expenditure reviews and country finan- cial accountability assessments, and related policy dialogue, will be the main vehicles for promoting transparency. In the context of new EI investment operations, WBG support will be conditional on transparency commitments by investors. Dis- closure of payments to governments will be required effec- tive immediately for major projects and will be expected for all projects in two years, when appropriate implementation modalities are expected to have been developed and tested under the EITI and similar activities. Over the next three years, Management will aim to complete five or more EITI pilots with countries and will aim to mainstream the approach to revenue transparency more broadly in the WBG. Define and Monitor Sustainability Indicators 3c Together with other stakeholders, the Bank Management accepts this recommendation. The WBG will should define indicators of economic, work with stakeholders to define appropriate sustainability social, and environmental sustainability, indicators that can be used to monitor and report on outcomes. establish baseline data, provide for ade- OP 4.01 requires the collection of baseline data. IFC has quate monitoring over the life of the proj- recently produced a good practice note (Addressing the ect, and report and evaluate on the results Social Dimensions of Private Sector Projects) that provides guid- during supervision and in project com- ance on collection of baseline data; a similar exercise is pletion reports. The Bank should also planned for environmental data. These notes can also serve encourage more independent outside mon- to guide IBRD/IDA and MIGA. The development of inde- itoring, ideally using local capacity (that pendent local capacity for monitoring the impact of EI proj- may have to be developed). ects is important. Capacity building within governments is already a key objective of IBRD/IDA activities in the sector. Development of community/civil society capacity can help with project monitoring and can often be considered in the project context. In the case of very large projects (such as in the Chad-Cameroon pipeline or BTC pipeline projects), the creation of independent monitoring groups may be practi- cal and effective, and will be considered. In some cases it may be appropriate to develop local capacity to play a role in such forms of oversight. In addition, see the responses to the recommendations of OEG (2a) and (3c) below. 3 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the OED Evaluation Management Response Increase local community participation 3d The Bank should support enhanced com- Management agrees with this recommendation. Enhanced munity consultation and participation community consultation and participation in EI projects is a throughout the life cycle of EI-projects. key area of evolving best practice for IBRD/IDA, in line with The Bank should assist countries to evolving experience in IFC. See the response to recommen- increase involvement by local communities dation of OEG (3d) for details. in EI decision-making processes, and ongo- ing consultation throughout the project life cycle, including closure. C. Recommendations of the OEG Evaluation Report Recommendation of the OEG Evaluation Management Response 1 Formulate an Integrated Strategy See response to the Main Report, 1a above. 1a IFC should work closely with other parts IFC Management supports this recommendation, and proposals of the WBG to ensure that CASs for in this respect are set out in the detailed responses to rec- resource-rich countries explicitly discuss the ommendations of the Main Report and OED reports and in EI sector's contribution to sustainable devel- the overall Management Response. IFC will work proactively opment (e.g., importance of fiscal rev- in the EI sector to identify opportunities for cooperation with enues, their management, distribution, and IBRD/IDA and MIGA, and to develop private-public part- use for development priorities) and obsta- nerships as appropriate in the context of individual projects. cles for enhancing its contribution. The CAS should provide an agreed framework for WBG-wide cooperation, with a partic- ular focus on close interaction between IFC and the World Bank's country departments. IFC and the World Bank should routinely work together to enhance the develop- ment impacts of EI projects, for example in the form of public-private partnerships with respect to community development programs. IFC and the WBG should build on existing initiatives such as Business Partners for Development and the Com- prehensive Development Framework to enlist the help of other stakeholders, such as the IMF, other bilateral and multilateral institutions, industry and civil society. 3 6 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the OEG Evaluation Management Response 1b Where country governance is weak, Weak governance can lead to poor oversight of the EI sec- increase transparency and address the tor and poor management of, and use of revenues from, weaknesses: Together with the World Bank resource projects. The IFC approach to this issue will be to and other stakeholders, IFC should analyze work with IBRD/IDA to ensure that EI issues are addressed all aspects of country governance quality in the CAS (see response to recommendation of the Main and the risks that poor governance may Report 1b above) and to generally support IBRD/IDA efforts detract from sustainable development. In on transparency initiatives, such as the EITI. particular, IFC should encourage enhanced transparency and disclosure concerning contractual agreements between investors and governments, the amount of fiscal rev- enues generated and their distribution. IFC -- together with the World Bank and other stakeholders -- should encourage such transparency sector wide in the country. 1b When financing projects whose major For significant new projects (typically, those large enough to (cont.)expected development contribution is the generate 10 percent or more of host government revenues), generation of revenues to governments, IFC IFC will require adequate mitigation measures to be put in should carefully review and discuss the place to reduce the risks that revenues will be wasted, and governance risk that these revenues will it will require transparency about EI-related payments to not be used productively. Where such gov- governments and the terms of key contracts with governments ernance risk is high, and the project's rev- that are of public interest (such as Host Government Agree- enues are significant, IFC should work ments, IGAs). For smaller projects, the IFC will evaluate with the government (in partnership with carefully the risks that revenues will not be used properly, the World Bank and IMF) to put in place and compare these and other risks against expected bene- mechanisms to reduce this risk, including fits, and evaluate the value of its involvement. Where risks possibly ring-fencing of project revenue are too high, it will not proceed. As a part of its Summary of management. For all proposed EI invest- Project Information that is usually published 30 days before ments, IFC should address these issues in a project goes to its Board for approval, IFC will summarize Board Reports. this risk review. Within two years IFC will expect EI payments to governments to be disclosed for all EI projects with which IFC is involved. In some areas that are not essential for the public interest, companies may need to maintain confiden- tiality to protect their legitimate commercial interests, and IFC will work with them to ensure this. 3 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the OEG Evaluation Management Response 1c IFC should focus on projects that can serve IFC will continue to support only projects that, at a minimum, as role models for environmental and social meet the requirements of its evolving social and environmental performance, transparency, and disclo- policies and guidelines. In addition, it will aim to make an sure. Where laws and regulations--or their added contribution to the sustainable impact of such projects enforcement--are weak, IFC should insist and, where possible, help make the projects role models for on special measures to ensure a project's activities in the sector and country. Where local capacity out- sound environmental and social perform- side of the project is weak, IFC will work with sponsors to ance. Such measures could include build- mitigate this with project design and operation/supervision ing local monitoring capacity, and processes, etc. When appropriate, it will work with other stake- disclosure of independently audited and holders (including IBRD/IDA) to increase capacity outside of publicly disclosed monitoring reports. They the project in local and national government and otherwise could also include an explicit assessment (see response to recommendation 2a below). Annual moni- of the risk of conflicts, and measures to deal toring reports are independently audited and disclosed now with them. in some large projects. Independent auditing is not feasible for small projects; but in the context of IFC's review of its dis- closure policy (now under way), IFC plans to require for all new EI projects regular disclosure to local communities by investors of appropriate information about the environmen- tal, social, and economic impacts of projects. When it is appropriate, IFC will assess the potential for conflict. 2 Focus on Implementation 2a IFC should continue to require high-qual- Management agrees with the need for high-quality environ- ity environmental impact assessments that mental impact assessments that establish appropriate baseline establish baseline data for relevant envi- indicators. OP 4.01, Environmental Assessment, the principal ronmental and socio-economic impact indi- safeguard policy for project environmental impact assessments, cators. These indicators--compared to the requires the establishment of baseline data. In Dec. 2003, the baseline--should be consistently tracked staff of the IFC Environmental and Social Department (CES) pub- and aggregated for IFC's management. lished a good practice note to improve the social component Appropriate requirements to allow IFC to of the environmental impact assessment. Since 2000, IFC has adequately mitigate risks and monitor all used an Environmental and Social Risk Rating (ESRR) system its projects should be included for all to prioritize supervision, and rate project performance. A rat- investments, particularly equity. Where IFC ing of 4 (substandard) requires a site visit by CES staff/invest- finds poor environmental and social sys- ment officers. IFC has improved the effectiveness of its tems or performance, it should address environmental and social functions by mainstreaming the work them proactively and vigorously. within operational departments, as well as by adopting a pol- icy of active portfolio management. Management will work with CES and COC to develop an appropriate database for all proj- ects, including portfolio projects, to help monitor key indica- tors. When issues are discovered, corrective action plans to remedy problems are prepared and agreed with the sponsor. Ultimately IFC can use loan agreements to try to ensure coop- eration. Performance indicators are being developed in the review of IFC's safeguard policies and the sustainability frame- work. The issue of requirements for equity investments is one that applies to all sectors; IFC will address this issue in the con- text of the current revision of safeguard policies and guidelines. 3 8 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the OEG Evaluation Management Response 2a IFC's investment officers and nominees to In the broadest sense, responsibility for project outcomes lies (cont.)company boards should be co-responsible with the Investment Department Management. However, the with technical specialists for the environ- different responsibilities of the investment officer, who is the mental and social performance of their overall "task manager" for the project, and the environmental projects. Where possible, IFC should also and social specialists, who provide technical input and ensure develop and use local monitoring capacity. compliance with IFC guidelines (with reporting relationships to IFC CES), are important ones. The latter's own reporting lines and budget provide a valuable degree of independence. IFC is now mainstreaming environmental and social responsibili- ties are "mainstreamed" to Investment Departments, but with CES retaining responsibility for quality assurance. The outcome of this experience will guide future arrangements (see response to recommendation 2b below). It is agreed that when possi- ble, IFC should promote the development and use of local capacity to monitor projects. The IFC nominees to company boards can support Investment Department Management in ensuring IFC requirements are met and its views understood, and that company issues and concerns in this respect are brought to Management's attention. 2b IFC needs to ensure that its environmen- It is agreed that the early involvement of environmental and tal and social specialists are consulted social specialists is warranted. Beginning with its first envi- throughout the project life and as early as ronmental review procedure in March 1990 and continuing possible and that investment officers fully through subsequent procedures (1992-1993 and 1998), IFC has share relevant information. To that end, developed a culture of ensuring that its environmental and social investment officers need to be better specialists are involved as early as possible in the project trained to identify risks and opportunities. cycle and throughout appraisal and supervision. Following the Also, changing the incentive structure by adoption of the 1998 "Procedure for Environmental and Social making the investment officer and depart- Review of Projects" a corporate-wide training program was con- ment explicitly accountable for environ- ducted to apprise investment officers of project environmen- mental performance would likely provide tal and social requirements, as well as risks and opportunities. better incentives for calling in the experts Sustainability training began in the spring of 2002 on a depart- as early as possible, not after a problem has mental basis, and it covers issues of governance, environment, materialized. and social matters. For about two years, environmental and social specialists have been co-located in the Oil, Gas, Min- ing, and Chemical Department's mining and oil and gas divi- sions; this has fostered coordination and early involvement in projects. As mentioned in response to recommendation 2a above, the environmental and social mainstreaming initiative at IFC explicitly places accountability and responsibility for envi- ronmental and social inquiry, decision making, and perform- ance on line management. CES will retain an independent quality assurance role. IFC has also pioneered "Departmental Scorecards" that set departmental targets across a range of indi- cators, including development impact and the volume of investments. IFC also recognizes outstanding environmental and social work in its performance awards system. 3 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the OEG Evaluation Management Response 2c IFC should develop a reporting template The recently introduced iDesk system for IFC project infor- that specifies for each portfolio project mation includes such a provision for each new project on which safeguard policies and guidelines which safeguard policies and guidelines apply. Compliance apply, whether the company is in com- with these policies and guidelines for portfolio projects are pliance with them, and how it performs tracked by the ESRRs (see response to recommendation 2a with respect to key sustainability indicators above). IFC will supplement this with a consistent internal for the industry. Where relevant, IFC should management database for all IFC projects that indicates the also include "beyond the fence line" issues, status of all key sustainability indicators (including mine clo- such as transportation and project-related sure/decommissioning plans, safeguard compliance, gas flar- security issues. ing, use of security forces, etc.). Work is underway to improve key sustainability indicators and enhance their usefulness (see responses to recommendations 1c, 2a, and 3c). COC, in con- junction with CES, will also review iDesk to ensure that it can provide Management with appropriate information and indi- cators for all projects (see response to recommendation 2a). IFC will review "beyond the fence" issues where it is appro- priate to do so and will make this explicit. All future IFC-sup- ported projects will require that investors meet a set of requirements relating to the use of security forces along the lines of the Voluntary Principles on Security and Human Rights that were developed through a process of dialogue between the Governments of the U.K and the U.S., EI com- panies, and NGOs. 2d IFC should develop global comparators IFC already reviews the split of resource project net benefits for the distribution of benefits from EI-- between investors and government. It also reviews the ways among investors, governments at different investors obtained access to resources. Management will fol- levels and local communities. For its proj- low the recommendation to review more explicitly and to test ects, IFC should analyze the distribution the distribution of benefits to different stakeholders, includ- and compare it to other EI projects. At ing levels of government. Wherever feasible it will compare appraisal, IFC should include the distribu- the distribution of benefits to government and others with tion effects in its sensitivity and risk analy- international comparators using established reference sources, sis (e.g., distribution of benefits at different evaluated against different assumptions about key variables levels of output and prices), track actual such as oil prices and production. IFC's annual project super- distribution during the project life, and vision reports now track key development outcomes, and aggregate the data at the country and sec- where revenue distributions are an important expected out- tor level. come, it will track these also. 4 0 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the OEG Evaluation Management Response 3 Engage Stakeholders 3a In consultation with stakeholders, IFC should Management has taken its response to the recently completed continuously update its environmental and CAO Safeguard Policies Review to CODE, and IFC has social safeguard policies, guidelines, and embarked on a program to revise its safeguards. This revi- processes in line with evolving good prac- sion will take into account CAO and OEG views on EI and tice in the industry. The WBG should use its recommendations such as those for safety of dams, mine clo- convening power and the help of its mem- sure, acid rock drainage, etc. Within the WBG, there is agree- ber governments to promote their use by ment that IFC will take the lead in the updating of the 1998 governments, industry, and other financiers. PPAH. One objective of the updating is to eliminate the IFC should develop, update or clarify poli- inconsistencies in the PPAH. Ongoing collaborations between cies and guidelines on Indigenous Peoples the WBG and MFIs, as well as the adoption of the "Equator (or "vulnerable people"), safety of dams, Principles" by a growing number of commercial banks that natural habitats (or biodiversity), security will use IFC safeguards for their project finance lending in and human rights, HIV/AIDS prevention, developing countries, demonstrate that other financiers find mining (closure--funding and social issues, the safeguards useful and relevant. Industry and govern- acid rock drainage, precious metal mining), ments also often refer to the safeguard policies and guide- and oil and gas (gas flaring, downstream lines, and the updating of the safeguards and the PPAH will transportation of oil). make them more attractive to these stakeholders. 3b IFC should encourage--and consider See responses to recommendation 1b above concerning trans- requiring--its clients to publish information parency of EI revenue payments and recommendation 1c con- in 3a above. Where client confidentiality cerning regular publication of information about projects by undertakings initially restrict disclosure, investors. IFC is currently reviewing its disclosure policy; it is IFC could report results on an aggregate likely that this review will to lead to changes in its general country, regional or sectoral level and par- approach. In the case of EI projects IFC proposes to require new ticipate in initiatives advocating such dis- investors to provide information on a regular basis concerning closure. IFC needs to balance client the environmental, social, and economic impacts of IFC-financed confidentiality with its own accountability projects. This will include, for example, appropriate informa- as a public institution and the public's tion that is now contained in Annual Monitoring Reports. IFC desire to know more. On balance, increased will work with investors to agree on an effective and meaningful communication and transparency is likely approach to such information provision. As a part of the review to help IFC and its clients and reduce mis- of its disclosure policy, IFC will consider how it can better pro- conceptions, distrust, and criticism. vide information about its aggregate activities in EI. 3c In consultation with other stakeholders, See responses to recommendations 1b, 1c, 2a, 2c, and 3b IFC should develop and track key sus- above. IFC is developing an improved process to collect rele- tainability indicators and consider disclos- vant baseline socioeconomic data for its projects, and it will col- ing them to demonstrate the economic, laborate with IBRD/IDA in this work and with external social and environmental impacts of its EI stakeholders. The size of projects (including their ability to bear projects. Reporting on credible sustainable the cost of such analysis) and their range of potential impacts development indicators will help over- will inform the choice of indicators and baseline data. IFC already come the current inability to systemati- monitors key development outcomes expected from projects cally demonstrate results achieved. and reports on these in its internal annual project monitoring reports. It will discuss its approach with others and take note of best practice in the sector, as appropriate, given the nature of IFC's portfolio and its objectives. It will consider whether and in what form relevant information from these can be disclosed. 4 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the OEG Evaluation Management Response 3d This evaluation found strong evidence that It is agreed that good, ongoing consultation with communities improved community consultation is in is important and should be the norm, and this approach will the best long-term interest of our clients. be applied to new EI projects within two years. In 2000, IFC IFC should thus make community devel- prepared a community development resource guide for com- opment programs with ongoing consulta- panies ("Investing in People: Sustaining Communities through tions the norm for EI projects. Such Improved Business Practice"). This guide provides IFC clients programs should start with a participatory and private investors with practical advice on establishing com- assessment of the community's situation munity development programs. IFC will encourage existing and long-term development needs. They clients to engage in ongoing consultations and will disseminate should include ongoing consultations, its community development resource guide to clients. In par- focus on sustainable solutions to meet allel, the practice of CES for high impact EI projects is to focus these needs, and prepare communities for on community development opportunities. For example, the the time after the extractive operations requirement for resettlement action plans in OD 4.12 is nor- cease. Good communication is also likely mally complemented with actions for broader community to improve results--by listening to people development plans. Also, vulnerable groups under OD 4.20, and being exposed to public scrutiny and Indigenous Peoples, and OD 4.30, etc., are now the focus of challenge. community development plans. IFC's Corporate Citizenship Facil- ity works with IFC clients and other stakeholders to develop capacity at the community level. In cooperation with IBRD, as appropriate, IFC will aim to work with investors to develop as a pilot a "sustainable community development plan" that would involve all stakeholders, including communities, local govern- ments, and investors as envisaged in the MMSD report, Break- ing New Ground. COC is currently developing proposals for a sustainable EI development facility that will aim, through proj- ect interventions and partnerships with stakeholders, to broaden the practical application of best practice to EI projects. 3e IFC should routinely share best practice IFC will institute a more systematic approach to advising clients among clients and encourage them to of updates/changing best practices and encourage them to apply apply it. IFC should communicate its infor- these even when they are not obliged to. The new relationship mation needs better to its clients, for exam- with the "Equator Banks" provides an important additional way ple by tailoring reporting to their own for IFC to communicate beyond its direct client base. IFC needs requirements. Clients very much appreci- to ensure that client reports cover at least its minimum require- ated assistance they had received from ments in terms of safeguards. It will work with sponsors to ensure IFC staff, but were eager for more. IFC reporting is as effective as possible for both IFC and the client, should build on its various initiatives to add given specific project needs. As noted (see response to recom- value and further facilitate exchange of mendation 3a above), IFC is now responding to the CAO review ideas among its clients, for example by of its safeguards, and updating and revising safeguards may offer organizing conferences and further devel- the opportunity to make these more "customer friendly" with- oping toolkits on how to best address out diluting their key objectives. Management agrees that it can environmental and social issues. (often as a WBG approach) use its convening power and range of clients to promote the exchange of ideas and best practices and it will do this selectively. A schedule for best practice notes, lessons learned, and good practice notes is under preparation for FY05; this will cover areas relevant to EI. 4 2 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E D. Recommendations of the OEU Evaluation Report Recommendation of the OEU Evaluation Management Response 1 Strategy and Rules of Engagement: MIGA Management is committed to implement this recom- MIGA needs to recognize and promote mendation and will look for such opportunities to promote the potential benefits it brings to EI proj- the potential benefits it brings to insured projects through its ects through its internationally recognized internationally recognized and comprehensive set of safeguard and comprehensive set of safeguard poli- policies and its environmental and social impact mitigation cies and its environmental and social services. Management is committed to promoting projects with impact mitigation services. MIGA's engage- the greatest development impact and that are economically, ment with EI projects should move beyond environmentally, and socially sustainable. MIGA's new orga- compliance with its environmental and nizational structure will facilitate this. Management reviews social safeguard policies toward the pro- will focus on development effectiveness, and these reviews motion and achievement of the develop- now will be done early in the project process cycle. See ment effectiveness of these projects. responses below concerning specific recommendations in this subject area. 1a Recognizing that MIGA has the opportu- Management fully recognizes that MIGA should be more nity to add value to EI projects by adopt- proactively involved in the social and economic aspects of ing an explicit business strategy focused on EI projects. MIGA this year has hired a senior social specialist providing proactive environmental and as part of MIGA's Environment group. A senior manager, social advice to its guarantee clients that whose responsibilities include reviewing the economic, envi- brings EI projects closer to best practices ronmental, and social aspects of MIGA projects, has also joined in the industry, with the goal of achieving the MIGA Management team as Director and Chief Econo- sustainable development. This requires mist in the newly formed Economics and Policy Group. This strengthening the economic and social expansion of MIGA's in-house capacity and additional eco- components in MIGA's work in addition to nomic, social, and development impact training of staff will the environmental component. This calls enable MIGA to take a more proactive approach to EI clients. for a more proactive, forward looking Moreover, MIGA has just undergone a major reorganization approach to servicing clients that goes of its functional groups, to better integrate environmental, beyond the current practice of intervening social, and economic analysis, to offer a more holistic only when events warrant it. approach to assessment of developmental impact of prospec- tive projects, and to integrate the guarantees program and tech- nical advisory services to better serve clients. MIGA will adopt a more proactive approach to offer advice and sup- port to EI projects, especially sensitive or complex projects. The budgetary implications of providing proactive support subsequent to issuing coverage will need to be analyzed fur- ther, and MIGA will seek to secure support of a Trust Fund to enable a more intensive focus on such work. 4 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the OEU Evaluation Management Response 1b Strengthening the upstream involvement of Management concurs that it is advantageous to strengthen the environmental and social issues in MIGA's upstream involvement and consideration of these issues. underwriting decision-making process. This Management will notify clients as early as possible about appli- entails consistently identifying applicable cable MIGA safeguard policies. Management notes that in safeguard policies to clients as early as recent years experienced EI investors tend to be well aware possible in the underwriting process, and of these policies before coming to MIGA. It should be noted using risk assessments early on to identify that a large majority of guarantee applications arrive at MIGA where failures in the safeguard system with the environmental assessment process already com- may occur to avoid adverse impacts on the pleted and the environmental impact assessment approved environment and local communities. in the host country. MIGA needs to make a greater effort to Management concurs with the thrust of this recommendation, work with clients to ensure compliance and the recent hiring of a social specialist will facilitate this. with its environmental and social safe- Management notes that its business model (and the Opera- guard policies and guidelines at the time tional Regulations) provides scope for including as conditions of Board approval. of guarantee, the completion of proposed or ongoing criti- cal safeguard tasks, subject to Board approval. As has been done since MIGA adopted its own environmental policies and procedures in 1999, Management's commitment is to notify the Board of any outstanding, significant concerns that will need to be addressed as part of contractual requirements in the guarantee(s) for the project. The expansion of MIGA's in- house environmental and social expertise will lead to greater effort in monitoring subsequent compliance for projects that have high risk during implementation. In addition, MIGA needs to consider how Management will offer prospective clients advisory support its work in assessing, underwriting, and to enhance the developmental impacts of projects, to go supervising its guarantee projects can go beyond compliance with safeguards and promote sustainable beyond the monitoring of compliance with development. A model of this might be work done over the safeguards toward promoting development past four years by MIGA's environmental specialist in the con- effectiveness in its projects. text of the Antamina Mine in Peru. The budgetary implica- tions of this proactive support will need to be analyzed further as Management gains additional experience in this effort to add value to clients. 1c Associating with investors committed to Management associates with investors that are committed to sustainable development and avoiding sustainable development, but also notes that this recom- those who are unable to provide MIGA mendation poses some challenges for lenders or minority part- with timely environmental and social mon- ners. The majority of MIGA guarantees that have been issued itoring reports during implementation. have been held by lenders or minority partners, clearly demonstrating the value of MIGA's products to this type of investor. The implications for these investors will need to be carefully assessed in the context of how their investments con- tribute to outcomes of sustainable economic and social devel- opment. Proactive measures (e.g., working through the best 4 4 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the OEU Evaluation Management Response efforts of the investor or lender to implement best practices, distribution of best practices, etc.) can be taken. In this respect, MIGA will take comfort in those lenders that have committed to the "Equator Principles." Management also notes that great care will be needed to ensure that "South- South" investments are not discriminated against. MIGA should satisfy itself before engaging Management agrees with this recommendation and has put in new EI projects that the investor under- in place an upstream review process for all projects, to stands its environmental and social respon- address this and other issues. Management takes into account sibilities and demonstrates ownership at the client reputation, and assesses indicators of the likely risk for top management level to community devel- noncompliance during implementation and the associated opment and mitigating environmental and risks of faulty implementation. social impacts. The project enterprise's orga- nizational structure, policies, and stated mis- sion should be consistent with these goals. 2 Policies, Procedures, and Enforcement Mechanisms MIGA should strengthen its internal poli- See responses 2a, 2b, 2c, and 2d below. cies and support them by appropriate pro- cedures and guidelines to staff to ensure accountability. 2a Establishing internal requirements for See response to recommendation 4a. Management accepts that MIGA's timely engagement and system- it could do more in this area (see response to recommendation atic monitoring to maximize environmen- 1a). In particular, MIGA will encourage investors in EI projects tal and social benefits. to approach MIGA at a very early stage. Management has had internal guidance with respect to the selection and prioritizing of site monitoring over the past four-five years. In July 2003, Man- agement implemented a more standardized approach to mon- itoring compliance and performance of all new EI projects. This will entail avoiding projects where Management will avoid projects whose net outcomes are not MIGA can not address environmental or anticipated to be positive. social issues to improve the outcome due to its late participation. Site visits by MIGA's environmental and Under the newly reorganized structure of the Agency, project social experts should be required as early teams will normally visit the project site prior to any decision as possible in its involvement in category to recommend approval of the project to the Board. MIGA's Envi- `A' and other high-risk projects to assess ronmental and Social Review Procedures call for a site visit as which policies are applicable. MIGA should part of the environmental and social review and due diligence not rely exclusively on assessments and during the underwriting of Category A projects; these also will reports of non-WBG institutions. be carried out as early as possible. The procedures allow for the site visit to be carried out by qualified MIGA or IFC experts or by a qualified consultant (whose work will be reviewed by qualified staff). 4 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the OEU Evaluation Management Response 2b Incorporating standards recognizing the In the context of the overall WBG approach to these issues, rights of individuals relating to security Management will evaluate and help develop best practice arrangements at EI projects into its policies and Operational Regulations. 2c Making better use of MIGA's Contracts of With respect to environmental guidelines, MIGA's practice for Guarantee to enable the Agency to facilitate the past five years has been to attach the appropriate guide- compliance with its policies and standards. lines to the contract as conditions of coverage. With respect In addition to the current requirement to to safeguard policies, see response to the next part of this comply with safeguard policies and envi- recommendation. ronmental and health and safety guidelines, for future projects MIGA should ensure that the contracts clearly and explicitly state which environmental and social safeguard policies and guidelines apply to the project under guarantee and establish thresholds and con- ditions for timely and effective compliance. When applicable, contracts should also Management agrees with this recommendation. Management specify requirements for implementation of sees this approach as the mechanism by which project-spe- Environmental Management Plans (EMPs), cific requirements of the safeguard policies can be addressed Resettlement Plans (RPs), Community by binding and legally sound contract requirements. Man- Development Programs (CDPs), and agement takes care that any contractual requirements are Indigenous Peoples Plans (IPPs). clearly defined in a way that failure to comply can be rea- sonably assessed in the event of arbitration arising over the decision by MIGA to deny a claim or unilaterally cancel cov- erage due to noncompliance. As required by the involuntary resettle- Management agrees that these plans should be prepared ment and Indigenous Peoples policies, before project approval. However, these are not static plans MIGA should ensure that investors prepare and require adaptation to evolving circumstances. Also, Man- RPs, CDPs, and IPPs before project agement believes its business model provides scope for approval rather than leaving them to imple- including, as conditions of guarantee, the completion of pro- mentation. posed or ongoing critical tasks, subject to Board approval. In such cases, MIGA conducts necessary follow-up and mon- itoring to ensure compliance. 2d Establishing necessary mechanisms to Management believes it is obtaining information in timely and ensure systematic, timely, and regular mon- cost-effective ways for sensitive projects (e.g., Category A), itoring and supervision of safeguard com- and not levying excessive demands on guarantee holders for pliance of MIGA EI guarantee projects Category B projects. Management believes these judgments (e.g., MIGA should require in its Contracts are important contributions to the Agency's efficiency and of Guarantee timely environmental and effectiveness, as noted in paras. 49-51 of the OEU report. Nev- social monitoring reports from its guaran- ertheless, in response to this recommendation, Management tee holders during the project implemen- has implemented a more standardized approach to monitoring tation phase). compliance and performance of all new EI projects. 4 6 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the OEU Evaluation Management Response MIGA should also require sponsors to set Management identified this matter in 2000 as a lesson learned up environmental and social project man- from its experience with Antamina project in Peru. Manage- agement systems at a sufficiently early ment now considers this in all prospective EI projects where stage to effectively monitor impacts, includ- it has been identified as a potentially significant concern and ing during the construction stage. risk. 3 Internal Organization MIGA should update its business model by See responses below to specific recommendations in this sub- clearly assigning the locus of responsibil- ject area. MIGA has just undergone a major reorganization ity for better integration of economic, envi- that created a unit to integrate the assessment of economic, ronmental, and social issues in MIGA environmental, and social issues in MIGA operations, and to operations. This is needed in order to sup- approach developmental impact assessment in a more holis- port other departments in the achievement tic fashion. of these objectives and to provide guidance to operational staff, as well as, for the analysis and monitoring of economic, envi- ronmental, and social issues in an inte- grated manner. 3a Scaling up the analysis of developmental MIGA Management supports the recommendation and has impacts of prospective projects integrating made significant steps over the past few years to more closely new concepts in harmony with the rest of cooperate with other members of the WBG (e.g., work on the WBG. In so doing, MIGA should closely CASs, sector strategy papers, the Extractive Industries Review, cooperate with the other members of the etc.) to benefit from synergies, complementarities, experience, WBG to benefit from synergies, comple- and expert knowledge. Efforts will continue to be made to mentarities, and expert knowledge, with scale up these actions. the objective of promoting a holistic approach to EI projects. This will also require building internal MIGA Management has built and intends to further build its capacity by both recruiting needed eco- internal capacity in these areas. Initial training of underwrit- nomic skills and appropriate training to cur- ers has already been conducted by an IFC economist, who rent staff. has subsequently joined MIGA's staff as senior manager (Director and Chief Economist) for country assessment, pol- icy, economics and strategy (Economics and Policy Group). 3b Establishing an internal system that allows The recent reorganization of functional groups, and the a more integrated and timely monitoring intent to increase site visits to prospective projects, will offer of developmental impacts of guaranteed opportunities to increase timely monitoring of guaranteed proj- projects. ects in MIGA's portfolio. The planned closer collaboration with OEU will enhance this. 4 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Recommendation of the OEU Evaluation Management Response 3c Upgrading and expanding the role of envi- As previously noted, an experienced social specialist has been ronmental and social specialists and, at the hired as part of MIGA's Environment group (which has now same time, building internal social skills been incorporated into the newly formed Economics and Pol- capacity to effectively enable the applica- icy Group) to augment and build internal capacity. tion of social safeguards in MIGA projects. 3d Formalizing the practice of ensuring that Management agrees with this recommendation and is mak- MIGA environmental staff are involved in ing changes in its internal procedures to enhance the time- projects beyond the submission of clear- liness and extent of its environmental and social specialists ance memos, and requiring that MIGA involvement in these and other operational areas. environmental and social staff to provide inputs to guarantee and legal documenta- tion to incorporate any environmental and social concerns. In addition, MIGA under- writing staff should be required to keep environmental and social specialists appraised of all relevant changes beyond Board approval and contract signing. 4 Active Projects MIGA needs to review its portfolio of active See responses below to specific recommendations in this sub- EI projects to identify potential or actual ject area. MIGA has taken and will take appropriate reme- deficiencies in the application of safeguard dial actions to address deficiencies that are identified. policies and to swiftly take appropriate remedial actions. 4a Identifying projects that may not be con- Management notes that since late 1997 MIGA has exten- sistent with safeguard policies. In particu- sively and regularly identified "higher risk" projects vis-à-vis lar, where resettlement and land acquisition safeguard policies. This identification has been used to has taken place without follow-up audits develop a monitoring program of site visits, which has to determine compliance with WBG poli- included eight EI projects in the course of a three-year cies regarding resettlement, third-party period. MIGA plans to expand this effort. Also, soon after the audits should be required. Similarly, where Office of the CAO was established in 2000, MIGA provided Indigenous Peoples have been affected a list of all projects in MIGA's portfolio that involved invol- without the provision for Indigenous Peo- untary resettlement or Indigenous Peoples, discussed the ples Plans to mitigate the impacts, spon- risks of each project with the CAO, and described the mon- sors should be asked to prepare and itoring that MIGA directly had been carrying out or had implement such plans. Providing briefings been relying on to track the projects' compliance issues. on potential problems with sensitive proj- Briefings of the CAO on sensitive projects in the pipeline and ects, a system currently used by MIGA, is the portfolio have been regularly provided (approximately useful but not sufficient. MIGA should take quarterly) since then, as have exchanges of information with appropriate remedial actions to address the IFC on common projects. MIGA continues to review reg- existing safeguard deficiencies in extractive ularly the project portfolio and identify priority projects for industry projects that are still active in monitoring visits, focusing particularly on projects with higher MIGA's portfolio. risk. Management will consider on a case-by-case basis the need for a third-party audit of compliance with MIGA's poli- 4 8 A N N E X A -- W O R L D B A N K G R O U P F I N A L M A N A G E M E N T R E S P O N S E Recommendation of the OEU Evaluation Management Response 4b Making every effort to encourage consis- cies. Management believes that it has taken care to ensure tency with MIGA's safeguard policies in that, when Indigenous Peoples are at risk for significant active extractive industries projects with adverse impacts, plans have been established and imple- reinsurance agreements pre-dating the new mented to effectively mitigate those impacts. MIGA practice. New agreements require that environmental and social standards There are no longer any remaining active reinsurance con- applied by partners are consistent with tracts of this type. As noted by OEU, this matter has been MIGA's own safeguard policies and guide- addressed in new contracts. lines. 4 9 ANNEX B--CHAIRMAN'S SUMMARY: COMMITTEE ON DEVELOPMENT EFFECTIVENESS (CODE) Background nical challenges to transforming resource endow- This joint evaluation was one of the major sec- ments into sustainable benefits for their people. tor evaluations in OED's FY03 work program. It The OED/OEG/OEU evaluation reports include was undertaken in parallel with the EIR, an recommendations directed at the Bank, IFC, independent, multi-stakeholder consultative exer- and MIGA, respectively. cise, headed by Mr. Emil Salim, former Minister The key recommendations for the WBG are of Environment of Indonesia. The EIR focuses that it remain engaged in EI and that it should on the future role of the WBG in extractive (i) formulate integrated strategies for the sector industries ( comprising oil, gas, and minerals and and resource-abundant countries that address metals mining). The EIR was launched by Bank the risk that EI contributions to fiscal revenues Management following the 2000 Annual Meet- may not be used effectively for development ings in Prague, where a group of NGOs priorities; (ii) not support significant sector expan- approached the Management of the World Bank sion where the risk that EI fiscal revenues may with a proposal that the WBG should cease its not be used for development priorities cannot be support for EI projects, on the grounds that adequately mitigated; (iii) strengthen the imple- these projects did more harm than good in mentation of the existing policy framework; developing countries. Management decided to adapt the safeguard policies and guidance to be undertake a review of the WBG's involvement in line with evolving best practice; rigorously in this sector, and the EIR is its response to this apply safeguard policies; and monitor, docu- commitment. ment, and report on the social, economic, and environmental/safety impacts of its EI projects and Main Findings and Recommendations specifically monitor the distributional benefits; and Conducted in parallel with the EIR, the joint eval- (iv) proactively engage stakeholders with a focus uation by the three WBG-independent operations on governance, revenue management, and com- evaluation units assesses the effectiveness of munity development; define and report on key WBG assistance to clients in enhancing the con- sustainability indicators; and work toward and tribution of EI to sustainable development. The support disclosure of fiscal revenues from EI. In evaluation report's main message is that--while its comments on the joint evaluation, the Exter- there are differences in performance between nal Advisory Panel supports the recommendations WB, IFC, and MIGA projects--EI projects have but believes they should be made more com- produced positive economic and financial results prehensive and binding. and have contributed to sustainable development where projects meet appropriate social, envi- Conclusions and Next Steps ronmental, and economic criteria. While the The Committee welcomed the report's findings, majority of WBG projects were in compliance including the positive performance of the WBG with its environmental and social safeguards, the portfolio in EI. It was generally satisfied with the degree of compliance has been uneven. The scope and analysis presented in the OED/OEG/ WBG is well positioned to assist countries in OEU evaluation. The Committee believed that the overcoming the policy, institutional, and tech- Interim Management Response (IMR) was appro- 5 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T priate and also agreed with Management's pro- and noted that good models existed from the posal to formulate a comprehensive Final Man- Botswana and Chad-Cameroon projects. Some agement Response (FMR) following completion members noted that they were not convinced by of the external EIR (expected in December 2003). the "resource curse" arguments presented in the The Committee will have a more extensive sec- joint review and cautioned that resource-poor ond-round discussion, focusing on the recom- countries and non-EI sectors also have governance mendations and their policy implications, at the issues. The performance of resource-rich coun- time it discusses the FMR and the findings of the tries, however, could be adversely affected by the EIR. The Committee agreed with OED's recom- so-called Dutch-disease problem. They recom- mendation that the joint evaluation, the IMR, mended including examples from successful CODE Chairman's Report, and the report of the countries to provide a more nuanced under- External Advisory Panel be disclosed following standing of the relationship between the EI sec- this first-round CODE discussion. tor and macroeconomic performance and were of the opinion that revenue management should Governance be addressed primarily within the context of The Committee emphasized the importance of overall public finance management. Management the Bank addressing governance and revenue agreed that it would be key to address trans- management issues both in resource-abundant parency and distribution issues related to EI rev- and resource-poor countries in a proactive and enue management in its FMR. transparent way. Members supported the eval- uation's recommendation to develop a WBG Safeguards and Performance of the strategy for sequencing its EI interventions tak- Portfolio ing governance issues into account. They also Members asked for clarification of the recom- recognized the difficulty of implementing this and mendation that safeguard policies in extractive cautioned against a one-size-fits-all approach. industries projects be rigorously applied and, in Members considered that there are questions particular, whether there would be a different about how issues of governance, including standard for EI projects. The DGO responded human rights, should be addressed in EI proj- that the recommendation was that existing poli- ects. These questions require further attention by cies be implemented and that this recommen- all parties. The WBG's involvement in such dation should apply to all sectors, not just EI. issues should be consistent with its mandate Some members noted that the report suggested and comparative advantage. At the same time, that there were still gaps and overlaps in safe- the approach adopted in each country needs to guard policies, and that further consideration have local ownership. Management noted the needs to be given to human rights issues. Man- importance of governance issues and agreed to agement noted that considerable progress had address them, as well as the question of CAS been made by public and private entities in treatment of EI issues, in its FMR. improving environmental management of EI resources. Revenue Generation from EI Projects The Committee noted that revenue generation Report of the External Advisory Panel from EI projects constitutes a particular chal- Members would have liked to have seen more lenge. Some members noted that when assessing substantiation of the conclusions of the the impact of EI, the focus on revenues was too OED/OEG/OEU's external advisory panel report. narrow, and some underlined the importance of They did not agree with the advisory panel's assessing the full impact of EI projects on poverty, assessment regarding the limited value of a employment, and the environment. The Com- "rear-view approach" and reemphasized the mittee underlined the need for the WBG to be importance of evaluation to the Bank's opera- even more forthright in its dialogue with clients tions. The DGO clarified that the advisory panel in addressing the issue of disclosure of revenues has been used for several major evaluations and 5 2 A N N E X B -- C H A I R M A N ' S S U M M A RY: C O M M I T T E E O N D E V E L O P M E N T E F F E C T I V E N E S S ( C O D E ) that the role of the panel was to advise OED/ Communication OEG/OEU in the development of the review but The Committee suggested that Management con- stressed that panel comments were conveyed to sider a communication to the public explaining CODE as written by the panel. the background and process for the two-stage response by Management to the OED/OEU/OEG Scope of the Final Management evaluation. It also suggested that WBG Man- Response agement consider a workshop on the results of Committee members provided their expecta- the OED/OEG/OEU study, perhaps in connec- tions regarding the scope of the FMR. They tion with the EIR process. It was agreed that the asked that it provide a framework for WBG Committee chair would inform the Board con- involvement in the EI sector and a clear assess- cerning the discussion of the OED/OEG/OEU ment of the recommendations in both the eval- review and the two-stage process by which uation and the EIR reports. Members also noted Management will respond to it. that the WBG should forge partnerships to address recommendations that touched on areas outside of the WBG's mandate. Finn Jonck, Chairman 5 3 Operations Evaluation Department: Evaluation of World Bank Experience ANNEX C: WORLD BANK EXPERIENCE 1. Introduction ment in the 1990s, and to a more inclusive approach involving civil society, local govern- Background and Context ments, and the private sector in recent years. In resource-abundant countries, the extractive The involvement of the Bank and the WBG industries should be expected to play a major in the extractive industries has come under role in support of sustainable development. increased scrutiny in recent years from several They can be an important source of government sections of civil society. Some are concerned that revenues and foreign exchange and generate the extractive industries exact a heavy toll on the employment in otherwise economically neg- environment, with the poorest citizens paying the lected areas. They can attract investment for highest price, and they have put the spotlight on local and national infrastructure, and provide the treatment of local populations, especially countries with opportunities to strengthen their where a project involves involuntary resettle- institutional and administrative capacities. But ment.60 Others have been concerned with issues these industries also provide opportunities for of poor governance and failure to use rents rent-seeking that can hinder the conversion of effectively to support sustained economic devel- EI revenues into sustainable development. Para- opment.61 At the Annual Meetings in 2000, some doxically, over the past three decades, resource- NGOs asked the WBG to stop supporting the abundant developing countries have experienced extractive industries, because, in their view, the poor economic performance in higher propor- adverse environmental, social, and governance tion than resource-poor developing countries. impacts outweigh whatever economic and social The factors that lead to underperformance have benefits may accrue to the domestic economy been studied extensively but are not fully under- and the poor from the extractive industries.62 stood, nor is the design of appropriate strategies In response to these concerns, the inde- for dealing with them (see Box C1). pendent evaluation units of the World Bank The World Bank helps its client countries Group63 have prepared evaluations of the extrac- develop their mineral resources through a vari- tive industries activities supported by the WBG. ety of lending and nonlending activities in the Concurrently, WBG management launched the extractive industries. Lending assistance is pro- Extractive Industries Review64 to better under- vided through specific investment loans, tech- stand stakeholder views and advise the Bank on nical assistance, and structural adjustment loans. its role in the sector. While the evaluations have Nonlending activities consist of a variety of advi- consulted with the EIR, they constitute a sepa- sory and analytical activities, including sector- rate exercise that has been conducted inde- related economic and other studies, workshops pendently. This annex reports on the Operations and conferences, and training. The focus of the Evaluation Department evaluation of the World Bank's involvement has evolved over four Bank's experience. decades, beginning with an emphasis on pro- duction and exploration in the 1960s and 1970s, Study Objective and Process proceeding to commercialization of state enter- This evaluation assesses the effectiveness of the prises in the 1980s and private sector develop- World Bank in enhancing the sustainable devel- 5 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T B o x C 1 T h e " P a r a d o x o f P l e n t y " In recent decades, many resource-abundant developing countries have experienced significantly lower rates of growth than resource-poor developing economies.a This phenomenon is accompanied by poor governance and lack of transparency in managing EI revenues, and significant negative environmental and social impacts. This phenomenon is referred to as the "paradox of plenty." Figure C1: Slower Economic Growth with Greater EI Dependencea 10.00 5.00 (%) 99­ 0.00 1990 -5.00 Growth -10.00 GDP -15.00 0 20 40 60 80 100 (%) Average EI Exports / Total Exports: 1990­99 Source: World Bank, World Development Indicators. Economists and social scientists (among them, Auty 2000, Gelb 1988, Isham 2002, and Sachs and Warner 1995) have proposed several explanations for the phenomenon and strategies to deal with it, but no single model yet synthesizes the interplay of institutional, social, and political factors that is behind the observed paradox.b The emerging consensus is that the underperformance of resource-abundant developing countries, to the extent that it is the result of institutional and policy failure, is not inevitable. Overall, while the technical requirements for managing volatile and exhaustible revenue flows and other impacts such as the so-called Dutch disease, and devoting them to sustainable development are well understood, creating good governance appears to be at the heart of the institutional and policy changes needed to improve fiscal management, mitigate negative environ- mental and social impacts, and maximize benefits from the development of extractive industries. Another perspective on this debate is that "the appropriate public policy question is not should we or should we not promote mining in the developing countries, but rather where should we encourage it and how can we ensure that it contributes as much as possible to economic development and poverty alleviation" (Davis and Tilton 2001). a. This relationship, which is statistically significant at the 95 percent confidence level (t-statistic = ­2.39), illustrates a conclusion that is widely accepted in the literature. No claim is made that EI dependence is the sole determinant of a country's economic growth. When non-borrower countries are included in the regression, the slope is statistically significant (t-statistic = ­2.82) and steeper (­0.038 vs. ­0.032). b. Analysis in the 1960s focused on how to manage the macroeconomic impacts of resource export income, which raised domestic prices and made other exports less competitive internationally (so-called Dutch disease). More recent analysis emphasizes poor use of fiscal revenues from resources. opment contribution of the extractive industries the underperformance of many resource-abun- and distills lessons from experience to inform the dant countries will be sound fiscal policies, rig- Bank's future role in the sector. The evaluation orous mitigation of negative environmental and design is based on the widely supported view social impacts, and good governance.65 Thus, the that the main elements of a strategy to address evaluation focuses on assessing economic effects, 5 8 A N N E X C -- W O R L D B A N K E X P E R I E N C E environmental and social effects, and gover- all 76 Bank-supported projects in the EI sectors nance issues associated with the Bank's inter- that were approved since fiscal year 1993--48 ventions in the sector. "closed" or completed projects and 28 "active" or ongoing projects.68 The list of projects Economic Effects reviewed is in Attachment 1. · Improving the generation of fiscal revenues Phase II built upon the findings from Phase from the development of extractive industries I and consisted of the following:69 · Promoting the distribution and expenditure · Three Thematic Studies of the Bank's EI port- of the revenues in support of sustainable folio: (i) revenue management, (ii) safeguards development and poverty reduction implementation, and (iii) governance (referred · Strengthening the framework for managing to hereafter as the Revenue Study, Safeguards the volatility and exhaustibility of fiscal rev- Study, and Governance Study, respectively) enues from extractive industries · Five Country Case Studies for Ecuador, Equa- · Ensuring the adequacy of provisions for legal torial Guinea, Ghana, Kazakhstan, and Papua entitlements and compensation for negative New Guinea (PNG)70 impacts · Seven recent PPARs · Two Surveys: (i) of task managers of active Environmental and Social Effects EI and EI-related projects and country econ- · Mitigating the adverse environmental impacts omists of resource-abundant countries71 and and enhancing positive impacts (ii) of participants of the EIR's Regional Stake- · Mitigating the adverse social impacts, includ- holder Workshops.72 ing those associated with resettlement and clo- sure of existing facilities, and contributing to Structure of the Report social objectives Following the Introduction, Chapter 2 outlines the evolution of Bank involvement in the EI sec- Governance tors and characterizes the EI portfolio and its per- · Improving the institutional and policy frame- formance. Chapter 3 reviews the economic work benefits of Bank projects. Chapter 4 assesses the · Strengthening governance processes extent to which the Bank's portfolio imple- mented its environmental and social safeguard Evaluation Criteria policies and addressed issues of environmental At the project level, this study evaluates the capacity-building and mine closure. Chapter 5 effectiveness of Bank-supported EI projects discusses the Bank's efforts to improve the gen- based on an assessment of their outcome, sus- eration, management, and utilization of fiscal rev- tainability, and institutional development enues from resource extraction. Chapter 6 impact.66 At the country level, the Bank's effec- reviews the Bank's approach to governance tiveness is evaluated based on an assessment of issues in EI-dependent countries. Chapter 7 the overall coherence, level of effort, and results presents the recommendations. of its assistance to resource-abundant countries for enhancing the contribution of the extractive 2. The World Bank's Extractive industries to sustainable development. Industries Role and Portfolio The World Bank's role in extractive industries Evaluation Process has evolved from mainly supporting explo- The evaluation has been carried out in two ration and production activities (1960s to the phases: Phase I consisted of a review of the port- early 1980s), to sector policy reform and com- folio of World Bank extractive industry projects mercialization of state-owned enterprises (referred to as the Portfolio Review hereafter), (1980s), to a greater emphasis on capacity- supplemented by a review of CASs and a liter- building and private sector development (1990s). ature survey.67 The Portfolio Review covered Also in the 1990s, the Bank began to help tran- 5 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T sition economies maintain production levels, The guidelines under OMS 3.82 provided for rehabilitate or close uneconomical facilities, the Bank to assist borrower countries to (1) and attract foreign equity to their extractive design and implement effective energy policies; industries sectors. Since the mid-1990s, the (2) design and implement effective investment Bank's approach to extractive industries has plans and sound policies for exploration, devel- been evolving toward addressing social, envi- opment, and use of petroleum; (3) mobilize the ronmental, mine closure, revenue management, domestic and external financial resources and sustainable development issues in a more required; and (4) develop local capacity to con- holistic manner. It also has increased its col- duct petroleum operations and to provide petro- laboration with civil society, local governments, leum service efficiently and competitively. The and the private sector. guidelines also suggested that the Bank promote The Bank's EI portfolio from the 1980s to the exploration only where no significant explo- present illustrates the most recent shifts in its role. ration was taking place. Between the 1980s and the 1990s, the Bank's overall lending to the EI sector decreased mar- Early 1990s: In keeping with OMS 3.82, the ginally in absolute terms and significantly rela- Bank supported private provision of services in tive to the Bank's overall lending. Lending for the extractive industries and encouraged new oil and gas fell considerably, while lending for direct private investment. This trend was strength- mining rose sharply. Over the same period, the ened as Central and Eastern European countries quality of EI project outcomes has been better began their transition to a market economy in the than that of the Bank's projects as a whole, early 1990s. The Bank supported this shift by pro- while the mining sector improved over the oil viding technical assistance and advisory services and gas sector during the 1990s. for the modification of legislative, institutional, and taxation regimes to accommodate and attract for- The Bank's Evolving Policy and Role in the eign equity investment in the extractive industries. Extractive Industries The Bank's attention shifted more explicitly to cre- ating an enabling environment for the private sec- 1960s to the early 1980s: The Bank assisted tor (thus changing the role of the government public sector investment efforts to enhance pro- from owner-operator to regulator), privatization, ductive capacity in both the oil and gas sector mine closure, and industry restructuring as out- and the mining sector. This trend accelerated in lined in the 1992 Africa Technical Department the oil and gas sector when the Bank established Paper, Strategy for African Mining.73 Thus, as an Energy Department, in part to support lend- countries moved from public to private owner- ing for oil and gas operations after the second ship and extractive resource exploitation, the oil shock of 1979.The Bank established a pro- Bank moved from direct lending for production- gram to attract private financing for oil and gas related projects to supporting initiatives that exploration in countries that lacked resources to would bolster private sector growth. develop national petroleum industries. The late 1980s and early 1990s also witnessed rising public concern about environmental degra- 1980s: The Bank shifted its focus toward sup- dation and social inequity. A Bank Operational porting sector policy reform and the commer- Directive (OD) on environmental assessment cialization of state-owned enterprises. Later in the (OD 4.01) was issued in 1989 and, revised as a decade, the Bank pursued sector reform and lib- more comprehensive policy for environmental eralization and developed a framework for pri- and social impacts, adopted in 1991. In 1999, it vate investment, leading to active promotion of was converted to Operational Policy (OP) 4.01, private investment, such as for developing explo- which covers all projects except for structural ration data. In 1984, the Bank issued policy adjustment loans. guidelines for oil and gas (Operational Manual OP 4.01 is particularly important for the EI sec- Statement 3.82).73 tors because of their potential for negative envi- 6 0 A N N E X C -- W O R L D B A N K E X P E R I E N C E ronmental and social impacts. The objective of Mid- and Late 1990s: The mid-1990s saw the the policy is to ensure that projects are envi- Bank take a more inclusive approach to its devel- ronmentally and socially sustainable by pre- opmental operations and begin to emphasize venting, mitigating, or compensating for potential the need for external partnerships connecting adverse impacts. Under the policy, the envi- government, the private sector, and civil society ronmental assessment of projects should take into in the design and implementation of socially account the natural environment (air, water, and and environmentally sensitive projects. In the lat- land), human health and safety, social aspects ter part of the 1990s, there was an increased focus (involuntary settlement, indigenous peoples, on reform and deregulation programs in an effort and cultural property), and transboundary and to further good governance as a central element global environmental impacts. in the improvement of country economic per- The formulation and implementation of safe- formance. In 1998, growing management concern guard policies, which have been widely accepted about environmental and social impacts led to and emulated outside the Bank, illustrate how the creation of the Bank's safeguards policy the Bank can play a convening role and have framework, which combined the environmental influence beyond the implementation of projects assessment policy with nine other "do no harm" (see Box C2). policies.74 This was followed by the establishment C h a n n e l i n g t h e B a n k ' s C o n v e n i n g P o w e r f o r S u s t a i n a b l e B o x C 2 D e v e l o p m e n t o f t h e E x t r a c t i v e I n d u s t r i e s S e c t o r s The Bank, often in collaboration with other organiza- seen as having had an important impact on the aware- tions, has helped bring together various stakeholders ness of social and community issues in Papua New in the extractive industries sectors to address issues Guinea and in the region. A similar event, Mining and at the national, regional, and global levels. This con- the Community, was held for Latin American nations in vening power is prized because the Bank has access Quito, Ecuador, in 1998. In May 1995, in Washington, D.C., to all stakeholders, broad development experience, the Bank hosted an International Roundtable on Arti- and ongoing involvement with project investments and sanal Mining that brought together representatives technical assistance in the sector. from different parts of the world. In March 2001, the In the oil and gas sector, the Bank has collabo- Bank, along with other multilateral institutions, rated with the government of Norway in a major Global launched the Communities and Small-Scale Mining Gas Flaring Reduction Initiative,a which was the sub- Initiativeb to improve coordination among miners, com- ject of a 2002 conference in Oslo that hosted repre- munities, donors, governments, and other stakeholders. sentatives of industry, government, the research Another significant event was a roundtable focused on community, and NGOs. In September 2002, an interna- foreign investment and mining development in west- tional training program, Good Governance in a Global ern China. The October 2000 conference, Attracting Economy--Oil and Gas Policy and Regulation, held in Private Mining Investment, was held in Urumqi, China, Calgary, Canada, in collaboration with the Canadian and was organized jointly with the Association of South Petroleum Institute and the IFC, again brought together East Asian Nations (ASEAN) Federation of Mining Asso- senior government and industry representatives. ciations, the Malaysian Chamber of Mines, and the In the mining sector, the Bank and the government Metal Mining Agency of Japan. of Papua New Guinea co-sponsored the September 2002 Conference on Mining and the Community for a. For details, see http://www.worldbank.org/ogmc/global_gas.htm. Asian and Pacific Nations in Madang. The event, in b. For details, see www.casmsite.org. which other Asian mining countries took part, is widely Source: World Bank. 6 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T of an enhanced safeguards compliance system Energy Business Renewal Strategy, 2001: in 1999, a concerted effort to implement the The most recent rethinking of the Bank's role policies, which previously had been more flex- in the energy sector is reflected in the Energy ibly interpreted as "guidelines." Business Renewal Strategy (EBRS), which was New priorities began to emerge for sustain- presented to the Board in 2001. The EBRS rec- able mining and regional and local economic ognizes a declining demand for traditional development through private investment in min- IBRD/IDA products in the energy sector and ing, and community development. The evolu- shifts the focus to the WBG's priorities--includ- tion in the Bank's mining strategy was presented ing poverty alleviation--and comparative advan- in two World Bank Technical Papers: World tages: addressing poverty, macro-governance, Bank Group Assistance for Minerals Sector Devel- and the environment; supporting reform and opment and Reform in Member Countries75 and regulation to help support competitive energy A Mining Strategy for Latin America and the markets; facilitating the transfer of knowledge Caribbean.76 The new priorities were docu- among developing countries; and catalyzing mented in various partnerships, publications, investment in noninvestment-rated countries. conferences, and workshops on community The EBRS aims to facilitate access to modern issues, mine closure, revenue management, and fuels, create objective and transparent regula- sustainable development supported by the World tory mechanisms, and catalyze private invest- Bank Mining Division between 1997 and 2002. ments. It continues the Bank's emphasis on In the late 1990s, it became clear that despite closing loss-making mines and oil refineries; pro- efforts to coordinate over the years, IFC and the moting clean transport fuels and switching from Bank had not capitalized enough on synergies coal to gas; and facilitating environmentally between transactions and policy work. To inte- sustainable exploration, production, and distri- grate WBG activities and advisory work in the bution of oil, gas, and coal. Reducing gas flar- extractive industries more closely, the oil and gas ing and facilitating carbon trading and joint unit and the mining unit of the Bank and IFC investments to reduce greenhouse gas (GHG) were reconstituted as joint Bank-IFC Global emissions are also priorities under the new Product Groups. strategy (see Box C3). C l i m a t e C h a n g e : B o x C 3 T h e W B G ' s A p p r o a c h It is increasingly recognized that the adverse effects for Thought (World Bank 2000), which highlights appro- of climate change, especially through burning of fos- priate policy for improving energy efficiency and the sil fuels, can produce changes in precipitation pat- use of clean technologies and fuels. Further, the WBG terns and rise in sea levels that can pose major seeks to leverage external resources, particularly the developmental challenges for developing nations. Global Environment Facility (GEF), as well as new Hence, the WBG supports its client countries in (a) instruments, such as the Prototype Carbon Fund, Com- mitigating the adverse impacts of climate change, (b) munity Development Carbon Fund, Bio-Carbon Fund, and reducing vulnerability and improving adaptation, and private sector resources within the framework of the (c) building capacity for both a and b. Successful sup- Kyoto Protocol. In terms of capacity-building, the WBG port requires policy dialogue, integrated planning and helps clients through methodological, technical, and generation, and dissemination of knowledge backed by investment work to develop market mechanisms, sec- investment lending. toral and national plans, and international cooperation. The WBG's approach to mitigating the effects of and vulnerability to climate change is laid out in Fuel Source: World Bank. 6 2 A N N E X C -- W O R L D B A N K E X P E R I E N C E Overview of the 1980s and 1990s Projects overall decline masks a difference between the two sectors: lending for the oil and gas sector fell Lending for oil and gas decreased while min- by 34 percent, while for the mining sector it rose ing increased: Between the 1980s and 1990s, the by 63 percent. During the same period, the EI sec- overall amount of Bank lending to the EI sectors tors' share of the Bank's entire portfolio declined declined by 6 percent (Figure C2). However, this from 4 percent of lending to 2 percent. I n c r e a s e d L e n d i n g t o M i n i n g F i g u r e C 2 H a s B e e n M o r e T h a n O f f s e t b y D e c r e a s e d L e n d i n g t o O i l a n d G a s 8 1980s 6 1990s billion 4 US$ 2 0 Total EI Oil and Gas M ining Q u a l i t y o f W B L e n d i n g F i g u r e C 3 f o r E I P r o j e c t s 100 80 1980s projects 1990s 60 of satisfactory better 40 or 20 Percentage 0 moderately Total EI Oil and Gas Mining I n s t i t u t i o n a l D e v e l o p m e n t I m p a c t F i g u r e C 4 o f E I P r o j e c t s 100 80 1980s projects better 60 1990s of or 40 20 substantial Percentage 0 Total EI Oil and Gas Mining 6 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T S u s t a i n a b i l i t y F i g u r e C 5 o f E I P r o j e c t O u t c o m e s 100 80 1 980s projects of better 60 1990s or 40 likely 20 Percentage 0 Total EI Oil and Gas Mining Outcome: Overall EI project outcome77 ratings of projects for which the rating was "likely" or were higher than the Bank-wide average during better--improved from 39 percent to 72 percent the 1980s and 1990s, though they fell somewhat for all EI projects between the 1980s and 1990s for oil and gas and rose sharply for mining proj- with gains in both oil and gas (44 percent to 75 ects. EI projects with outcomes rated "moderately percent) and mining (28 percent to 68 percent). satisfactory" or better rose slightly (77 percent Overall, these ratings improved much faster than to 78 percent). The percentage dropped for oil the Bank-wide average, which rose from 44 per- and gas projects (84 percent to 71 percent) and cent in the 1980s to 56 percent in the 1990s. rose significantly for mining projects (55 percent to 86 percent). Taken together, these outcomes Highlights of the Portfolio of Projects under are better than for the Bank as a whole, for which Review: FY93­FY02 the comparable ratios rose from 65 percent in The Portfolio Review covered all 76 EI proj- the 1980s to 75 percent in the 1990s. ects81 approved during the fiscal period 1993­2002. This portfolio consists of 48 com- Institutional Development Impact: The insti- pleted projects (oil and gas: 24; mining: 24) and tutional development impact78 for all EI projects 28 active projects (oil and gas: 15; mining: 13). improved between the 1980s and 1990s, declined This section describes the main characteristics of somewhat for oil and gas, and rose appreciably this portfolio.82 for mining projects. The institutional develop- ment impact of all EI projects--in terms of per- The transitional economies of the Europe centage of projects that were rated "substantial" and Central Asia Region accounted for the or better--rose from 38 percent to 50 percent largest share of lending: For completed proj- between the 1980s79 and 1990s. The oil and gas ects in both the oil and gas sector and the min- sector saw moderate decline (43 percent to 38 ing sector, the Europe and Central Asia (ECA) percent), while the mining sector showed con- Region received the major share of lending siderable improvement (24 percent to 64 percent) (Figure C6). The East Asia and Pacific (EAP) over the same period. Taken together, these Region accounted for the next largest share of ratings are higher than the average for all Bank oil and gas lending, and Latin America and the projects, which rose from 30 percent in the Caribbean (LAC) had the next largest share of 1980s to 43 percent in the 1990s. mining lending. Sustainability: The sustainability80 of project The most common project objectives benefits saw very large gains in both the oil and reflected some of the similarities between gas sector and the mining sector. The sustain- the two sectors: Analysis of the project objec- ability of outcomes--in terms of the percentage tives (each project could have more than one) 6 4 A N N E X C -- W O R L D B A N K E X P E R I E N C E T h e E u r o p e a n d C e n t r a l A s i a F i g u r e C 6 R e g i o n A c c o u n t e d f o r t h e L a r g e s t S h a r e o f L e n d i n g i n B o t h S e c t o r s Percentage of Actual Lending Percentage of Actual Lending FY1993­02: Oil and Gas FY1993­02: Mining 60 53 66 70 50 60 40 50 40 30 24 30 20 14 20 12 9 9 10 5 5 0 10 2 0 0 0 AFR EAP ECA MNA LAC SAS AFR EAP ECA MNA LAC SAS identified a few similarities and many differ- were 25 and 13. For mining projects, only 20 per- ences between the two sectors. Among the sim- cent of the completed projects and none of the ilarities, for both oil and gas projects and mining active projects came under Category `A.' In addi- projects, institutional development, private sec- tion, 50 percent of completed and 30 percent of tor development (PSD), and environmental man- active mining projects came under Category `B.' agement were among the leading objectives. Project performance ratings have been bet- But the remaining objectives tended to dif- ter than average: The Bank's portfolio of com- fer across the two sectors and between com- pleted EI projects generally has performed well pleted (older) and ongoing (more recent) in all three categories used by OED: outcome, projects. For completed oil and gas projects, sustainability, and institutional development the next most frequent objectives included impact.84 Of the completed oil and gas projects, pipeline construction, policy reform, produc- outcome was rated "moderately satisfactory" or tion, and social objectives, in descending order. better for 71 percent, sustainability was rated For active projects, the other objectives were pro- "likely" or better for 73 percent, and institu- duction, pipeline construction, and social issues, tional development impact was rated "substan- in descending order. For completed mining proj- tial" or better for 37 percent. Of the completed ects, other objectives were rehabilitation/clo- mining projects, outcome was rated "moder- sure of mines, social issues, production, and ately satisfactory" or better for 86 percent, sus- ASM. For active mining projects, the other objec- tainability was rated "likely" or better for 68 tives were social issues and policy reform-- percent, and institutional development impact production did not figure at all. was rated "substantial" or better for 64 percent. The portfolio of active projects also has been The importance of the environmental assess- performing well according to supervision reports. ment policy is apparent in the high per- All active oil and gas projects had development centage of projects in categories A and B: outcome ratings of "satisfactory" or better, and Among oil and gas projects, approximately 33 no adverse issues were reported regarding com- percent of all active and completed projects pliance with the Bank's safeguard policies. All came under Category `A'83 of the Bank's envi- active mining projects had ongoing develop- ronmental assessment policy (OD/OP 4.01). For ment outcome ratings of "satisfactory" or better, Category `B,' the corresponding percentages and only one project reported less than satis- 6 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T factory compliance with a provision under the Reporting of Economic Benefits Bank's safeguards policies. It should be noted, The Implementation Completion Reports (ICRs) however, that OED has not validated these self- are an integral part of the Bank's knowledge assessments of active projects. management and accountability reporting sys- tem and are intended to document and evalu- 3. Economic Benefits from Bank Projects ate the outcomes and impacts of the project, Extractive industries have the potential to make including their economic benefits. As summa- a major contribution to the development of rized in Table C1, the Portfolio Review found resource-abundant countries by transforming that, out of the 44 completed projects, ICRs of their mineral wealth into sustainable develop- 17 (mostly investment loans) had re-estimates of ment. The rationale for Bank projects is based ERRs and NPVs, and an additional 13 ICRs on the expectation that they will support the (mostly of technical assistance and sectoral country's development goals, and this expecta- adjustment loans) featured at least some ex- tion is underpinned by an economic appraisal post quantification and valuation of the bene- intended to ensure that the objectives have been fits.87 This finding is consistent with the relative chosen appropriately and that the project is the simplicity of attributing and quantifying the costs least-cost way of attaining the stated objectives.85 and benefits of investment projects compared The discounted present value (NPV)of the net with other types of projects. Nevertheless, given benefits, the economic rate of return (ERR), or, the issues that have been raised about the eco- where the benefits cannot be measured in mon- nomic contribution of extractive industries proj- etary terms, a cost-effectiveness criterion are ects, a greater effort to document and analyze the indicators of choice for making this deter- economic benefits would be desirable, includ- mination. Following completion of the project, ing a cost-effectiveness assessment where an ERR an ex-post recalculation of the economic rate of is not feasible, in line with the Guidelines for return or the cost-effectiveness criterion is used Preparing ICRs.88 to determine whether the project produced the For the Specific Investment Loans (SILs), the expected benefits in an efficient manner.86 This benefits derived mainly from increased pro- chapter discusses the available information on duction, increased private investment, and the extent and sources of the economic bene- improved productivity. Out of 20 SILs89 in the fits drawing from the Portfolio Review of the portfolio, 18 had an ERR or NPV estimated at Bank's extractive industries projects. appraisal, of which 16 were re-estimated at com- E c o n o m i c E v a l u a t i o n T a b l e C 1 i n I m p l e m e n t a t i o n C o m p l e t i o n R e p o r t s ERR/NPV/ ERR/NPV/ least-cost least-cost Monetary Monetary analysis analysis Quantification value value Instrument conducted reported of benefits Quantification of benefits provided (number)a at appraisal in ICR feasible? done in ICR? feasible? in ICR? Yes/No/Partly Yes/No/Partly Yes/No/Partly Yes/No/Partly SILs (20) 18 16 20/­/­ 17/­/3 20/­/­ 15/2/3 TALs (15) 3b 1 4/4/7 3/9/3 6/2/7 3/8/4 SECALs (9) ­ ­ 7/1/1 5/3/1 6/1/2 6/3/­ Total (44) 21 17 31/5/8 25/13/7 32/3/9 24/13/7 a. SILs include one emergency rehabilitation loan (ERL); technical assistance loans (TALs) include one GEF project; Sectoral Adjustment Loans (SECALs) include one rehabilitation investment loan. b. The Equatorial Guinea Petroleum technical assistance (TA) project estimated a financial rate of return (FRR) and the Azerbaijan Petroleum TA. 6 6 A N N E X C -- W O R L D B A N K E X P E R I E N C E pletion. While it is comforting to note that, in 15 largely due to strong government commitment, out of these 16 cases, the returns were greater supplemented by flexibility on part of the Bank. than 10 percent,90 it would have been feasible This is evident in Bolivia's Regulatory Reform and to have reported ex-post analyses for three of Capitalization and Hydrocarbon Sector Reform the remaining SILs.91 projects, as well as in Peru's Privatization Adjust- The 15 Technical Assistance Loans (TALs)92 in ment Loan and Energy/Mining projects. Privati- the portfolio were associated with quantifiable zation of coal mines in Russia was a highly and valuable benefits, such as increased pri- complex task carried out in a difficult political vate investment, increased gas sales, increased and industrial relations environment, and it oil and minerals production, increased fiscal might not have been possible without strong gov- revenues, improved environmental conditions, ernment commitment and efforts at consulting and improved sector efficiency, as well as ben- important stakeholders, together with Bank flex- efits that are more difficult to quantify, such as ibility in the design and implementation of the improved legal and regulatory frameworks and projects. On the other hand, inadequate gov- institutions, and preparatory studies for future ernment commitment and political consensus, projects. Of the 15 TALs, one had a re-estimated apart from issues of evolving sector strategy ERR93 and 7 ICRs provided at least some indi- and commercial viability, appear to be behind cation of the monetary value of the benefits. the limited progress of privatization in Poland's Because some benefits were amenable to mon- Hard Coal SECAL I and II projects. The slow etary valuation in 12 of these projects, more progress in privatizing Zambia Consolidated could have been done to document their cost- Copper Mines can be attributed largely to unfa- effectiveness and highlight their economic con- vorable market conditions for copper and polit- tributions. ical interference in the process. All nine completed Sectoral Adjustment Loans A particularly effective form of PSD inter- (SECALs)94 were in the mining sector and were vention was attracting increased private invest- associated with increased or decreased pro- ment--such as in the mining sectors of Guinea duction of minerals (coal, in most cases), reduced and Tanzania--through relatively low-cost TA government subsidies, cleaner environment, interventions (see Box C4). increased operational efficiency, improved prof- itability, and increased private investment. Six of Economic Benefits from Mine Closure or the ICRs provide some data on these achieve- Rehabilitation ments, from which a judgment can be made More than 60 percent of completed mining proj- about the efficiency of the projects. The other ects, including six completed SECALs in Poland, three ICRs did not provide any quantitative Russia, and Ukraine, involved large-scale reha- information on results. bilitation or closure of uneconomical coal mines. On a smaller scale, 15 small copper mines and Economic Benefits from Private Sector 66 chrome mines were closed or privatized in Development Albania. The economic benefits from such proj- World Bank efforts to promote privatization and ects derive mainly from the reduced burden on boost private investment had largely positive government budgets (see Box C5). outcomes. Eleven out of 16 completed projects Rehabilitation and closure of coal mines in with PSD components yielded or promised to Russia were major tasks, as already noted, but yield significant benefits by laying the ground- government commitment, stakeholder consul- work for improving the efficiency of public tation, and Bank flexibility contributed to the pos- enterprises through commercialization and pri- itive results. In Ukraine, favorable results were vatization, and increasing EI activity by attract- obtained under less difficult conditions. The ing private investment. strategy of approaching Ukraine's rehabilita- Privatization was politically complex in all tion/closure process cautiously, starting with cases. Wherever progress was made, it was the smaller-scale Ukraine Coal Pilot project and 6 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T E x p e r i e n c e w i t h P r i v a t e S e c t o r B o x C 4 D e v e l o p m e n t i n t h e E x t r a c t i v e I n d u s t r i e s S e c t o r s The Bank's efforts at commercialization and privatiza- privatization, but the economic crisis in 2002 has dimin- tion and at improving the climate for private investment ished their immediate impact. Little headway was yielded largely positive returns in terms of increased made in Zambia on privatizing the dominant Zambia investments and exports and reduced burden on state Consolidated Copper Mines because of a volatile mar- budgets. These efforts generally involved TALs that ket for copper and stakeholder disagreements. The were smaller than investment and adjustment loans. overall efficacy of the World Bank's interventions in The positive results were associated with strong gov- Ghana's mining sector during the 1990s is judged to be ernment commitment, the prior establishment of an substantial because of the success in attracting private appropriate legal and regulatory framework, and flex- capital and strengthening sector management capa- ibility on the part of the Bank. However, even where bilities, particularly of the Minerals Commission. earnest efforts were made, volatile commodity prices In Ecuador, a new Mining Law passed in 1991 and and macroeconomic crises affected some of the out- amended in 2000 included much-improved provisions comes adversely. to attract private sector investment and helped develop Armed with a strong mandate for privatization, a regulatory framework close to best practice. But the Bolivia moved ahead quickly with the sale of three country's political instability and unreliable judicial sys- state-owned hydrocarbon enterprises that yielded tem acted as disincentives, which were compounded US$828 million and improved prospects for investment by the negative effect of falling international com- of up to US$2 billion during 1998­2000. Strong govern- modity prices. ment commitment also was evident in Peru, where the Finally, Kazakhstan's Petroleum TA project was hydrocarbon sector was opened to private investment. successful in improving the capacity of key petroleum Despite strong political and labor opposition, Russia sector agencies to attract foreign investment. It achieved a major feat by privatizing 77 percent of coal financed the continuation of technical, financial, and assets by 2001, helping decrease subsidies by 40 per- legal advisory services that were critical to the con- cent. clusion of two major Caspian Sea projects. On the neg- Tanzania's and Guinea's success in attracting high ative side, the effort to privatize Uzenmunaigas, the levels of private investment to their mining sectors country's largest state-owned petroleum enterprise was aided by a relatively integrated approach to devel- and a centerpiece of the Bank-funded TA program, did oping an enabling legal, regulatory, and fiscal frame- not make much headway. On the other hand, the Bank work. Tanzania's mineral exports grew from US$15 also helped reform in a broad range of sector policy million to US$312 million during 1992­2001, while in issues covering petroleum legislation and taxation, Guinea, mineral exports rose from US$400 million to pricing, and privatization of retail petroleum trade. US$500 during 1996­2001. Argentina's Mining Development TALs made a good beginning in improving the institutional framework for Source: World Bank. leveraging its success for the larger Ukraine tors for laid-off workers remained an impor- SECAL, appears to have worked well. A notable tant issue, although there was progress in feature of Poland's Hard Coal SECALs I and II resolving the employment problem in Russia was that they succeeded in reducing uneco- as the economy began to recover from the nomical production levels and excess employ- crisis of 1998. This may imply that adequate ment while keeping a tense situation from attention to the demanding task of generating exploding. alternative employment should be the focus of However, in all three countries, attempts to projects outside of the extractive industries generate alternative employment in other sec- sectors. 6 8 A N N E X C -- W O R L D B A N K E X P E R I E N C E E c o n o m i c B e n e f i t s B o x C 5 o f R e h a b i l i t a t i o n o r C l o s u r e o f U n e c o n o m i c a l M i n e s The economic benefits of closing uneconomical mines remaining mines was increased 85 percent between derive mainly from reducing the burden on govern- 1998 and 2000. The coal production workforce was ment budgets through lowered or eliminated subsi- reduced by 24 percent between 1995 and 1999, while dies, reduced waste of resources, the freeing up of production dropped by only 3 percent. Subsidies for labor that can be used more productively elsewhere, loss-making coal mines were halved, from US$500 mil- and improved climate for privatization and competition lion in 1996 to US$250 million in 1999. contributing to overall efficiency. As of 2001, Russia's Coal SECAL I and II led to the The experience was positive in Poland, Russia, closure of the 183 most uneconomical mines, of which and Ukraine. The Poland Hard Coal SECAL I and II proj- 158 completed substantive closure works. As a result ects reduced excess coal production capacity by 23 of these projects, budgetary subsidies for the coal sec- percent to 105 million tons per year and employment by tor were reduced from 1.05 percent of gross domestic 36 percent to 155,000 between 1997/98 and year-end product (GDP) in 1993 to 0.07 percent of GDP by 2001. 2001. In Poland, the coal industry's financial perform- In both Russia and Ukraine, Bank support not only ance improved from a loss of US$1.0 billion in 1998 to helped reduce subsidies, but also shifted the compo- a profit of US$43.3 million by 2001 (at an exchange rate sition of subsidies away from operating expenses of US$1 = 0.2545 PLN). Under Ukraine's Coal Pilot and toward social mitigation, mine closure, and environ- Coal SECAL projects, more than 25 percent of Ukraine's mental cleanup. coal mines were closed, and the efficiency of the Source: World Bank. Economic Benefits from Environmental ings ponds through the Environmental Conser- Cleanup and Mitigation vation and Rehabilitation project), and Thailand Most of the projects in the EI portfolio had envi- (converting to unleaded fuel production in a ronmental components of varying magnitude Bangchak refinery), in the case of the recently and importance. Some dealt with cleanup of completed Coal Sector Environmental and Social existing environmental conditions, and others Mitigation project in India, an Inspection Panel were concerned with mitigating the environ- investigation found it to be out of compliance mental effects of new operations under the proj- with some safeguards provisions. ect or related projects. Only a few projects--five Notwithstanding the lack of compliance, the completed and three active--focused mainly project resulted in considerable improvement in on dealing with existing or ongoing environ- Coal India's approach to social and environ- mental problems. These projects were expected mental mitigation. The Oil Spill Contingency to yield economic benefits through healthier project for the western Indian Ocean islands of living conditions, greater resources for produc- Comoros, Madagascar, Mauritius, and Seychelles tive activities, and improved productivity of seeks to build their capacity to comply with resources, through reclamation of land and related international conventions and protocols. improvement to air, water, and soil quality. Among the projects that were not focused Five completed projects, in Brazil, Ecuador, exclusively on environmental issues but con- India, Russia, and Thailand, focused on techni- tained significant environmental components, cal assistance for addressing environmental the Bolivia-Brazil Gas Pipeline project contained impacts of past or ongoing extractive industries provisions for stakeholder consultation and com- activities. While the outcome was broadly sat- munity participation that gave credibility to envi- isfactory in India (strategy for managing coal ronmental initiatives and improved their chances mine fires in Jharia coalfields), Brazil (reclaim- of success. Bolivia-Brazil's experience stood in ing degraded mining areas and constructing tail- contrast to the Ecuador and India projects in this 6 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T respect. Another feature worth noting is that the cost effectiveness of achieving the objec- while many projects in the portfolio contained tives.95 Based on an evaluation of the feasibil- significant environmental components, almost ity of additional economic analysis, this share none of them explicitly factored the environ- could have been raised to about 89 percent. mental benefits into their economic cost-bene- While the project's economic returns constitute fit analysis. A notable exception was only an intermediate outcome in the transfor- Bolivia-Brazil's pipeline project, which applied mation of mineral wealth into sustainable devel- an environmental premium for the displace- opment, adequate reporting and validation of ment of more polluting fuels by natural gas in project benefits, in line with Bank policy, con- its economic analysis. stitutes the basis for most further evaluation and should be an essential component in the Bank's Economic Benefits of Artisanal and accountability reporting. Some improvement in Small-Scale Mining this area also would help the Bank address the The rationale for promoting ASM needs to rest perception that the economic benefits of the proj- on its potential for alleviating poverty by creat- ects may have been outweighed by adverse ing and maintaining employment in a socially environmental and social impacts. and environmentally acceptable manner. Among Aside from the reporting issue, the main les- the Bank projects reviewed in this study, ASM son that emerges is that projects with satisfac- issues were a significant component in three tory outcome ratings tended to be associated with completed projects in Ecuador, Ghana, and Tan- greater government commitment to project objec- zania and four active projects in Burkina Faso, tives and adequate infrastructure (India Coal Madagascar, Mozambique, and Zambia. The Sector Rehabilitation, Russia I and II Oil Sector main approaches involve improving the legal Rehabilitation, and Thailand Gas Transmission framework/formalization of ASM activities, I and II), favorable commodity prices (Russia I increasing tax revenues (Ecuador, Madagascar, and II Oil Sector Rehabilitation), and a high Mozambique, Tanzania), improving production level of stakeholder involvement (Bolivia-Brazil methods and technology and providing exten- pipeline and Bosnia-Herzegovina's Natural Gas sion services (Burkina Faso, Ecuador, Ghana, System Reconstruction projects). The less suc- Mozambique, Tanzania), improving environ- cessful projects appeared to be affected by poor mental awareness and management (Burkina government commitment (Ethiopia's Calub Gas Faso, Ecuador, Ghana, Madagascar, Tanzania), Development project) and unfavorable eco- and improving the capacity of government to nomic conditions or commodity prices (Korea's deal with ASM (Burkina Faso, Ecuador, Ghana, Petroleum Distribution and Sector Improvement Madagascar, Tanzania, Zambia). Based on results project and Mongolia's Coal project). These les- to date, the main lesson is to recognize ASM as sons are broadly consistent with the Bank's a poverty-driven issue and to move from using experience in other sectors. a narrow technical approach to a more integrated approach--ensuring an appropriate legal and fis- 4. Environmental and Social Impacts and cal framework, involving ASM communities in Their Mitigation decisionmaking, and considering environmen- tal and social aspects of ASM at the project Addressing Environmental and Social Impacts design stage (see Box C6). The potential benefits from the extractive indus- tries often have been undermined by adverse Conclusions environmental and social impacts. Negative envi- Overall, 73 percent of the ICRs of completed ronmental impacts from oil and gas activities can extractive industries projects contained at least result from leakages and spills, flaring of excess some ex-post quantification and valuation of gas, and the opening of access to new areas the benefits, but only 39 percent had a re-esti- where settlement and deforestation can occur. mated ERR or NPV, and the rest do not discuss Mining activities can be associated with defor- 7 0 A N N E X C -- W O R L D B A N K E X P E R I E N C E B o x C 6 A r t i s a n a l a n d S m a l l - S c a l e M i n i n g Nearly 13 million people are involved in ASM world- 1989 by passage of the Small-Scale Mining Law. The wide, with a high proportion of women (10 to 45 per- establishment of a legal purchasing arrangement, ini- cent) and children (5 to 30 percent) in several countries. tially by a public and later by private buying agents ASM production accounts for 15 to 20 percent of the offering world prices for gold and diamonds to artisanal value of the world's nonfuel mineral production--and miners, was the result of active policy dialogue with as much as 90 to 100 percent in some countries. The the Bank. majority of earnings from ASM, especially artisanal Ecuador's Mining Development and Environmental mining, are used for subsistence. Being largely in the Control project helped to formalize most of the coun- informal sector (50 percent), artisanal and small-scale try's ASM activities by granting title to 166 of 169 ASM miners often have no legal rights to mine, do not pay associations that existed before 1995. This may have taxes, and are prone to exploitation by middlemen. In contributed to the absence of land invasions by infor- general, ASM is characterized by poor standards of mal miners in the country in recent years. Currently, 99 safety and health and greater environmental cost per percent of ASM enterprises in the country have pre- unit of output than large-scale mining activities. sented environmental impact assessments (EIAs) or Developmental priorities for ASM are improving environmental management plans (EMPs) either indi- the legal and regulatory framework, investing rev- vidually or through associations. The project helped enues for sustained benefits, avoiding or mitigating demonstrate the feasibility of reducing ASM-related negative environmental and social impacts, encour- contamination, succeeded in promoting change to less aging alternative economic activities, adopting a gen- polluting processing technologies, and increased envi- der-sensitive approach, ending child labor, and ensuring ronmental health and safety awareness among miners good relationships between miners and other stake- and other stakeholders. holders. In Ghana, upon advice from the Bank, gold produc- Sources: Mines and Minerals for Sustainable Development (MMSD) tion by small-scale artisanal miners was legalized in 2002; Country Case Studies; World Bank. estation, soil erosion, contamination of surface To mitigate the adverse environmental and and groundwater from toxic wastes, and mine social impacts of the projects it supports, the tailings and coal mine fires. In addition to the World Bank, over the past two decades, has damage from ongoing projects, closed and aban- developed a comprehensive framework of safe- doned projects have often left a legacy of cleanup guard policies (see Chapter 2). Its main objec- costs that no one may be willing or able to tive is to ensure that projects "do no harm"; that pay.96 is, that they are environmentally and socially sus- Negative social impacts can arise from reset- tainable by ensuring that potentially adverse tling local populations, including indigenous impacts on the natural environment (air, water, peoples, or from disrupting traditional lifestyles and land), human health and safety, and social to make way for extractive industries. Other aspects (involuntary settlement, indigenous peo- social impacts can follow after resources are ples, and cultural property), and transboundary exhausted or have become uneconomical to and global environmental impacts are prevented, extract, resulting in unemployment and scaled- mitigated, or compensated. These policies define down or abandoned infrastructure. On the explicit requirements for the Bank to follow. In whole, social impacts tend to be more promi- light of the potential adverse impacts associated nent for mining than oil and gas activities, given with oil, gas, and mining activities, the evalua- the higher employment generated at the local tion included a review of the degree to which level and greater exposure to environmental, the Bank's appraisal and implementation of health, and safety hazards. extractive industries projects have been consis- 7 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T tent with these requirements (the Safeguards Overall, most projects were found to be sub- Review), whose findings are summarized in the stantially consistent with the applicable safe- first section of this chapter. guards at approval and during implementation. Beyond achieving the objectives of the safe- About 74 percent of the sample of `A' and `B' guards, an important aspect of the Bank's projects were substantially consistent with safe- approach to development assistance involves guards at approval, 67 percent during imple- the pursuit of positive environmental and social mentation, and only 41 percent were rated to goods, such as the remediation of pre-existing have had adequate supervision inputs and report- conditions resulting from past mining and petro- ing. The `A' projects' performance was higher leum activities (legacy issues), and the strength- than the `B' projects' performance in all three ening of the policy and institutional framework areas, but the difference was greatest at the to promote the implementation of safeguards approval stage. While the degree of consistency across the entire economy. Many extractive indus- was lower than the WBG aims to achieve, there tries projects have such components to "do is no implication that the performance pattern good," and their experience is also discussed. of these projects is different from that in other sectors, as they are all subject to the same poli- Consistency with Objectives of the Safeguards: cies, procedures, and constraints.102 "Do No Harm" The degree of consistency appears to have The Safeguards Review focused on assessing the improved modestly over time. A comparison of projects' consistency with the objectives of the the findings for the `A' and `B' projects in the sam- safeguard policies in three areas: at approval, ple approved before and after year-end 1995 during implementation, and in the adequacy of indicates that, at the approval stage, there has Bank supervision inputs and reporting. Desk been no overall trend. At the implementation reviews were carried out on a sample of 38 stage, however, there has been some improve- projects drawn from the portfolio of 76 closed ment in the more recent projects.103 and active extractive industries projects approved The findings of the Safeguards Review fall during or after fiscal year 1993.97 The sample was between those of the external and internal sur- purposely chosen to include projects that were veys. The survey of participants of the EIR's likely to have adverse environmental or social Regional Stakeholder Workshops104 found that, impacts and included 19 oil and gas and 19 with regard to the promotion of sustainable mining projects.98 In terms of the categorization environmental performance and mitigation of of projects under the Bank's Environmental negative environmental effects, the WBG's effort Assessment Policy, the sample included 15 `A' was rated "mostly effective" or better by 60 per- projects, 17 `B' projects, 5 `C' projects, and 1 cent of respondents and its success as "mostly uncategorized project.99 effective" or better by 46 percent. With regard The Bank's safeguard policies contain a long to the promotion of sound social development list of requirements that have been subject to dif- and the identification and mitigation of negative fering interpretation, and no independent and social impacts on local communities and indige- generally agreed criteria have been established nous peoples, the WBG's effort was rated "mostly to determine if a project is in substantial com- effective" or better by 40 percent of respon- pliance.100 In the absence of an established dents and its success as "mostly effective" by 28 approach, the Safeguards Review has synthesized percent. Bank staff involved in EI projects feel the policy requirements into a set of basic cri- more positive about the adequacy with which teria and applied them for sample projects. EI projects have mitigated negative environ- While there have been minor changes in some mental impacts (83 percent) and social impacts of the policies since 1993, each project was (75 percent). While the survey findings corrob- evaluated based on the specific version of the orate that the EI portfolio faces a gap in fully policy in force at the time the project was achieving the objectives of the safeguards, the approved.101 difference from the Safeguards Review points to 7 2 A N N E X C -- W O R L D B A N K E X P E R I E N C E the possibility of both internal and external per- Initial Project Screening ception gaps. A major finding of the Safeguards Review is that The review also identified a number of prom- the initial screening of projects106 has important ising practices that have established new bench- implications for the subsequent preparation, marks for safeguard policy implementation appraisal, and supervision of the project. In some performance and "value added." Such practices cases, screening decisions resulted in assign- were found in the Bolivia-Brazil Gas Pipeline ment of a lower environmental category than may project, Chad-Cameroon Petroleum Develop- have been warranted.107 This is important because ment and Pipeline project, Poland Coal SECAL less attention and fewer resources tend to be II, and Thailand Clean Fuels and Environmen- devoted to the assessment and mitigation of tal Improvement project. These projects have environmental impacts in lower EA categories. achieved international recognition for the com- On the other hand, not all difficulties in prehensiveness of their environmental and social achieving the objectives of the safeguards can mitigation measures and stand as examples of be traced to shortcomings in the initial project what compliance with safeguards can achieve. screening process. In fact, while 69 percent of the projects that were not substantially consis- Issues During Safeguards Implementation tent with safeguards had been incorrectly The most important inadequacies in the imple- screened, over half of the projects that had been mentation of safeguards are associated with incorrectly screened were substantially consis- shortcomings at the initial project screening. tent with policy requirements at the approval Another important source of problems, and a stage in terms of the adequacy of provisions for possible explanation for the decline in safe- mitigation of potential adverse impacts (see guards implementation from approval to imple- Figure C7). These findings suggest that, while mentation, is inadequacies in supervision and shortcomings at the initial project screening are reporting.105 an important source of concern, these upstream I n i t i a l P r o j e c t S c r e e n i n g F i g u r e C 7 a n d C o n s i s t e n c y w i t h S a f e g u a r d s 40 39 35 26 30 (15) 24 25 Percentage of (10) (9) projects 20 (no. of projects) 15 11 10 5 (4) Inadequate Adequacy of initial 0 project screening Adequate Substantial or High Modest or Negligible Degree of consistency at approval 7 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T errors often can be overcome by appropriate ity and prioritization of recommended actions in efforts during subsequent project preparation and the mine-specific EIAs. Other mine-restructuring appraisal. SECALs did not follow this model and therefore may have missed the opportunity for consider- EA Categorization ably more appropriate and cost-effective actions The Safeguards Study concluded that, of the for mitigating negative environmental and social sample of 38 projects, 6 out of the 17 Category impacts. `B' projects should have been classified as Cat- egory `A,' and all 5 of the `C' projects should have Technical Assistance Projects: While six of the been `B.' The definitions of EA categories were Technical Assistance projects in the sample were developed mainly for application to "invest- correctly categorized as `A' or `B' projects, five ment" projects and before the social and legal were incorrectly categorized as `C.' As noted in safeguard policies assumed as much importance the 1993 EA Source Book Update on Environ- as they have in the past decade. Since the late mental Screening, "while most technical assis- 1980s, the Bank has been diversifying and tance (TA) projects should fall into Category expanding its array of lending instruments,108 `C'... certain TA operations are designed to pave while EA categorization definitions and guidance the way for major investments or privatization.... on application of appropriate EA instruments109 In such cases, it is appropriate to undertake a lim- have not kept pace. The study found two major ited review of the environmental institutional areas where greater clarity is needed: and regulatory framework for the sector and recommend improvements (as needed). Cate- Sectoral Adjustment Projects: Five of the six gory `B' is normally the correct classification for `B' projects that should have been categorized such projects."115 as `A's were SECALs involving the closure of The Colombia Energy TA project, a `B,' illus- mines.110 While the OP 4.01 can be interpreted trates the importance of early attention to the to allow categorizing them as `B's, it would have environmental and institutional and regulatory been more appropriate to categorize them as `A's, framework, which allowed for the preparation given the significant, diverse, and unprecedented of a well-designed set of components to oper- cumulative impact of the mining sector on the ationalize the application of the Bank's safe- environment and communities in the mining guard policies. On the other hand, in line with areas and to ensure a level of attention, normally the objectives of the safeguard policies, TA proj- associated with a full EA, commensurate with the ects in Cameroon, Kazakhstan, Papua New degree of environmental and social impacts and Guinea, Russia, and Zambia all should have risks.111 Thus, the guidance set out in the 1993 been categorized as `B's rather than `C's, which EA Source Book Update on Environmental Screen- resulted in less attention being given to review- ing recommends that Sectoral EAs be carried out ing substantial issues of environmental and social for SECALs, and the 1991 EA Source Book112 rec- impacts that can emerge in the process of attract- ommends that EIAs be carried out on each indi- ing major investments and preparing for priva- vidual mine closure plan.113 While these tization. guidelines are not mandatory, they support the objectives of the safeguards policies, and OED Identification of Applicable Safeguards has used them to underpin its assessment. An important function of the initial project Among mining SECALs, the Poland Coal screening is to identify the safeguard policies that SECAL II illustrates the potential usefulness of a should apply to a particular project. Aside from Sectoral EA, which, for this project, found that the EA policy, the most frequently triggered the damage costs of saline water discharge were safeguards in the sample of extractive industries not as serious as previously estimated114 and projects relate to involuntary resettlement, indige- identified land subsidence as a potential prob- nous peoples, natural habitats, dam safety, and lem. It also found several shortcomings in clar- cultural properties. There is a natural inclination 7 4 A N N E X C -- W O R L D B A N K E X P E R I E N C E to downplay the relevance of individual safe- of an Indigenous Peoples Development Plan guards in order to simplify processing of proj- (IPDP). A good example of an IPDP was pre- ects. Moreover, in the case of TA projects, such pared for the Bolivian section of the Bolivia-Brazil issues as protection of natural habitats, cultural Gas Pipeline project. Under this plan, indigenous property, and indigenous peoples, and so forth, peoples' land rights were established through while possibly relevant to the sector, had not land titling, and communities were supported in been triggered when needed, as the policies have developing sustainable resource management been worded to apply when "investment" proj- practices. A trust fund of US$1 million was also ects are undertaken. This is unfortunate, as often established for protection and management of the TA projects are helping governments to the Kaa-Iya National Park, which is co-man- improve the regulatory system for private invest- aged by an indigenous NGO and Bolivia's ments in extractive industries, for which such National Protected Areas Agency. issues are highly relevant. Natural Habitats: Three of the five projects in Involuntary Resettlement: Of the seven proj- which the Natural Habitats policy applied met ects that should have triggered the Involuntary the requirements of this policy. For the Chad- Resettlement policy, four had prepared com- Cameroon Pipeline project,118 alternative corri- prehensive Resettlement Action Plans (RAPs), dors for the pipeline were assessed and while for three of the projects the RAPs were alignment of the pipeline within the preferred either not prepared or inadequate. The risks corridor was optimized from cost, technical, associated with inadequate safeguard identifi- safety, environment, and social perspectives. In cation at the screening stage are illustrated by addition to aligning the pipeline to follow exist- the Second Gas Transmission project in Thai- ing infrastructure and/or traverse degraded land land,116 where the issue of resettlement arose to the extent possible, because of the proxim- very late in project preparation--so late, in fact, ity of the right-of-way to areas of important nat- that it had to be dealt with at loan negotiations. ural habitat in Cameroon, biodiversity impact At this stage it was not even certain how many mitigation measures included two environmen- people had to be relocated and how many had tal offsets--one for the semi-deciduous forest and to be compensated for loss of income during one for the Atlantic Littoral forest. pipeline construction or for loss of structures. While the completion document reports that Supervision, Monitoring, and Consultation the resettlement of the few families was in line Other issues that emerged from the Safeguards with the guidelines and carried out without a Review relate to the (a) adequacy of supervision problem, it also reports that problems with land inputs and reporting, (b) management and/or acquisition were compounded by difficulties in action plans that were prepared, (c) adequacy purchasing the right-of way because of of provisions for monitoring and evaluating landowner lock-outs. There were also problems environmental and social impacts, and (d) pro- with squatters moving onto the pipeline route visions for disclosure and stakeholder consul- in an attempt to obtain compensation.117 It is tation. quite possible that problems, which happened before in earlier projects, could have been Supervision Inputs and Reporting: The study reduced through earlier identification of reset- found that in only 41 percent of the sample tlement issues and the earlier involvement of projects, the task teams had adequately super- resettlement specialists in planning for their mit- vised and reported the implementation of safe- igation, as would have been appropriate. guard policies. About 30 percent of the projects (all of which were likely to have adverse impacts) Indigenous Peoples: Three out of the seven included environmental or social specialists in projects for which the indigenous peoples pol- at least one supervision mission, which is about icy applied met the requirement for preparation half the level projected in the supervision plans 7 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T prepared at appraisal.119 Frequent changes in task same can be said for the oversight system. Super- teams, especially task leaders, and the lower vision reports generally record safeguards com- managerial attention and resources devoted to pliance positively without any discussion or safeguards supervision in incorrectly screened evidence provided in the text, and only a sin- and categorized projects also contributed to the gle reported violation of safeguard policies was modest intensity of safeguards supervision, as reported.120 Finally, less than a quarter of the ICRs reflected in infrequent and inadequate reporting reviewed discuss the implementation of safe- on safeguard policy matters in aide-memoires, guards, even though the Bank's ICR policy supervision reports, and completion reports. requires such a discussion for all Category `A' These issues are important because they projects and those that triggered any other safe- account for the entire slippage in the projects' guards and could reasonably be expected for all consistency with safeguards from the approval Category `B' projects. The paucity of monitoring, to the implementation stage. Thus, for about a documentation, and reporting of the projects' quarter of the 23 projects for which supervision implementation of safeguards is a serious weak- inputs and reporting were inadequate, the con- ness in the oversight system sistency with safeguards deteriorated during implementation. On the other hand, of the 14 Environmental and Social Management and projects that were supervised adequately, not a Action Plans: The basic instruments that the single one failed to meet the safeguard objec- Bank safeguard policies rely on for implemen- tives, and two previously inconsistent projects tation of environmental and social mitigation (14 percent) became substantially consistent measures are the EMPs, RAPs, and Indigenous with safeguards during implementation (see Peoples Action Plans (IPAPs). The review found Figure C8). that EMPs are being prepared to an appropriate The oversight and reporting of safeguards standard for 93 percent of the `A' projects but compliance and EMP implementation can be only 60 percent of the `B' projects. Because the only as effective as the environmental and social EA policy leaves the decision on the scope of monitoring reporting system provided for under EMPs to the judgment of Bank staff, this would the projects. Since these were found to be defi- likely have been less of a compliance problem cient in nearly half of the projects reviewed, the if the projects had been assigned to their proper A d e q u a c y o f P r o j e c t S u p e r v i s i o n F i g u r e C 8 a n d C h a n g e i n C o n s i s t e n c y w i t h S a f e g u a r d O b j e c t i v e s 43 45 40 (16) 35 32 30 Percentage 25 of projects 16 20 (12) (no. of projects) 15 3 (6) 5 10 (1) 5 Quality of project Inadequate 0 (2) 0 supervision Adequate Better (0) Same Worse Change in consistency with safeguards objectives from approval to implementation (1) 7 6 A N N E X C -- W O R L D B A N K E X P E R I E N C E EA category at the screening stage, with atten- this area. The ICRs of several `B' projects where dant availability of more resources for special- consultation took place noted the importance of ist staff to help define and supervise the EMP. stakeholder consultation. OED's assessment of Similarly, about half of the sample projects that a `B' project in Ecuador, in which full public con- involved involuntary resettlement and affected sultation only started five years into implemen- indigenous peoples did not have comprehensive tation, concludes that the projects and programs and implementable RAPs and IPAPs, largely involving natural resources extraction need to be because the relevant safeguards had not been managed carefully and proactively. Effective triggered at the initial project screening. communication, consultation, and stakeholder participation strategies need to be designed Monitoring and Baseline Surveys: An impor- early during preparation and maintained through- tant requirement, often overlooked, is that of out implementation. monitoring and evaluating safeguard compli- Beyond consultation, the Bolivia-Brazil Gas ance "on-site," which was implemented effec- Pipeline project offers an excellent model for tively in only about 33 percent of the projects establishing a participatory safeguards compli- reviewed. This weakness in the compliance ance monitoring, evaluation, and reporting oversight and supervision system, if allowed to framework. The completion report notes that persist, can lead to substantial and costly failures continuous dialogue and exchange of informa- for the borrower as well as the Bank. Moreover, tion between the local communities and civil it is rare that a monitoring plan, no matter how society representatives and the environmental well prepared, will cover all the potential envi- inspectors, environmental auditor, and ronmental and social impacts in any new proj- ombudsperson was an important feature of the ect completely. Some impacts become evident on-site supervision of environmental and social only during implementation. Such impacts can concerns. This process allowed a growing under- be documented most quickly and effectively if standing of the concerns of each of the stake- comprehensive environmental and social base- holders, the identification of new issues, better line surveys have been prepared before project monitoring of the performance of social com- implementation, as was done for about half of pensation programs in the field, and, more the `A' projects in the sample.121 important, an improvement of the environmen- tal inspection/monitoring system, which resulted Public Disclosure, Consultation, and Par- in a better definition of roles and functions for ticipation: Bank policy expects the borrower the contractor environmental field inspectors, the to consult affected groups and local NGOs for environmental inspection team and manage- all Category `A' and `B' projects, to disclose rel- ment unit independent from the contractor, and evant EA materials, and to incorporate their the independent environmental auditor and legitimate concerns into project designs. The ombudsperson. requirements are somewhat more rigorous for `A' than for `B' projects. The Safeguards Review Beyond Safeguards: "Doing Good" found that public consultation in the EA prepa- An important aspect of the Bank's approach to ration process had been substantially addressed development assistance involves the pursuit of in 73 percent of the `A' projects in the sample positive environmental and social impacts and 38 percent of the `B' projects. Stakeholder beyond strict compliance with safeguards, such participation, in terms of opportunities to influ- as the remediation of pre-existing conditions ence and share control over development ini- resulting from past mining and petroleum activ- tiatives, decisions, and resources, is not required ities and the strengthening of the policy and insti- under Bank policy and has been attempted in tutional framework to promote the only a few projects. implementation of safeguards across the entire Here again, the `B' projects appear to have had economy. Many extractive industries projects fewer resources than necessary to devote to have such objectives and components. 7 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T W o r l d B a n k P r o j e c t s B o x C 7 a n d P r e - e x i s t i n g E n v i r o n m e n t a l I m p a c t s In the oil and gas sector, the efforts included control- sands of people in the Jharia coalfields (India); and pas- ling drilling wastes and reducing environmental sage of a new environmental code for mining to ensure impacts from oil and gas operations (Russia); control- cleanup of existing pollution and rigorous guidelines ling and mitigating pollution from refinery activities for new foreign investors (Peru). (Thailand); controlling pollution from leaking pipes The efforts in Tanzania and Thailand yielded posi- and storage facilities (Tanzania); and addressing the tive results, and good progress was made in Peru, impact of petroleum development in an area of extreme where contamination levels were reduced by 15 to 20 environmental sensitivity near the Caspian Sea (Azer- percent, and in Poland, where saline water and solid baijan). discharge from coal mines were reduced by 21 percent In the mining subsector, pre-existing pollution and 29 percent, respectively. Under the Mongolia Coal issues included water and air pollution from mine tail- project, a beginning was made by establishing an Envi- ings and airborne particles (Guinea, Peru, Poland, and ronmental Management Unit. In Guinea, environmen- Mongolia); environmental impacts on surrounding com- tal audits of all mining operations were carried out. munities (Ghana, Russia); contamination from activities Ghana's project made some headway in reclaiming of artisanal and informal miners (Ecuador, Peru); a three pilot areas reclaimed and launched a "green strategy to control widespread mine fires that were communities" plan. affecting local infrastructure, farmland, and habita- tion and could potentially dislocate hundreds of thou- Source: Portfolio Review. Addressing Pre-existing Environmental nomic and financial situation was better (Poland's Conditions Hard Coal SECAL I and II) and in cases where environmental components were larger relative Environmental Rehabilitation: Nine com- to the entire project (Mongolia Coal project) pleted projects (oil and gas: 5; mining: 4) pro- and where stakeholder participation was higher vided assistance for addressing environmental (Tanzania Mineral Sector Development TA), impacts from past or ongoing extractive indus- there was greater progress indealing with pre- tries activities, while other completed projects existing environmental impacts. approached them as part of larger efforts in economic transition. Based on the generally Social Rehabilitation: Important coal mine limited information provided in the ICRs, pre- rehabilitation projects in Poland, Russia, and existing environmental conditions appear to Ukraine substantially achieved their mine closure have been addressed in a moderately satisfac- objectives, but the results on the social front have tory or better manner, in all but two cases (see been mixed. The greatest difficulties were in gen- Box C7). erating alternative employment for workers who Pre-existing environmental impacts tended lost their jobs in the rehabilitation and mine to be given less priority in countries where the closure process. The difficult economic transi- sector faced poor economic and financial con- tion in Russia and Ukraine made it very hard to ditions, where the priority was to restore pro- generate alternative employment, and it is not duction levels and earn import revenues, and clear if these issues were addressed through where the mitigation components were a rela- projects in sectors other than the extractive tively small part of the project. All these factors industries. Another area of concern was finding were evident in Russia's Oil Sector Rehabilita- alternative funding sources for social services that tion I and II projects as well as in Coal SECAL I previously had been provided by the state min- and II projects. In countries where the eco- ing enterprises. These issues are important 7 8 A N N E X C -- W O R L D B A N K E X P E R I E N C E because the process by which employment mental benefits. Under Brazil's Gas Sector Devel- reduction is handled is crucial for the acceptance opment project, the creation or improvement of by the mining communities of economically 13 national parks was initiated. This project, as necessary mine closure programs. well as Thailand's Gas Transmission I and II proj- ects, made available larger amounts of envi- Capacity-Building and Reform for ronmentally acceptable fuel--natural gas--and, Environmental and Social Management along with Thailand's Clean Fuels and Environ- Components in support of capacity-building, mental Improvement, had consequent benefits institutional development, and policy reform for air quality and health. Bosnia-Herzegovina's for environmental management were part of 16 Natural Gas System Reconstruction project completed and 9 active projects. Most of the helped reduce environmental pollution through activities were completed satisfactorily. For many rehabilitating war-damaged gas distribution sys- of these efforts the impacts are not evident from tems. the ICRs, perhaps because results may be real- ized only in the long term. Projects in three Missed Opportunities in Addressing countries--Burkina Faso, Madagascar, and Mau- Adverse Impacts ritania--aim to improve capacity for environ- The survey of Bank staff followed up on a recent mental management in their mining sectors. Quality Assurance Group (QAG) Quality-at- Burkina Faso's Mining Capacity-Building project Entry Assessment, which noted, "in numerous seeks to establish capacity for environmental interviews with task teams, panelists detected an management. The Madagascar Mining Sector aversion to including project components that Reform project will establish capacity in the may trigger safeguard policies, ...[and]...that it country by means of pilot projects to identify and was too risky to design operations with signifi- address environmental as well as social impacts cant social safeguard issues."122 Thus, the survey from mining. The Mauritania Mining Sector asked if the WBG has avoided good projects in Capacity project has an Environmental Man- the EI sectors due to concerns related to safe- agement System to include capacity-building at guards policies. The majority of respondents the Ministry of Mining and Industry, for moni- agreed that this has been the case, particularly toring and enforcing environmental regulations. in response to concerns originating from WBG Capacity-building for environmental and social management (86 percent) and WBG task man- management represents a valuable contribution agers (56 percent), rather than client countries by the Bank to client countries at a relatively low (22 percent) or private investors (40 percent). cost. While it is too early to judge the impacts This response suggests that the WBG is missing of these project components in many cases, opportunities to help its clients address adverse indications are that most of the changes are impacts in the sector mainly because of an inter- sustainable, especially in countries that already nally generated aversion based on the significant had a reasonable level of institutions and human costs and risks associated with its safeguard resources in these areas. The Bank's cross-coun- policies. try experience also helped client countries to learn from other countries facing similar envi- Conclusions ronmental situations. The number of efforts to The Safeguards Review of a sample of extrac- build capacity for environmental management in tive industries projects most likely to face envi- extractive industries projects appears to be ronmental and social challenges found the increasing. majority to be substantially consistent with appli- cable safeguard policies, but the degree of con- Other Environmental Benefits from Extractive sistency is below the expectation that Industries Projects Board-approved policies will be implemented as In the portfolio of 48 completed projects, 5 proj- a matter of routine.123 The degree of consis- ects produced other miscellaneous environ- tency varied greatly depending on the phase of 7 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T project cycle and the environmental category of good" by addressing environmental legacy issues the projects. The degree of consistency appears and building capacity for the management of to have improved modestly over time. The environmental and social impacts have yielded review also found that supervision inputs for and mostly satisfactory results. These appear to be reporting of safeguards compliance had been areas where the Bank should continue to make adequate for less than half of the projects. a valuable contribution to the development of The most important shortcomings with regard resource-abundant countries. to the implementation of safeguards can be traced to inadequacies in the initial project 5. From Resource Revenues to screening. Another important source of problems Sustainable Development was inadequacies in supervision inputs and From a country development perspective, the reporting. Inadequate attention to compliance most important component of the economic during project implementation also is reflected benefits from extractive industries is usually in the fact that environmental and social spe- the flow of revenues that can be used for cialists were involved in supervision in only growth-promoting public expenditures.125 This about 30 percent of the sample and that fewer chapter assesses the Bank's efforts to integrate than a quarter of the project completion reports the incremental revenues from resource extrac- discuss this subject. tion into the countries' overall development While the validity of these findings is limited strategy through improved fiscal management to the sample of projects that was reviewed, and expenditure policies.126 While the potential some of them may be helpful for strengthening for major fiscal revenues is generally greater the Bank's safeguards framework, which is no from the petroleum than the mining sector, it is different for extractive industries than for other useful to discuss them together in light of their types of projects.124 In particular, the findings shared characteristics of volatility and point to the need for clearer and more consis- exhaustibility. tent guidance for the categorization of sectoral adjustment and technical assistance projects; Linking Extractive Industries Sector the identification of applicable safeguards at the Development to Overall Country Assistance initial project screening; the appropriate scope The management of EI revenues cannot be and arrangements for monitoring of safeguards isolated from the larger context of economic compliance during project implementation, management. In a resource-rich country, EI rev- including the preparation of comprehensive enues deserve special attention because of their baseline surveys at the start of the project; and importance to the economy and their concen- the reporting and evaluation of results at proj- tration in a few sources, which affords greater ect completion. Improvement would be of par- scope for rent-seeking. Hence, an assistance ticular importance to the extractive industries strategy for a resource-abundant country must portfolio, given its large share of sectoral adjust- not only recognize the specific issues involved ment and technical assistance projects, the inad- in managing EI revenues but also chart their link- equacies in monitoring and reporting, and the ages with the broader management of the coun- controversy surrounding the sector's environ- try's development. mental and social impacts. A review of the World Bank's most recent On the other hand, the Bank's safeguards CASs127 found that 64 percent of those for poorly policies have received wide acceptance, even for performing EI-dependent countries128 recognized projects where the Bank is not involved, which one or more issues related to the management points to the potential for the Bank to continue of EI revenues (see Figure C9).129 The issues building on its global mandate and convening spanned a wide range, including managing of power for catalyzing good practice in respect to volatility and exhaustibility of EI revenues (Azer- safeguards and other issues. Beyond compli- baijan, Mongolia), achieving macroeconomic sta- ance with safeguards, the Bank's efforts at "doing bility (Gabon, Trinidad, and Tobago), public 8 0 A N N E X C -- W O R L D B A N K E X P E R I E N C E P e r c e n t a g e o f C o u n t r i e s W h o s e F i g u r e C 9 C A S R e f e r s t o E I I s s u e s 80.0 80 (11) 70 64.0 60 53.0 Percentage of 50 (12) CASs with 40 (25) 18.0 references to EI 30 (15) 20 10 Positive Average GDP 0 Negative per capita <15% >15% growth, 1990­99 EI dependence (average EI exports/total Number of countries in parentheses exports, 1990­99) expenditure policies for EI revenues (Bolivia, involvement in poorly performing EI-depend- Chad), transparency in handling EI revenues ent countries. World Bank lending per capita (Kazakhstan, Papua New Guinea), diversifying over 1990­99 was significantly lower (at US$47) of economic activity (Nigeria, Zambia), and for poorly performing EI-dependent countries reducing subsidies to the EI sectors (Russia). than for better-performing EI-dependent coun- In general, the mention of EI revenue issues tries (US$80) or poorly performing non-EI- in a CAS does not appear to translate readily dependent countries (US$61; see Figure C10). into developmental interventions by the Bank. While this is a consequence of the Bank's coun- The dearth of follow-up interventions could be try policy and institutional performance-based related to the relatively low level of Bank allocation of IDA credits, there is no indication I B R D / I D A L e n d i n g p e r C a p i t a F i g u r e C 1 0 ( n u m b e r o f c o u n t r i e s ) 80.2 90 71.5 80 (45) (23) 70 60.8 Average 60 IBRD/IDA 50 (26) 46.8 lending per 40 capita, 1990­99 (21) 30 (current US$) 20 10 Positive Average GDP 0 Negative per capita <15% growth >15% EI dependence (average EI exports/total exports, 1990­99) Number of countries in parentheses 8 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T A n a l y t i c a l a n d A d v i s o r y A c t i v i t i e s B o x C 8 i n t h e E I S e c t o r s The Bank has engaged in a variety of analytical and ad- include Legislative Frameworks Used to Foster Petro- visory activities (AAA) in the EI sectors, including eco- leum Development (1995), Management of Oil Windfalls nomic and sector work (ESW), as well as sponsoring in Mexico: Historical Experience and Policy Options meetings, conferences, and workshops for stakehold- for the Future (2001), and Does Mother Nature Cor- ers. rupt?--Natural Resources, Corruption and Economic None of the AAA in the EI sectors has been evalu- Growth (1999). ated through either self-evaluative Activity Comple- In the mining sector, several country-level sectoral tion Summariesa or the annual reviews of ESW by the reviews have been prepared, among them the Kyrgyz QAG from 1998 to 2001. However, some reporting in the Republic: Mining Sector Review (World Bank 1994a), ICRs, as well as in country case studies prepared for Russian Federation: Restructuring the Coal Industry: this evaluation, gives an idea of the integration of rep- Putting the People First (World Bank 1994b), Kaza- resentative AAA with project preparation.b khstan: National Gas Investment Strategy Study (ESMAP In Papua New Guinea, the Bank has provided a 1997), and Ecuador--Public Sector Reforms for Growth range of ESW on many occasions since the 1980s in the in the Era of Declining Oil Output (1991). A Mining mining sector, and it undertook reviews of environ- Strategy for Latin America and the Caribbean (Van de mental issues in 1992 and again in 2000 that provided Veen et al. 1996) and Strategy for African Mining (World input into the mining TA project. The Argentina Mining Bank 1992) spell out strategies for boosting private Sector Review (1993) helped improve the quality of investment in the regions. project preparation for the country's Mining TA and Mining Sector Development TA projects. In Ecuador, the Bank assisted the government in the preparation of a Mining Sector Policy and Strategy Paper in 1990 a. At least since 1998, the Bank has required Activity Completion (updated in 1993) stressing the need for legal and insti- Summaries to be prepared for all ESW with a budget of $50,000 or tutional reform to attract private sector investment in above, within six months after "delivery to client." In AFR, there is no threshold, and in ECA it is $15,000. the sector and to address environmental impacts of b. A detailed list of ESW by the Bank in both the oil and gas sector artisanal and small-scale mining. and the mining sector is included in the Bibliography annexed to the Other illustrative publications from the oil and gas Portfolio Review. sector on institutional development and policy issues Sources: Country Case Studies; World Bank. that the shortfall in lending has been mitigated enue distribution and utilization, as well as by nonlending interventions, such as economic attempts at economic stabilization and diversi- and sector work, as would seem desirable in fication. Ecuador and Ghana lacked the politi- light of these countries' needs130 (see Box C8). cal will and the fiscal discipline to maintain For a more in-depth assessment of the Bank's macroeconomic stability, putting other reforms involvement in the revenue management issues in jeopardy. Kazakhstan and Papua New Guinea of EI-dependent countries, the Revenue Study showed little institutional development or com- reviewed CASs, Country Assistance Evaluations mitment to governing openly or fairly. Only in (CAEs), project documents for EI and other sec- Bolivia did the government show a commit- tors, and adjustment lending and Public Expen- ment to managing its revenues within the con- diture Reviews and other documents for five text of overall public finance management, but EI-dependent countries: Bolivia, Ecuador, Ghana, even Bolivia is having difficulty maintaining fis- Kazakhstan, and Papua New Guinea.131 cal discipline. The Revenue Study also found that The study found that in all five countries, gov- desirable structural reforms were slowed in the ernance was the key to successful management face of large resource flows from resource extrac- of EI revenues and fed into the quality of rev- tion (see Box C9). 8 2 A N N E X C -- W O R L D B A N K E X P E R I E N C E E I R e v e n u e M a n a g e m e n t a n d B o x C 9 M a c r o e c o n o m i c P e r f o r m a n c e : S o m e W o r l d B a n k C o u n t r y E x p e r i e n c e s The World Bank has assisted several EI-dependent In Kazakhstan, an inflow of petroleum revenues countries in reconciling EI revenue management with created prosperity that began to produce symptoms of broader macroeconomic management. In most cases the Dutch disease and reduced commitment to overall the outcomes have been less than satisfactory. reform, to the point that the country has forgone sound In Ecuador, in the 1990s, the Bank identified con- advice from the World Bank regarding the management straints to macroeconomic performance as the major of EI revenues. negative effect of the decline in oil revenues and their In Papua New Guinea, private investment in the EI mismanagement, but it failed to develop a more com- sectors created some prosperity in the early 1990s, after prehensive strategy to isolate the economy from volatil- which the government discontinued reforms, which ity and exhaustibility of the resources and to share oil precipitated a financial crisis. Subsequently, the WBG benefits. Though the Bank provided financial assis- supported a new government effort to restore macro- tance to sectoral rehabilitation and macroeconomic sta- economic stability and initiate structural reform, with bilization, the expected reforms were not implemented, emphasis on governance and economic diversifica- and export and fiscal revenues went to finance highly tion. But macroeconomic mismanagement continued, inefficient public expenditures. Overall, the Bank had compounded by political uncertainty and poor trans- a very limited influence on how oil revenues were parency and accountability, forcing the Bank to suspend managed to promote macroeconomic stability and the second tranche of a structural adjustment loan. social equity. In Bolivia, WBG strategy in both hydrocarbons and In Ghana, during the 1990s, the Bank supported minerals had great success in generating revenues, efforts for better financial management and civil serv- helped in large measure by the country's own "capi- ice reform, but OED's CAE of 2000 found these efforts talization" program. However, public expenditure man- were only partly successful. Many shortcomings remain agement in the country is still weak, and Bolivia has not in the overall quality of Ghana's public governance, as responded well to several WBG technical assistance illustrated by politically motivated spending on public and structural adjustment operations targeted at pub- sector wage increases and consumer subsidies before lic finance management, civil service reform, customs each election in 1992, 1996, and 2000. These increases administration, and judicial reform. led to persistent macroeconomic instability with neg- ative consequences for investment and growth. Sources: Revenue Study; Country Case Studies. The Revenue Study also found that while lining cocoa production management, and com- economic diversification through directing pub- petition between mining and agriculture for lic expenditure toward socially profitable invest- arable land continues to be an important issue. ments is necessary for the sustainable The Bank advised Kazakhstan that efficient man- development of EI-dependent countries, this agement of the National Oil Stabilization Fund approach is difficult to promote in the face of and better management of public finances in gen- poor governance. Bolivia successfully devel- eral were preconditions for promoting economic oped agriculture in the lowlands but at the cost growth in the nonextractive industries sectors, of additional environmental damages that are dif- but governance of the oil fund and of public ficult to control. The Bank and the government finance continue to be difficult problems. showed clear commitment to develop agricul- Ecuador's poor management of public expen- ture in Papua New Guinea, but after 10 years of ditures is the core cause of the continuous finan- assistance the strategic options for stimulating cial crises the country faced in the 1990s, and it agriculture have yet to be developed. Ghana had is still excessively dependent on oil exports. In difficulties in developing agriculture and stream- general, while the World Bank supported diver- 8 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T sification in all these countries, it has not been exports (Mongolia); developing a strong private able to address these diversification issues with sector in industries other than oil (Azerbaijan); any clarity, and the efficacy of its interventions creating an oil stabilization fund (Colombia); has been low. and keeping a sizable reserve cushion (Chile). Overall, the Revenue Study concluded that the In two CASs a clear link was found among relevance of the World Bank's interventions for issues relating to volatility and exhaustibility of revenue management in the EI sectors had been EI revenues, appropriate policy dialogue, and a modest for Ecuador and Kazakhstan, substantial lending/nonlending program to address them: for Papua New Guinea, and high for Bolivia and The Papua New Guinea CAS addresses the coun- Ghana. The study rated the efficacy of inter- try's vulnerability to external shocks and suggests ventions as negligible for Ecuador, Kazakhstan, enhancing macroeconomic stability through and Papua New Guinea, modest for Ghana, and appropriate policy dialogue and a structural substantial for Bolivia. adjustment loan. The Kazakhstan CAS addresses the volatility inherent in commodity-led growth Managing Volatility and Exhaustibility of by proposing careful management of oil rev- Revenues enues, reflected in lending for public sector Fewer than half the CASs for EI-dependent coun- resource management and structural adjustment, tries (12 out of 26) recognized the importance as well as nonlending initiatives. of dealing with volatility and exhaustibility of rev- A general review of experiences with savings enues from the EI sectors. These CASs identified and stabilization funds, with or without Bank broad approaches to dealing with the issues: cre- intervention, as well as recent analytical work, ating a windfall fund and encouraging growth suggests that the experience with such funds has outside the oil sector (Gabon); offshore funds been mixed, with the few important successes (Kazakhstan); longer-term strategy of fiscal man- coming from countries with a strong history of agement of copper revenues and diversifying fiscal prudence (Botswana, Chile). Without such B o x C 1 0 H o w E f f e c t i v e A r e R e s o u r c e F u n d s ? A number of EI-dependent countries have responded to to evolve rules for transfer of funds and establish spend- the prospect of volatility and exhaustibility of EI rev- ing priorities and has already been criticized for mis- enues by setting up petroleum, resource, or future gen- use of funds. The Petroleum Stabilization Fund erations funds, with the objectives of maintaining fiscal established by Ecuador in 1990 turned into an addi- discipline, achieving overall macroeconomic stabi- tional source of revenue to finance regular budgetary lization, or saving for future generations. These attempts expenditures. In Equatorial Guinea, the government have been mostly unsatisfactory. has established a Future Generations Fund in its over- Papua New Guinea's Mineral Resource Stabiliza- all scheme for the use of anticipated petroleum rev- tion Fund of the 1970s was depleted by withdrawals and enues, but no significant amounts have been deposited. excessive public spending and was finally used up in In general, the same elements of disciplined eco- 1999 to retire debt that had then reached 25 percent of nomic management are needed to make a success of GDP. Ghana's Mineral Fund is a source of controversy a resource fund as are needed to run an economy effec- because its recipients, both mining communities and tively. Thus, recourse to resource funds is unlikely to the Ministry of Finance, have mishandled its system of yield better results than pursuing equitable distribution resource-rent sharing. Kazakhstan's National Oil Sta- and effective utilization of EI revenues through sound bilization Fund, created in 2001 to reduce the negative fiscal policies. impact of oil revenues on the domestic economy and provide for the welfare of future generations, has yet Sources: Country Case Studies; Davis et al. 2001; World Bank. 8 4 A N N E X C -- W O R L D B A N K E X P E R I E N C E a history, the integration of resource funds with favorable contractual terms. The lesson is that overall fiscal policy has proved problematic, where such conditions are stipulated, these proj- and the stabilization of expenditure has remained ect initiatives seem to be straightforward and elusive (see Box C10). effective. Revenue Generation Revenue Distribution Project components designed to help resource- A distribution of EI revenues among federal, dependent countries improve the generation state, and local governments that is broadly and accounting of fiscal revenues from resource acceptable and sustainable to key stakeholders extraction were included in 10 of the completed is critical for converting the revenues into sus- projects in the portfolio. These components tainable development and poverty reduction. focused on improving the capacity of govern- In general terms, an acceptable distribution of ments to negotiate with investors and on upgrad- revenues is one that is consistent with national ing accounting procedures to international developmental priorities, subject to (i) entitle- standards. ments of legal, customary, and traditional own- Six of the completed Technical Assistance ers of resource rights, and subnational units of Loans helped to improve negotiating capacity the government, as recognized under national and four others helped upgrade accounting pro- laws and (ii) compensation for negative envi- cedures. Three projects, in Georgia (Oil Institu- ronmental and social impacts. An additional tion Building TA), Papua New Guinea (Petroleum negotiated premium to local communities and Exploration TA), and Peru (Peru's Energy/Min- governments also may be appropriate, depend- ing TA), helped build negotiating capacity ing on national priorities. While the perception through improved data collection and economic of equity will vary, the experience of several analysis for exploration and development. Capac- countries shows that it is important that none of ity was developed in Russia for working with for- the claimants gets an excessive share, poor gov- eign suppliers and organizing bidding (Oil Sector ernance does not constrain the actual transfer of Rehabilitation I and II projects) and in Equato- funds, and there are clear regulatory provisions rial Guinea (Petroleum TA project) for main- for using the funds in the intended manner (see taining a dialogue on long-term development Box C11). plans with oil companies. Issues relating to distribution of revenues Four completed projects supported the adop- among owners of resource rights and different tion of international accounting practices by levels of government figured in six of the com- state enterprises for improving transparency and pleted projects in the portfolio--with largely compatibility with foreign investors: Azerbai- satisfactory outcomes--and two active projects jan's Petroleum TA with respect to the State Oil relating to the Chad-Cameroon pipeline. The six Company of Azerbaijan, the Mongolia Economic completed projects--in Bolivia, Papua New Transition Support project for the planning and Guinea, and Russia--contained provisions for restructuring of operations of the ERDENET distribution of revenues from resource extraction copper mine, and Thailand's Gas Transmission to meet entitlements, compensation, and other I and II projects with respect to the Petroleum national priorities. Of the six projects, four had Authority of Thailand. The results are reported satisfactory outcomes in terms of achieving their to have been satisfactory. distributional objectives. Efforts to improve capacity for negotiating with private investors and for adopting interna- Revenue Utilization tional accounting practices have yielded gener- Developmentally efficient use of EI revenue can ally favorable results, mainly because the client stimulate broad-based and sustainable economic governments and implementing agencies rec- development that goes beyond the EI sectors. ognized the immediate benefits of attracting Approaches to better use of EI revenues are higher private investment and gaining more discussed in CASs for 6 out of 26 EI-dependent 8 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T D i s t r i b u t i o n o f E x t r a c t i v e B o x C 1 1 I n d u s t r i e s R e v e n u e s -- S t r i k i n g t h e R i g h t B a l a n c e Striking the right balance in distribution of EI revenues a 50 percent of mining profits taxes to be plowed back involves many complex issues and needs firm institu- into local communities. Yet few of these funds appear tional arrangements and provisions for consultations to reach the communities, primarily because the fed- among stakeholders to arrive at equitable and sus- eral government retains them to pay ancient debts. tainable arrangements. In Ghana, the constitution explicitly reserves all The government of Papua New Guinea (GOPNG) mineral rights for the state. Nevertheless, public sen- has handed over a greater share of the resource rent timent has favored local communities receiving a direct to the provincial governments and landowners since share in royalties paid to the government of Ghana by pioneering an innovative Development Forum in 1989 mining companies. As a result, the government set up to represent their interests. In a recent project, GOPNG a Mineral Development Fund (MDF), which restored a ceded 30 percent of its equity to the landowners, though traditional practice of payments to custodians of the the 1998 Oil and Gas Act had established a cap of 20 per- mining land. The MDF receives 20 percent of all min- cent. Neither side has demonstrated effective use of ing royalties, of which 9 percent goes to mining com- these resources, and the distribution of revenues has munities, which in turn is subdivided between local not yet been settled to everyone's satisfaction. authorities. The other 11 percent goes to mining sec- In Equatorial Guinea, all oil revenues accrue to the tor institutions and mineral-related investment projects. central government, which exclusively decides their In practice, however, the discretion given to the Min- allocation, though local municipalities are deeply istry of Finance in handling the MDF together with the affected by the oil economy. In Chad, just under 5 per- lack of clear expenditure guidelines for the local cent of anticipated oil revenues are allocated to the authorities has resulted in little benefit to the local local authorities in the oil-producing region and 70 communities. percent to poverty sectors throughout the country The distribution of oil rents in Ecuador is consid- (including the oil-producing region). ered the most centralized and least transparent of the The experiences of Nigeria and Peru illustrate how four Andean countries (ESMAP 2000). Over 1995­2000, revenue distribution can go awry for lack of proper an average of 90 percent of available oil rents was implementation and proper regulatory mechanisms. In assigned to the central government and its institu- Nigeria, federal revenues, predominantly from oil, tions, 62 percent to the central budget, 7 percent to the appear to be reasonably shared among the federal armed forces, and 23 percent to the universities. Pro- government (49 percent), state government (24 per- ducing provinces and municipalities averaged 1.2 and cent), and local government (20 percent). In practice, 2.4 percent, much below the Andean countries' aver- these shares are not realized because of prior appro- age of 18.9 percent and 9.5 percent. Although a large priations, which are taken off the top, effectively reduc- share of local government resources come from other ing the share of state and local governments, making central government transfers, they account for less the issue one of actual implementation and quality of than 1 percent of central government expenditures. governance rather than a lack of appropriate consti- tutional provisions. In Peru, since 2001, the law requires Sources: Country Case Studies; World Bank. countries. The approaches include improving ing revenues toward sustainable use (Kaza- capacity for public finance management and khstan). Once again, there is little evidence in developing a strategy for poverty-oriented use the CASs of lending or nonlending activities of revenues (Chad), resisting the unwise expen- that follow directly from these discussions. Only diture of oil revenues (Azerbaijan), managing three active projects relating to the Chad- resource rents effectively (Mongolia), and direct- Cameroon pipeline contain explicit provisions 8 6 A N N E X C -- W O R L D B A N K E X P E R I E N C E A p p l y i n g E x t r a c t i v e I n d u s t r i e s B o x C 1 2 R e v e n u e s t o t h e R i g h t D e v e l o p m e n t a l P r i o r i t i e s Issues related to use of EI revenues are intertwined with In Bolivia and in Ghana, EI revenue enabled the those of public expenditure policies. However, depend- government to increase spending on social programs ing on the relative importance of EI revenues and the and begin to alleviate poverty, but poverty remains nature of developmental and macroeconomic priorities, entrenched in both countries. In Ecuador and PNG, sector-specific strategies need to be devised. poverty alleviation is an even more distant hope. In In Papua New Guinea, a large proportion of EI rev- Kazakhstan, poverty assessments were undertaken enues went toward nonproductive uses in the 1990s, a only in the late 1990s, and their conclusions have been period of poor economic growth for the country. This incorporated into World Bank strategy, but the Bank has was due to inadequate institutional capacity as well little leverage after abundant oil revenue reduced the as government preoccupation with macroeconomic government's commitment to reform. imbalances, which distracted it from the scope and Chad's ongoing Petroleum Revenue Management quality of public expenditure. Since 2000 the govern- project contains a detailed Revenue Management Plan ment of PNG has been consciously redirecting recur- that allocates prospective revenue from petroleum rent expenditure toward development projects. projects to poverty-related sectors such as education, In Equatorial Guinea, after a long period of poor eco- health, rural development, and infrastructure (70 per- nomic growth, there have been visible signs of infra- cent), civil sector operation expenditure (15 percent), structure improvements since 1995 that support the oil a future generations account (10 percent), and a sup- and the associated service industry and access roads plement to the producing region (5 percent). Capacity- in agricultural areas. The investment budget--which building and institutional arrangements for transparent reflects a 1997 commitment to give priority to essential allocation and utilization are in process. infrastructure and to alleviate poverty through invest- In Ecuador, a Bank review concluded that most of ments in social services and agricultural diversifica- the country's oil capital was being used to finance tion--is allocated among administration (20 percent), the government consumption, including widespread over- productive sectors (13 percent), health (10 percent), edu- staffing in the public sector, growth in inefficient pub- cation (15 percent), and infrastructure (32 percent). While lic enterprises and low levels of non-oil taxation, and the allocation appears appropriate for Equatorial high levels of subsidies for petroleum. Guinea's development needs, much needs to be done to develop the capacity of the sector ministries to imple- ment such a large investment program efficiently. Source: Country Case Studies. for allocating fiscal revenues from extractive dination across the WBG on important issues industries (see Box C12). affecting the EI sectors, 52 percent of Bank staff and 100 percent of MIGA, but only 48 percent Coordination across the World Bank Group of IFC staff, responded that it was adequate. In Aside from serving as an instrument for inte- response to a question about factors that con- grating activities within the Bank, the CAS is strain the WBG's ability to help client countries expected to strengthen coordination and coop- enhance the contribution of the EI sectors to sus- eration between the Bank and IFC/MIGA. How- tainable development, Bank and MIGA staff ever, the review of CASs of EI-dependent tended to point to the inadequate linkage countries found that, while the discussion of link- between EI activities and sustainable develop- ages with the Bank's EI activities has been very ment (50 percent and 56 percent, respectively, modest, the EI activities of IFC and MIGA are not versus 42 percent of IFC staff), while IFC staff always mentioned, even in joint CASs.132 In pointed to the inadequate level of support from response to a survey question about the coor- the Bank's Country Departments and Country 8 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T Management Units (55 percent versus 52 percent it will likely require government commitment as of Bank staff and 29 percent of MIGA staff). well as the full leverage of the Bank to achieve These findings also point to a need for greater both sound fiscal management and a support- integration of EI sectoral and macro interventions ive governance framework. The best place to in the Bank's assistance strategies, especially clarify the linkages between resource rents and for IFC activities. sustainable development is the CAS, which can then be used to guide the design of specific proj- Conclusions ects and the monitoring and evaluation of results. At the country level, the majority of CASs in EI- The strategic approach needs to ensure that dependent countries recognized one or more project-specific interventions are effectively inte- issues related to the management of fiscal rev- grated with a macro-level effort to manage the enues from resource extraction, but in only a few revenues for sustainable development. Projects instances was the discussion linked to specific and analytical and advisory activities to interventions to address them. Also, the Bank's strengthen policies and institutions to ensure overall lending to EI-dependent countries expe- that the management and use of EI revenues is riencing negative growth has been substantially efficient and transparent should play a major role. lower than average, with no indications of com- Projects to close uneconomical mines and mit- pensating non-lending interventions133 and no igate pre-existing environmental and social con- evaluative evidence on the results of such inter- ditions, including the integration of artisanal ventions. A desk review of Bank interventions and small-scale mining within the formal sector, in five EI-dependent countries found that gov- also will be important where such problems ernance was the key to the successful manage- exist. Projects to establish a legal and regulatory ment of EI revenues and fed into the quality of framework that is appropriate, stable, and con- revenue distribution and the efficiency of its sistently enforced and that will facilitate the pri- use in support of broad-based and sustainable vatization of ongoing activities also should be development. expected to make a major contribution. Where The CAS review and the staff survey findings the Bank can be confident that the incremental point to a need for greater integration of EI sec- revenues will support sustainable development, toral and macro interventions in the assistance it should continue to promote private investment strategies. The evidence suggests that only half for sector expansion. of WBG staff believed the actual level of coor- dination to be adequate , with inadequate link- 6. Addressing the Challenge of ages between EI activities and sustainable Governance development and inadequate support from the High dependence on revenues from extractive Bank's country units emerging as the main areas industries has been associated with corrosive for improvement. The joint CAS process, which effects on economic and political life, including has not been much used in EI-dependent coun- rent-seeking and government ineffectiveness, tries, would appear to be an important instru- in many countries. Indeed, a review of the lit- ment to achieve integration. erature and feedback from NGOs suggest that Taken together, these findings suggest that, good governance is central to creating an envi- while the Bank has been reasonably effective in ronment that fosters sustainable and equitable the few cases when it addressed revenue gen- development and is an essential complement to eration and distribution issues at the project sound revenue management and safeguard poli- level, it has yet to formulate and implement a cies. Figure C11 shows the association between strategy to consistently transform resource rents the quality of governance and EI dependence.134 into sustainable development, particularly in Countries such as Botswana and Chile135 have the most poorly performing EI-dependent coun- successfully leveraged their wealth into sus- tries where the need is greatest. If the Bank is tainable growth through investment-friendly to have a more effective role in such countries, policies, fiscal discipline, and long-term planning. 8 8 A N N E X C -- W O R L D B A N K E X P E R I E N C E W o r s e C o u n t r y G o v e r n a n c e w i t h F i g u r e C 1 1 G r e a t e r E I - D e p e n d e n c e 0 a 20 Rank 40 60 Indicator 80 100 GRICS 2000/2001 " 120 140 160 Composite" 180 0 20 40 60 8 0 100 Average EI Exports / Total Exports, 1990­99 (%) a"Composite" GRICS ranks are a simple average of individual GRICS rankings for 2000/2001 for Voice and Accountability, Political Stability, Government Effec- tiveness, Regulatory Quality, Rule of Law, and Control of Corruption. Source: http://www.worldbank.org/sbi/governance/pdf/2001 kkzcharts.xls While the highest quality of overall and sectoral Project Components Relating to Governance governance may not be required for an EI proj- and Transparency ect to be beneficial to a client country, some min- The Portfolio Review found that about 41 per- imum conditions should exist to help ensure that cent of extractive industry projects had at least the benefits of EI projects are not squandered one component that bears directly or indirectly and the citizens left with costs that can include on improving governance and transparency. environmental damage, health risks, and war. The relevant project components address sectoral Governance, defined as how power is exer- governance issues such as (i) the institutional and cised in the management of a country's eco- policy framework and related capacity-building nomic and social resources for development, has for clarification of property rights and improved been an explicit concern for the World Bank at accounting and auditing standards and prac- least since 1990, when the Bank's General Coun- tices and (ii) strengthening governance sel articulated the legal basis for its work in this processes, including public consultation and area. This was followed by a Board Paper on participation, information disclosure and dis- "Governance and Development"136 that outlined semination, transparency promotion, and cor- the Bank's general approach to improving gov- ruption reduction. ernance. Before this time, the Bank had under- taken many initiatives that addressed institutional Institutional and Policy Framework: Prop- and policy aspects related to governance. They erty rights issues relating mainly to clarification included projects to reform public sector policies and administration of exploration rights and and institutions and to create an enabling envi- access to pipelines were addressed in nine ronment for private sector development. Since the completed and five active projects and had early 1990s, much effort has been devoted to generally satisfactory outcomes. Cadastre and strengthening complementary process-oriented registry systems were formulated or upgraded aspects of governance, including public partici- (Argentina, Ecuador, Peru), and institutional pation, information disclosure, transparency pro- capacity was improved for enforcement of laws motion, and corruption reduction. and regulations, as well as for administering 8 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T mine titles (Albania, Bolivia, Guinea, Peru, Rus- Overall, while public consultation and par- sia, Zambia). Ongoing efforts among active ticipation has helped project implementation projects included strengthening mining cadas- where it was carried out, it was quite rare across tral systems and related institutional capacity the portfolio of EI projects. This is an important (Madagascar, Mozambique, Romania). In addi- gap in a sector where production and rehabili- tion, components addressing the management tation activities directly affect the livelihood and of fiscal revenues were included in 10 projects environmental and social well-being of large (see Chapter 5). numbers of people and where benefits need to be shared in a cooperative and transparent man- Public Consultation and Participation: Con- ner to prevent rent-seeking behavior. The promi- sultative and participative decisionmaking nent examples of public consultation have processes involving all important stakeholders-- occurred in countries with relatively higher lev- local community, government, and industry-- els of education and per capita incomes. In light recently have emerged as important in a strategy of this finding, it is important to develop suit- to strengthen governance processes. In the port- able mechanisms to ensure that affected people folio of completed projects, public consulta- who are less literate and economically weak tions of varying levels and in different forms, are given appropriate and fair means to regis- beyond the minimum requirements of the Bank's ter their feedback on issues that effect them. The EA policy, were undertaken in only four proj- provisions established for the Chad-Cameroon ects. The Bolivia-Brazil Gas Pipeline project projects represent a particularly important pilot involved creating community-based organiza- experience in this area. tions and committees and consulting the pub- lic on draft regulations and the project's Disclosure and Information Dissemination: environmental assessment. The Georgia Oil Insti- Public disclosure and information dissemina- tution Building project provided for training in tion, including conducting opinion surveys, fig- stakeholder analysis and public consultation to ured in only six completed projects. Opinion maximize public participation in environmental surveys of project beneficiaries were conducted decisionmaking. During the India Jharia Mine in six projects in Albania, Peru, Poland, and Fire Control project, effective public consultation Ukraine. Public information and communica- processes included concerned state government, tions campaigns were mounted in six completed union leaders, tribal communities, and NGOs. projects in Albania, Bolivia, Peru, Poland, and The Russia Coal Implementation TA project sup- Zambia, with mixed results. Among active proj- ported stakeholders' participatory activities, espe- ects, the four projects associated with the Chad- cially local trade unions and the Association of Cameroon pipeline contain exemplary provisions Mining Cities. for public disclosure and information dissemi- Among the active projects, the Chad- nation.137 Cameroon Pipeline project has involved public In Albania, as part of the Structural Adjustment consultations in the preparation of the project's Credit project (in which mining was only one Environmental Assessment and Environmental component), the government conducted a sur- Management Plan. Extensive and frequent pub- vey of citizens' satisfaction with services, gov- lic consultation also has taken place on the ernance, and institutional reform strategy and subject of likely project impacts and compen- received generally favorable feedback. A survey sation measures. Compensation rates for all of beneficiaries and stakeholders was made crops, trees, and other assets have been well under Poland's Coal SECAL I and II projects, researched and discussed with affected people while Poland's government also initiated an in all categories of land tenure. The private intensive dialogue with representatives of local sponsors will pay compensation at real market government, labor unions, and NGOs. In the values, which are over and above government Ukraine Coal Pilot and Coal SECAL projects, an schedules. independent institute was involved in monitor- 9 0 A N N E X C -- W O R L D B A N K E X P E R I E N C E ing social rehabilitation efforts with affected projects, the government of Russia took a series parties and obtained generally positive feed- of radical and far-reaching steps that enhanced back from project beneficiaries. A public opin- transparency and accountability through trans- ion survey was conducted following the fer of subsidy administration to government Privatization Adjustment project in Peru. ministries and created mechanisms for direct A public information campaign was mounted payment of entitlements to individuals and job in Poland's Hard Coal SECAL I, and Albania creation programs to local administrations. began a program to survey citizen's satisfaction The Bank's funding for Peru's Committee for with key public services and publicized reviews Promotion of Private Investment helped it func- of the impact of each element of its governance tion with greater independence during the sale and institutional reform strategy (Albania Struc- of state-owned enterprises (Peru's Privatization tural Adjustment Credit project). Following a Adjustment project). Open and transparent bid- controversy over its mapping work, the Ecuador ding was used for the first time for petroleum Mining/Environment TA project began a dis- imports, which helped to reduce costs of petro- semination effort to present scientific facts leum purchases (Petroleum Sector Reform proj- through various public forums. Bolivia's public ect). Transparency was improved through information campaign on the benefits of the upgrading accounting and auditing procedures reform was not sufficient or effective enough to during Azerbaijan's Petroleum TA and Thailand's answer public criticism of the Regulatory Reform Gas Transmission project, as well as under Mada- and Capitalization projects regarding benefits gascar's Petroleum Sector Reform project. of newly capitalized firms. Zambia's efforts to A notable achievement of the Peru produce an NGO policy paper proved insuffi- Energy/Mining TA was that the government and cient to bridge the gap between the complex public have accepted the concept of autonomous groups of NGOs and the government. Ukraine regulatory operators with stable and nondis- failed to respond adequately with appropriate criminatory rules. The funds for the Miners' Sep- information or disclosure to damaging reports aration Package scheme under Poland's Hard in the media on the conduct of coal sector Coal SECAL were properly accounted for through reform and may have invited political opposi- audits, and accountability of mining companies tion to the reform process. was improved through more transparent com- pany business plans and operating plans. Promoting Transparency and Reducing Cor- In the Ukraine Coal SECAL, the small business ruption: Promoting transparency and reducing component saw some fraud in applications for corruption did not figure as explicit objectives micro-credit and employment subsidies, but fol- in any of the completed projects that were low-up measures to prevent recurrence were reviewed, with the exception of the Russia Coal effective. Some administrative problems were SECAL I and II projects. However, some tech- encountered during audits of the employment nical assistance components, such as those relat- restructuring funds and mine liquidation funds ing to accounting standards, bidding processes, in Poland's Coal SECAL I and were satisfactorily and better management practices, had the effect resolved, and it was confirmed that the funds had of improving transparency, some of which may been used properly. have lasting effects. There was one instance of There were some less successful experiences, misuse of project funds that was addressed as in Zambia's Second Economic and Social eventually. Overall, 16 projects had components Adjustment project, where bilateral donors sus- related to transparency or corruption, some of pended program lending because of their con- which were minor in scope. cerns about governance issues. The Bank's sector An important objective of Russia's Coal SECAL policy initiatives in Russia helped underline the I and II projects was the establishment of a importance of institutional regulations surround- transparent mechanism for the allocation and ing transparent allocation of quotas and access to effective monitoring of subsidies. During these export pipeline facilities (Oil Sector Rehabilitation 9 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T I and II projects), though a draft law for this pur- Addressing Governance at the Country Level pose fell short of expectations. Albania's Anti-Cor- Since major governance issues are most likely ruption Plan supported an array of measures to to be addressed through interventions that are increase transparency, such as deregulation, more not tied directly to EI projects, the Governance transparent privatization and licensing proce- Study was undertaken to review the World dures, public administration reform, and judicial Bank's assistance to six EI-dependent coun- reform, which had an impact on all sectors, tries138--Chile, Ecuador, Ghana, Kazakhstan, including hydrocarbon and mining. Papua New Guinea, and Tanzania--in light of In Bolivia's Regulatory Reform and Capital- macro and sectoral governance problems. The ization Assistance projects, detailed asset valu- study sought to understand the degree to which ation helped set a benchmark to ensure that a the Bank is factoring governance into its sectoral fair bidding process and the privatization process approach through governance-focused ESW, a were considered most transparent by investors. governance-informed sectoral assistance strategy, However, the government's scheme for sharing and the design of projects. The study also makes the proceeds of capitalization with specified an important distinction between macro and sections of the population was marred by cases sectoral governance. of fraud by claimants who falsified their ages to claim benefits. During the Guinea Mining Sec- Macro Governance: Governance at the macro tor Investment project, the Ministry of Mines level covers all aspects of exercising authority negotiated mining rights with potential private through formal and informal institutions in man- investors in a nontransparent way with respect aging a state's resources for sustainable devel- to bauxite and alumina concessions, especially opment. Thus, the elements of macro for the Dian Dian deposits. Though outside the governance include the creation of a favorable scope of the project, these actions could well climate for economic growth, transparent budg- have affected the interest of potential investors etary and financial management, transparency in in project activities. However, on another count, the political process, and a voice for all citizens, budgetary transparency was improved by the while providing them with effective social and elimination of the Agency for the Management environmental services. Many indicators have of Mines Infrastructure. Under the Mongolia been developed for measuring the quality of Coal project, modern financial accounting, budg- macro governance in terms of its performance eting, and cost accounting have been intro- and process. Each indicator tends to cover one duced and adopted. or two aspects of macro governance and the Overall, the scope of the project components viewpoint of one or more important stakehold- relating to governance and transparency tended ers--the government, civil society, or the busi- to be narrow, relating to specific steps in the ness community. The World Bank Institute's sequence of project-related activities. In most Governance Research Indicators Country Snap- cases, the link with better governance and trans- shot (GRICS) estimates six dimensions--voice parency was incidental and did not follow from and accountability, political stability, govern- a stated objective of the project. None of the proj- ment effectiveness, regulatory quality, rule of law, ects have any stated objectives dealing with and control of corruption.139 larger governance or transparency issues, though these issues are recognized in many CASs. One Sectoral Governance: In contrast to macro reason for this could be the political sensitivity governance, sectoral governance in the context of this subject, making it difficult to convince of the EI sector is more closely concerned with client countries to adopt specific objectives in this a satisfactory legal, regulatory, and institutional regard. Another possibility is that these issues, framework to manage environmental and social being common to many sectors, may need to be risks; involving and protecting local communi- dealt with at the macro level rather than through ties against negative impacts of EI activities, sectoral interventions. including abuse of individual rights;140 ensuring 9 2 A N N E X C -- W O R L D B A N K E X P E R I E N C E investor compliance with the law; and protect- its non-lending assistance, but restrain its lend- ing investor contractual rights. This requires that ing services." Although both later operations, the appropriate environmental, financial, and com- 2000 Mining Sector Institutional TA Project and pensation regulations exist and are enforced, the 2000 Gas Development TA project, are pri- with the effective participation of the local com- marily intended to increase private investment munities, while the rights of investors are in their respective sectors, they also include respected. The structure and process of good sec- components to address macro and sectoral gov- toral governance can be ensured through gov- ernance issues.142 The Governance Study, how- ernment capacity-building and appropriate ever, found no indication that the Bank policy, legal, and institutional reforms, preferably considered the likely benefits of such increased in the overall context of good macro gover- investment in light of governance risks. nance. In the absence of indicators specific to In Kazakhstan, while a public sector reform sectoral governance, they may need to be loan achieved the technocratic reforms it sought, derived from those for macro governance, but it did not achieve its stated purpose of improv- extra efforts may be needed to tailor them to the ing the effectiveness of resource mobilization and specific situations and for data collection. the efficiency of the use of resources because of the absence of system-wide checks and bal- From Governance Awareness to Project Design ances.143 Papua New Guinea and Kazakhstan are The Governance Study found that most of the not isolated cases. Bank's EI projects are not the result of a gover- The findings of the Governance Study are nance-informed sector strategy. There is no indi- broadly similar to those of the Stakeholders' cation that the decision to support increased Survey, but WBG staff involved in EI projects and investment or structural adjustment loans was countries tend to be more sanguine. The survey preceded by an analysis that considered the of participants in the EIR's Stakeholder Work- likely governance benefits and risks of such shops found that, while 83 percent of respon- investments. It is recognized that most of the EI dents expressed the need for the WBG to projects under review predate the Bank's sharp- become involved in improving governance and ened focus on governance in the later 1990s.141 transparency, only 41 percent felt that the level The Bank's apparent lack of integration of gov- of effort and 26 percent that the level of success ernance concerns into the lending program is had been adequate. The survey of WBG staff reflected in recent OED CAEs covering the 1990s found that 90 percent of respondents felt that that found fault with the Bank for a belated, indi- improving governance and transparency in EI- rect, or muffled response to obvious gover- dependent countries was important, and 64 per- nance issues in Ecuador, Ghana, Kazakhstan, and cent said that these issues had been adequately Papua New Guinea. addressed in projects. Here again, the survey PNG presents a rare case where a link can be findings confirm that there is room for signifi- discerned between governance ESW, a gover- cant improvement in strengthening the linkage nance-informed strategic approach to the EI between EI activities and governance issues. sectors set out in the CAS, and the design of EI projects in the period under review. Both of Sequencing EI Lending with Regard to PNG's Petroleum TA projects predated the Bank's Improved Macro and Sectoral Governance increased focus on governance. But despite the In pursuing lending interventions in EI without success of these projects in building Papua New paying sufficient attention to governance, the Guinea's petroleum sector, OED's CAE found that World Bank risks a situation where a country is "progress in managing the growth of the oil unable to capture the benefits or control the risks. and gas industry has not led to sustained eco- Historically, the Bank's approach to the EI sec- nomic benefits to the country because of macro- tors has promoted private investment for sector economic mismanagement of oil revenues" and expansion as a major objective on the basis that recommended that "the Bank should intensify state enterprises in the sector had not been 9 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T managed to maximize productivity and were social risk ahead of promoting new investments subject to corruption and political interference. in expanding the EI sector. Alternatively, effec- The rationale was that private sector develop- tive measures need to be taken to ensure that ment was desirable because it would be better revenues from new production are used to pro- managed and produce more fiscal revenue, but mote development and reduce poverty. no explicit linkage was made to the efficient use of these revenues. This focus on expanding Conclusions production through PSD predates the institutional While the Bank has long been aware of the changes in the late 1990s that allowed gover- importance of addressing the governance chal- nance to be diagnosed, analyzed, and consid- lenge for ensuring the transformation of resource ered, and it may predate much of the debate on rents into sustainable development, there is lit- the development impact of EI sectors. tle evidence of sector-specific governance strate- The Bank has no strategy for sequencing gies in CASs of EI-dependent countries. The governance interventions in the EI sectors or Bank's project-level interventions tend to be coordinating them with work done in other sec- sporadic and narrow in scope, with few cases tors. Instead, the sequence of Bank actions has where a link can be discerned between these been shaped by the evolution of its under- interventions and governance ESW or a gover- standing of the issues and its mandate. As a con- nance-informed strategic approach to the EI sequence, where the Bank sought to increase sectors set out in the CAS. Where some links can investment in the EI sectors, it pursued this be observed, as in Papua New Guinea and Kaza- objective either before supporting better risk khstan, their experience suggests that gover- management, or simultaneously. But as the nance issues take a long time to address, and experiences in Papua New Guinea and Kaza- working to establish good governance in parallel khstan illustrate, working to establish the pre- with, or after supporting increased investment requisites for good development outcomes from in EI, is a high-risk strategy in countries with poor EI investments in parallel with, or after sup- macro and sectoral governance. porting expansion of the sector, poses a major The priority of supporting increased invest- challenge and is a high-risk strategy in countries ment in the EI sectors needs to be based on an with poor macro and sectoral governance. assessment of the quality of macro and sectoral Finally, countries are likely to be less recep- governance. Where sectoral governance is poor, tive to improving governance in revenue and the Bank may focus its efforts on helping the safeguards after the major investments have borrower better capture the benefits and con- been made and incremental revenues are flow- trol the risks of EI projects in preparation for ing. Yet no awareness of such logic is evident greater investment. Where macro governance is in the portfolio under review, nor is there any also weak, however, the Bank's decision to indication from ESW that the World Bank con- support sectoral reforms must be undertaken sidered a sequencing of its interventions to mit- strategically with an understanding of their igate the attendant risks. The decision to focus likely impact. the policy dialogue with Equatorial Guinea, To assess the quality of macro and sectoral Kazakhstan, and Papua New Guinea on gover- governance, the Bank needs to develop appro- nance issues came after private investments in priate diagnostic instruments that take key indi- resource development had made the Bank unim- cators into account, supplemented by additional portant as a source of finance. In hindsight, the analysis. Key indicators of macro governance experience in these countries points to the need relate to the quality of public financial man- for the Bank to develop a more selective and agement and rule of law144 as a measure of the sequenced approach that takes macro and sec- government's ability to address problems toral governance issues into account and gives through institutional reforms. At present, while priority to improving management of existing there is substantial Bank ESW focused on the sectoral revenue flows and environmental and quality of public financial management, there 9 4 A N N E X C -- W O R L D B A N K E X P E R I E N C E is no diagnostic instrument to evaluate the rule riches into sustainable benefits, and its achieve- of law or the quality of sectoral governance. ments are many. Overall, nearly 80 percent of Both of these gaps would need to be addressed the Bank's EI projects had at least moderately for the Bank to be able to take macro and sec- satisfactory outcomes, and the performance of toral governance into account, at least in EI- this portfolio has been consistently and signifi- dependent countries. cantly above Bank-wide averages in terms of out- Given an assessment of the quality of macro come, institutional development impact, and and sectoral governance, a three-tiered approach sustainability. The Bank's research made major would seem appropriate: contributions to broadening and deepening · For countries with sound macro and sectoral understanding of the disappointing perform- governance, the Bank should support the ance of resource-abundant countries. It has country as needed to attract investment to helped set standards in the formulation and expand the sector or further improve man- implementation of guidelines for the mitigation agement of resource revenue flows and envi- of environmental and social impacts. More ronmental and social risks. recently, it has begun to address the challenge · For countries with sound macro governance of governance with a variety of innovative tools. and weak sectoral governance, the Bank On the other hand, the Bank can do much should focus its support on strengthening more to improve its performance in enhancing sectoral governance, including management the EI sector's contribution to development and of environmental and social risks, and support poverty reduction by (i) formulating and imple- significant sector expansion only in con- menting integrated corporate- and country-level junction with adequate provisions to com- strategies for addressing the broader develop- pensate for sectoral governance weaknesses. mental issues that lie at the heart of many · For countries with weak macro and sectoral resource-rich countries' inability to achieve sus- governance, where the government lacks the tainable development; (ii) strengthening the ability to manage revenues well, increased implementation of the Bank's projects based on investment designed to augment government its policies for mitigating environmental and revenues will have little benefit, and the Bank social impacts and for monitoring and reporting should focus its support on strengthening economic, environmental, and social results; governance and managing of environmental and (iii) engaging stakeholders to develop and social risks.145 The promotion of invest- stronger and widely accepted governance frame- ments for significant sector expansion should works to assist the transformation of resource be avoided, except where the Bank can ade- endowments into sustainable development. quately mitigate the risk that fiscal revenues Given the size and complexity of the World from new investment may not be used for the Bank Group and the diversity of issues that country's development priorities. The Chad- need to be addressed, the responsibility for fol- Cameroon model represents an important lowing up on these recommendations is not test case for such a holistic approach.146 expected to rest exclusively with the sector spe- cialists in the Energy and Mining Sector Board 7. Recommendations and the Oil, Gas, Mining, and Chemicals Global How effectively has the World Bank assisted its Products Group.147 client countries in improving the contribution of the extractive industries to sustainable devel- Recommendation 1: Formulate an Integrated opment? On the one hand, with its global man- Strategy date and experience, comprehensive country The Bank has not devoted enough attention to development focus, and overarching mission to the developmental needs of the poorly per- fight poverty, the Bank is well positioned to help forming resource-abundant countries, many of countries overcome the policy, institutional, and which experienced negative growth during the technical challenges to transforming resource 1990s. To address this gap, the Bank Group 9 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T needs to formulate and implement integrated priate for resource-rich countries with weak strategies, at both the corporate and country macro and sectoral governance152 by devoting levels, for transforming resource endowments greater management attention and an adminis- into sustainable development. Such an inte- trative budget for advisory and analytical activ- grated strategy will start with the presumption ities aimed at improving the policy, institutional, that successful EI projects--whether financed by and governance framework for EI. This would the Bank or not--have to provide revenues to enable the Bank to establish and maintain con- governments, mitigate negative environmental tinuity of engagement and facilitate a quick and social effects, and benefit local communi- response to opportunities for assistance when ties. It also will need to address governance they arise.153 squarely and help to ensure that EI revenues are (d) Support private sector development and used effectively to support development prior- environmental sustainability: In all countries, the ities. It also will require much better coopera- Bank should be ready to support the closure of tion within the WBG and with other stakeholders. uneconomical mines, reform and privatization of (a) Formulate a sector strategy: The Bank, state-owned enterprises, and mitigation of pre- together with other members of the World Bank existing environmental and social problems. Group, needs to design and implement a sec- Where appropriate, the Bank should help inte- tor strategy that closely integrates resource extrac- grate ASM with the formal sector and internal- tion with sustainable development through the ize its environmental and social impacts, while effective management of EI revenues in support at the same time creating alternative employment of developmental priorities and the reliable mit- opportunities and supporting the consolidation igation of adverse environmental and social of ASM activities for greater efficiencies and impacts.148 Where macro and sectoral gover- economies of scale. nance are weak, the Bank's assistance should focus on strengthening macro and sectoral gov- Recommendation 2: Strengthen Project ernance. In such cases, the Bank should care- Implementation fully assess and report on the risks that EI fiscal The Bank needs to strengthen the implementa- revenues may not be used for development pri- tion of its existing policy framework and ensure orities.149 The Bank should not support signifi- that it remains up-to-date with evolving needs. cant sector expansion unless it can adequately Given the potential impacts of resource extrac- mitigate these risks.150 Where macro governance tion and the controversy surrounding the sector, is sound but sectoral governance is weak, the rigorous implementation of safeguard policies is Bank should focus on improving sectoral gov- a minimum requirement for the Bank to oper- ernance. ate in a world concerned with sustainable devel- (b) Address extractive industries in CASs: For opment. In addition, in light of growing concerns all resource-rich countries, the Bank should about the sustainability of EI-based develop- explicitly address extractive industries in the ment, the Bank needs to define, monitor, doc- CASs.151 The CAS should discuss the sector's ument, and report on the economic, social, and economy-wide linkages (such as the impor- environmental impacts of its projects more sys- tance of government revenues, their manage- tematically. Specifically, the sharing of benefits, ment, and distribution) and reference the identified by many stakeholders as a very impor- underlying governance assessment. This should tant issue for resource extraction, needs to be guide future project design, facilitate monitor- explicitly monitored and evaluated. ing and evaluation, and provide a framework (a) Improve upstream project screening: The for WBG-wide coordination and collaboration Bank should provide clearer and more consis- in the EI sector. tent guidance for the categorization of sectoral (c) Promote improved governance where gov- adjustment and technical assistance projects, ernance is weak: The Bank should compensate the identification of applicable safeguards at for the lower level of lending that may be appro- the initial project screening, the appropriate 9 6 A N N E X C -- W O R L D B A N K E X P E R I E N C E scope and nature of the EA instruments, and the ment with project investment and technical assis- reporting and evaluation of safeguards imple- tance in the sector. But the Bank has addressed mentation. This needs to be followed up through some areas inadequately--notably governance the entire implementation framework, from and revenue management. The Bank's perform- good practice guidelines to appropriate moni- ance in these areas can be enhanced by improv- toring and training. ing consultation with stakeholders, including (b) Provide for adequate specialist involvement local communities, and by systematically and at every stage: The Bank should strengthen the transparently reporting on key sustainability indi- implementation of its safeguard policies by pro- cators. Such an approach also is likely to raise stan- viding adequate resources for the participation of dards and practices of the sector as a whole. qualified environmental and social specialists in (a) Update policy framework: In consultation the preparation, appraisal, and supervision of all with its stakeholders, the Bank should adjust its projects that are likely to have adverse impacts. policy framework for extractive industries peri- This will ensure that such impacts are addressed odically to ensure that they remain up-to-date adequately through the upstream design of appro- with evolving industry practice. It should resolve priate mitigation strategies or project alternatives, remaining inconsistencies within the WBG154 and as well as through the retrofit of timely remedia- address identified gaps.155 It also should recognize tion measures should unexpected impacts mate- the expanding awareness of the human rights rialize during project implementation. dimension of Bank policies and projects and (c) Enhance reporting of results: The Bank explore possible avenues for addressing the issues, should strengthen the implementation of its especially where it lags industry best practice. completion reporting requirements by (i) ensur- (b) Promote disclosure of fiscal revenues from ing that project completion reports include the EI: The Bank should vigorously pursue country- calculation of an ex-post economic rate of return and industrywide disclosure of government rev- or net present value or, where that is not feasi- enues from EI and related contractual arrange- ble, a cost-effectiveness analysis to determine ments (such as production-sharing agreements, whether the project represented the least-cost concession, and privatization terms).156 It should solution to attain its objectives and (ii) prepar- work toward and support disclosure of EI rev- ing an activity completion summary for every sig- enues and their use in resource-rich countries. nificant nonlending activity. (c) Define and monitor sustainability indi- (d) Evaluate the sharing of benefits: At cators: Together with other stakeholders, the appraisal and project completion, the Bank Bank should define indicators of economic, should systematically estimate the distribution of social, and environmental sustainability,157 estab- project benefits among different stakeholder lish baseline data, provide for adequate moni- groups--government at different levels, private toring over the life of the project, and report and companies, and local communities--evaluate evaluate on the results during supervision and its sensitivity to different scenarios and discuss in project completion reports. The Bank also its acceptability with key stakeholder groups. should encourage more independent outside monitoring, ideally using local capacity (which Recommendation 3: Engage the Stakeholders may have to be developed). Often in collaboration with other organizations, (d) Increase local community participation: the Bank has brought together diverse stake- The Bank should support enhanced community holders in extractive industries to address issues consultation and participation throughout the life at the local, national, regional, and global levels. cycle of EI-projects. The Bank should assist The Bank's convening role has been actively countries to increase involvement by local com- sought and has been significant because of its munities in EI decisionmaking processes and access to all stakeholders, private and public ongoing consultation throughout the project life development experience, and ongoing involve- cycle, including closure. 9 7 98 EXTRACTIVE A t t a c h m e n t 1 P o r t f o l i o o f E x t r a c t i v e I n d u s t r i e s P r o j e c t s : F Y 9 3 ­ F Y 0 2 Total Number of Projects: 76 Oil and Gas (Completed 24; Active 15); Mining (Completed 24; Active 13) INDUSTRIES Oil and Gas: Completed Projects FY FY EA Project Project title Region Country Lending instrument approval completed category cost WB loan Petroleum Technical Assistance II AFR Equatorial Guinea Technical Assistance 1993 1998 C 3 3 AND Calub Energy Development AFR Ethiopia Specific Investment 1994 2001 A 14 14 Petroleum Sector Reform AFR Madagascar Sector Investment and 1993 1999 B 6 5 SUST Maintenance Loan Petroleum Sector Rehabilitation AFR Tanzania Specific Investment 1991 2001 B 0 0 AINABLE Petroleum Rehabilitation AFR Zambia Specific Investment 1994 2000 B 19 4 Petroleum Exploration & EAP Papua New Guinea Technical Assistance 1994 2001 C 13 11 Development Technical Assistance Petroleum Distribution & EAP Republic of Korea Specific Investment 1993 1999 A 653 112 DEVELOPMENT Sector Management Bongkot Gas Transmission EAP Thailand Specific Investment 1993 1996 A 334 92 Second Gas Transmission EAP Thailand Specific Investment 1995 1998 A 482 111 Clean Fuels and Environment Improvement EAP Thailand Specific Investment 1995 2000 A 41 38 Petroleum Technical Assistance ECA Azerbaijan Technical Assistance 1995 2001 C 10 20 Natural Gas System Reconstruction ECA Bosnia-Herzegovina Emergency Rehab. 1997 2000 B 44 10 Oil Institution Building Technical Assistance ECA Georgia Technical Assistance 1997 2001 C 1 1 Petroleum Technical Assistance ECA Kazakhstan Specific Investment 1994 2000 C 14 13 GHG Reduction in Natural Gas (GEF) ECA Russian Federation Global Environment Facility 1996 1999 C 1 1 Oil Rehabilitation Project ECA Russian Federation Specific Investment 1993 2000 A 1035 414 Second Oil Rehabilitation Project ECA Russian Federation Specific Investment 1994 2000 A 678 346 Third Structural Adjustment Loan ECA Russian Federation Structural Adjustment 1999 2001 U 1500 1500 Oil Pipeline Engineering Project ECA Turkey Technical Assistance 1997 1999 C 3 3 Hydrocarbon Sector Reform & LAC Bolivia Technical Assistance 1996 1999 B 9 11 Capitalization Technical Assistance Gas Sector Development Project LAC Brazil Specific Investment 1997 2001 A 1594 130 Energy Technical Assistance LAC Colombia Technical Assistance 1995 2002 B 12 11 Energy and Mining Technical Assistance LAC Peru Technical Assistance 1993 1999 B 16 11 Gas Infrastructure Development SAS Bangladesh Specific Investment 1995 2000 A 135 68 Oil and Gas: Active Projects FY EA Project Project title Region Country Lending instrument approval category cost WB loan Oil Spill Contingency AFR Africa Global Environment Facility 1999 C 5 3 Petroleum Environment Capacity Enhancement Project AFR Cameroon Technical Assistance 2000 C 11 6 Chad/Cameroon Pipeline AFR Cameroon Specific Investment 2000 A 3500 90 Chad Petroleum Power Engineering AFR Chad Specific Investment 1991 C 14 22 Petroleum Development & Pipeline Project AFR Chad Specific Investment 2000 A 3724 93 Petroleum Sector Capacity-Building AFR Chad Specific Investment 2000 C 26 24 Management of the Petroleum Economy Project AFR Chad Specific Investment 1999 C 19 18 Gas Engineering AFR Mozambique Specific Investment 1994 B 49 30 Songo Songo Gas Development and Power Generation Project AFR Tanzania Specific Investment 2001 A 313 183 GEF Sichuan Gas Development & Conservation EAP China Specific Investment 1994 A 945 265 Gas Development Technical Assistance EAP Papua New Guinea Technical Assistance 2000 C 8 7 Energy Transit Institutional Building ECA Georgia Technical Assistance 2001 C 12 10 Uzen Oil Field Rehabilitation ECA Kazakhstan Specific Investment 1997 A 136 109 Petroleum Sector Rehabilitation ECA Romania Specific Investment 1994 B 346 176 Emergency Oil Spill Mitigation ECA Russian Federation Emergency Rehabilitation 1995 C 140 99 ANNEX C -- WORLD BANK EXPERIENCE 99 100 EXTRACTIVE (continued) Mining: Completed Projects FY FY EA Project Project title Region Country Lending instrument approval completed category cost WB loan INDUSTRIES Mining Sector Development & Environment AFR Ghana Specific Investment 1995 2002 B 13 9 Mining Sector Investment Promotion AFR Guinea Technical Assistance 1996 2001 C 16.8 23 Mining Sector Development AFR Tanzania Technical Assistance 1995 2002 B 13 12 Second Economic and Social Adjustment Credit AFR Zambia Structural Adjustment 1996 1998 U 90 90 AND Econ. Recovery and Inv. Promotion Credit AFR Zambia Sectoral Adjustment 1996 1998 C 140 140 Public Sector Reform and Export Promotion AFR Zambia Structural Adjustment 1999 2001 U 170 170 SUST Credit Project Economic Transition Support EAP Mongolia Rehabilitation Investment 1994 1997 U 26 23 AINABLE Mongolia Coal Project EAP Mongolia Specific Investment 1996 2002 B 61.9 0 Structural Adjustment Credit ECA Albania Structural Adjustment 1999 2001 U 45 45 Hard Coal Sectoral Adjustment ECA Poland Sectoral Adjustment 1999 2001 B 300 300 Hard Coal Sectoral Adjustment II ECA Poland Sectoral Adjustment 2002 2002 B 100 100 DEVELOPMENT Coal Sectoral Adjustment ECA Russian Federation Sectoral Adjustment 1996 1997 B 500 500 Coal Sector Restructuring Implementation ECA Russian Federation Technical Assistance 1996 2003 C 31 17 Assistance Project Coal Sectoral Adjustment II ECA Russian Federation Sectoral Adjustment 1998 2002 B 800 800 Priv. Impl. Assistance & Social Safety Net ECA Turkey Technical Assistance 1994 2000 C 129 30 Coal Pilot ECA Ukraine Specific Investment 1996 2001 B 28 13 Coal Sectoral Adjustment ECA Ukraine Sectoral Adjustment 1996 2000 B 300 300 Capitalization Program Adjustment Credit LAC Bolivia Sectoral Adjustment 1996 1999 B 147 65 Reg. Reform and Cap. TA LAC Bolivia Specific Investment 1994 1999 C 30 15 Env Conservation and Rehabilitation LAC Brazil Specific Investment 1996 2000 B 87 36 Mining Dev and Env Control TA LAC Ecuador Technical Assistance 1994 2001 A 24 11 Privatization Adjustment Loan LAC Peru Sectoral Adjustment 1993 1998 C 280 280 Coal Sector Rehab SAS India Specific Investment 1998 2001 A 1697 263 Jharia Mine Fire Control TA SAS India Technical Assistance 1993 1999 B 11 8 Mining: Active Projects FY EA Project Project title Region Country Lending instrument approval category cost WB loan Mining Capacity-Building AFR Burkina Faso Specific Investment 1997 C 22 21 Mining Sector Reform Project AFR Madagascar Learning and Innovation Loan 1998 C 22 21 Mining Sector Capacity AFR Mauritania Technical Assistance 1999 C 16 15 Mineral Resources Project AFR Mozambique Technical Assistance 2001 C 33 18 Economic Recovery and Investment Promotion TA AFR Zambia Technical Assistance 1996 C 27 23 Mine Township Services Project AFR Zambia Specific Investment 2000 B 38 38 Mining Sector Institutional Strengthening TA EAP Papua New Guinea Technical Assistance 2000 B 12 10 Mine Closure ECA Romania Specific Investment 2000 B 62 44 Privatization Social Support ECA Turkey Specific Investment 2001 C 355 250 Mining Sector Development LAC Argentina Technical Assistance 1996 B 40 30 Mining Technical Assistance LAC Argentina Technical Assistance 1998 B 46 40 Energy & Mining TA Loan MNA Algeria Technical Assistance 2001 C 22 18 Coal Environment & Social Mitigation SAS India Specific Investment 1996 C 84 63 ANNEX C -- WORLD BANK EXPERIENCE 101 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T A t t a c h m e n t 2 E x t r a c t i v e I n d u s t r i e s ­ D e p e n d e n t C o u n t r i e s Oil and Gas Average oil Average and gas share Population Population Gross national GDP/capita of total exports1 20022 below poverty income capita2 growth,2 Country 1990­99 (%) (millions) line3 (%) (US$: 1999) 1990­99 (%) Yemen 89.0 17.5 19 390 1.46 Congo, Rep. 88.1 50.9 .. 560 ­3.27 Nigeria 86.8 126.9 34 250 0.2 Oman 86.4 10.8 .. n/a 0.95 Angola / Cabinda 83.5 1.6 .. 410 ­2.03 Iran 82.0 63.7 .. 1,600 3.01 Turkmenistan 74.5 5.2 .. 640 ­7.11 Gabon 73.8 1.2 .. 3,300 ­0.07 Venezuela 56.9 24.2 31 3,730 0.16 Syria 48.9 16.2 .. 930 3.19 Cameroon 33.5 14.9 40 600 ­2.11 Ecuador 30.4 12.6 35 1,330 ­0.27 Algeria 28.7 30.4 23 1,540 ­0.49 Kazakhstan 23.1 14.9 35 1,290 ­4.36 Papua New Guinea 20.0 4.8 .. 770 2.26 Trinidad / Tobago 16.3 1.3 .. 4,660 2.01 Russian Federation 16.2 145.6 31 1,750 ­4.9 Azerbaijan 15.8 8.0 68 570 ­2.18 Vietnam 15.8 78.5 51 370 5.51 Colombia 14.7 42.3 18 2,150 0.92 Note: ".." = not available. Sources: World Bank and International Finance Corporation (2002)1; World Development Indicators, Central Database, World Bank2; World Development Indicators, World Development Report 2003.3 1 0 2 A N N E X C -- W O R L D B A N K E X P E R I E N C E Mining Average Average mining share Population Population Gross national GDP/capita of total exports1 20022 below poverty income capita2 growth,2 Country 1990­99 (%) (millions) line3 (%) (US$: 1999) 1990­99 (%) Guinea 84.7 7.4 40 490 1.42 Congo (Dem. Rep.) 80.0 51.4 .. 100 ­6 Zambia 74.8 10.1 86 320 ­2.3 Niger 70.6 10.8 63 190 ­1.5 Botswana 70.0 1.6 .. 3,040 2.53 Namibia 55.4 1.7 .. 2,100 1.6 Jamaica 51.3 2.6 19 2,400 ­0.13 Sierra Leone 50.0 5.0 68 130 ­6.31 Suriname 48.3 0.4 .. 1,350 2.71 Chile 46.6 15.2 21 4,600 4.86 Mauritania 46.0 2.7 57 390 0.55 Papua New Guinea 44.8 4.8 .. 770 2.11 Peru 43.7 25.7 49 2,130 1.5 Mongolia 43.0 2.4 36 390 ­1.64 Central Afr. Republic 42.1 3.6 .. 290 ­0.82 Ukraine 40.0 49.6 32 770 ­8.63 Mali 40.0 10.8 .. 240 0.69 Togo 37.7 4.7 32 310 ­1.27 Bolivia 35.6 8.3 .. 990 1.63 Guyana 35.0 0.9 .. 760 4 Ghana 34.0 19.2 31 400 1.55 South Africa 30.0 42.8 .. 3,160 ­0.67 Jordan 28.9 4.9 12 1,630 0.4 Kazakhstan 23.2 14.9 35 1,290 ­4.36 Kyrgyz Republic 21.2 4.9 51 300 ­4.58 Morocco 20.0 28.7 19 1,190 0.73 Armenia 20.0 3.8 .. 490 ­2.6 Uzbekistan 18.4 24.7 .. 640 ­2.46 Cuba 17.8 11.2 .. 500 5.6 Tanzania 15.8 33.7 42 260 0.36 Note: ".." = not available. Sources: World Bank and International Finance Corporation (2002)1; World Development Indicators, Central Database, World Bank2; World Development Indicators, World Development Report 2003.3 1 0 3 A N N E X C -- W O R L D B A N K E X P E R I E N C E A t t a c h m e n t 3 O E D E v a l u a t i o n G u i d e l i n e s OED's guidelines for evaluating the outcome, relevant objectives with only minor develop- sustainability, and institutional development ment benefits. impact (IDI) of projects are summarized below: Highly Unsatisfactory: Project has failed to Outcome achieve, and is not expected to achieve, any of Definition: The extent to which the project's its major relevant objectives with no worthwhile major relevant objectives were achieved, or are development benefits. expected to be achieved, efficiently. The outcome criterion is assessed on a six- Institutional Development Impact point scale--highly satisfactory, satisfactory, Definition: The extent to which a project improves moderately satisfactory, moderately unsatisfac- the ability of a country or region to make more tory, unsatisfactory, and highly unsatisfactory. efficient, equitable, and sustainable use of its These differentiations reflect the large amount human, financial, and natural resources through of information contained in the assessments of (a) better definition, stability, transparency, the three criteria supporting the outcome assess- enforceability, and predictability of institutional ment (relevance, efficacy, and efficiency). The arrangements and/or (b) better alignment of the guiding principles provided below cover a high mission and capacity of an organization with its proportion of likely project evaluation scenar- mandate, which derives from these institutional ios. arrangements. IDI includes both intended and unintended effects of a project. Ratings Development can be defined as a process of Highly Satisfactory: Project achieved or institutional transformation through which scarce exceeded, or is expected to achieve or exceed, resources are used to enhance human welfare all its major relevant objectives efficiently with- over the long term. This transformation involves out major shortcomings. changes in values, customs, laws and regulations, and formal and informal rules, as well as peri- Satisfactory: Project achieved, or is expected odic realignments of organizational mandates, to achieve, most of its major relevant objectives objectives, competencies, and resources. A devel- efficiently with only minor shortcomings. opment intervention has a positive institutional development impact if it effects such a trans- Moderately Satisfactory: Project achieved, or formation and thereby enhances the ability of a is expected to achieve, most of its major rele- country or region to make more efficient, equi- vant objectives efficiently but with either sig- table, and sustainable use of the human, finan- nificant shortcomings or modest overall cial, and natural resources at its disposal. relevance. Accountability, good governance, the rule of law, and the participation of civil society and the Moderately Unsatisfactory: Project is expected private sector are prominent characteristics of an to achieve its major relevant objectives with effective institutional environment. major shortcomings or is expected to achieve only some of its major relevant objectives, but Ratings it is expected to achieve positive efficiency. High: Project as a whole made, or is expected to make, a critical contribution to the coun- Unsatisfactory: Project has failed to achieve, try's/region's ability to use human, financial, and is not expected to achieve, most of its major and natural resources effectively, either through 1 0 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T the achievement of the project's stated institu- to identify projects that require close attention tional development (ID) objectives or through by the borrower, the Bank, and other partners unintended effects. in managing risks that may affect the flow of net benefits. Sustainability says nothing about the Substantial: Project as a whole made, or is absolute level of the net benefits in relation to expected to make, a significant contribution to economic justification thresholds. It focuses on the country's/region's ability to use human, the features that contribute to the maintenance financial, and natural resources effectively, either of operational achievements over the long term through the achievement of the project's stated and the adaptability of operational designs and ID objectives or through unintended effects. implementation arrangements to deal with shocks and changing circumstances. Modest: Project as a whole increased, or is expected to increase, to a limited extent the Ratings country's/region's ability to use human, finan- Highly Likely: Project net benefits flow meets cial, and natural resources effectively, either most of the relevant factors determining over- through the achievement of the project's stated all resilience at the "high level," with all others ID objectives or through unintended effects. rated at the "substantial" level. Negligible: Project as a whole made, or is Likely: Project net benefits flow meets all rele- expected to make, little or no contribution to the vant factors determining overall resilience at the country's/region's ability to use human, finan- "substantial" level. cial, and natural resources effectively, either through the achievement of the project's stated Unlikely: Project net benefits flow meets some ID objectives or through unintended effects. but not all relevant factors determining overall resilience at the "substantial" level. Sustainability Definition: The resilience to risk of net benefits Highly Unlikely: Project net benefits flow meets flows over time. few of the relevant factors determining overall Sustainability is evaluated by assessing the resilience at the "substantial" level. risks and uncertainties faced by a project and by ascertaining whether adequate arrangements Not Evaluable: Insufficient information available are in place to help avoid known operational to make a judgment. risks or mitigate their impact. The rating helps 1 0 6 A N N E X C -- W O R L D B A N K E X P E R I E N C E A t t a c h m e n t 4 B a c k g r o u n d P a p e r s Thematic Studies 5. World Bank. 2003. World Bank Group's Activ- ities in the Extractive Industries: Kazakhstan 1. World Bank. 2002. Evaluation of the World Country Case Study. OED Background Paper, Bank Group's Activities in the Extractive Indus- World Bank. tries: Review of the Portfolio of World Bank Extractive Industries Projects. 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Technical Papers 139, 140, 1 1 0 Operations Evaluation Group: Evaluation of IFC's Experience I F C A p p r o v a l s a t a G l a n c e · Following a peak in 1991 ($400 million), IFC · Approvals were concentrated in countries approved investments of about $250 annually with high country risk, much more so than in EI. IFC's overall approvals; these countries also · The share of EI has declined from over 20 per- predominantly feature poor governance. cent in 1991 to around 5 percent in the last · IFC's portfolio in EI (as of June 2002) was $628 three years. million, or 6 percent of IFC's total portfolio. · Approvals were concentrated in oil and gas · Just over 60 percent of the EI portfolio was (54 percent), gold (14 percent), and copper in mining, and just under 40 percent was in (10 percent). oil and gas. · Approvals were concentrated in Latin Amer- · Just over half was loans, just under half was ica (34 percent) and Sub-Saharan Africa (30 equity. percent). Concentrated in oil and gas, Declining share since 1992 gold and copper IFC approvals since inception ($4.3 billion) 400 25 Oil and 350 Percentage gas 20 54% 300 bar) 250 15 of IFC's (US$M, 200 Other approvals 10 Mining 150 Approvals 4% Gold 100 Net (line) 5 Coal 14% IFC 50 3% Copper Other 0 0 10% Metal Nickel Iron C a l e n d a r y e a r 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 8% 4% 3% Concentrated in Latin America Concentrated in countries with and Sub-Saharan Africa poor investment climates IFC approvals since inception ($4.3 billion) Sub- IFC Overall Extractive Industries Saharan 40 Africa Middle East Risk 30% and North 35 Africa Lower 10% 30 25 South Asia 3% 20 Latin 15 Southern America Europe and 10 and Central Risk Caribbean 5 Asia 34% 13% Higher Central and 0 East Asia Eastern C a l e n d a r and Pacific y e a r 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Europe 6% 4% 1 1 2 ANNEX D: IFC'S EXPERIENCE 1. Introduction we will all need oil, gas, minerals, and metals, and that exploration, development, and use will Summary: Overall, IFC support for EI has been continue with or without IFC and the WBG. The effective, but implementation can be improved, question is whether the WBG and IFC can broader sustainability issues better addressed, improve the sector's development potential by and results better tracked and reported. Projects enhancing positive and mitigating negative usually generated large revenues for govern- aspects. While IFC and the WBG finance only a ments and opportunities for people. IFC gener- small share of the sector's investment, their actual ally has added value, particularly in improving and potential influence is often much larger. the environmental158 and social aspects of proj- ects, but given the sector's high-impact potential, Sustainable development defined for this it needs to prevent or mitigate negative impacts evaluation. Sustainable development "meets better and more systematically. IFC also needs the needs of the present without compromising to ensure that its environmental and social guide- the ability of future generations to meet their own lines and procedures continue to set standards needs." An individual mine or oil field will even- and adapt to rapidly improving industry stan- tually be exhausted, but EI projects can still dards, and that its projects adapt with them. In contribute to sustainable development and thus pursuit of its sustainability agenda, IFC needs to provide a role model for other private investment do more to address the risks that government rev- if they are-- enues may not be used effectively for develop- · economically sound, providing adequate rev- ment and poverty reduction, that benefits may enues for host countries, which in turn are not be distributed transparently, and that local used for the benefit of current and future communities may not benefit tangibly from EI generations; projects. To enhance the contribution of IFC's · financially sound, providing sufficient returns projects and the sector to sustainable develop- to reward investors for risk; ment requires further improvements in project · environmentally sound, adequately mitigating implementation, effective cooperation within the negative environmental effects159--and, where WBG, and full engagement of all stakeholders. possible, improving the environment; and OEG's evaluation is based on the premise · socially sound, adequately mitigating negative that IFC should support EI projects only if it can social effects and providing tangible and sus- help improve the sector's contribution to sus- tainable benefits for local people. tainable private sector development. Promoting sustainable private sector development, and ulti- The focus on sustainability in IFC's EI activ- mately reducing poverty and improving peo- ities has increased over the past decade. ple's lives, is IFC's mission. Some people feel that IFC's sector strategy160 has consistently empha- the exploitation of nonrenewable natural sized the sector's contribution to government rev- resources and sustainable development are an enues and has focused on countries and projects inherent contradiction. But most realize that, where the value added by IFC is greatest. Ini- over the next decades and probably centuries, tially, IFC mainly saw its role as funding proj- 1 1 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T ects without access to commercial finance and ability, private sector development, business acting as a neutral party between government success, and environmental and social effects-- and investors. In the mid-1990s, the strategy into one "development outcome," which meas- was expanded to highlight environmental issues, ures a project's overall impact on a country's later to social issues, and later still to governance development. Fifty-nine percent of the 22 eval- and revenue management--how host countries uated EI projects achieved positive results, com- distribute and manage the revenues from EI. In pared with 60 percent for all other IFC projects.164 recent years, IFC's environmental and social The development success rate for all 45 studied specialists have devoted more time to the sec- projects (65 percent) is slightly higher.165 The tor than to any other and have frequently "win-win" outcomes--positive development improved EI projects beyond the requirements results and good investment results for IFC--are of IFC's policies and guidelines. about the same when only evaluated projects are considered and slightly better for all studied This increased focus on sustainability reflects projects (Figure D1). While there is room for the evolution in IFC and the industry. Over the improvement, it is important to note that this suc- past decade, environmental, social, and sustain- cess rate has been achieved in very difficult ability concerns have become more prominent in country environments, where many develop- the sector. Industry has responded by develop- ment institutions are struggling to achieve pos- ing and implementing better standards and tech- itive results.166 niques to reduce the environmental impacts of its About three-quarters of IFC's EI projects were operations.161 Leading industry players now report economically attractive; results in mining were on sustainability indicators--health, safety, envi- the same as in other sectors, those in oil and gas ronmental, and most recently social indicators-- significantly better. Seventy-three percent of the of their operations and are working on evaluated EI projects had adequate economic standardizing the reporting.162 Industry also rec- returns--real economic rates of return over 10 ognizes that it must do more to retain its "social percent--compared with 57 percent for other license to operate," particularly to broaden the projects. The success rate for oil and gas (83 per- benefits of wealth creation and thereby con- cent) was significantly167 higher than that for min- tribute to poverty reduction.163 Similarly, IFC's ing (60 percent) and other sectors. Again, these sustainability initiative, started in the past few results were achieved in difficult countries, but years, has heightened the focus on sustainable it is also important to note several limitations of development results within IFC and beyond. IFC's the economic rate of return: EI operations were often among the first to · It does not take into account the distribution develop or implement new programs, such as of benefits--a dollar for the investor is SME linkages or IFC and AIDS. Under the sus- treated the same as a dollar for government tainability initiative, IFC developed a position or a dollar spent on a social program for the paper on revenue management in 2002, which poorest. recognized that large government revenues, as · It does not address how government rev- they typically occur in EI projects, require spe- enues are used. cial attention--particularly where country gov- · Accounting for the depletion of natural ernance is poor. Indeed, this is an area deserving resources in economic rate of return calcu- special attention from IFC and the WBG. lations is difficult. IFC uses a depletion pre- mium to account for the non-renewable 2. From Economic Benefits to nature of the resource.168 Sustainable Development · Compliance with IFC's environmental and social requirements was interpreted as an Development results in EI were the same as indication that negative externalities had been in other sectors. IFC synthesizes development adequately mitigated; where appropriate, we results of four indicators--economic sustain- imputed costs of cleanup as economic costs; 1 1 4 A N N E X D -- I F C ' S E X P E R I E N C E E I v e r s u s n o n - E I P r o j e c t s : F i g u r e D 1 S i m i l a r D e v e l o p m e n t , B e t t e r I n v e s t m e n t R e s u l t s 1 1 1 2 56 % 2 41 % 2 43 % HIGH 9% HIGH 18% HIGH 17% High development High development High development High development outcome High development outcome High development outcome outcome High return outcome High return outcome High return Low return Low return Low return Outcome Outcome Outcome 4 3 4 3 4 3 24% 11% 18% 23% 30% 10% Low development Low development Low development Low development Low development Low development outcome outcome outcome outcome outcome outcome Low return High return Low return High return Low return High return Development LOW Development LOW Development LOW LOW HIGH LOW HIGH LOW HIGH Investment Outcome Investment Outcome Investment Outcome (a) 45 studied EI projects (b) 22 evaluated EI projects (c) 286 evaluated non-EI projects n Various approval years Approved 1991­96 Approved 1991­96 however, it is difficult to quantify environ- forgo some taxes until a project turned around. mental and social externalities, and data are In Eastern Europe, some IFC clients faced scarce. increasing tax demands that led to financial losses from otherwise viable projects. A Latin Financial and economic project success American oil company failed, but its assets were were closely linked. All 12 projects that were bought and rehabilitated, and the new com- financially successful also provided adequate pany contributed more than $30 million in roy- economic returns.169 In addition, 4 out of 10 proj- alties in 2000. A mining company lost more ects that were not successful for investors still than $30 million in four years, but was expected had adequate economic rates of return (greater to pay about US$5.5 million in taxes. than 10 percent). In three of them, the govern- ment retroactively changed earlier agreements, All stakeholder groups recognize that the making otherwise viable projects financially distribution of benefits and costs is the cru- unattractive. cial issue in EI. We surveyed stakeholders from many backgrounds--government, industry, Most projects generated large revenues for NGOs, and the WBG.172 Among a wide range of governments, sometimes even when private questions covering economic, environmental, investors did not do well. These revenues social, and governance aspects (Attachment 6A), come in many different forms170 but usually as equitable distribution of benefits was perceived income taxes and royalties.171 Governments to be the most important overall; it was also sometimes get revenues even when investors do among the top two issues in every stakeholder not do well. For example, IFC has funded proj- group. ects that failed or ran into financial difficulties. Often, but not always, these companies continue But IFC--and the WBG--has not adequately to pay all taxes, including royalties, duties, and addressed distribution. In several projects, transit fees, while investors lose money. In other people outside and even inside the WBG ques- cases, governments faced with the potential loss tioned ex-post whether benefits of EI projects of jobs and community livelihood agreed to were distributed fairly.173 For example, where 1 1 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T governments had taken a large equity share, but commercial risk--that has not always received commodity prices--and fiscal revenues-- enough attention. IFC typically has not calculated dropped below expectations, they were later dis- shares accruing to different levels of government appointed, or where they had granted income or accruing directly to local communities. It is tax exemptions for the first years--often the difficult to define "sufficient" benefits. At the least, most profitable for a gold project. We surveyed they should compensate local communities for 33 IFC staff--all EI sector investment staff and negative impacts and maintain or improve their all regional economists or strategists. Only half living standards. Where local people oppose of the respondents indicated that distribution projects, businesses risk costly interruption and was adequately addressed in IFC's EI projects-- property damage. In EI, environmental problems or in CASs. Responses by World Bank staff were often trigger the opposition. However, such similar (Attachment 6C). Recognizing the impor- opposition often can be traced to deeper social tance of distribution in EI, IFC usually identifies issues; for example, a long-standing perception the share of net benefits that accrues to gov- of insufficient benefits. In such situations, com- ernment. But IFC typically has not compared the panies sometimes spend a lot to build trust or benefits with other EI projects or stated whether defend themselves--money that could be bet- it perceives the distribution of benefits to be rea- ter spent on community development. Where IFC sonable--and has been criticized for this in the client companies proactively engage the com- case of the Chad-Cameroon pipeline.174 IFC munity and provide benefits for local people-- also has not systematically tracked actual gov- for example, increased employment or sales, ernment revenues during supervision.175 Rec- better infrastructure, schools, and housing-- ognizing the uncertainty about commodity they reduce risk for their operations. But private prices, resource quality, and many other factors, companies cannot be expected to take over IFC typically addresses downside risks for government responsibilities--for financial rea- investors in a sensitivity analysis, but IFC did not sons, and because such a solution is not sus- address how such risk factors affect the distri- tainable. bution of benefits. Benefits from government revenues do not Transparency and improved analysis of always reach local communities. In many the distribution may help prevent later con- countries where IFC operates, government rev- flicts. Because of variations in country and proj- enues are not being used effectively for the ect characteristics (e.g., resource quality, taxation benefit of local communities. In some coun- regimes, legal entitlements, country risk), some tries, communities received only a very small people question the reliability and relevance of share of fiscal revenues--which led to problems. distributional comparisons. But given the impor- For example, in one case, the "legal" distribu- tance of rent distribution--and the history of con- tion to the provincial authorities was only a flicts over it176--more comparative analysis is small share of royalties; even that was not con- warranted. Attempts have been made to com- sistently distributed, and communities accused pare distributions across countries, both in the local leaders of embezzlement. In another case, WBG and elsewhere.177 World Bank staff we the "legal" distribution to the region was quite interviewed stated that they could and should high but usually not forthcoming. Even where be cited to provide a frame of reference when money was distributed to the provincial gov- presenting IFC projects for approval. More trans- ernments, people affected by EI did not neces- parency on how the distribution was arrived at, sarily benefit, because of mismanagement, lack comparing it with other projects, and testing its of transparency and possible corruption, allo- robustness under different scenarios would help cation of the money to other parts of the reduce potential conflicts and disputes.178 province, or its being used for recurrent admin- "Insufficient" benefits for local communities istrative expenditures instead of invested to pro- are an important development issue--and a vide sustainable benefits. 1 1 6 A N N E X D -- I F C ' S E X P E R I E N C E Volatility of revenues is also a problem but rates of return > 20 percent), they also featured may be easier to fix. The discussion during tax- more financial losses (Figure D2). IFC's equity ation conferences179 tends to focus on manag- investments in EI are as likely to succeed as those ing the volatility of revenues from EI, caused by in other sectors--about one-third of the time-- changing commodity prices and the exhaustibil- but successful investments are more likely to ity of the resource. Several "technical" solu- result in large returns. IFC's strong portfolio tions--for example, funds for stabilization or for results are carried by a handful of very big win- future generations--are well understood, but ners. In all of the projects, IFC invested early in the record of such solutions is poor, owing in the project's development, taking considerable part to the secular decline in commodity prices risk. Overall, such winners tended to be con- and in part to poor governance. centrated in Latin America, in countries with at least reasonable governance, and in oil, gold, and 3. Private Sector Development and copper--the largest exposures by subsector.182 Benefits to Investors The main drivers of project business success EI investments were often among the first attrac- were quality of management and the resource, tive investment opportunities for private investors commodity prices, and the country's governance and IFC. In at least a dozen countries,180 IFC's first and investment climate. Among the studied proj- investment was in EI. IFC's EI investment also was ects, the following tended to be the main busi- often the first private investment in the sector, pro- ness success drivers: viding important demonstration effects. Invest- · Quality of management: Strong management ments in other sectors--by IFC and others--often and a financially committed sponsor are cru- followed. In recent years, IFC has focused increas- cial to deal appropriately with production ingly on enhancing SME linkages in connection challenges and market downturns--but were with its EI investments (Box D1) and on sup- sometimes missing. porting EI-related projects with trust funds. · Quality of the resource: Only resources that are globally cost-competitive are likely to Financial returns--for IFC and other result in attractive financial returns. IFC and investors--were better than for other sec- the sponsors sometimes have overestimated tors ... OEG evaluates both business success-- the quality of the resource or--put differ- whether projects were attractive for all ently--underestimated the difficulties and investors181--and IFC's own investment results. costs to extract and process it. Business success was better in EI (55 percent · Commodity prices: The 1990s were a decade positive) than in other sectors (44 percent). of falling prices for many commodities. For While this result is not significantly different, it example, from 1990 to 1998, oil prices was achieved in very difficult country circum- dropped in real terms by over 40 percent, gold stances. Controlling for country risk, the business by over 20 percent, and copper by almost 40 success of EI projects was significantly better than percent. This has had negative effects on the for other projects, indicating that EI projects can projects IFC supported and shows the impor- be among the few attractive investment oppor- tance of investing in the lowest-cost produc- tunities in difficult countries. IFC's investment ers. Several commodity prices have since results on a portfolio basis also are substantially recovered, so the current outlook is proba- better than in other sectors, enhancing IFC's bly brighter than at the evaluation stage. overall profitability and helping to support IFC's · The host country environment: Taxation regimes activities in other sectors. are an important determinant of returns to investors, as are other features of the enabling ... but financial risks also were higher. For environment. In several cases, viable projects investors, the sector is riskier than others. For had poor returns to investors because of gov- example, while EI projects featured more ernment actions, such as retroactively increased extremely positive financial results (financial taxation or transit fees. Better regulatory qual- 1 1 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T B o x D 1 V a l u e - A d d e d S M E L i n k a g e s IFC's environmental and SME departments increasingly micro-enterprises. Already 14 field officers are work- work with project sponsors, aid agencies, and NGOs to ing with more than 150 enterprises. develop programs promoting sustainable economic · IFC is working with the U.S. organization Africare to development in areas affected by EI projects. Examples implement a project to provide food to petroleum of programs to set up or strengthen micro-finance organ- workers in the short term and to the general popula- izations, training programs, and technical advice for tion in the long term. Eight enterprises have been cre- local businesses include the following: ated and more than 120 people have received training and financing. Mozal Aluminum Smelter, Mozambique · IFC worked with Mozal to develop local business Yanacocha Gold Mine, Peru capacity to compete for product and service con- · IFC is working with Yanacocha to implement a Rural tracts--transport, catering, cleaning, and security. and an Urban Development program. Many program For these, Mozal broke its contracts down into smaller components have been implemented with NGOs, rural components (to attract local competition) and now communities, and the city of Cajamarca. Yanacocha spends about US$35 million annually with private and external donors have provided more than $15 mil- local companies. As part of Mozal's Community Devel- lion and $7.3 million respectively, for this program. opment Trust, which tries to maximize positive impacts · Local SMEs supplying goods and services participate for the local community, farm extension services have in quality management training focused on interna- been provided to 1,200 farmers. tional business practices and environmental and safety · An ongoing linkage supply program developed by the standards to improve productivity and win Yanacocha IFC-managed Africa Project Development Facility contracts. A training program equips tradesmen to helps small businesses win and deliver Mozal phase participate in the construction of a housing complex II construction contracts. that will be developed over the next five years. Also, SMEsuppliersofcomponents,suchaswindowframes, Chad-Cameroon Petroleum Development are being assisted. and Pipeline Project · Another program has been established to build local · The WBG worked closely with the sponsors to put in farmers' capacity to supply the mine's canteen and place features to ensure economic benefits for local hotels. Similarly, local artisans in ceramics and tex- businesses--to date more than $340 million has been tiles have been identified for training in design, pro- spent, more than $139 million in Chad alone. Ongoing duction, and marketing and are supported at local training enables SMEs to win pipeline-related con- and international trade fairs. tracts. IFC launched The Support and Training Entre- preneurial Program in Chad to train university Note: Data provided by the WBG's SME department and summarized graduates to consult, train, and develop small and by OEG. ity was significantly correlated with better finan- 1988­89, IFC began its own reviews and cial results, as was political stability, which appointed its first environmental advisor.183 Ini- also was significantly correlated with better tially, IFC followed the World Bank's safeguard development results and environmental effects. policies, guidelines, and procedures, but grad- ually IFC developed its own, better adapted for 4. Environmental and Social Issues-- the private sector. From 1993, IFC developed From "Do No Harm" to Sustainability sector-specific guidelines for areas not cov- ered by the World Bank's existing guidelines IFC has continually expanded the scope of and adopted specific procedures for environ- its environmental and social assessment. In mental review in 1992­93. In 1998, after exten- 1 1 8 A N N E X D -- I F C ' S E X P E R I E N C E E x t r a c t i v e I n d u s t r i e s : F i g u r e D 2 R i s k i e r t h a n O t h e r s 22 EI projects compared with 165 other projects evaluated 1996­2001 EI Projects Non-EI Projects 80 70 results 60 all 50 of 40 30 Percentage20 10 0 Negative 0% to 20% 20% and Above Financial rate of return sive consultation, IFC revised its review pro- is adapting constantly. The recently completed cedures and adapted several safeguard policies safeguard policy review by the CAO is likely to for the private sector. It also developed a pol- result in changes also. icy statement on harmful child and forced labor (the World Bank lacks such a policy).184 Also in IFC increased staffing in support of the 1998, the World Bank updated its Pollution increased focus on environmental and social Prevention and Abatement Handbook185 issues. Starting with one staff member, IFC (PPAH), providing industry-specific guidelines hired additional environmental, and later social, that apply to WBG projects. IFC continues to experts between 1990 and 2002 and currently modify its operating procedures and to develop employs almost 40 specialists. Their role is to additional industry-specific guidelines.186 appraise and supervise projects to ensure that projects financed by IFC meet the applicable Lessons from experience lead to changes environmental and social safeguard policies and in policies, guidelines, procedures, and guidelines and improve projects "beyond com- practices. Based on past evaluation findings, pliance." In recent years, IFC's environmental and OEG has made numerous recommendations social experts have spent more time on EI than with respect to environmental and social safe- on any other sector, highlighting the sector's guard policies, guidelines, and procedures, high-impact potential in this area. many of which have been implemented. IFC's Environmental and Social Development Depart- IFC categorizes projects on the basis of ment also feeds lessons from practical experi- their potential environmental and social ence and research into upgrading procedures impact. When a project is first presented to IFC, within the department. For example, IFC intro- the environmental and social specialists cate- duced a guideline on hazardous materials han- gorize it according to its potential negative dling, in part motivated by the Yanacocha impact. The categorization determines how IFC mercury spill and the Kumtor cyanide spill. IFC appraises and supervises a project and which produced a guideline for offshore oil and gas actions will be sought from the clients. A Cat- projects before investing in Early Oil, Azerbai- egory `A'187 project--considered likely to have jan. Thus, the body of policies, documents, and significant adverse environmental and social procedures that codifies IFC's environmental impacts, unless prevented or mitigated--requires and social operating procedures and practices peer review and triggers a detailed and dis- 1 1 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T closable assessment document (environmental achieve almost all other goals, most notably impact assessment), a public consultation increasing access to clean water (58 percent process, and frequent supervision throughout versus 72 percent) and reducing child mortality the life of the project. A Category `B' project-- (46 percent versus 65 percent), maternal mor- with lesser potential impact than Category `A'-- tality (45 percent versus 59 percent), and has a narrower environmental assessment, HIV/AIDS (50 percent versus 63 percent). IFC requires only submission of an environmental recently has started an initiative against summary, and, in practice, receives less direct HIV/AIDS, with 6 of 14 engagements with client supervision. Some NGOs have criticized IFC companies working in the EI sector (Box D2). for "under-categorizing" projects and have argued that all EI projects should be Category IFC's Results in Mitigating Negative and `A.' Management--and the CAO--maintains that Enhancing Positive Impacts projects should be categorized to reflect their impact potential. OEG usually found projects to Mixed environmental and social results for be appropriately categorized, but given unclear EI projects. Using only the random sample of guidance and lacking documentary explana- detailed evaluations,190 the results for mining (4 tion it is sometimes difficult to understand the of 10 projects, or 40 percent rated positive) are rationale for categorizations.188 Even so, IFC significantly worse and those for oil and gas (11 sometimes goes beyond the requirements for of 12, or 92 percent positive191) are significantly Category `B' projects; for example, subjecting better than those for other projects (65 percent). them to independent audits. Using the broader, but less in-depth analysis of the entire portfolio,192 the positive results for oil EI projects have high potential for negative and gas (94 percent positive) are confirmed, environmental and social impact. About 40 and mining projects (62 percent positive) are not percent of IFC's EI investments are Category `A' different from the IFC average (65 percent). For (most others are `B'), compared with 3 percent mining, the better performance of the broader of IFC's non-EI investments. More than 40 per- portfolio of studied projects, compared with the cent of IFC's total Category `A' investments are evaluated sample, indicates that performance has thus in EI. This indicates the high environmen- improved.193 To validate results from the eval- tal sensitivity of the sector and IFC's commitment uations and desk reviews, OEG staff visited 13 to thorough environmental review and moni- EI projects (Box D3). Each field visit included toring of the sector. In support of this commit- an environmental specialist with EI experience ment, IFC's environmental and social specialists or a mining engineer. For the most part, the field spent one-third of their time on the EI portfolio visits confirmed the information in IFC's files. in fiscal year 2002. IFC's oil and gas projects performed well, Resource-rich countries are more likely to but there are issues beyond compliance. have problems achieving important devel- The oil and gas sector is dominated by multi- opment goals. The WBG has assessed the like- nationals that in recent years have stated their lihood that countries will achieve important commitments to improve performance and Millennium Development Goals.189 OEG then enhance sustainability and are also disclosing analyzed whether EI-dependent countries were results achieved. OEG's analysis also found that more or less likely to achieve the Millennium the performance of projects sponsored by major Development Goals than other developing coun- multinationals was much better than that of tries. Only the goal of reduced child malnutri- projects sponsored by smaller companies. IFC tion was much more likely to be achieved in could transfer knowledge and disclosure stan- EI-dependent countries (likely or possible in 67 dards from these companies to less progressive percent of countries) than in others (51 percent). companies to improve overall sector perform- EI-dependent countries were less likely to ance.194 While oil and gas projects have an 1 2 0 A N N E X D -- I F C ' S E X P E R I E N C E B o x D 2 E x t r a c t i v e I n d u s t r i e s a n d H I V / A I D S The majority of the private sector, including most of IFC's clients, still is not meaningfully involved in counter- acting HIV/AIDS, a disease that affects communities, workers, and managers. Businesses will feel the impact of HIV/AIDS most clearly through their workforce, with direct consequences for profitability. Some sectors are more risky than others regarding HIV transmission. Extractive industries tend to be particularly at risk, because they usually pay salaries that are significantly higher than those of the general population and their operations also rely on a workforce separated from their families for long periods of time. Such conditions have contributed systematically to high-risk behavior, in extractive industries and in related activities, such as infrastructure con- struction and transportation. The rural settings of EI operations, which--unlike more urbanized areas--often lack government health, education, and prevention programs, further increase the risk. Thus, the communities in which extractive industries operate have a heightened AIDS risk. The figure below also illustrates that resource-rich countries are less likely to achieve the Millennium Development Goal of halting or reversing AIDS by 2015. HIV/AIDS: Worse in resource-rich countries Likelihood of achieving the Millennium Development Goal of halting or reversing AIDS by 2015 32 resource-rich countries 52 resource-poor countries (Excludes 17 countries without data) (Excludes 54 countries without data) 21% 34% 34% 52% 15% 16% 16% 12% Likely Possible Unlikely Very Unlikely Likely Possible Unlikely Very Unlikely The program IFC Against AIDS guides its clients in designing and implementing education, prevention, and care programs in support of employees and the communities in which they work and live. Under this initiative, IFC has to date worked with 10 clients (4 in EI) on HIV/AIDS programs and is starting to engage with 4 more (2 in EI). With the help of trust funds, IFC also is working on putting together an HIV/AIDS toolkit that would help mining companies become effective partners in the prevention and treatment of HIV/AIDS, both for the mining work- force and the communities dependent on the mines. The assignment is to identify, evaluate, and disseminate selected examples of public-private partnership approaches to HIV/AIDS prevention and treatment in the min- ing sector that have proved to be workable and cost-effective. Among the clients with which IFC has worked is Mozal, an aluminum producer in Mozambique, which has a strong HIV/AIDS program that includes educat- ing and raising awareness, voluntary testing and counseling, and supplementing medication available at local hospitals. For more information on the program, see Mozal's Health, Safety, Environment and Community Report (www.mozal.com). Note: For more information on IFC's initiative, see www.ifc.org/test/sustainability/docs/IFC_against_AIDS.pdf. 1 2 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T O b s e r v a t i o n s f r o m O E G ' s S i t e B o x D 3 V i s i t s a n d C o u n t r y S t u d i e s OEG staff visited 13 projects in 6 countries.a Evaluators ple, local versus international--sometimes differed analyzed the overall country and sector context, substantially. reviewed firsthand the impact of IFC's projects (and, to · The very strong contribution by IFC's environmental a lesser extent, other projects), and asked represen- and social development specialists in several proj- tatives from government, civil society, industry, and ects was acknowledged by clients and communities the WBG about their perceptions. The main observa- with whom they interacted. tions were as follows: · But these interactions often came late, responding · EI projects, their relations with communities, and to problems rather than preventing them proac- their impacts are extremely complex. tively--which would have been more effective and · For the most part, the field visits confirmed infor- cheaper; more systematic tracking of key risk fac- mation in IFC's files, but they also found surprises-- tors could have prevented some problems. good and bad--demonstrating that, even with · Companies that consulted early and continuously diligent supervision from Washington and occa- with the local community had more effective support sional field visits, IFC will always be struggling to programs that did not necessarily cost a lot but remain fully informed. established trust and support. · IFC projects usually brought direct jobs and other · Once the trust of the local community is lost--for opportunities; most projects improved access to example, following an accident--companies find infrastructure and services for many people, often in it very costly to regain it. remote areas. · Affected communities usually saw few benefits from · Some client companies were especially proactive the taxes and royalties companies paid to govern- in trying to increase opportunities for local people ments--either little money flowed back or it was not by providing training for potential employees and effectively used. suppliers--sometimes with IFC's help. · Companies were expected to make up for the lack · Opportunities attracted people from outside the proj- of government services, and many of them did a lot: ect area; their influx sometimes caused environ- providing roads, water, or power, or supporting edu- mental and social problems for the existing cation and health services for the community. But community. In particular, where the capacity of local companies are wary of taking on too much: not only governments was weak, companies found it difficult can it be costly and create further expectations, it to cope. also creates an unsustainable dependency on a lim- · Not everyone benefited, and negative environmen- ited-life EI project. tal and social impacts were not always adequately · Several clients asked OEG about best practices with mitigated. respect to social, environmental, health, and safety · IFC-supported projects appeared to operate to higher issues. There is much potential to share best practices standards than others; nevertheless, NGOs focused among IFC's client companies; for example, one min- their criticism on projects supported by IFC, other ing company gave sewing machines to village women international financial institutions, and multinational who, once they had developed skills making uni- companies, perhaps because they felt they had more forms for the mine, began to export clothing. leverage there than at the national level. · NGO criticism alerted IFC to problems on several a. Argentina, Brazil, Ghana, Kazakhstan, Kyrgyz Republic, Peru. In one occasions, but some criticism was unwarranted, country (Kyrgyz Republic), the focus was mainly on the environmen- and views expressed by different NGOs--for exam- tal and social performance of the project. almost spotless compliance record, OEG later corrected. In another case, an oil pipeline observed one instance of noncompliance with (replacing truck traffic) in an area later designated respect to wastewater discharges, which was as a national park raised complex environmen- 1 2 2 A N N E X D -- I F C ' S E X P E R I E N C E tal and social issues. When IFC exited two years example, NGOs raised concerns about spills after disbursement, the project was not in full from pipelines used by, but not part of, IFC compliance with IFC's requirements, but the projects. In another project, OEG discovered sponsor was working toward it. Other projects that environmental staff were unaware that a raise issues beyond IFC's requirements: project had started to transport oil using trucks · First, several projects feature routine gas flar- and rail rather than the originally anticipated ing. When the projects were approved, this pipeline, and environmental management of was not covered by a specific guideline. Even this transport mode appeared insufficient. The today, the WBG guidelines for onshore oil and environmental impact of the transportation gas projects are not very specific on this infrastructure for IFC's oil and gas projects has issue, particularly compared with more recent not always been a focus in the past, but IFC IFC offshore guidelines.195 In any event, it was has begun to pay more attention to this issue. difficult to establish the extent of the prob- However, it can be a difficult issue to address, lem, because IFC management does not sys- as it is often "beyond the fence line" of con- tematically track gas flaring--or GHG trol by the project sponsors. emissions--for all portfolio projects. IFC will calculate GHG emissions for future projects Mining projects, particularly gold, had some (see Box D4 on climate change), but it is environmental problems. The broad range of unclear whether they will be tracked during environmental and social issues facing mining supervision. Also, the WBG is leading a global projects requires a strong focus by the sponsoring gas flaring reduction initiative, which company just to achieve compliance with IFC's includes--as a first step--tracking gas flaring, guidelines. Gold mining projects--the largest followed by a number of possible steps to share of IFC's mining projects--had a higher inci- reduce the problem.196 dence of reported problems. Gold production · Second, transportation of oil could have been usually involves toxic materials (e.g., cyanide, addressed more thoroughly in some cases. For mercury, arsenic), and weaknesses in their han- I F C ' s P o s i t i o n o n C l i m a t e C h a n g e B o x D 4 ( e x c e r p t s ) IFC recognizes the long-term risk from climate change. · Will support low-cost energy solutions for devel- While the Kyoto Protocol puts the main responsibility oping countries (in parallel with WB policy reform); for reducing GHG emissions on developed countries, · Pursues projects generating GHG emission reduction IFC believes it can have a role in reducing the GHG credits and establishes relationships with poten- intensity of economic activity in developing countries. tial buyers; IFC requires that environmental assessments for each · Uses concessional funding (Global Environment project consider global environmental aspects, includ- Facility) to promote renewable energy and energy ing climate change. GHG emissions are quantified and efficiency where appropriate; disclosed for projects with potentially significant emis- · Devotes substantial resources to find, develop, and sions. IFC actively promotes market-based solutions. fund projects for renewable energy; In particular, IFC · Will support funds to purchase GHG emissions cred- · Seeks to reduce methane and carbon dioxide emis- its when the market is ready; and sions in hydrocarbon extraction projects; · Pursues projects that reduce losses in power trans- · Will invest in cleaner coal projects that demon- mission and distribution. strate best practice in addressing environmental Source: http://www.ifc.org/test/sustainability/docs/ and social issues; Climate_Change_IFC.pdf 1 2 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T dling were the most frequent problem. In IFC Helping to Generate Sustainable Benefits response, IFC has developed a hazardous mate- rials management guide but has not yet urged Community Development--the shift from all its existing client companies to follow it. IFC "do no harm" to "doing good." IFC's previous also participated in the steering committee devel- focus on mitigating negative impacts to ensure oping the Cyanide Management Code.197 compliance with safeguard policies is moving increasingly toward a focus on enhancing pos- For a positive rating, projects need to be, itive socioeconomic impacts in its EI projects as over their lifetime, in material compliance part of a broader sustainability initiative. For with IFC's at-approval requirements, which example, in 2000, IFC issued guidance on com- are a proxy for what IFC considered acceptable munity development.199 The WBG's Small and environmental performance. Projects are thus not Medium Enterprise (SME) Department has measured against current requirements, unless worked with several communities to assist in the at-approval requirements were clearly out of development of small businesses in connection line with sound environmental practice in place with high-profile projects, with a particular focus at the time.198 Thus, some projects rated satis- on EI.200 IFC policy encourages community factory would not comply with current stan- development plans but has not made them dards. Given the rapid evolution of industry mandatory for EI projects.201 standards, IFC may consider · Continuously updating guidelines and poli- IFC often goes beyond the guidelines and cies as industry standards evolve, policies. OEG has observed that in many cases, · Routinely advising clients when IFC updates IFC establishes internal procedures for appraisal guidelines, and supervision of projects that go beyond the · Identifying and documenting any shortfalls minimum standards of the published guidelines. against the latest guidelines during supervi- For example, even where they were not required, sion and urging clients to comply voluntar- IFC has ily, and · Helped clients implement community devel- · Contractually requiring clients on future proj- opment plans, sometimes using trust funds ects to achieve compliance with updated (see Box D5 and Attachment 5); guidelines; however, this may be difficult to · Helped clients with HIV/AIDS initiatives (see negotiate, as clients are unlikely to subscribe Box D2); to a "moving target." · Requested cumulative EIAs; and D o n o r - S u p p o r t e d T r u s t F u n d s B o x D 5 C o n t r i b u t e t o I F C ' s S u s t a i n a b i l i t y I n i t i a t i v e Since 1994, through IFC's Trust Fund Unit, donors have broadly successful. However, because Project Com- spent $3.5 million to support technical assistance for pletion Reports have often not been prepared, OEG 22 EI-related projects--mostly in the past three years was unable to assign project ratings. Technical assis- (Attachment 5). Increasingly, technical assistance sup- tance demand by the EI sector--focusing on social ports sustainable development, including a confer- and environmental development--is likely to grow. ence in China to improve the investment climate for Through better tracking, IFC would be in a better posi- sustainable mining and a global initiative to dissemi- tion to understand and communicate the impacts of nate examples of successful approaches to HIV/AIDS its technical assistance program to its donors and the prevention. So far, the projects appear to have been public. 1 2 4 A N N E X D -- I F C ' S E X P E R I E N C E · Encouraged some clients to adopt the new that IFC's and the WBG's guidance materials-- hazardous materials management guidelines. particularly on social issues--are very helpful. For example, IFC has published good practice The WBG has developed policies, guide- manuals on public consultation, resettlement, lines, practices, and procedures that are set- HIV/AIDS, child labor, and community devel- ting standards and helping to improve the opment.205 By publishing guidance206 on topics sector's contribution to sustainable devel- such as mine closure and community develop- opment. Many observers--international organ- ment and by hosting workshops and partici- izations, government, industry, and NGOs-- pating in or leading sector initiatives, the WBG concur that the World Bank Group's require- is highly visible, taking a leadership role in ments and guidelines set a high standard.202 A improving environmental and social impacts. 2001 United Nations Environment Program In 2003, some of the largest private project (UNEP) study observed that the participation of finance banks have committed to adopting IFC multilateral financial institutions significantly safeguard policies and guidelines, thus broad- raises a project's environmental and social stan- ening their reach.207 Nevertheless, many other dards. Other multilateral (e.g., European Bank financial institutions and export credit agencies for Reconstruction and Development, Inter- still lack such standards (Box D6). American Development Bank) and bilateral insti- tutions reference and some use IFC and World Nevertheless, some guidelines are incon- Bank guidelines. Several government officials sistent, incomplete, or missing. Given the have commented that WBG guidelines are an WBG's high visibility, it is particularly important important benchmark when setting local stan- that its guidelines be updated regularly and con- dards. Industry also sees value: 95 percent of form to at least good practice standards in the clients in EI saw IFC's requirements as primarily industry and among financial institutions. IFC did helpful to their long-term interest, compared not update its safeguard policies for several with only two-thirds of all clients.203 Some clients years, and some are now inconsistent with World and even other companies list in their annual Bank guidelines.208 For example, staff told OEG reports that they comply with IFC guidelines,204 that IFC projects now must comply with a draft, and several industry representatives commented nonpublic version of the 1999 policy on safety L a c k o f S i m i l a r S t a n d a r d s B o x D 6 i n O t h e r F i n a n c i a l I n s t i t u t i o n s Many businesses recognize that "addressing sustain- institutions with lower standards when IFC cannot able development is critical to their long-term sur- convince potential clients that IFC's guidelines are in vival, and to delivery of enhanced shareholder value."a their own long-term interest. OEG found that NGOs are But there is also much concern that similar standards often vocal critics of projects supported by international do not apply to everyone. NGOs use WBG guidelines financial institutions and multinational corporations but to point out weaknesses in other financial institutions' do not necessarily raise similar concerns about local requirements and are concerned about a "race to the or state-owned companies with worse performance. bottom."b UNEP noted in 2001 that, despite some progress since 1999, most export credit agencies were a. Mining & Minerals Sustainability Survey 2001: A PriceWaterhouse lacking adequate environmental and social require- Coopers survey of 32 world-class mining and minerals organizations. ments--all the more worrisome because their invest- b. Numerous examples include ECA-Watch (www.eca-watch.org/ ment volume in the sector is much larger than that of problems/impacts.html) demanding to "stipulate World Bank and the multilateral institutions. Some IFC investment staff OECD DAC [Development Assistance Committee] standards as the expressed concerns about losing business to financial minimum acceptable" for export credit agencies. 1 2 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T of dams, not with the 1996 version on IFC's Web clients have been accused of human rights vio- site, nor with the 2001 World Bank policy. Sim- lations, and IFC has been criticized for support- ilarly, IFC does not use the "new" World Bank ing projects that could lead to such violations. 2001 involuntary resettlement policy but the Following an initiative led by several countries, "old" 1990 policy, combined with a resettle- many industry leaders and NGOs have signed on ment handbook, which is appreciated by prac- to "Voluntary Principles on Security and Human titioners but not mandatory. While OEG was told Rights."211 However, IFC currently has no policy that what applies is clear to IFC's specialists, to or guidance on country-internal conflicts212 or any outsider it must appear extremely confus- potential human rights abuses and does not usu- ing. There are also numerous examples of incon- ally specify how its client companies should sistent or incomplete IFC guidelines. For protect staff and assets. Given the potential risks example, requirements for closure plan funding for people in the host country and for IFC's own differ for different types of mines (coal, open pit reputation, this appears to be a significant gap mining, base metal mining). IFC promised spe- and an area where WBG standards and guide- cific guidelines for cyanide leaching in gold lines do not reflect corporate best practice. mining in 1998, but they have yet to be pub- lished. Ongoing consultations are seen as criti- Policies, guidelines, and best practice must cal for enhanced community development but produce results in the field. Operational poli- are not required. Social issues are recognized as cies and guidelines provide direction to IFC crucial for mine closure but are not addressed staff and clients. But the ultimate test of their use- in the requirements. IFC's 2001 guidelines for off- fulness is whether they improve results in the shore oilfields place much more emphasis on field. Safeguards are useful, but identification of reducing gas flaring and other sources of green- potential problems by investment officers is house gas emissions than the applicable 1998 equally important so that these issues are not WBG guidelines for onshore oilfields. IFC's overlooked. Therefore, additional training of requirements for identifying and controlling investment staff to recognize social and envi- impacts of downstream transportation of oil and ronmental issues in EI projects throughout the gas projects are generally adequate but may project cycle would be useful. Investment offi- need to be more specific on road and rail trans- cers need not have the expertise to replace port of oil, oil products, and gas. Some areas, environmental and social development special- such as human rights, are not covered by IFC's ists, but they should have sufficient skills to rec- guidelines but are being addressed by the indus- ognize problems and the benefits of getting try or other bilateral or multilateral institutions.209 specialists involved in internal and external proj- ect preparation as early as possible. Particu- Leading EI companies have signed on to larly, investment staff intervention to bring "Voluntary Principles on Security and specialists into early contact with sponsors and Human Rights," but IFC has no such require- to encourage sponsors to retain skilled and ments. Human rights organizations have repeat- experienced social specialists in relevant situa- edly noted violations of the rights of individuals tions is of prime importance. Strong management in connection with EI projects, particularly in the support and recognition of investment officers oil sector.210 EI projects involve large invest- who proactively engage with sponsors to address ments, often in countries where security, includ- social and environmental issues are essential ing the threat of war or terrorist attack, is a for improved sustainability of IFC projects. concern. IFC has approved projects in several such countries, where sponsors were working Problems can arise when IFC's environ- with the army or private security forces to pro- mental and development specialists are not tect their property. Because IFC usually leaves involved early enough. Several projects had security issues up to client companies, there is problems that could have been prevented or potential for problems to develop. A few IFC more easily mitigated had there been early inter- 1 2 6 A N N E X D -- I F C ' S E X P E R I E N C E action between IFC's social specialists and the closure plans and funding in place, and which project sponsor. For example, in one Latin Amer- oil and gas projects involve routine flaring. ican project, IFC became involved in the early IFC's new management information system 1990s, but the first social development special- will address some, but not all, of these issues. ist input from IFC came many years later, because IFC did not hire social specialists until the mid- Many of IFC's EI projects are in countries with 1990s. IFC's specialist recommended that the inadequate environmental and social gover- sponsor employ more social specialists to ade- nance; this strongly challenges IFC in terms of quately address community issues, including resource allocation, reputation risk, and respon- conflict resolution. But this recommendation sibility. Many host countries lack adequate envi- was taken seriously only after the social and envi- ronmental laws, regulations, and enforcement. ronmental impacts of a subsequent spill became Previous OEG studies214 have found significantly apparent. The sponsor now has a very proac- worse performance in such countries. EI proj- tive social department of 15 people who con- ects are particularly concentrated there, and sult with both rural and urban stakeholders IFC's potential added value is thus also greatest. about the project. But substantial resources are required for IFC to ensure compliance. It is unclear whether IFC will Supervision for EI projects is better than ever--or should--be in a position to replace host for the overall IFC portfolio, but gaps remain. country enforcement. In addition, even if IFC can IFC's supervision for EI projects was significantly ensure compliance while it is an investor, it typ- better overall than for other sectors, with 82 per- ically cannot influence performance after exit- cent (versus 59 percent) rated satisfactory. In ing its investment.215 Also, some issues (e.g., part, this reflects the necessity of closer supervi- new settlement in areas of resource develop- sion of environmental and social aspects, as many ment) are difficult for IFC and its clients to deal EI projects face complex environmental and social with in the absence of government support. Yet issues. Nevertheless, there are important gaps: IFC does not consistently assess the institutional · IFC had insufficient information to assess the capacity of national government agencies. In environmental performance of several EI some cases there was a preceding or concurrent portfolio projects, often where IFC had only World Bank involvement to upgrade government an equity investment or in older projects pre- capacity, but this is not the norm.216 This raises ceding the introduction of IFC's 1998 proce- the question whether IFC ought to seek World dures.213 Bank assistance more routinely to upgrade gov- · IFC was caught unaware because of weak ernment's environmental review capacity where monitoring, or less than full disclosure by it is found lacking. A complementary action that companies, of problems relating to handling would reduce the burden on IFC would be to of hazardous materials, mine closure plans, require that clients subscribe to international acid rock drainage, tailings impoundments, standards of independent monitoring.217 In all IFC's resettlement policy, gas flaring, and new Category `A' projects (and for some Cate- transportation of oil. gory `B' projects), IFC requires independent · While project-level supervision overall was audits or at least independent verification of strong, IFC's management and information the Annual Monitoring Reports (AMRs). Such systems do not provide adequate centralized requirements could reduce the supervision load data on environmental and social issues for and reputation risk for IFC, but this has to be the portfolio. For example, management is balanced against the higher cost for the client-- only now starting to develop overview report- who also benefits from improved performance. ing templates specifying which safeguard policies and guidelines apply to specific proj- Baseline data are important but were not ects and whether projects comply with them, always established or tracked sufficiently. which mining projects have appropriate mine EIAs prepared for Category `A' projects are 1 2 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T required to include a comprehensive baseline cases that this approach can be problematic-- survey of environmental and social conditions. when commodity prices declined, the ore body Yet for several past projects either this had not was less valuable and the mine life thus shorter been completed or it did not provide enough than anticipated. While IFC eventually secured information.218 A detailed inventory of the envi- funding for mine closure in several such cases, ronmental and social conditions before break- this clearly represented a risk, and mine closure ing ground for exploration is crucial to track issues have not been resolved for all portfolio development results, and it is also in the self- projects.222 Another difficulty for implementing interest of the company. Local communities-- sustainable solutions for mine closure is that understandably--highlight areas where they IFC generally exits from its investments when its want improvements and do not necessarily give role is completed--often well before the mine credit for past improvements achieved. It is closes--and therefore loses any influence over common for the EI industry to be charged with the mine operator. The WBG has developed polluting air and water, degrading land, destroy- good practice guidance, covering different ing structures, and, in general, worsening liveli- options for securing funding that may offer solu- hoods. While many claims are real, some cannot tions,223 but this guidance is not mandatory. be substantiated.219 Extensive baseline data, later There is clearly an urgent need to identify solu- tracked in ongoing monitoring programs, would tions (e.g., financial instruments) to ensure that help distinguish real from false claims and make mines will be closed properly, even if a company it possible to appropriately compensate for neg- becomes insolvent. ative impacts. They also would help the com- pany--and IFC--to demonstrate positive Social issues related to mine closure--not developments.220 On the other hand, monitor- covered and even more complex. The social ing and baseline surveys are costly. It is there- issues surrounding mine closure are not covered fore important to establish the most important in IFC's guidelines. They revolve around com- environmental and socioeconomic indicators in munities being able to deal with loss of jobs, eco- the EIA and identify how they should be tracked nomic activity, revenues, and services associated later. IFC has started to track development results with mine closure. To address them requires the more systematically in its supervision, and well- cooperation of multiple stakeholders, including designed EIAs and AMRs could help in this local communities, mining companies, and dif- respect. ferent levels of government. The WBG has devel- oped guidance on this issue, including the Challenges in Meeting IFC's Environmental and respective roles of different stakeholders and Social Development Objectives "checklists" on handling social and environ- mental mine closure issues. Like all guidance Funding mine closure--difficult to imple- notes, they are not mandatory for IFC projects.224 ment. Mine closure is a major environmental and social issue. Abandoned mines represent an Longer mine life--more potential for sus- environmental hazard to the country and poten- tainable development? IFC has funded mines tially significant cumulative cleanup costs asso- with estimated lives exceeding 30 years where ciated with long-term environmental and social the mining company becomes a part of the damage. Since 1982, the WBG has therefore community and can justify expenditures for required concrete and detailed plans for recla- improved infrastructure to support its opera- mation and funding, with the goal of returning tions. This allows more time to contribute to sus- land to conditions supporting prior land use tainable development and prepare for mine (or better uses). Since 1998, IFC's guidelines closure but may increase the community's have required that money be reserved over the dependence. IFC also funds mines with relatively life of the mine to cover closure cost.221 How- short lives. The compressed life can exaggerate ever, IFC's experience has shown in several some of the social and environmental issues 1 2 8 A N N E X D -- I F C ' S E X P E R I E N C E associated with mining, including mine closure not considered part of the project's impact. and reclamation risk. One African company told While there has to be a cut-off, defining the fence OEG that it wished it had invested in local com- line is difficult. For example, a country's ability munity development earlier. It did not, in part or lack thereof to clean up a spill can have because it had expected to close down within effects well beyond what may be considered the a decade, but it will now continue to operate fol- confines of the project, particularly with respect lowing the acquisition of an adjacent mine. to transport--by rail, road, pipelines, and sea. Transport often is contracted to or is the full Tailings dams--the Achilles' heel of mining responsibility of third parties. Two IFC projects projects but few problems in IFC's portfo- experienced high-profile hazardous materials lio. In 1996, Comsur, an IFC client, experienced spills, Minera Yanacocha, Peru, and Kumtor a tailings dam break. In the same year, IFC also Gold, Kyrgyz Republic. Both featured road trans- discovered through an evaluation that the client port mishaps outside what had been defined as of one of its older investments was discharging the fence line. On the basis of these experiences, tailings straight into a river--without a tailings IFC has extended its appraisal and supervision dam.225 Following this, a 1999 draft Policy on reach to cover some of the operations of sup- Safety of Dams (OP4.37) was prepared that pliers and shippers, applying environmental includes tailings dams. The environmental assess- guidelines to these activities. Nevertheless, the ment must now provide information on the tail- debate will remain over the point of transfer of ings dam. IFC's mining engineers and responsibility. environmental staff are expected to review tail- ings dam safety at appraisal and during super- Challenges when IFC enters late in the vision. While there were no problems until process. IFC can have a major influence if recently, IFC just discovered a problem with a involved in the project from inception. In sev- leaky tailings impoundment.226 Tailings dams eral cases, however, IFC was not approached often remain following closure, posing a poten- until after the sponsors had advanced the proj- tial threat to the community. It is thus important ect, not always in accordance with IFC's guide- to assess the public risks from potential tailings lines, particularly in relation to public dam failure, starting from the EIA. consultation. In such cases, IFC faces a choice between turning down a project and losing the Private ownership can improve environ- opportunity to add value, or imposing what mental performance, but this often means may be costly conditions on the client for pro- addressing the environmental legacy of past ceeding. Current guidance on what to do in practices--a challenge. Several IFC invest- such circumstances is unclear. ments have been in newly privatized but exist- ing operations. The past practices of the former Ensuring sound environmental and social government managers had left a legacy of envi- performance equity investments. IFC has ronmental problems (oil pits, leaking pipelines, several equity-only investments, with little legal contaminated waterways, leaking tailings dams), leverage to influence the project and no legal often passed on to the new owners charged with right to obtain Annual Monitoring Reports. IFC the cleanup. Environmental performance invari- could use "moral suasion" but has not always ably improved under the new ownership, revers- done so. In some cases, the appropriate envi- ing most of the negative impacts, but in some ronmental and social terms and conditions were cases bringing the operation into compliance in the loan documents, but they expired upon proved difficult and prolonged. repayment of the loan. If the company is delin- quent in its environmental or social responsi- Going beyond the fence line. Current industry bilities, IFC will bear some reputation risk, practice places an imaginary fence line around whether it remains an investor or exits. Even the project, with activities outside the fence line today, IFC does not always include contractual 1 2 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T environmental and social requirements for equity. ASM precedes large mines, and government reg- OEG pointed out this problem in its first Annual ulation often requires eviction of miners; at other Review in 1997. IFC management responded times, ASM is attracted by large-scale mining that it would look into this issue, but that there activity. In either case, large mining companies were complex commercial and other consider- face a dilemma--evicting ASM operators is dif- ations. But IFC's 1998 environmental and social ficult and results in poor community relations, review procedures do not distinguish between while letting them operate results in reputation investment instruments and do not address this risk--being blamed for the poor environmental issue. It is difficult to negotiate appropriate and safety record of ASM.228 In one case, an IFC requirements for equity investments (e.g., share- client wanted to help artisanal miners with bet- holders' agreement, put option in case of envi- ter equipment and guidance but realized that ronmental default), but lack thereof makes it even improved conditions would still constitute difficult, if not impossible, for IFC to comply with too great a reputation risk. Dealing with ASM its own procedures. Also, there are no guidelines often has proved beyond the capability of indus- establishing how active IFC should be as a share- try. But governments also are struggling with it. holder; for example, whether IFC should rou- Observers suggest a twofold solution: one, cre- tinely ask for information about a client's ate alternative employment opportunities; two, environmental practices and raise this issue at help "upgrade" this subsector: provide assistance shareholder meetings.227 to transform artisanal miners into safer, small-scale miners who are regulated and abide by improved New approvals--similar difficulties. Since environmental standards. Experience beyond 2001, IFC has approved funding for five projects IFC's portfolio suggests that private companies to help the EI sector with services, loans, or seed can engage constructively with ASM operators capital. These projects could create jobs, estab- (Box D7), as does other WBG work.229 lish new ventures, and improve services. As yet, there have been few disbursements under these 5. Disclosure and Consultation projects, but when they or similar projects are disbursed, they could present unique challenges IFC's disclosure requirements have for monitoring and enforcing compliance under increased. IFC adopted its first disclosure pol- IFC's safeguards policies and guidelines, because icy in July 1994 and revised it in 1996 and of IFC's indirect relation to the underlying proj- 1998.230 Under the policy, IFC balances account- ects and lack of contractual leverage. Similar ability as a public institution--favoring disclo- issues apply to EI projects approved through sure--with the need to protect commercially financial markets operations, which were not sensitive information. EI projects are particu- covered in this evaluation. larly sensitive, and IFC frequently signs confi- ASM can give rise to major environmental dentiality agreements. Disclosure in IFC has and social problems and sometimes pose a rep- increased substantially since the early 1990s, utation risk for IFC's clients. ASM features promi- when almost none was required. Recognizing the nently in a number of countries where IFC has fundamental importance of accountability and EI investments. Authorities sometimes consider transparency in the development process, IFC ASM a stopgap measure for poverty prevention requires disclosure of the following: and leave it untouched, even if they oppose its · Summary of Project Information--a brief practices. ASM is often illegal and involves very factual summary of the evolving project. unhealthy and unsafe working conditions, includ- · Environment-Related Documents--Cate- ing child labor. ASM can cause major environ- gory `A' projects: environmental impact assess- mental damage, degrade land beyond ment, released at least 60 days before the rehabilitation, and pollute waterways with heavy Board date; Category `B' projects: summary sediment, heavy metals, hazardous materials of the key findings of the environmental (mercury), and acid rock drainage. Sometimes review, released at least 30 days before. 1 3 0 A N N E X D -- I F C ' S E X P E R I E N C E A r t i s a n a l a n d S m a l l - S c a l e M i n i n g -- B o x D 7 C o n s t r u c t i v e E n g a g e m e n t b y a P r i v a t e C o m p a n y Irrespective of the legality of their presence, the sig- the reasons for their presence and the extent to which nificance of small-scale mining activity on conces- mining meets their basic needs (as a primary or sup- sions (or potential incursions by small miners from plemental economic activity) and identifying viable elsewhere) should not be underestimated, either by alternative livelihoods or opportunities to continue to government authorities or private companies. In par- mine. ticular, where small-scale mining is the main eco- The emerging policy of encouraging an intimate nomic activity of "established" communities, any association between small- and large-scale mining external threats to miners' livelihoods will be resisted projects has merits but should not be used as a sub- strongly. stitute for a comprehensive government strategy The "problem" of small miners can be addressed towards small-scale mining. only by looking beyond the threat they present to the Source: Case study on the Las Cristinas Project (Venezuela)--Lessons project. This involves developing an understanding of from the Evaluation, by Aidan Davy and Auristela Perez, May 1999. Disclosure is only required before approval; to voluntarily disclose detailed social, environ- public information is thus often outdated, mental, and financial reports, recognizing that but this aspect has improved recently. In sev- openness and transparency increases trust and eral projects reviewed by OEG, project scope or is in their long-term interest. Others, such as one design had substantially changed, but the pub- client who asked OEG's advice about best prac- licly available information had not been tice in sustainability reporting, are considering updated.231 Publicly available project documents it,. Leading industry players publish independ- usually addressed planned measures to address ently verified, detailed sustainability reports, environmental effects, not whether these meas- including, for example, sites with independent ures have been effectively implemented. Such audits and mine closure plans; injury rates; land, issues usually would be covered in an AMR water, and energy use; spill incidents, gas flar- supplied by the client to IFC, but AMRs are not ing, carbon dioxide, and greenhouse gas emis- publicly available.232 While disclosure has to be sions; and environmental and noncompliance balanced against commercial confidentiality, incidents. IFC has begun to insist on disclosure lack of disclosure diminishes trust.233 For some of ongoing environmental and social informa- recent IFC projects, updated environmental and tion in a few high-profile projects, but this is not social information has been disclosed.234 the norm. IFC protects its clients by keeping project In several cases, IFC clients have gone information confidential--but is that in beyond the disclosure requirements.236 One their best interest? Leading industry players see client is now the only company in the country value in disclosure. IFC, at EIR workshops and that audits and discloses environmental per- other consultations, has been criticized--some- formance reports. In a few recent cases, IFC has times based on misconceptions about specific EI agreed with the client on independent moni- projects. More information could diminish such toring and disclosure of the AMR. In several misconceptions, but IFC does not disclose, even cases, IFC has gone beyond the minimum in aggregate form, noncompliance by its requirements; one example being the Chad- clients.235 There are no guidelines on whether, Cameroon Pipeline project, with a 19-volume or under what circumstances, IFC should notify environmental management plan and ongoing local authorities or the public of known com- independent review. Some other IFC clients also pliance shortfalls. Many IFC clients have started disclose substantial amounts of information 1 3 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T about their environmental and social activities.237 with the companies on an equal footing, the Such information often can be found on IFC's communities and other stakeholders may need or the clients' Web sites. assistance and training to understand the busi- ness and technology. Independent experts can Build community trust through open, hon- help, but who pays for them? If the sponsor pro- est, respectful, and ongoing consultation. vides the funding, the expert may be perceived But IFC's requirements fall short of its own good as compromised, but alternative funding sources practice guidance on public consultation and dis- are scarce. IFC has worked with a number of closure plans.238 The guidance defines consul- clients and communities to facilitate the con- tation as "a wider continuous process of sultative process, sometimes using trust funds participation of all stakeholders in the decisions (Attachment 5), sometimes with the help of throughout the formulation and execution of a the CAO--and OEG has witnessed positive project." IFC's preapproval disclosure and con- effects in several projects. sultation requirements may not be enough to achieve trust in the community. In particular, 6. Governance and Challenges of ongoing consultations are not required (unless Managing Revenues from Extractive a project involves resettlement or indigenous Industries peoples),239 nor is disclosure. Extractive industries--large revenues for Good communication can improve the effec- countries with poor governance. The eco- tiveness of assistance programs and reduce nomic sustainability section of this report indi- anxiety if problems occur. Unilateral com- cated that most of IFC's EI investments created pany decisions on what is best for the com- large revenues for host countries, particularly in munity are likely to be misguided and expensive oil and gas, sometimes even when investors and cause discontent. For example, when a did not achieve satisfactory returns.242 There is mining company used tanks to temporarily abundant evidence that such large revenues, restore water supply to villagers without con- which, tend to be volatile and finite, create par- sulting them, they accused it of treating them ticular challenges for resource-rich countries. "like refugees." But another mining company While IFC usually analyzed the financial, social, consulted extensively with the community and, and environmental aspects of a project thor- for a few hundred dollars, developed a project oughly, it has, in the past, not approached rev- that recycles engine oil for coastal fishermen, enue management and distribution with the reduces coastal pollution, and has strong com- same rigor. Because IFC's EI projects are highly munity support. Companies that communicate concentrated in risky countries that tend to suf- poorly can face the high costs of project inter- fer from weak governance, the issue becomes ruptions and community relations turned sour.240 particularly important. Since fiscal year 1993, From field visits, desk reviews, and the litera- half of IFC's EI approvals were in countries in ture, it is clear that IFC clients that consult, dis- the worst governance quartile, compared with close, and communicate well are better off than only one-quarter of all non-EI approvals.243 To those that do it poorly. recommend not investing in countries with poor governance sounds tempting, but the WBG's Public consultation can be complex, con- mission is to reduce poverty and improve peo- fusing, and difficult for both the company ple's lives--and hundreds of millions of people and the stakeholders. Some multinationals live in resource-rich countries with poor gover- have geared up for this important part of doing nance. While the WBG alone may not be able business, but others are struggling and even to improve governance, by using its unique with the best of intentions are finding them- position as global player with the convening selves running into difficulties. Some have power to engage both public and private stake- requested assistance from IFC.241 To consult holders, it can effect change. 1 3 2 A N N E X D -- I F C ' S E X P E R I E N C E Challenges of investing in countries with D3). It is also worth noting that investing in the poorest governance. Countries with poor countries with poor governance is not neces- governance often lack transparency, adequate sarily financially attractive for IFC. In fact, none laws, financial capacity, and regulations to allow of IFC's 10 most successful EI investments were regulators and judiciary systems to cope ade- in a country with the highest corruption.247 quately with large EI projects. If corruption is an IFC's equity returns were worst in countries issue, customs agents, transport companies, reg- with the poorest control of corruption and the ulators, and government officials could exert best in countries with the highest control (Fig- significant pressure on projects, causing delays ure D4).248 Environmental results were signifi- and additional costs. From a development per- cantly better with better political stability. spective, corruption is bad for growth and tends to reduce economic growth and private sector Bribes are common in EI, particularly in oil investment.244 Resource-rich developing coun- and gas. According to Transparency Interna- tries that are often cited among the best exam- tional,249 the oil and gas sector is perceived as ples for the positive contribution of the EI third most likely to involve bribes, following only sector--such as Botswana and Chile--are all public works contracts and arms deals. Mining considered to have relatively little corruption.245 ranks seventh. The Organisation for Economic Co-operation and Development (OECD) Con- Results--for development, IFC's bottom line vention on Combating Bribery of Foreign Pub- and the environment were closely corre- lic Officials in International Business lated with governance quality. OEG ana- Transactions250 entered into force in February lyzed the results of the 45 studied projects using 1999. Thirty-five countries have ratified the con- different governance indicators.246 Develop- vention, and most have already enacted legis- ment results were significantly better in coun- lation to make it a crime for businesses to bribe tries with good government effectiveness, foreign public officials. Quite a few countries political stability, and regulatory quality (Figure already had laws outlawing corruption abroad.251 B e t t e r D e v e l o p m e n t R e s u l t s F i g u r e D 3 w i t h B e t t e r G o v e r n a n c e ( 4 5 s t u d i e d E I p r o j e c t s ) 100% Poor governance Good governance 80% success 60% outcome 40% Development 20% 0% Government Political stability Regulatory quality effectiveness Source: WBI Grics-II 1 3 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T B e t t e r C o u n t r y G o v e r n a n c e -- F i g u r e D 4 B e t t e r I F C E q u i t y R e t u r n s f o r E I a n d f o r O t h e r S e c t o r s 100% Governance quartiles Worst Best 80% 60% inception)40% (since20% 0% equity on -20% -40% returns EI equity returns real Non-EI equity returns -60% -80% Relative 2 10 32 431 40 579 3 43 Number of projects Note: 175 countries were sorted based on the average of their respective GRICS indicators (Voice and Accountability, Political Stability, Government Effective- ness, Regulatory Quality, Rule of Law, and Control of Corruption) and divided into quartiles. Source: World Bank Institute. Governance Research Indicators Country Snapshot (GRICS) Dataset, 2001. Nevertheless, paying bribes still appears to be ruption, there is clearly a risk. OEG's field visits common. and other research showed substantial differ- ences with respect to the transparency and han- IFC takes precautions against corruption, dling of EI sector revenues among different but it is clearly a risk. IFC projects provide a countries with IFC EI investments. demonstration effect for others, and it is there- fore imperative that the projects are implemented Corruption is linked to revenue manage- transparently and honestly. IFC usually explicitly ment but is difficult to prove. International requires sponsors to abide by host country laws Monetary Fund (IMF) research has found that and regulations, which often outlaw corruption. corruption distorts allocation of resources by During appraisal, IFC typically checks the back- governments. It is associated with higher pub- ground and reputation of its sponsors and how lic spending but poorer quality infrastructure. licenses were awarded. To that end, IFC has, on In countries with poor governance, it is there- several occasions, hired private investigators. fore particularly important to address how IFC also typically requires that its clients' finan- governments manage fiscal revenues from EI. cial statements be audited, which may reduce but OEG visited several countries where little of the not eliminate the scope for irregularities. OEG government revenues was flowing back to reviewed project files and had informal discus- benefit communities next to EI projects. In sions with IFC staff, project sponsors, and third some countries, there was a strong suspicion parties knowledgeable about the sector. OEG that government officials at different levels found no evidence that IFC clients were paying were corrupt. Without transparency about the bribes but did not conduct an audit. However, resource flows, such allegations are difficult to particularly because IFC projects are taking place prove or disprove. About 70 percent of gov- in countries with high perceived levels of cor- ernment officials surveyed (Attachment 6B) 1 3 4 A N N E X D -- I F C ' S E X P E R I E N C E saw a need for the IFC to help improve gov- policies critical with respect to revenue manage- ernance and transparency (the corresponding ment and utilization:254 (i) the establishment of figure for the World Bank is 83 percent). One transparency and accountability with respect to mining minister advocated disclosure of mon- revenues earned and their disposition, (ii) con- eys provided to local authorities to better sultation with principal stakeholders in develop- ensure local communities benefit from it. ing plans for the use of resource revenues, (iii) credible oversight and audit of the imple- IFC's recent efforts with respect to revenue mentation of these plans, and (iv) serious atten- management. The Chad-Cameroon pipeline is tion to building local institutional capacity. the first IFC project to proactively tackle revenue management.252 This effort followed IFC's recog- Disclosure of government revenues--a nition that projects that devolve little or no ben- step toward better management? To date, efit to local communities present both neither the IMF nor the World Bank necessar- development and commercial risks. A recent ily require that resource-rich countries dis- IFC position paper on revenue distribution and close the revenues generated by EI, even management253 (Box D8) states that, in high- though they sometimes recommend it. IFC's EI impact projects in countries with poor gover- clients are also not required to disclose the rev- nance and weak institutions, IFC will enues they generate for governments. However, systematically assess the risks that governments several public campaigns have started to advo- would misuse payments or that intended ben- cate disclosure of EI revenues.255 But disclosure efits may not reach local communities. IFC would of government revenues can raise difficult also, together with the Bank, IMF, and sponsors, issues. Governments in some countries even consider mitigating measures. At this point, the make it illegal, through confidentiality position paper applies only to "high-impact" covenants in production-sharing agreements, projects (substantial in relation to the nation's for example. Industry is concerned that uni- income), and none of the mitigating measures lateral disclosure could create a competitive dis- are mandatory. advantage. However, almost all industry representatives whom OEG interviewed in the Key issues in revenue management. A joint course of this study would support industry- working group consisting of industry, civil soci- wide disclosure of government revenues. Most ety, and WBG staff considered the following of them, however, emphasized that these were I F C ' s P o s i t i o n R e g a r d i n g R e v e n u e B o x D 8 D i s t r i b u t i o n a n d M a n a g e m e n t -- H i g h l i g h t s Revenue distribution and management in extractive To deal with the problem, IFC proposes a number of industry projects are important development issues steps that it may undertake for high-impact projects that and have emerged as major risk factors for both the will generate substantial revenues for host governments: operation and the reputation of investors. Large rev- · Engage with the World Bank or IMF to coordinate enues generated by these projects and accruing to issues beyond IFC's mandate. government may be misused. Benefits from these rev- · Consider other mitigation measures, such as spon- enues may not reach local communities. While revenue sor's community development programs, when coor- distribution and management are not issues in every IFC dination may not achieve the necessary level of project, they can become problematic in high-impact management. projects; that is, where revenues are substantial in · Seek funds or partners to assist a sponsor with relation to the nation's fiscal income. capacity-building. 1 3 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T their personal, not necessarily corporate, views. transparency are still inadequate. To validate Some companies operating in the EI sector the findings of this evaluation, we surveyed all have started disclosing government revenues of IFC's sectoral investment staff and regional even against host government concerns. economists.257 Almost 90 percent responded that merging IFC's and the World Bank's sector 7. Issues Beyond the Control of IFC and departments into one Global Product Group Its Clients Require Effective had improved coordination of sectoral issues. At Cooperation and Action Inside and the same time, less than half said that overall Outside the World Bank Group cooperation within the WBG was adequate; in their view, lack of support by the World Bank's Issues beyond IFC's control require better country departments was the biggest internal cooperation among financiers and devel- constraint.258 One likely explanation for the opment partners. IFC has been more effective insufficient coordination is that the country direc- in EI projects than in other sectors in address- tors lack the incentive to address EI issues: in ing most issues within its own control. More the countries where IFC operates, the WBG's EI needs to be done to ensure that the sector and lending volume tends to be small, EI projects are the projects IFC supports contribute to sustain- considered environmentally risky,259 and gov- able development. IFC can address some issues ernments may not be receptive to WBG activ- with its clients; for example, helping them to ity in this area. Of 24 IFC staff who responded, improve their environmental performance, com- 63 percent considered host country govern- munity development activities, and consultation ments' lack of support to be the biggest constraint and disclosure--to serve as role models for sus- to enhancing the contribution of the EI sector tainable development. IFC has done much256 to sustainable development. Only about half of and can probably do even more to convince its the IFC respondents said that revenue distribu- clients that better environmental and social per- tion and utilization, governance, and trans- formance, while potentially entailing short-term parency were adequately addressed in EI costs, will ultimately be in their long-term inter- operations. This response confirmed an analy- est. But to have even greater impact, IFC also sis of CASs showing that weak country gover- needs to work on further improving its own envi- nance and revenue management in resource-rich ronmental and social policies and guidelines countries often were not adequately addressed and their implementation and--together with its in CASs and subsequent WBG interventions; member countries--help improve those of other IFC's EI activities often were not even men- international financial institutions. Little would tioned in CASs (see Annex C). This points to a be gained if IFC alone adds requirements and need to address EI issues in country strategies its potential clients seek financing elsewhere. But more thoroughly, ideally in a Comprehensive many of the issues discussed in this evaluation Development Framework mode, also engaging are beyond even the control of IFC's client com- other stakeholders beyond the WBG. panies. To resolve them will require close coop- eration within the World Bank Group and with Perceptions of environmental and social other stakeholders and partners--the IMF, IFC's performance differ. Well over 90 percent of member governments, and other international IFC staff responded that environmental and financial institutions. The recent adoption of social issues were adequately addressed in IFC's IFC's policies and guidelines on environmental EI projects. This perception is better than our and social issues by several internationally active evaluation results suggest, but staff may have banks is an important step in that direction. considered IFC's performance on current proj- Merging World Bank and IFC units has ects, whereas we evaluated past results. Certainly improved sectoral cooperation, but cooperation the perception of IFC staff is different from that with country departments and attention to rev- of outside observers. Among the participants at enue distribution and utilization, governance, and the EIR workshops, only 44 percent (of 52) 1 3 6 A N N E X D -- I F C ' S E X P E R I E N C E responded that IFC successfully addressed envi- tive use of those resources. Our evaluation ronmental impacts; 33 percent (of 48) responded results suggest that better country governance positively for social impacts. Views among NGOs is not only likely to improve the development were the worst--15 percent and 7 percent pos- results of IFC's operations but also IFC's finan- itive, respectively. Responses from government cial results. and industry were around 50 percent positive, slightly better for environmental issues. This IFC needs to better tackle transparency, points to a need for improved performance government revenue distribution, and, more compared with past results and also for much generally, sustainable development. Other greater disclosure and engagement of stake- stakeholders echoed the perceptions of IFC staff. holders to address the poor perceptions where NGOs, industry, and governments expressed a they are not warranted. need for IFC to address these issues (Attachment Even a concerted WBG effort is probably not 6B). But no group responded that there was enough. About two-thirds of IFC staff responded enough IFC effort or success. NGOs were most that the biggest factor keeping EI from con- critical (less than 10 percent said IFC success- tributing to sustainable development is the lack fully addressed these areas), but the percep- of support from the host country government. tions of industry (about 20 percent) and One respondent explained, "[The] main problem government (about 40 percent) also indicate is governments in client countries don't want the substantial room for improvement. Bank or IFC messing with their only independ- ent source of revenues. Even when the Bank 8. Conclusions and Recommendations does intervene, it often does not have the lever- Overall, IFC has effectively supported EI oper- age to engineer change." Some respondents ations, but it needs to further improve their commented that the IMF also needs to be implementation, better address broader sus- involved and that continued engagement in the tainability issues, and, with its clients, better sector was important to maintain the country dia- track and report on results achieved. Projects usu- logue. An OED study also found that governance ally generated large revenues for governments was key to successful management of fiscal rev- and opportunities for people. IFC has generally enues from EI but that government commit- added value, particularly in improving the envi- ment or political will to address it was lacking ronmental and social aspects of projects, but in four out of five country cases (Annex C, given the sector's high impact potential, IFC Chapter 5). needs to help client companies prevent or mit- igate negative impacts more effectively and sys- The results confirm that closer coopera- tematically. IFC also needs to ensure that its tion is needed--within the WBG and environmental and social guidelines and pro- beyond. The survey results confirm the eval- cedures continue to set standards and adapt to uation findings--that important issues, such as rapidly improving industry standards and that its revenue distribution, utilization, governance, projects adapt with them. In pursuit of its sus- and transparency, need to be better addressed. tainability agenda, IFC needs to do more to This will require closer cooperation within the address the risks that government revenues may WBG. But the WBG will also need to use its not be effectively used for development, that convening power and the help from its mem- benefits may not be distributed transparently, and ber governments, the IMF, industry, financiers, that local communities may not tangibly bene- and civil society to break the resource curse fit from EI projects. To enhance the contribution and ensure that extractive industries contribute of IFC's projects and the sector to sustainable to sustainable development. Greater trans- development requires further improvements in parency about the resources generated for project implementation, effective cooperation governments is likely to increase pressure on within the World Bank Group, and the full governments to account for the flow and effec- engagement of all stakeholders. 1 3 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T This evaluation found gaps in three areas: enhanced transparency and disclosure con- strategic gaps, resulting from inadequately cerning contractual agreements between addressing issues such as country governance investors and governments, the amount of fis- and revenue management through effective cal revenues generated, and their distribution.262 action, both within the WBG and with other part- IFC--together with the World Bank and other ners, and clearer project selection criteria; imple- stakeholders--should encourage such trans- mentation gaps, which, if addressed, could parency sectorwide in the country. When financ- enhance the performance of IFC's EI projects ing projects whose major expected development and, through the demonstration effects of IFC's contribution is the generation of revenues to gov- projects and requirements, that of EI more gen- ernments, IFC should carefully review and dis- erally; and gaps in engaging stakeholders, which, cuss the governance risk that these revenues will if addressed, would allow IFC and its clients to not be used productively. Where such gover- improve performance and better demonstrate nance risk is high and the project's revenues are contribution to sustainable development. significant,263 IFC should work with the gov- ernment (in partnership with the World Bank and Recommendation 1: Formulate an integrated IMF) to put in place mechanisms to reduce this strategy risk, including possibly ring-fencing of project revenue management. For all proposed EI invest- Address extractive industries in CASs. IFC ments, IFC should address these issues in Board should work closely with other parts of the Reports. WBG to ensure that CASs for resource-rich coun- tries260 explicitly discuss the EI sector's contri- Support environmental and social sus- bution to sustainable development (e.g., the tainability. IFC should focus on projects that importance of fiscal revenues and their man- can serve as models for environmental and agement, distribution, and use for development social performance, transparency, and disclo- priorities) and obstacles for enhancing its con- sure. Where laws and regulations--or their tribution. The CAS should provide an agreed enforcement--are weak, IFC should insist on framework for WBG-wide cooperation, with a special measures to ensure a project's sound particular focus on close interaction between IFC environmental and social performance. Such and the World Bank's country departments. IFC measures could include building local moni- and the World Bank should routinely work toring capacity and disclosing independently together to enhance the development impacts audited and publicly disclosed monitoring of EI projects; for example, in the form of pub- reports. They could also include an explicit lic-private partnerships with respect to commu- assessment of the risk of conflicts and measures nity development programs.261 IFC and the WBG to deal with them. should build on existing initiatives, such as Busi- ness Partners for Development and the Com- Recommendation 2: Focus on implementation prehensive Development Framework, to enlist the help of other stakeholders, such as the IMF, Improve project appraisal264 and supervi- other bilateral and multilateral institutions, indus- sion.265 IFC should continue to require high-qual- try, and civil society. ity environmental impact assessments that establish baseline data for relevant environ- Where country governance is weak, increase mental and socioeconomic impact indicators. transparency and address the weaknesses. These indicators--compared with the baseline-- Together with the World Bank and other stake- should be consistently tracked266 and aggre- holders, IFC should analyze all aspects of coun- gated for IFC's management. Appropriate try governance quality and the risks that poor requirements allowing IFC to adequately mitigate governance may detract from sustainable devel- risks and monitor all its projects should be opment. In particular, IFC should encourage included for all investments, particularly equity.267 1 3 8 A N N E X D -- I F C ' S E X P E R I E N C E Where IFC finds poor environmental and social update its environmental and social safeguard systems or performance, it should address them policies, guidelines, and processes in line with proactively and vigorously.268 IFC's investment evolving good practice in the industry.270 The officers and nominees to company boards should WBG should use its convening power and the be co-responsible with technical specialists for help of its member governments to promote the environmental and social performance of their use by governments, industry, and other fin- their projects. Where possible, IFC should also anciers. IFC should develop, update, or clarify develop and use local monitoring capacity. policies and guidelines on indigenous peoples (or "vulnerable people"), safety of dams, natu- Adequately involve specialists throughout. ral habitats (or biodiversity), security and human IFC needs to ensure that its environmental and rights, HIV/AIDS prevention, mining (closure-- social specialists are consulted as early as pos- funding and social issues, acid rock drainage, sible and throughout the project life and that precious metal mining), and oil and gas (gas flar- investment officers fully share relevant infor- ing, downstream transportation of oil). mation. To that end, investment officers need to be better trained to identify risks and opportu- Promote disclosure of fiscal revenues from nities. Making the investment officer and depart- EI. IFC should encourage--and consider requir- ment explicitly accountable for environmental ing--its clients to publish such information. performance would likely provide a strong Where client confidentiality undertakings ini- incentive for calling in the experts as early as pos- tially restrict disclosure, IFC could report results sible, not after a problem has materialized. on an aggregate country, regional, or sectoral level and participate in initiatives advocating Enhance reporting of results. IFC should such disclosure. IFC needs to balance client develop a reporting template that specifies for confidentiality with its own accountability as a each portfolio project which safeguard policies public institution and the public's desire to know and guidelines apply, whether the company is more. On balance, increased communication in compliance with them, and how it performs and transparency are likely to help IFC and its with respect to key sustainability indicators for clients and reduce misconceptions, distrust, and the industry. Where relevant, IFC should also criticism. include "beyond the fenceline" issues, such as transportation and project-related security issues. Develop, monitor, and report on sustain- ability indicators. In consultation with other Evaluate distribution of benefits. IFC should stakeholders, IFC should develop and track key develop269 global comparators for the distribu- sustainability indicators and consider disclosing tion of benefits from EI--among investors, gov- them to demonstrate the economic, social, and ernments at different levels, and local environmental impacts of its EI projects.271 communities. For its projects, IFC should ana- Reporting on credible sustainable development lyze the distribution and compare it with other indicators will help overcome the current inabil- EI projects. At appraisal, IFC should include the ity to systematically demonstrate results distribution effects in its sensitivity and risk achieved. analysis (e.g., distribution of benefits at differ- ent levels of output and prices), track actual dis- Increase local community participation. This tribution during the project life, and aggregate evaluation found strong evidence that improved the data at the country and sector level. community consultation is in the best long-term interest of our clients. IFC should make com- Recommendation 3: Engage the stakeholders munity development programs with ongoing consultations the norm for EI projects. Such pro- Update policies and guidelines. In consulta- grams should start with a participatory assessment tion with stakeholders, IFC should continuously of the community's situation272 and long-term 1 3 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T development needs. They should include ongo- should communicate its information needs bet- ing consultations, focus on sustainable solutions ter to its clients; for example, by tailoring report- to meet these needs, and prepare communities ing to their own requirements. Clients very much for the time after the extractive operations cease. appreciated assistance they had received from Good communication is also likely to improve IFC staff but were eager for more. IFC should results, as will listening to people and being build on its various initiatives to add value and exposed to public scrutiny and challenge. further facilitate exchange of ideas among its clients, by organizing conferences and further Improve communications with clients. IFC developing toolkits on how to best address envi- should routinely share best practice among ronmental and social issues, for example.273 clients and encourage them to apply it. IFC 1 4 0 A N N E X D -- I F C ' S E X P E R I E N C E A t t a c h m e n t 1 E v a l u a t i o n A p p r o a c h For this study, OEG analyzed a random sample WBG's background paper to the EIR. Both are of IFC projects approved between 1991 and available online. A brief summary of the analy- 1996 and evaluated at early operating maturity sis is in Attachment 3, and highlights are in between 1996 and 2001. The performance of Attachment 1. these 22 evaluated EI projects was compared Evaluators visited more than a dozen project with others evaluated in the same time period, sites in six countries to assess development using IFC's established evaluation framework results and to talk to representatives from indus- (see www.ifc.org/oeg/xpsrs/xpsrs.html) under try, government, and civil society (see Box D3). three performance dimensions: development We surveyed participants at the EIR workshops outcome, IFC's investment outcome, and IFC's about their perceptions: initially, about the most effectiveness (Attachment 4B). To validate the important sectoral issues, to help guide the eval- findings, OEG also conducted a desk review of uation (Attachment 6A); then, at the regional all EI projects approved since fiscal year 1993 workshops, about the need for, and effort and and older projects still in IFC's portfolio. The success of, IFC and the WBG in the sector results of these 45 studied EI projects are sum- (Attachment 6B). OEG also asked IFC staff to marized in Attachments 4C and 4D. OEG also what extent the WBG was appropriately address- reviewed IFC's strategy in the sector, technical ing key issues in the sector (Attachment 6C) and assistance trust fund activities (Attachment 5), whether coordination in the WBG was ade- internal documents, and relevant literature. quate. OEG also sought feedback from numer- OEG presented an analysis of IFC's invest- ous stakeholders knowledgeable about the ments in the sector in its approach paper for this sector, inside and outside the WBG. study. More information can also be found in the 1 4 1 A N N E X D -- I F C ' S E X P E R I E N C E I F C ' s I n v e s t m e n t A t t a c h m e n t 2 i n E x t r a c t i v e I n d u s t r i e s Approvals. In the 1960s and 1970s, few devel- Extractive Industries: Declining Importance in IFC since 1991 oping countries considered private sector devel- 400 25 opment of their EI resources. IFC funded its 350 Percentage 20 first EI project, a Chilean copper mine, in 1958 300 bar) and only five EI projects in the subsequent 12 250 15 of IFC's (US$M, years, three of them in the Chilean copper sec- 200 approvals 10 tor. As countries loosened control of their nat- 150 Approvals Net (line) ural resources and permitted private sector 100 IFC 5 investment, IFC became more active in the sec- 50 tor. Growth was initially slow. Prior to FY1980, 0 0 Calendar 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 year IFC had approved only 17 projects for US$137 million. Growth then accelerated through 1991, when IFC's net approvals reached almost US$400 than other projects (26 percent). IFC has been million. Approvals have, since 1991, fluctuated successful in attracting participant funding to EI-- at around US$250 million annually, with a sim- participants approved funding for about as much ilar amount funded through the IFC B-loan syn- as IFC approved for its own account. dication program. Compared with IFC's total approvals, the importance of EI projects declined Frontier countries. IFC's overall strategy does substantially from around 15 percent in the not emphasize EI as a sector. However, it does 1980s to about 6 percent today. Since 1990, IFC emphasize investments in "frontier countries," has approved more than 140 extractive indus- defined as countries with poor country credit rat- tries projects, predominantly in Latin American ings.275 Investments in EI depend on the loca- and Sub-Saharan African countries (about 30 percent each). Concentrated in oil and gas and gold IFC approvals 1990­2002 ($3.1 billion) Products and funding instruments. IFC's EI Oil and gas approvals--about US$3.1 billion from 1990 to the 61% end of 2002--were particularly concentrated in oil and gas production and development (61 per- cent).274 Gold (16 percent) and copper (6 per- cent) were also important. IFC has provided Other Mining loans, equity, quasi-equity, and syndicated invest- 4% ments (mostly loans) to EI projects. IFC approved Coal Gold 2% relatively fewer equity investments in EI (12 16% Other Metal percent) than in other projects (16 percent) Copper 5% 6% since 1990. In IFC's outstanding portfolio, how- Nickel Iron 3% 3% ever, EI had a larger share of equity (34 percent) 1 4 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T Extractive Industries - Outstanding Portfolio June 30, 2002 US$ Concentrated in Latin America millions % and Sub-Saharan Africa Loan 214 56% Mining IFC approvals 1990 - 2002 (US$3.1 billion) Equity/Quasi-Equity 170 44% sub-total 384 4% Southern Europe and Change from previous year -6% Central Asia Loan 143 59% 18% Sub-Saharan Africa Oil and Gas Equity/Quasi-Equity 101 41% 31% sub-total 245 2% Change from previous year 5% South Asia Central and Eastern 3% Loan 357 57% Europe All EI 6% Equity/Quasi-Equity 271 43% East Asia and Pacific sub-total 628 6% 5% Change from previous year -2% Middle East and North Loan 6,511 65% Non-EI Africa Latin America & Equity/Quasi-Equity 3,581 35% Caribbean sub-total 10,092 94% 30% Change from previous year -1% Grand Total 10,720 100% tion of the natural resources. IFC's investments share of IFC's EI approvals. In Sub-Saharan also depend on where IFC has a role to play. Africa, where foreign direct investment is scarce, IFC's role and contribution in EI projects was sig- IFC's extractive industries approvals have nificantly better (95 percent satisfactory or bet- accounted for more than 40 percent of IFC's total ter) than in other projects (79 percent). On approvals since 1956. IFC's outstanding EI port- average, IFC's approvals in EI have been in folio on June 30, 2002, was concentrated in countries 10 points riskier (on a scale of 0 to 100) Latin America and Sub-Saharan Africa. than IFC's average approvals. Thus, operating in More analysis of IFC's approvals can be found EI allows IFC to invest in risky countries, where in the WBG background paper for the EIR it is often difficult to find other opportunities. For (www.eireview.org) and in OEG's approach example, in at least a dozen countries, IFC's first paper (www.ifc.org/oeg). Further details on approval was in EI,276 and during the past IFC's EI portfolio performance are included in decade, Sub-Saharan Africa received the largest the main report and in Attachment 4. 1 4 4 A N N E X D -- I F C ' S E X P E R I E N C E A t t a c h m e n t 3 A S u m m a r y R e s u l t s -- A l l E I P r o j e c t s This attachment combines all EI projects that Note that the comparator--IFC average and OEG reviewed: evaluated projects (Attachment non-oil, gas, and mining projects--refers to 4B) using IFC's established evaluation framework projects approved 1991­1996 and evaluated (www.ifc.org/oeg/xpsrs) and studied projects 1996­2001, whereas studied extractive indus- (Attachments 4C and 4D) using desk reviews and tries projects include both older and newer the simplified binary evaluation framework projects. (Attachment 4H). Ratings in some cases refer to multiple investments in the same company. IFC's investment Development outcome IFC's effectiveness outcome s , ctef sal oni ai ci ect D na appr onitar butir ur ojr ent st cont P onomc E ilitybaniatsu efla and ytiu gni PS Eq Lo g,n onisiv nii s nmor ctur vin enierc st peru and adm S elo E S R Studied projects (Various approval years) Oil and Gas Number rated 23 23 23 17 23 23 16 19 23 23 23 23 Success Rate 70% 61% 78% 94% 65% 65% 50% 58% 78% 57% 83% 87% Mining Number rated 22 22 22 21 22 22 13 22 22 22 22 22 Success Rate 59% 59% 59% 62% 77% 68% 46% 73% 73% 64% 86% 91% All EI Number rated 45 45 45 38 45 45 29 41 45 45 45 45 Success Rate 64% 60% 69% 76% 71% 67% 48% 66% 76% 60% 84% 89% Evaluated projects (Approved 1991­96, Evaluated 1996­2001) Oil and Gas (12) 67% 50% 83% 100% 58% 58% 25% 80% 92% 50% 92% 100% Mining (10) 50% 60% 60% 40% 90% 70% 60% 78% 70% 70% 70% 90% All EI (22) 59% 55% 73% 71% 73% 64% 44% 79% 82% 59% 82% 95% IFC average (Approved 1991­96, Evaluated 1996­2001) 1996­2001 evaluations (308) Success Rate 60% 44% 58% 65% 72% 54% 28% 73% 62% 55% 60% 80% ...of which: non-EI (286) Success Rate 60% 44% 57% 65% 72% 53% 28% 73% 60% 54% 59% 79% 1 4 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T P e r f o r m a n c e R a t i n g s A t t a c h m e n t 3 B f o r E v a l u a t e d E I P r o j e c t s The 22 EI projects were part of a random rep- partly satisfactory, or unsatisfactory. For a sim- resentative sample of 308 IFC projects approved plified presentation, the top half of the rating 1991­1996 and evaluated 1996­2001. An eval- scale appears in the table as `S' (satisfactory or uated project's development outcome was better, also referred to as "positive" in the rated as one of the following: highly success- main text); the bottom half as `LS' (less than sat- ful, successful, mostly successful, mostly unsuc- isfactory). cessful, unsuccessful, or highly unsuccessful; In 2002, OEG updated the evaluation frame- indicators were rated excellent, satisfactory, work to better align it with other IFC initiatives social, effects & economy appraisal, safety business of standards & sector contribution INVESTMENT & s' s' structuring ypeT DEVELOPMENT OUTCOME Project success Growth Living Environmental, health, Private development IFC OUTCOME Equity Loan IFC EFFECTIVENESS Screening, & Supervision administration Role 1 Min S S S S S S S S S S S S S 2 Min S S S S S S S S S S S S S 3 Min S S S S S S S N/A S S S S S 4 Min S S S S LS S S N/A S LS S LS S 5 Min S S S S LS S LS N/A LS S LS S S 6 Min LS LS LS S S S S N/A S S S S S 7 Min LS LS LS S LS S S S S S S S S 8 Min LS S S S LS S S N/A S LS LS LS LS 9 Min LS LS LS S LS S LS LS N/A S S LS S 10 Min LS LS LS S LS LS LS LS LS LS LS S S 11 OG S S S S S S S N/A S S S S S 12 OG S S S S S S S S S S S S S 13 OG S S S S S S S N/A S S S S S 14 OG S S S S S S S N/A S S S S S 15 OG S S S S S LS S N/A S S S S S 16 OG S S S S NOP S LS N/A LS S S S S 17 OG S LS S S S S LS N/A LS S LS S S 18 OG S LS S LS S S LS LS S S LS S S 19 OG LS LS S S S LS S N/A S S LS S S 20 OG LS LS LS S S LS S N/A S LS LS LS S 21 OG LS LS LS LS S LS LS LS N/A S LS S S 22 OG LS LS S S S LS LS LS N/A S LS S S 1 4 6 A N N E X D -- I F C ' S E X P E R I E N C E (e.g., corporate and departmental scorecards, sus- OEG's current evaluation framework is available tainability initiative). The major change was to at: http://www.ifc.org/oeg/xpsrs/NonfinMarkets/ reduce the development outcome indicators nonfinmktsinsts.html. from six to four: · "Economic growth" and "Living standards" Type: Min = Mining; OG = Oil and gas were merged into one indicator--"economic Outcomes/indicators: S = Satisfactory or better; sustainability" LS = Less than satisfactory NOP = No opinion · "Enabling environment" was merged into possible; N/A = Not applicable, as this opera- "Private sector development" tion featured none 1 4 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T P e r f o r m a n c e R a t i n g s f o r S t u d i e d A t t a c h m e n t 3 C O i l a n d G a s P r o j e c t s Outcomes/indicators: S = Satisfactory or better; possible; N/A = Not applicable, as this opera- LS = Less than satisfactory; NOP = No opinion tion featured none social, effects & economy appraisal, safety business of & sector contribution INVESTMENT EFFECTIVENESS & s' s' structuring DEVELOPMENT OUTCOME Project success Growth Environmental, health, Private development IFC OUTCOME Equity Loan IFC Screening, & Supervision administration Role 1 S S S S LS S S S S S S S 2 S S S S S S S S S S S S 3 S S S S S S N/A S S S S S 4 S S S S S S S LS S LS S S 5 S S S LS S S S LS S LS S S 6 S S S S S S N/A S S S S S 7 S S S S S S S S S S S S 8 S S S S S S S LS S S S S 9 S S S S S S N/A S S S S S 10 S S S S S S N/A S S S S S 11 S S S NOP S S S LS S S S S 12 S S S S S S S LS S S S S 13 S LS S S S S N/A S S LS S S 14 S S S NOP S LS LS LS S S LS S 15 S S S NOP LS LS LS N/A LS LS S LS 16 S LS S S S LS LS LS LS LS S S 17 LS LS S S LS S N/A S S LS S S 18 LS LS LS S LS S N/A S LS LS LS S 19 LS LS LS NOP LS LS LS N/A S S S S 20 LS LS LS S LS LS LS N/A S S S LS 21 LS LS S S LS LS LS LS S LS S S 22 LS LS LS NOP LS LS LS N/A LS LS LS LS 23 LS LS LS NOP S LS LS S LS LS LS S 1 4 8 A N N E X D -- I F C ' S E X P E R I E N C E P e r f o r m a n c e R a t i n g s f o r S t u d i e d A t t a c h m e n t 3 D M i n i n g P r o j e c t s Outcomes/indicators: S = Satisfactory or better; possible; N/A = Not applicable, as this opera- LS = Less than satisfactory; NOP = No opinion tion featured none social, effects & economy appraisal, safety business of & sector contribution INVESTMENT EFFECTIVENESS & s' s' structuring DEVELOPMENT OUTCOME Project success Growth Environmental, health, Private development IFC OUTCOME Equity Loan IFC Screening, & Supervision administration Role 1 S S S S S S S S S S S S 2 S S S S S S S S S S S S 3 S S S LS S S N/A S S S S S 4 S S S S S S S S S S S S 5 S S S S S S N/A S S S S S 6 S S S LS S S S S S LS S S 7 S S S S S S NOP S S S S S 8 S S S S S S N/A S S S S S 9 S S S S S S N/A S S S LS S 10 S S S S S S N/A S S S S S 11 S S S S S S N/A S S S S S 12 S S S LS S S S S S S LS S 13 S S S LS S LS N/A LS S LS S S 14 LS LS LS S LS S S S S S S S 15 LS LS LS NOP LS S LS S LS LS S LS 16 LS LS LS LS LS S N/A S LS LS S LS 17 LS LS LS S S LS LS LS S S S S 18 LS LS LS S S LS LS S S S S S 19 LS LS LS LS S LS LS LS LS LS LS S 20 LS LS LS S LS LS LS LS LS LS S S 21 LS LS LS LS S LS LS LS LS LS S S 22 LS LS LS LS LS LS LS LS LS LS S S 1 4 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T A t t a c h m e n t 3 E A p p r o v e d P r o j e c t s R e v i e w e d b y O E G -- M i n i n g Evaluated (in bold italics) and studied projects Approved amounts may differ from disbursed amounts (US$ millions) Date Size Type Sector Gross Net Country ProjectName ID Approval Status Project IFC IFC Loan Equity Quasi-equity Other Participants Project Environ. Category Detail Bolivia Comsur COMSUR (II) 3956 Sep-93 Active 55.5 12.3 12.3 11.0 0.0 1.3 0.0 0.0 Investment B Zinc COMSUR III 4799 Aug-95 Active 22.0 13.3 8.3 7.5 0.0 0.8 0.0 5.0 Investment A Gold COMSUR V 9670 Dec-99 Active 22.7 10.0 10.0 10.0 0.0 0.0 0.0 0.0 Investment B Zinc Brazil Codemin CODEMINSAIII 420 May-78 Active 98.4 62.9 8.9 5.0 3.9 0.0 0.0 54.0 Investment N Nickel CODEMINIII 658 Feb-83 Active 4.0 0.4 0.4 0.0 0.4 0.0 0.0 0.0 RightsIssue N Nickel Brazil MBR MBR (II) 2649 Jun-92 Active 266.1 60.0 35.0 25.0 0.0 10.0 0.0 25.0 Investment A Iron MBR LTDP 9343 Jun-99 Active 342.0 140.0 25.0 20.0 0.0 5.0 0.0 115.0 Investment A Iron Brazil Para Pigmentos PARAPIGMENTOS 4494 Jun-94 Active 183.0 74.0 34.0 25.0 0.0 9.0 0.0 40.0 Investment A Misc.Ores Brazil Samarco Samarco 5036 Jan-97 Active 44.8 39.0 23.0 23.0 0.0 0.0 0.0 16.0 Investment A Iron Chile Escondida ESCONDIDA COPPER 1081 Jul-88 Active 1,143.2 85.0 85.0 70.0 15.0 0.0 0.0 0.0 Investment N Copper Escondida RI 9209 Nov-98 Active 25.0 25.0 25.0 0.0 0.0 25.0 0.0 0.0 RightsIssue C Copper Chile Refimet REFIMETSMELTER 4802 Feb-95 Closed 91.2 79.0 20.0 10.0 0.0 10.0 0.0 59.0 Investment B Copper Refimet(Rev) 7346 Nov-95 Closed 6.0 5.0 5.0 5.0 0.0 0.0 0.0 0.0 Investment C Copper Gabon COMILOG II COMILOG II 2772 Jun-91 Closed 35.4 9.0 9.0 9.0 0.0 0.0 0.0 0.0 Investment U Other Metals Ghana Bogosu BOGOSU GOLD 973 Jul-87 Active 6.0 0.6 0.6 0.0 0.0 0.6 0.0 0.0 Investment N Gold BOGOSU (V)-RESTR 4102 Jun-93 Active 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Rescheduling B Gold Ghana GAGL IDUAPRIEMGOLD 1231 Feb-90 Active 13.5 3.0 3.0 0.0 3.0 0.0 0.0 0.0 Investment N Gold IDUAPRIEMII 2386 Jun-91 Active 55.4 48.0 18.0 8.4 0.0 8.5 1.1 30.0 Investment B Gold GAGL III 4896 Jul-95 Active 11.5 10.1 10.1 0.0 0.0 2.6 7.5 0.0 Investment B Gold GAGLIV 7261 Mar-96 Active 13.5 4.5 4.5 4.5 0.0 0.0 0.0 0.0 Investment B Gold GAGL IV-Restr 10327 Jun-00 Active 13.5 0.5 0.5 0.0 0.0 0.5 0.0 0.0 Restructuring C Gold Kyrgyz Republic Kumtor KUMTORGOLD 3966 Mar-95 Active 335.0 40.0 40.0 30.0 0.0 10.0 0.0 0.0 Investment A Gold Mali SOMISY SOMISY 2429 Dec-91 Active 122.6 23.2 23.2 0.0 1.5 21.7 0.0 0.0 Investment B Gold SomisyCapex 7975 Jun-97 Active 63.8 35.0 10.0 10.0 0.0 0.0 0.0 25.0 Investment B Gold Randgold RI 9342 Nov-98 Active 34.8 2.3 2.3 0.0 2.3 0.0 0.0 0.0 RightsIssue C Gold Mali Sadiola Gold SADIOLA GOLD 4360 Dec-94 Active 246.2 64.8 39.8 35.0 4.8 0.0 0.0 25.0 Investment A Gold Mozambique Mozal MOZAL 7764 Jun-97 Active 1,365.0 120.0 120.0 55.0 0.0 65.0 0.0 0.0 Investment A Aluminum Mozal II 10323 Apr-01 Active 1,024.0 25.0 25.0 25.0 0.0 0.0 0.0 0.0 Investment A Aluminum Peru Buenaventura BUENAVENTURA 1 446 Dec-78 Active 10.0 3.5 3.5 2.0 1.5 0.0 0.0 0.0 Investment N Silver BUENAVENTURA III 1232 Mar-90 Active 6.0 0.6 0.6 0.0 0.6 0.0 0.0 0.0 RightsIssue U Silver BUENAVENTURA IV 4070 May-93 Active 105.8 0.7 0.7 0.0 0.7 0.0 0.0 0.0 RightsIssue B Silver Peru Minera Regina MINERALAREGINA 737 Jun-84 Active 21.4 5.2 5.2 5.0 0.2 0.0 0.0 0.0 Investment N OtherMetals Regina Restr II 8888 Dec-97 Active 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Restructuring A OtherMetals Peru Yanacocha YANACOCHA 2983 May-93 Active 45.0 24.7 12.7 12.0 0.3 0.3 0.0 12.0 Investment A Gold MAQUI MAQUI 4449 May-94 Active 53.8 15.9 10.9 10.0 0.0 0.0 0.9 5.0 Investment A Gold YanacochaIII 9502 Jun-99 Active 121.0 110.0 30.0 30.0 0.0 0.0 0.0 80.0 Investment A Gold Tajikistan Zeravshan Zeravshan Gold 7192 Oct-96 Active 127.0 7.5 7.5 0.0 1.2 6.3 0.0 0.0 Investment B Gold NelsonGold 7911 Oct-96 Active 0.0 2.1 2.1 0.0 0.0 0.0 2.1 0.0 Investment B Gold Zeravshan-Jilau 8579 Feb-98 Active 14.7 3.0 3.0 3.0 0.0 0.0 0.0 0.0 Investment B Gold Zeravshan-NGC 8823 Feb-98 Active 9.0 3.0 3.0 0.0 3.0 0.0 0.0 0.0 Investment B Gold Turkey CayeliBakir CAYELIBAKIR 2448 Jun-92 Active 144.5 75.0 30.0 30.0 0.0 0.0 0.0 45.0 Investment B Copper Uganda Kasese KaseseCobalt 4895 Jun-96 Active 110.0 24.6 19.6 16.0 3.6 0.0 0.0 5.0 Investment A OtherMetals Venezuela Minera Loma LomadeNiquel 7343 Apr-97 Active 430.0 124.5 74.5 65.0 2.4 7.1 0.0 50.0 Investment A Nickel MineraLomaRI 10398 Jun-00 Active 98.4 0.3 0.3 0.0 0.0 0.3 0.0 0.0 RightsIssue C Nickel Zambia KCM KCM 8570 Feb-00 Active 334.8 30.0 30.0 0.0 7.2 22.8 0.0 0.0 Investment A Copper Zimbabwe Wankie WANKIECOLLIERY2 3485 Oct-92 Closed 28.0 10.0 10.0 10.0 0.0 0.0 0.0 0.0 Investment B Coal Mining 1 5 0 A N N E X D -- I F C ' S E X P E R I E N C E Unrated projects, reviewed for issues and lessons Approved amounts may differ from disbursed amounts (US$ millions) Date Size Type Category -equity Sector Gross Net Country Project Name ID Approval Status Project IFC IFC Loan Equity Quasi Other Participants Project Environ. Detail Africa Region MACS MACS 9345 Apr -01 Active 100 74.0 34.0 30.0 4.0 - - 40.0 Investment B Mining Services Burkina Faso AEF FasoMine AEF FasoMine 9024 Sep-98 Active 5 1.5 1.5 1.0 0.5 - - - Investment B Iron China Daning Coal Daning Coal 10015 May -01 Active 75 30.0 15.0 13.0 2.0 - - 15.0 Investment A Coal Mining India Sarshatali Coal Sarshatali Coal 7984 Feb -99 Active 149 35.0 35.0 30.0 5.0 - - - Investment A Coal Mining Indonesia Dianlia Dianlia 9987 Feb -01 Active 10 5.0 5.0 4.0 - 1.0 - - Investment B Coal Mining Mexico Mexcobre MEXCOBRE SX/EW 4313 May -94 Closed 75 60.0 25.0 25.0 - - - 35.0 Investment B Copper Pan American Pan American 9800 Jul-99 Active 13 12.5 12.5 - 12.5 - - - Investment A Silver La Colorada 10326 Feb -01 Active 51 28.6 10.3 4.0 - 6.0 0.3 18.3 Investment A Silver PanAme - La Colora 10856 Feb -01 Active 1 1.2 1.2 - 1.2 - - - Investment A Silver Peru Quellaveco QUELLAVECO 3823 Apr -93 Active 31 6.2 6.2 - - 6.2 - - Investment A Copper QUELLAVECO - RI 7447 Mar -96 Active 27 5.3 5.3 - - 5.3 - - Rights Issue C Copper Minera Q RI 10170 Jan-00 Active 3 0.6 0.6 - 0.6 - - - Rights Issue A Copper Russian Federation Julietta Julietta 10020 Sep-00 Active 77 10.0 10.0 8.5 - 1.5 - - Investment A Gold Bema Gold Bema Gold 10655 Sep-00 Active 1 1.0 1.0 - 1.0 - - - Investment A Gold Sierra Leone Sierra Rutile SIERRA RUTILE 1 2609 Apr -92 Closed 71 20.0 20.0 20.0 - - - - Investment A Nickel SIEROMCO 3999 Jun-93 Closed 27 10.0 10.0 10.0 - - - - Investment B Other Sierra Restr 9148 May -98 Closed 0 0.0 0.0 - - - - - Restructuring N Misc. Ores Tunisia Miniere Bougrine MINIERE BGRN - RI 4677 May -94 Closed 8 0.9 0.9 - - 0.9 - - Rights Issue U Zinc Uzbekistan Amantytau Gold AMANTAYTAU GOLD 4323 Mar -94 Closed 6 1.2 1.2 - - 1.2 - - Investment C Gold 1 5 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T A p p r o v e d P r o j e c t s R e v i e w e d b y O E G -- A t t a c h m e n t 3 F O i l a n d G a s Evaluated (in bold italics) and studied projects Approved amounts may differ from disbursed amounts (US$ millions) Date Size Type Category Sector Gross Net Country Project Name ID Approval Status Project IFC IFC Loan Equity Quasi-equity Other Participants Project Environ. Detail Albania Patos Marinza Patos Marinza 7429 Mar-98 Active 275.2 108.5 58.5 30.0 28.5 0.0 0.0 50.0 Investment A O & G Production Patos Marinza In 10885 Jun-01 Active 197.5 10.0 10.0 10.0 0.0 0.0 0.0 0.0 Investment A O & G Production Argentina Bridas/PAE BRIDAS 2 3078 Jun-92 Active 238.0 130.0 50.0 35.0 0.0 15.0 0.0 80.0 Investment B O & G Production BRIDAS III 5093 Jun-95 Active 221.3 70.0 30.0 20.0 10.0 0.0 0.0 40.0 Investment B O & G Production Cadipsa (SOP) CADIPSA 2979 Oct-92 Closed 83.0 40.0 20.0 10.0 5.0 5.0 0.0 20.0 Restructuring B O & G Production Capsa Diadema Diadema Field 7418 Jun-96 Active 70.0 60.0 20.0 15.0 0.0 5.0 0.0 40.0 Investment B O & G Production Cia.Combustible CIA. COMBUSTIBLE 4067 Dec-93 Closed 251.6 80.0 40.0 25.0 15.0 0.0 0.0 40.0 Restructuring B O & G Production Huantraico / Neuquen Huantraico 2764 Oct-91 Active 60.0 17.0 17.0 0.0 17.0 0.0 0.0 0.0 Restructuring A O & G Production HUANTRAICO (II) 3262 Jun-92 Active 180.4 60.0 25.0 15.0 10.0 0.0 0.0 35.0 Investment U O & G Production Neuquen 7182 Mar-96 Active 186.0 26.4 26.4 0.0 26.4 0.0 0.0 0.0 Investment B O & G Production Neuquen Basin RI 9537 Jan-99 Active 5.0 5.0 5.0 0.0 5.0 0.0 0.0 0.0 Rights Issue C O & G Production Azerbaijan Early Oil Early Oil:Amoco 7271 Jul-98 Active 650.0 65.7 32.8 32.8 0.0 0.0 0.0 32.8 Investment A O & G Production Early Oil: Exxon 9440 Jul-98 Active 305.4 30.9 15.4 15.4 0.0 0.0 0.0 15.4 Investment A O & G Production Early Oil:LUKOil 9441 Jul-98 Active 382.7 38.6 19.3 19.3 0.0 0.0 0.0 19.3 Investment A O & G Production Early Oil:TPAO 9442 Jul-98 Active 259.8 26.1 13.0 13.0 0.0 0.0 0.0 13.0 Investment A O & G Production Early Oil:Unocal 9443 Jul-98 Active 384.7 38.8 19.4 19.4 0.0 0.0 0.0 19.4 Investment A O & G Production Cameroon Pecten PECTEN (II) 3815 Feb-94 Active 135.0 105.0 40.0 40.0 0.0 0.0 0.0 65.0 Investment B O & G Production Pecten Itindi 7621 Feb-97 Active 115.0 95.0 20.0 20.0 0.0 0.0 0.0 75.0 Investment B O & G Production Pecten - Mokoko 8498 Mar-98 Active 265.0 265.0 75.0 75.0 0.0 0.0 0.0 190.0 Investment B O & G Production Congo Engen ENGEN/ENGEN CONG 4981 May-95 Closed 99.8 91.4 46.4 15.0 2.9 28.5 0.0 45.0 Investment B O & G Production Cote d'Ivoire CI-11 BLOCKCI-11 3448 Mar-93 Active 45.5 11.4 11.4 0.0 11.4 0.0 0.0 0.0 Investment A O & G Production BLOCK CI-11 OIL 4603 Nov-94 Active 66.0 27.3 27.3 0.0 27.3 0.0 0.0 0.0 Investment A O & G Production BLOCKCI-11-UMIC 4975 May-95 Closed 45.0 35.0 15.0 15.0 0.0 0.0 0.0 20.0 Investment A O & G Production Block CI-II-GNR 7018 May-95 Closed 25.0 17.5 7.5 7.5 0.0 0.0 0.0 10.0 Investment A O & G Production CI-II-Pluspetrol 7019 May-95 Closed 25.0 17.5 7.5 7.5 0.0 0.0 0.0 10.0 Investment A O & G Production BlockCI-11/12 RI 8233 Mar-97 Active 5.0 5.0 5.0 0.0 5.0 0.0 0.0 0.0 Rights Issue C O & G Production Block CI-11 RI 2 9171 May-98 Active 5.0 5.0 5.0 0.0 5.0 0.0 0.0 0.0 Rights Issue FI O & G Production Ecuador Tripetrol TRIPETROL EXPLOR 3251 Jul-92 Closed 32.0 10.0 10.0 6.0 0.0 4.0 0.0 0.0 Investment B O & G Production Egypt Apache Qarun Concession MELEIHA OIL EXPL 873 Jun-86 Active 180.0 79.5 49.5 30.0 19.5 0.0 0.0 30.0 Investment N O & G Production MELEIHA II 995 Sep-87 Active 36.0 9.2 9.2 0.0 9.2 0.0 0.0 0.0 Investment N O & G Production MELEIHA & AGHAR 2975 Jun-92 Active 36.4 13.0 13.0 0.0 13.0 0.0 0.0 0.0 Investment B O & G Production Meleiha Phoenix Resource 5127 Oct-95 Closed 10.0 10.0 10.0 0.0 10.0 0.0 0.0 0.0 Investment A O & G Production Apache Qarun 7211 Oct-95 Closed 51.6 27.5 12.5 12.5 0.0 0.0 0.0 15.0 Investment A O & G Production PRC Qarun 7422 Oct-95 Closed 93.3 55.0 25.0 25.0 0.0 0.0 0.0 30.0 Investment A O & G Production Guatemala Basic BASIC 3888 Jun-94 Closed 33.0 20.0 14.0 10.0 4.0 0.0 0.0 6.0 Investment A O & G Production BASICII 7407 Jul-96 Closed 73.0 25.8 13.8 12.0 1.8 0.0 0.0 12.0 Investment A O & G Production India Triveni TRIVENI 2202 Dec-90 Closed 20.6 0.6 0.6 0.0 0.6 0.0 0.0 0.0 Investment U Oilfield Services Kazakhstan Akshabulak/Kazgermunai Akshabulak 7416 Mar-96 Active 266.9 65.7 65.7 0.0 0.1 65.6 0.0 0.0 Investment A O & G Production Pakistan MariGas MARI GAS II 2837 Dec-91 Closed 47.9 19.5 19.5 19.5 0.0 0.0 0.0 0.0 Investment B O & G Production PPL PPL 655 Nov-82 Active 176.6 163.4 17.0 15.5 1.6 0.0 0.0 146.4 Investment N O & G Production PPL-SUI LIME 3911 Jun-94 Active 72.5 52.1 31.1 31.1 0.0 0.0 0.0 21.0 Investment B O & G Production PPL-SUI LIME INC 4907 Oct-94 Active 2.0 2.0 0.0 0.0 0.0 0.0 0.0 2.0 Investment C O & G Production Poland Amoco Poland COALBEDMETHANE 3471 Mar-94 Closed 86.5 8.7 8.7 0.0 0.0 8.7 0.0 0.0 Investment B O & G Production Russian Federation Aminex (Russia/Tunisia) Oct-96 Aminex: Tunisia 7610 Oct-96 Closed 7.2 3.1 3.1 0.0 3.1 0.0 0.0 0.0 Investment B O & G Production Aminex: Kirtayel 7624 Oct-96 Active 85.2 20.1 20.1 17.0 3.1 0.0 0.0 0.0 Investment B O & G Production Aminex RI 9623 Mar-99 Active 1.1 0.1 0.1 0.0 0.1 0.0 0.0 0.0 Rights Issue C O & G Production Bitech Bitech-Silur 8902 Mar-99 Closed 65.0 25.0 25.0 17.5 7.5 0.0 0.0 0.0 Investment B O & G Production Polar POLAR LIGHTS 4040 Jun-93 Closed 340.0 60.0 60.0 60.0 0.0 0.0 0.0 0.0 Investment A O & G Production Vasyugan VASYUGAN 3532 Jun-93 Closed 37.1 11.5 11.5 10.0 0.0 1.5 0.0 0.0 Investment B O & G Production 1 5 2 A N N E X D -- I F C ' S E X P E R I E N C E Unrated projects, reviewed for issues and lessons A p p r o v e d a m o u n t s m a y d i f f e r f r o m d i s b u r s e d a m o u n t s ( U S $ m i l l i o n s ) yr Date Size Type Categor equity- Sector Gross Net Country Project Name ID Approval Status Project IFC IFC Loan Equity Quasi Other Participants Project Environ. Detail Africa Region SAPTFF SAPT FF 10145 Jun-00 Active 200 80 80.0 - - - 80.0 - Investment FI -2 Trade Finance Bangladesh Jalalabad II Jalalabad II 9354 Mar-00 Active 163 70 40.0 30.0 - 10.0 - 30.0 Investment A O&G Production Cameroon ChadOil -COTCO ChadOil-COTCO 11124 Jun-00 Active - - - - - - - - Investment A O&G Production Chad ChadOil ChadOil 4338 Jun-00 Active 3,274 400 10 100.0 - - - 30 Investment A O&G Production ChadOil -TOTCO 11125 Jun-00 Active - - - - - - - - Investment A O&G Production Colombia Harken Harken 9484 Jun-99 Closed 158 55 30.0 20.0 - 10.0 - 25.0 Investment B O&G Production Kazakhstan Sazankurak Sazankurak 10056 Jun-00 Active 45 20 20.0 15.0 - 5.0 - - Investment B O&G Production Kazakhstan FIOC FIOC 10411 Jun-00 Active - 0 0.0 - 0.0 - - - Investment B O&G Production Nigeria Delta Contractor Delta Contractor 10683 Jun-01 Active 30 15 15.0 15.0 - - - - Investment FI -2 Finance Companies Pakistan Lasmo Paki stan Lasmo Pakistan 10408 Jun-01 Active 120 40 40.0 40.0 - - - - Investment B O&G Production 1 5 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T R e a s o n s f o r N o t R a t i n g P r o j e c t s A t t a c h m e n t 3 G o r C o m p a n i e s Country Project name Reason Mining Africa Region MACS No disbursement yet. Burkina Faso AEF FasoMine No disbursement yet. China Daning Coal No disbursement yet. India Sarshatali Coal No disbursement yet. Indonesia Dianlia No disbursement yet. Mexico Mexcobre Exited, loan prepaid in 1996. Mexico La Colorada Too early to evaluate. The Russian project did not proceed; Mexican project in early start-up. Peru Quellaveco No commercial activity. Russian Federation Julietta Gold / OMGC Too early to evaluate; commenced operations in late 2000. Russian Federation Bema Gold Too early to evaluate; disbursed in late 2001. Sierra Leone Sierra Rutile Original project ceased operations due to civil war. Expansion not yet disbursed. Tunisia Miniere Bougrine Project closed; no information available. Uzbekistan Amantaytau Exited original project;--a feasibility study--was closed. Follow-on project was dropped. Oil and Gas Africa Region SAPTFF No disbursement yet. Bangladesh Jalalabad No disbursement yet. Chad/Cameroon ChadOil Too early to evaluate; no first oil yet Colombia Harken Exited; no current information available. Kazakhstan FIOC Sazankurak Too early to evaluate; disbursed in late 2001. Nigeria Niger Delta No disbursement yet. Pakistan Lasmo No disbursement yet. The companies and projects above were reviewed by OEG. They were considered inappropriate for rating purposes (i.e., too early, cancelled, insufficient informa- tion, etc.). They did provide valuable issues and lessons that have been used in this report. 1 5 4 A N N E X D -- I F C ' S E X P E R I E N C E E v a l u a t i o n F r a m e w o r k a n d R a t i n g A t t a c h m e n t 3 H G u i d e l i n e s f o r S t u d i e d P r o j e c t s I. Development Outcome Rating · Private Sector Development considers, as rel- The development outcome rating is a bottom- evant, the upstream and downstream linkages to line, synthesis assessment of the operation's private firms, new technology, management skills results, based on the following four development and training, degree of local entrepreneurship indicators: and competition, demonstration effects, enhanced · Project Business Success considers the private ownership, capital markets development, narrow objectives supported by IFC's financ- and business practices as positive corporate role ing. The best measure of a project's business models. It also includes regulatory improvements, success is its FRR. Lacking the data to calcu- such as changes in government policy and legal, late an FRR, we based this rating on assess- tax, and accounting frameworks and possibly ments of the inputs to an FRR--capital project-related technical assistance or project activ- expenditures, cost overruns, capacity utiliza- ities that have changed the enabling environment tion, sales volumes, pricing, revenues, mar- to create conditions conducive to the flow of pri- gins, profits, taxes, subsidies, and so forth. vate capital, domestic and foreign, into produc- -- Rates satisfactory when the inputs to an tive investment. FRR suggest a satisfactory FRR. -- Rates satisfactory when the project provides distinctly positive net contributions. · Economic Sustainability considers the pro- ject's net economic benefits to all members of II. IFC Investment Outcome society, which is best measured by an ERR. -- Rates satisfactory when no loss reserves Lacking the data to calculate an ERR, we based exist, loans are not in arrears, equity invest- this rating on assessments of the inputs to an ments achieve a 5 percent real return, any ERR--the social benefits and costs, including loan rescheduling still provides the full mar- taxes paid, benefits to suppliers, effects on com- gin originally expected, and any loan pre- petitors, consumer surplus, effects on input and payment provides greater than 65 percent of output markets, and how competitive prices the originally expected loan income. and quantities are determined in relevant mar- kets. It also should capture non-quantified ben- III. IFC's Effectiveness efits. In particular, whether the project had a · Screening, Appraisal, and Structuring direct impact--positive or negative--on the -- Rates satisfactory if it met IFC's proce- poor or on living standards in the local com- dures and good practice standards. munity. -- Rates satisfactory when the net economic · Supervision and Administration benefits are positive and near expectations -- Rates satisfactory if IFC was sufficiently and, in marginal cases, where a project also informed to react in a timely manner to any has a demonstrably positive effect on society material change in the project's and com- in the host country. pany's performance. · Project's Environmental Effects are based · Role and Contribution on the project's compliance with WBG envi- -- Rates satisfactory if IFC's role and contribu- ronmental requirements. tion were in line with its operating principles. -- Rates satisfactory if the project is--and was over its lifetime--in material compliance · IFC's Effectiveness (Synthesis) Rating with either IFC's current or at-approval -- Rates satisfactory if IFC's performance was requirements. up to a high professional standard. 1 5 5 A N N E X D -- I F C ' S E X P E R I E N C E I F C ' s T e c h n i c a l A s s i s t a n c e T r u s t A t t a c h m e n t 4 F u n d A c t i v i t i e s i n E I P r o j e c t s Trust Funds: IFC Donor-Supported TA Pro- Mongolia and privatization assistance in Mozam- grams, through IFC's Trust Fund Unit, has bique. EI project approvals reached 12 percent approved TA of US$3.5 million for 22 EI proj- of total approvals in 2002 but have accounted ects since 1994. The majority (84 percent) of the for only 3 percent of total approvals since 1994. funding was approved in the last three years and It is likely, as EI projects include more social and has increasingly supported sustainable devel- environmental development, that demand for opment initiatives. Examples include funding for the Technical Assistance Trust Fund to support a conference to improve the investment cli- EI projects will grow. Because Project Com- mate for sustainable mining (China), support to pletion Reports were generally not completed bring a coal company into environmental and on the above projects, OEG did a desk review social compliance (Russia), dissemination of and some one-on-one consultations to better examples of successful approaches to HIV/AIDS understand project results. Overall, the proj- prevention (global), and a range of programs ects have been broadly successful, but based on for a gold and copper mining investment (Laos). the information received, OEG was unable to In 2002, oil- and gas-related projects were assign project ratings. approved to support an investment forum in Amount Average Year US$ % Projects % US$ Country region 1994 100,000 3 1 5 100,000 Brazil 1995 225,000 7 1 5 225,000 Kazakhstan 1996 115,000 3 2 9 57,500 Albania, Tajikistan 1997 43,460 1 1 5 43,460 Mongolia (2) 1998 -- 0 0 0 -- 1999 60,000 2 1 5 60,000 Africa Region 2000 318,000 9 3 14 106,000 Tajikistan, Albania, Kyrgyz Republic 2001 800,000 23 5 23 160,000 China (2), Kazakhstan, World Region/Global, Zambia, Lao People's Democratic Republic 2002 1,795,400 52 8 36 224,425 Mongolia, Mozambique (2), Lao People's Democratic Republic (2), World Region/Global, China (2) Russia 3,456,860 100 22 100 157,130 1 5 7 A N N E X D -- I F C ' S E X P E R I E N C E P e r c e p t i o n s o f S u r v e y A t t a c h m e n t 5 A P a r t i c i p a n t s a t t h e E I R P l a n n i n g W o r k s h o p More than 50 stakeholders participated in the EIR peoples, biodiversity, and potential human Planning Workshop in Brussels (28­30 Octo- rights abuses, were ranked second overall and ber, 2001): government entities (9), the private among the top six questions by each group sector (15), nongovernmental organizations (21), of respondents. and the World Bank Group (8). Over the course 3. Appropriate mitigation mechanisms for of the workshop, OED/OEG asked participants environmental and social effects through- to rank the evaluative questions suggested in the out the project cycle was ranked third, with approach paper by importance. some differences of opinion by the respon- About half of the participants responded. The dents. questions, and the final rankings based on the 4. The WBG's role in improving develop- votes cast, are shown below: ment impacts and minimizing risks was 1. Distribution of costs and benefits was ranked fourth overall, with roughly equal ranked first overall and first or second by each importance across all groups. group. 5. Compliance with the WBG's safeguard 2. Environmental and social effects, includ- policies was ranked fifth, with wider varia- ing effects on local communities, indigenous tion among the respondents. EVALUATIVE QUESTIONS Rank (percentage of votes) 1. Project Context and Economic Effects 1.1 What was the share of EI of export earnings, GDP, and government revenues in the respective country of WBG operation? 22 1.2 To what extent has there been an association between EI's share of GDP and the country's economic growth and income distribution? 12 (3%) 1.3 To what extent were the project's objectives consistent with the country's current development priorities? 6 (6%) 1.4 What were the net benefits generated by a specific WBG investment operation? 11 (3%) 1.5 How are benefits and costs distributed among central government, local government, local communities, and private shareholders? Is the distribution perceived to be fair by different stakeholder groups? Are there conflict resolution mechanisms in place, and, if so, have they worked? Are there lessons to be learned about the consequences of different types of distributions? 1 (13%) 1.6 Did the operation have impacts on private sector development in the host country beyond the operation itself (e.g., demonstration effects, linkages, infrastructure development, etc.)? 17 1.7 Are royalties effectively channeled for developmental purposes? Are independent arrangements for auditing, monitoring, and evaluation in place? 9 (5%) 2. Environmental and Social Effects 2.1 What have been the environmental and social effects -- positive and negative -- of WBG activities in the sector? In particular, what were the effects on biodiversity, local communities (including indigenous peoples)? Have there been human rights abuses associated with WBG projects? 2 (11%) 2.2 Have WBG operations complied with relevant safeguard policies and adequate labor safety standards? How adequate are the measures taken to mitigate the most important negative environmental and social aspects, such as involuntary resettlement? How do WBG safeguard policies compare with local requirements? 5 (7%) 1 5 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) 2.3 Have expected environmental and social effects at each stage of the project cycle (construction, operation, closure and restoration) been adequately assessed and addressed at appraisal (e.g., through environmental assessments, public consultations, and project design and implementation arrangements)? 17 2.4 Have actual effects been adequately monitored during supervision? 20 2.5 Have appropriate mechanisms been put in place to handle environmental and social effects throughout the life cycle of oil, gas and mining operations (e.g., for compensation to adversely affected communities and for mine or field closure even beyond WBG involvement)? 3 (9%) 2.6 Was the operation affected by -- or did it even contribute to -- civil war? 26 3. Governance and Transparency 3.1 Did the operation contribute to capacity-building at the government (central or local), corporate, or voluntary agency level? 7 (6%) 3.2 Did corruption increase or decrease over the life of the project? Is this change attributable to the project? 17 3.3 Did the operation improve the framework for property rights in EI (e.g., is it clear who owns the resource and is it possible to transfer the rights)? 21 3.4 Were exploration and development rights awarded in a fair and transparent manner? 15 3.5 Disclosure: Were the benefits from development of the resource, and their distribution, disclosed? Was the use of the generated benefits transparently disclosed? What are the issues related to public disclosure? 8 (5%) 4. Role of the World Bank Group 4.1 Was WBG financing necessary for a particular project or activity to proceed? 12 (3%) 4.2 Did the WBG help improve the development impacts and minimize the risk associated with oil, gas, and mining activities? How and to what extent did the WBG affect the impacts from the point of view of government (central and local), civil society, and the companies? In particular, has the WBG helped improve positive environmental and social aspects and reduced potential negative aspects in the operations it supported? Has the WBG helped the country address macroeconomic consequences resulting from the volatility of commodities markets? 4 (7%) 4.3a Did the WBG help improve the efficiency of the oil, gas, and mining sector and the investment climate in the sector, ... 15 4.3b ... and has this resulted in subsequent private investment without WBG support? 24 4.4 Did the WBG contribute to improved governance and increased transparency in the sector? 10 (4%) 4.5 Did the WBG assess whether the economic benefits from EI, which are retained in the host economy, are adequate compared with the value of the resources and, if so, how? 12 (3%) 4.6 Did the WBG address and influence the distribution of benefits and costs? Can one establish what impact this had on poverty reduction? 24 4.7 Has there been a trade-off between IFC profitability and development outcomes achieved in these sectors? 23 CONTACTS: Andres Liebenthal, Operations Evaluation Department Roland Michelitsch, Operations Evaluation Group World Bank International Finance Corporation Phone/Fax: 1 (202) 458-2507 / 1 (202) 522-3123 Phone/Fax: 1 (202) 458-0768 / 1 (202) 974-4302 e-mail: aliebenthal@worldbank.org e-mail: rmichelitsch@ifc.org 1 6 0 A N N E X D -- I F C ' S E X P E R I E N C E P e r c e p t i o n s o f S u r v e y A t t a c h m e n t 5 B P a r t i c i p a n t s a t t h e E I R R e g i o n a l W o r k s h o p s The survey was conducted at the various EIR included in this report. The purpose of the Regional Workshops. To date, the Latin Amer- regional workshops is to engage the various ica and the Caribbean, Eastern Europe and Cen- regional stakeholders in the EIR. OED/OEG tral Asia, and Africa Workshops have been held asked the participants to provide their impres- in Rio de Janeiro, Brazil (April 15­19, 2002); sions on the need, effort, and success of World Budapest, Hungary (June 18­22, 2002); and Bank and IFC involvement in the EI in the Maputo, Mozambique (January 13­17, 2003), region. The response rate for the survey was respectively. Feedback from the Asia Workshop about 26 percent, as indicated in the table below. (March 2003) was not received in time to be TABLE 1. STAKEHOLDER SURVEY: RESPONDENT PROFILE Venue % of all Respondent category Rio Budapest Maputo Total respondents Local NGO 3 5 3 11 14 Global NGO 1 6 1 8 11 Industry 3 8 5 16 21 Government 11 1 19 31 41 World Bank Group 2 0 1 3 4 Other 1 4 2 7 9 No. of respondents 21 24 31 76 100 No. of workshop participants 85 80 127 292 % of respondents to participants 25 30 24 26 Responses pertaining to IFC Perception Survey Results - All Workshops by Participant Type QUESTIONS All NGO Industry Government WBG Other Total Responses primarily based on: (1) General knowledge of WBG activities 12 13 22 1 5 58 (2) Specific knowledge of one or more IFC projects 6 4 2 0 2 16 (3) Specific knowledge of one or more IDA or IBRD projects 12 1 12 2 4 35 %+ # %+ # %+ # %+ # %+ # %+ # 1. EXTRACTIVE INDUSTRIES DEVELOPMENT Need 67% 15 87% 15 76% 21 100% 2 50% 6 75% 59 Effort 21% 14 64% 14 56% 18 100% 2 33% 6 48% 54 Success 14% 14 47% 15 42% 19 50% 2 0% 5 33% 55 2. DISTRIBUTION OF PUBLIC REVENUES Need 80% 15 67% 15 82% 17 100% 3 60% 5 76% 55 Effort 17% 12 33% 12 41% 17 67% 3 25% 4 33% 48 Success 0% 10 27% 11 38% 13 33% 3 0% 5 21% 42 3. SUSTAINABLE DEVELOPMENT Need 86% 14 71% 14 74% 19 100% 3 80% 5 78% 55 Effort 8% 12 36% 11 50% 18 67% 3 60% 5 39% 49 Success 0% 12 13% 8 44% 16 33% 3 25% 4 23% 43 4. ENVIRONMENTAL IMPACTS Need 88% 17 93% 14 90% 21 100% 3 80% 5 90% 60 Effort 38% 13 83% 12 50% 20 67% 3 80% 5 58% 53 Success 15% 13 58% 12 53% 19 67% 3 40% 5 44% 52 5. SOCIAL IMPACTS Need 88% 17 86% 14 86% 21 100% 3 60% 5 85% 60 Effort 14% 14 60% 10 55% 20 33% 3 60% 5 44% 52 Success 7% 15 44% 9 50% 16 33% 3 40% 5 33% 48 6. GOVERNANCE AND TRANSPARENCY Need 94% 17 86% 14 68% 19 100% 3 80% 5 83% 58 Effort 21% 14 64% 11 44% 18 33% 3 33% 3 41% 49 Success 8% 13 22% 9 44% 18 33% 3 0% 4 26% 47 7. INVESTMENT CLIMATE AND ECONOMIC LINKAGES Need 71% 14 100% 12 83% 18 100% 3 80% 5 85% 52 Effort 30% 10 82% 11 61% 18 100% 3 67% 3 62% 45 Success 22% 9 33% 9 40% 15 100% 3 33% 3 38% 39 Response is greater than 60% 1 6 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Responses pertaining to IFC Perception Survey Results - By Workshop QUESTIONS Rio de Janeiro Budapest Mozambique Total Responses primarily based on: (1) General knowledge of WBG activities 13 20 25 58 (2) Specific knowledge of one or more IFC projects 2 13 1 16 (3) Specific knowledge of one or more IDA or IBRD projects 12 13 10 35 %+ # %+ # %+ # %+ # 1. EXTRACTIVE INDUSTRIES DEVELOPMENT Need 74% 19 68% 19 81% 21 75% 59 Effort 60% 15 53% 19 35% 20 48% 54 Success 69% 16 32% 19 5% 20 33% 55 2. DISTRIBUTION OF PUBLIC REVENUES Need 87% 15 67% 21 79% 19 76% 55 Effort 33% 12 24% 17 42% 19 33% 48 Success 33% 9 13% 16 24% 17 21% 42 3. SUSTAINABLE DEVELOPMENT Need 88% 16 79% 19 70% 20 78% 55 Effort 67% 12 29% 17 30% 20 39% 49 Success 45% 11 13% 15 18% 17 23% 43 4. ENVIRONMENTAL IMPACTS Need 94% 18 80% 20 95% 22 90% 60 Effort 62% 13 67% 18 50% 22 58% 53 Success 57% 14 53% 17 29% 21 44% 52 5. SOCIAL IMPACTS Need 95% 19 75% 20 86% 21 85% 60 Effort 46% 13 31% 16 52% 23 44% 52 Success 46% 13 25% 16 32% 19 33% 48 6. GOVERNANCE AND TRANSPARENCY Need 78% 18 80% 20 90% 20 83% 58 Effort 47% 15 44% 16 33% 18 41% 49 Success 46% 13 19% 16 17% 18 26% 47 7. INVESTMENT CLIMATE AND ECONOMIC LINKAGES Need 100% 16 71% 17 84% 19 85% 52 Effort 73% 15 64% 14 50% 16 62% 45 Success 62% 13 38% 13 15% 13 38% 39 Response is greater than 60% 1 6 2 A N N E X D -- I F C ' S E X P E R I E N C E P e r c e p t i o n s o f W B G S t a f f A t t a c h m e n t 5 C S u r v e y e d The survey of WBG staff included 66 questions · Capacity-Building for EI Sector Man- and room for comments. The questions were agement--including policy/legal/techni- designed to get the views of staff on the rela- cal/business issues tive importance of issues for EI-dependent coun- · Improving the Investment Climate-- tries and to determine if they feel that the WBG legal/regulatory framework, property rights addresses them adequately. · Improving Transparency and Gover- nance--more public disclosure, less rent- · Revenue Generation--generating higher seeking fiscal revenues from EI production activities · Revenue Distribution--fair allocation of The survey also asked staff to provide views fiscal revenues among central/federal gov- on the level of coordination among IFC, MIGA, ernments, subnational (provincial/district/ and the World Bank; on risk aversion toward municipal) governments, and local commu- EI; and on the constraints on the WBG's nities (villages, indigenous) involvement in EI. Questionnaires were sent · Revenue Utilization--allocation of fiscal out by e-mail, and respondents were given revenues from EI for developmental priori- about a month, until February 24, 2003, to ties respond. The 66 persons (69 percent) who · Mitigating Negative Environmental responded have, on average, worked for WBG Impacts--from past EI activities or new for about eight years (10 years for World Bank ones respondents and about 6 years for IFC and · Mitigating Negative Social Impacts--from MIGA) and indicated familiarity with 48 EI- past EI activities or new ones dependent countries. JOINT OPERATIONS EVALUATION DEPARTMENT/GROUP/UNIT STAFF SURVEY RESULTS IFC Staff IBRD Staff MIGA Staff Total Questions Positive High Total Positive High Total Positive High Total Positive High Total 1. Importance Revenue Generation 86% 62% 29 87% 83% 23 90% 70% 10 87% 71% 62 Revenue Distribution 86% 54% 28 77% 55% 22 88% 50% 8 83% 53% 58 Revenue Utilization 83% 59% 29 83% 57% 23 89% 67% 9 84% 59% 61 Mitigating Negative Environmental Impacts 86% 41% 29 77% 32% 22 100% 67% 9 85% 42% 60 Mitigating Negative Social Impacts 86% 45% 29 78% 39% 23 89% 56% 9 84% 44% 61 Capacity-Building for EI Sector Management 83% 38% 29 87% 39% 23 89% 56% 9 85% 41% 61 Improving the Investment Climate 93% 54% 28 88% 63% 24 90% 30% 10 90% 53% 62 Improving Transparency and Governance 93% 57% 28 88% 71% 24 90% 30% 10 90% 58% 62 1 6 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) 2. CAS--adequately addresses EI issues Revenue Generation 86% 14% 21 78% 35% 23 100% 40% 5 84% 27% 49 Revenue Distribution 60% 20% 20 50% 20% 20 80% 40% 5 58% 22% 45 Revenue Utilization 65% 20% 20 71% 38% 21 80% 20% 5 70% 28% 46 Mitigating Negative Environmental Impacts 77% 27% 22 80% 20% 20 80% 60% 5 79% 28% 47 Mitigating Negative Social Impacts 76% 24% 21 76% 29% 21 60% 60% 5 74% 30% 47 Capacity-Building for EI Sector Management 68% 11% 19 76% 0% 21 80% 0% 5 73% 4% 45 Improving the Investment Climate 86% 32% 22 91% 27% 22 80% 20% 5 88% 29% 49 Improving Transparency and Governance 80% 25% 20 70% 35% 23 100% 60% 5 77% 33% 48 3. EI projects/operations--adequately address EI issues Revenue Generation 92% 36% 25 88% 35% 17 100% 78% 9 92% 43% 51 Revenue Distribution 46% 8% 26 56% 19% 16 78% 22% 9 55% 14% 51 Revenue Utilization 54% 13% 24 67% 28% 18 78% 0% 9 63% 16% 51 Mitigating Negative Environmental Impacts 100% 62% 29 89% 50% 18 100% 67% 9 96% 59% 56 Mitigating Negative Social Impacts 96% 54% 28 78% 44% 18 88% 13% 8 89% 44% 54 Capacity-Building for EI Sector Management 83% 26% 23 88% 44% 16 89% 33% 9 85% 33% 48 Improving the Investment Climate 67% 21% 24 82% 35% 17 90% 30% 10 76% 27% 51 Improving Transparency and Governance 54% 8% 26 80% 35% 20 56% 11% 9 64% 18% 55 4. Interventions outside the EI sector--adequately address EI issues Revenue Generation 69% 25% 16 74% 32% 19 86% 57% 7 74% 33% 42 Revenue Distribution 63% 0% 16 39% 17% 18 100% 14% 7 59% 10% 41 Revenue Utilization 47% 0% 15 42% 16% 19 86% 29% 7 51% 12% 41 Mitigating Negative Environmental Impacts 89% 33% 18 63% 26% 19 100% 44% 9 80% 33% 46 Mitigating Negative Social Impacts 88% 29% 17 41% 12% 17 75% 38% 8 67% 24% 42 Capacity-Building for EI Sector Management 67% 0% 15 50% 6% 18 75% 13% 8 61% 5% 41 Improving the Investment Climate 65% 12% 17 89% 39% 18 100% 0% 9 82% 20% 44 Improving Transparency and Governance 76% 6% 17 60% 20% 20 89% 0% 9 72% 11% 46 5. Non-lending interventions--adequately address EI issues Revenue Generation 75% 6% 16 67% 29% 21 75% 0% 4 71% 17% 41 Revenue Distribution 60% 13% 15 50% 30% 20 100% 0% 4 59% 21% 39 Revenue Utilization 60% 20% 15 65% 25% 20 75% 0% 4 64% 21% 39 Mitigating Negative Environmental Impacts 84% 32% 19 43% 22% 23 100% 0% 4 65% 24% 46 Mitigating Negative Social Impacts 84% 32% 19 50% 21% 24 100% 25% 4 68% 26% 47 Capacity-Building for EI Sector Management 95% 15% 20 55% 18% 22 83% 33% 6 75% 19% 48 1 6 4 A N N E X D -- I F C ' S E X P E R I E N C E Improving the Investment Climate 94% 6% 18 77% 36% 22 83% 33% 6 85% 24% 46 Improving Transparency and Governance 68% 16% 19 68% 41% 22 80% 0% 5 70% 26% 46 6. Coordination across WBG is adequate 48% 46% 25 52% 13% 23 100% 50% 8 57% 18% 56 7. The Global Product Group for Oil, Gas, and Mining has helped to improve the following: Coordination between IFC and WB on sectoral issues 88% 46% 24 71% 29% 14 88% 0% 8 83% 33% 46 Strategic integration of sectoral and macro interventions 58% 11% 19 58% 8% 12 100% 0% 7 66% 8% 38 Quality of sectoral ESW and non-lending interventions 55% 0% 11 67% 8% 12 100% 0% 4 67% 4% 27 Sectoral knowledge-sharing across regions 90% 40% 20 67% 25% 12 83% 0% 6 82% 29% 38 Overall quality of service to clients 76% 19% 21 67% 0% 12 80% 0% 5 74% 11% 38 Other 100% 100% 1 67% 0% 3 100% 0% 1 80% 20% 5 8. WBG avoided good projects in EI due to safeguards concerns from the following: WBG management 86% 14% 14 86% 21% 14 100% 50% 6 88% 24% 34 WBG task managers 70% 0% 10 38% 23% 13 60% 40% 5 54% 18% 28 Client country government 30% 20% 10 29% 14% 14 0% 0% 5 24% 14% 29 EI public agencies/enterprises 56% 11% 9 21% 7% 14 75% 25% 4 41% 11% 27 Private investors 54% 15% 13 29% 7% 14 40% 20% 5 41% 13% 32 9. Factors that constrain WBG's ability to assist client countries in enhancing EI's contribution to sustainable development: Inadequate linkage between EI sector activities and sustainable development 42% 4% 24 50% 23% 22 56% 0% 9 47% 11% 55 Inadequate availability of staff with appropriate skills 32% 0% 25 59% 27% 22 22% 0% 9 41% 11% 56 Pressure for rapid processing of credits/funding/guarantees 38% 5% 21 38% 24% 21 44% 22% 9 39% 16% 51 Inadequate level of support from the Bank's Country Department/ Country Management Unit 52% 10% 21 55% 20% 20 29% 0% 7 50% 13% 48 Inadequate level of support from the Global Product Group for Oil, Gas, and Mining 8% 4% 24 33% 20% 15 0% 0% 6 16% 9% 45 Inadequate level of support from the client government 63% 17% 24 38% 19% 21 17% 0% 6 47% 16% 51 Inadequate level of support from project implementor (sectoral agency or private sponsor) 24% 0% 21 25% 6% 16 50% 13% 8 29% 4% 45 Other 100% 0% 3 100% 100% 2 100% 100% 1 100% 50% 6 1 6 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Italics = Response is less than 40% Rating Scale--Question 1: Bold = Response is less than 60% and 40% or more 1 = Not at all Important 2 = Moderately Important 3 = Important 4 = Highly Important High = % responding 4. Positive = % responding 3 or 4 Rating Scale--Questions 2­9: 1 = Strongly disagree 2 = Disagree 3 = Agree 4 = Strongly agree High = % responding 4. Positive = % responding 3 or 4 TABLE 2. STAFF SURVEY: RESPONDENT PROFILE Organization % of all World Bank IFC MIGA Total respondents Task Managers 12 12 18 Investment Officers 24 24 36 Regional Economists 14 6 20 30 Underwriters 1 5 5 8 Other 4 5 5 89 Number of respondents 26 30 10 66 100 Number of surveys distributed 51 33 12 96 Response rate (%) 51% 91% 83% 69% 1 6 6 A N N E X D -- I F C ' S E X P E R I E N C E R e l e v a n t I F C S a f e g u a r d P o l i c i e s , A t t a c h m e n t 6 G u i d e l i n e s , a n d P r o c e d u r e s Source: http://www.ifc.org/enviro Guidelines contained in the PPAH or updated http://www.ifc.org/enviro/enviro/pollution/ The following social and environmental safe- guidelines.htm: guards policies apply to extractive industries · General Environmental Guidelines (1993 and projects, as appropriate: 1998) · General Health and Safety Guidelines (1998) Environmental Safeguards Policies: · Base Metal and Iron Ore Mining (1998) · OP 4.01 Environmental Assessment--October · Coal Mining and Production (1998) 1998 · Oil and Gas Development--Onshore (1998) · OP 4.04 Natural Habitats--November 1998 · Oil and Gas Development--Offshore (2000) · OP 4.36 Forestry--November 1998 · Mining and Milling--Underground (1995) · OP 4.37 Dam Safety--September 1996 (IFC · Mining and Milling--Open Pit (1995) now reportedly uses a 1999 draft policy, but · Hazardous Materials Management Guidelines it is not in the public domain) (2001) · OP 7.50 International Waterways--November 1998 The PPAH also includes other guidelines on · OP 7.60 Disputed Territories--June 2001 environmental management, fire safety, waste minimization, pollution prevention, air pollution Social Safeguards Policies: control and wastewater management, cleaner · OD 4.20 Indigenous Peoples--September production, risk assessment, trans-boundary 1991 issues (GHG), and pollution management of · OD 4.30 Involuntary Resettlement--June 1990 various chemicals--all of which may also be rel- · OPN 11.03 Cultural Property--September evant in a specific project. A "precious metals" 1986 guideline is still pending. · IFC's Statement on Child and Forced Labor-- March 1998 IFC has specific requirements for Public Dis- closure and Public Consultation, depending OP 7.60, OD 4.20, OD 4.30, and OPN 11.03 upon the categorization of the project.277 remain as World Bank policies, while the oth- ers have been modified and updated to better correspond with the IFC business model. 1 6 7 A N N E X D -- I F C ' S E X P E R I E N C E S e l e c t e d S u s t a i n a b i l i t y G u i d a n c e A t t a c h m e n t 7 M a t e r i a l -- C o n s u l t a t i o n Consultation could be defined as a wider con- of key stakeholders and local authorities, includ- tinuous process of participation of all stake- ing existing alliances, social structures, and pos- holders in the decisions throughout the sibly prevailing conflicts among local groups formulation and execution of a project leading and/or external groups and NGOs. Where to a sustainable development for the population indigenous peoples have their own representa- in the area. Consultation, formally, is part of the tive organizations, such organizations should environmental impact assessment of the project. be the channels for communicating their pref- In practice, it is a tool for managing two-way erences. communication between the developer and the Governments have an important role in estab- public, in general, and the local community, in lishing first contact with the indigenous popu- particular. lation, gathering adequate social and cultural Consultation should be understood as a means information, and introducing the new contrac- to achieve certain goals and not as a goal in itself. tor. This kind of information is usually in the Its basic purpose is to improve decisionmaking hands of academia and NGOs rather than the and build understanding by actively involving government's alone. Governments and the con- individuals and organizations with a stake in the cerned private companies should make an effort project. This involvement will increase the pro- to gather and review this information as early as ject's long-term viability and will enhance its ben- possible. efits to 10 ally-impacted people and other Consultation should include the provision of stakeholders. information on the project in a timely, com- The process of consultation and participation plete, and culturally appropriate fashion. It should include precise agreements that could be should lead to a meaningful dialogue and pro- adapted and monitored throughout the life of the vide recorded results, including the views and project. Consultation should have an impact on recommendations of the indigenous peoples the project design and implementation. It should for the protection of the environment and the be started by the appropriate government agency mechanisms put in place for their participation. prior to licensing or contracting of the area and Mechanisms should be devised for direct par- should be continued by an oil company that ticipation by indigenous peoples in decision- assumes the operation from the early seismic making on aspects of the project that affect works through drilling operations, development them. Such participation shall take place through- and exploitation, and formal abandonment. out project design, implementation, monitor- When possible, the consultation process should ing, and evaluation. be witnessed by a third party (i.e., the ombuds- Proper consultation requires developing local man office and/or an association of environ- capacity to interpret the technicalities of envi- mental NGOs). ronmental studies, understanding the impact of international markets, developing long-term Emerging Best Practices on Consultation solutions, and being able to effectively com- A list of best practices comprises the following municate complex issues across cultural barri- points: Consultation requires exchange of infor- ers. It requires time to obtain consensus on an mation, collaboration, and mutual understand- adequate community relations program. Result- ing of the parties involved. It often proceeds ing delays could create conflicts if contract terms through cultural barriers, drops bad past lega- are not properly established. cies, and ends up creating confidence and trust. Consultation--by the government prior to It is essential to identify the representatives the contract or by the company as part of the 1 6 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T environmental impact assessment of any impor- methodologies for the peaceful resolution of tant operation--requires the preparation of typ- conflicts and differences; ical business plans, including identification of 7. Providing resources (e.g., food, shelter, travel objectives, responsibilities, and inputs to be funds) so persons can attend the consulta- accomplished by each stakeholder. tions from distant villages or their repre- sentatives can attend consultations in district, Some Practical Recommendations provincial, or national capitals; 8. Ensuring that interpreters are provided for To organize a consultation: Designing mean- indigenous participants when consultations ingful consultations with indigenous peoples are held in district, provincial, and national depends upon several factors, including the capitals; national, legal, and political context; the lin- 9. Supporting the local and regional indigenous guistic and cultural characteristics of the indige- leadership to improve communications with nous groups; and the degree of interaction and their communities and to be able to follow relationships with the regional and national soci- up the consultation process; and eties and external social actors (that is, mis- 10. Dealing with gender issues. sionaries, school systems, local traders, and loggers). It also depends on the nature of their To manage a consultation process: At any traditional social organizations and leadership point of the project life, the project developer patterns and the groups organized to represent should take into consideration the following the interests of indigenous peoples. Despite steps: these differences, there are some general prin- 1. Plan ahead--to identify the project risks, the ciples for organizing and conducting meaning- parties to be involved, and the stakehold- ful consultations with indigenous peoples. These ers' interests and institutional goals; to under- include the following: stand past experiences, if any; and to 1. Using facilitators who know the indigenous effectively fulfill regulations. languages and the indigenous cultures; 2. Test your proposals--to ensure that the key 2. Creating appropriate settings and locations stakeholders understand the project impacts for the consultations, preferably in the ter- and benefits and would be able to voice their ritories and settlements where indigenous concerns and input alternative approaches. peoples live; Prepare good responses to obvious ques- 3. Providing background information on the tions. proposed project in a language and format 3. Invest time and money--the schedule and that the population understands (e.g., sim- budget of the project should properly ple diagrams and charts in the native lan- include the consultation effort. Involve con- guages, maps, videos, 3D models); sultants and permanent staff with appro- 4. Recognizing the time frames of indigenous priate qualifications. peoples, especially in terms of decision- 4. Involve senior and local managers--their making, that are often different from those direct participation will make the entire of outsiders; company understand the importance of inte- 5. Respecting indigenous leadership patterns grating the stakeholders concerns. and religious beliefs and ensuring that eld- 5. Hire and train the right personnel--a com- ers and other traditional authorities have munity liaison advisor with direct access to the opportunity to express their points of management and certain negotiation capac- view; ity should be appointed and would be 6. Recognizing that in some cases there may responsible for hearing the local concerns. be different factions within a community The advisor could also work with commu- with contrasting views on national devel- nity liaison officers, depending on the size opment projects and establishment of of the project. 1 7 0 A N N E X D -- I F C ' S E X P E R I E N C E 6. Maintain overall responsibility--manage knowledge and could be sounding boards consultants and subcontractors carefully to for project design and mitigation efforts. avoid bad feelings from affected people Initial research is important to understand who will not differentiate contracted per- local power dynamics and to ensure that sonnel from the company itself. NGOs truly represent and convey the com- 7. Coordinate all related activities--to provide munity interests. consistency in the information conveyed 12. Prepare an action plan--consolidate in an by all company staff to all outside stake- action plan the agreed projects, including holders. timing and indicators for monitoring. 8. Build dialogue and trust--develop two channels of communication, preferably in Government responsibilities: Within the the local language. Particular attention process of consultation, government responsi- should be given to women and less pow- bilities could be grouped in the following list: erful groups, and actively include them in 1. To set adequate regulations a culturally appropriate way into the dia- 2. To provide land tenure rights logue. It is important to maintain the per- 3. To keep a database with sociocultural infor- sonnel who interact with the stakeholders. mation available to interested companies As in personal relationships, continuity and 4. To carry out the first consultation familiarity build trust. 5. To contract areas allowing enough time for 9. Manage expectations--avoid unrealistic preparing adequate environmental impact expectations. Be clear in describing the proj- assessments involving effective public con- ect impact and what it could deliver, trying sultations not to overstate the benefits. 6. To facilitate the process of consultation 10. Work with governments--inform and consult between industry and indigenous peoples, with relevant government departments ensuring due representation of the parties regarding the activities, risks, and opportu- and providing validity to the agreements nities of the project and the required per- reached mits. Work closely with local authorities 7. To establish proper links between the com- who often have long-established relations panies' community relations program, the with the local communities and who could communities' Planes de Vidal, and the delineate responsibilities between the local regional development plans with respect to municipalities, the community leaders, and education, health, infrastructure, defense, the project sponsor. and the activities of other productive sectors 11. Work with NGOs and community-based in the region organizations--identify and liaise, particu- 8. To supervise the execution of agreed plans larly with those who represent the affected and audit accounts people. NGOs have vital expertise and local 9. To mediate in case of conflicts 1 7 1 Operations Evaluation Unit: Evaluation of MIGA's Experience ANNEX E: MIGA'S EXPERIENCE 1. Introduction This report by MIGA's OEU presents the find- MIGA has supported investments in EI projects ings of an evaluation of MIGA guarantee proj- since its inception in 1988 by providing guar- ects in the EI sector. Section 1 describes the antees to foreign investors against political risks278 evaluation process and criteria for evaluation and and, to a lesser extent, by offering technical methodologies used. It also presents an overview assistance and advisory services. The involve- of the characteristics and evolution of MIGA's EI ment of foreign investors in EI projects has the portfolio. Section 2 assesses the consistency of potential for great benefits to the host countries MIGA EI projects with environmental and social and can significantly contribute to the private sec- safeguard policies. Section 3 assesses the devel- tor development agenda of resource-rich devel- opment impacts of a sample of evaluated EI proj- oping countries. At the same time, such ects. Section 4 reviews MIGA's role and investments have given rise, in some instances, effectiveness in the EI sector. Section 5 presents to concerns about potential negative impacts on conclusions of the evaluation and makes rec- environment and affected communities, as well ommendations for MIGA's future involvement in as about the sustainability of positive impacts. EI projects. In that regard, MIGA, like the rest of the WBG, has come under increased scrutiny by its stake- Evaluation Methodology and Approach holders. OEU's evaluation activities for this joint evalua- In order to review the WBG's past experience tion consisted of the following: and to inform its future strategy for the sector, · An overview of MIGA's EI portfolio, the WBG's three evaluation units279 have con- · A review of safeguard policy consistency for ducted a joint evaluation of Bank Group activ- a sample of MIGA EI projects,281 ities in EI. This independent evaluation reviews · An update and validation of previously eval- the WBG assistance to the development of EI and uated projects, its contribution to economic, social, and envi- · Two case studies of mining sector projects, ronmental outcomes. The objective is to evalu- and ate the development effectiveness of WBG · A staff survey of underwriters involved in EI activities in the EI sector and to draw lessons projects. from the WBG experience to inform its future role in the sector. The study covers the process The overview of MIGA's EI portfolio covered 100 of extracting oil, gas, coal, minerals, and metals percent of projects guaranteed in the EI sector from the earth and their initial processing or con- (with active and inactive guarantees) from FY90 centration. The downstream utilization of these through the first half of FY03 (December 31, resources or issues related to the global impact 2002). These 31 projects (corresponding to 61 of the consumption of EI products were not guarantee contracts) were used to describe the examined.280 In parallel to this joint evaluation, evolution and salient features of MIGA's EI port- WBG management commissioned an external folio.282 EIR to advise the Bank Group on its future role The objective of the safeguards review was in EI, in response to stakeholder concerns. to assess the consistency of MIGA guarantees in 1 7 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T the EI sector since inception of operations in MIGA's role and effectiveness. The update and FY90 with current relevant environmental and validation consisted of a review of MIGA under- social safeguard policies and the adequacy of writing and evaluation files and information measures to mitigate adverse environmental and available in the public domain relating to vari- social impacts. OEU evaluated the consistency ous aspects of the projects. of projects with MIGA's interim safeguard poli- OEU also undertook two evaluation case cies and procedures at two points for each proj- studies, both in Latin America, that involved ect: at approval and during implementation site visits. The first case applied OEU's new (under guarantee or, if the guarantee had been guarantee project evaluation methodology, cancelled, at the time of cancellation). including a cost-benefit analysis, whereas the sec- For the safeguards review, OEU selected a ond case study focused on environmental, social, sample of 12 MIGA projects283 in the EI sector and community aspects. (or 39 percent of EI sector projects with a total Finally, OEU conducted a survey of a group of 26 guarantees) with characteristics represen- of MIGA staff involved in underwriting EI proj- tative of MIGA's EI portfolio. Thus, OEU ects, soliciting staff's perceptions on important reviewed both early and more recent projects issues in EI and obstacles to more MIGA involve- underwritten by MIGA, spanning a period of 12 ment in the EI sector to compare those percep- years (FY90­01). The sample consisted of nine tions with OEU's findings from project mining sector projects, of which four were gold, evaluations. (OED and OEG have used the same one cobalt, three copper (/zinc), and one coal, survey to obtain views from World Bank and IFC as well as three oil and gas projects. Projects in staff.) environmental categories `A' (nine) and `B' Altogether, OEU covered 15 out of 31 MIGA (three) were reviewed. The sample included EI projects through the safeguards review, val- projects in which other development institu- idation and update, or case studies. This is tions or insurers were involved (such as the equivalent to 48 percent of MIGA's EI portfolio. IFC, European Investment Bank, Overseas Pri- Attachment 2 provides an overview of the proj- vate Investment Corporation, Export Develop- ects reviewed by OEU. ment Canada, and Export Finance and Insurance Corporation) and some in which MIGA was the Portfolio Overview: MIGA Activities in the sole participant. The review covered projects Mining and Oil and Gas Sectors where MIGA guaranteed majority owners as MIGA began supporting mining projects in 1990, well as minority owners or lenders. Finally, the at the start of its operations. In fact, the first two sample was balanced in terms of projects with projects ever to receive MIGA coverage were in active guarantees (five) and those cancelled by the mining sector, and in its first year of opera- the investor or lender (seven). tions, mining accounted for 76 percent of MIGA's In addition to the safeguards review, OEU car- aggregate liability. ried out a desk review to update and validate As of December 31, 2002, MIGA had insured evaluations of six mining projects undertaken by 24 mining and 7 oil and gas projects, for a total MIGA's former evaluation unit. These six proj- of 31 EI projects.284 (A complete list of MIGA EI ects, five gold mines and a facility extracting projects since its inception are in Attachment 1.) cobalt from tailings, had been visited in MIGA was relatively active in mining in the 1990s FY90­FY00. These relatively mature projects but has not insured mining projects since FY01. were underwritten by MIGA in the early to mid- By contrast, MIGA began insuring oil and gas 1990s (FY92­FY96). This desk review, using the investments relatively late, in the mid-1990s (see most recent information available, sought to Figure E1). In terms of MIGA's cumulative aggre- address four evaluation criteria: (i) the project's gate liability, mining has overshadowed oil and financial sustainability, (ii) the project's eco- gas (of the total liability issued in EI of almost nomic sustainability, (iii) the project's contribu- $1.5 billion, mining accounts for 74 percent and tions to private sector development, and (iv) oil and gas for 26 percent). Overall, 13 percent 1 7 6 A N N E X E -- M I G A' S E X P E R I E N C E M I G A G u a r a n t e e s I s s u a n c e F i g u r e E 1 i n M i n i n g a n d O i l a n d G a s Mining (U.S.$M) Oil and Gas (U.S.$M) 300 250 200 Millions 150 US$ 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2 0 0 2 * 2003** Fiscal Year * No guarantees issued in EI **As of 12/31/2002 of MIGA's cumulative issued liabilities were in EI. (see Figure E2). As of December 31, 2002, this As MIGA operations grew and it diversified its figure dropped to approximately 11 percent (6.6 portfolio into other sectors, fewer EI projects percent for mining and 4.3 percent for oil and were underwritten, and as existing coverage gas), or $552 million, in absolute terms. expired or was cancelled, the share of EI in MIGA coverage corresponded to an estimated MIGA's outstanding portfolio gradually decreased foreign direct investment (FDI) of $10.2 billion F i g u r e E 2 M I G A E x p o s u r e i n M i n i n g D e c l i n i n g MIGA Guarantees -- Mining Projects as a Percentage of MIGA Total Gross Exposure 80 70 60 Total 50 of 40 30 Percentage 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Fiscal Year 1 7 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T for mining projects and an estimated $5.1 billion countries. There is often a correlation between for oil and gas. The total FDI facilitated in EI the perceived risk in a country and governance; accounts for 32 percent of the overall estimated that is, political risks are likely to be more promi- FDI facilitated by MIGA since its inception. nent in weaker governance environments. This Extractive industries projects, especially green- in turn means that the need for MIGA guaran- field projects, often entail large capital invest- tees is higher in countries where governance ments. Even privatizations and modernizations, tends to be weaker. While there are no gener- which represent about half of the mining proj- ally accepted governance ratings, Transparency ects that MIGA has insured, required significant International's (TI) corruption perception index investments. This tends to produce a higher provides a proxy for one dimension of gover- level of MIGA exposure per project, $47 million nance in countries where MIGA had EI project on average, compared with the MIGA average guarantees. The 2002 TI rankings include 20 ($28 million). MIGA's exposure ratio, measured countries in which MIGA has had EI projects. The as the share of its gross exposure to the FDI facil- unweighted average score for countries with itated by MIGA projects, is about 10 percent for MIGA EI involvement is 3.58 (on a scale of 0 to EI (mining: 11 percent, oil and gas: 7 percent), 10, with MIGA EI scoring from 1.9 to 7.5), which whereas the overall ratio for MIGA is 23 percent. is identical to the average score of all develop- MIGA has extensively used opportunities for ing countries (79) covered by the corruption per- reinsurance and coinsurance with public or pri- ception index. This means that MIGA EI projects, vate political risk insurers for its projects in the on average, were in countries where perceived EI sector, thereby limiting MIGA's net exposure. governance levels were similar to the average Half of MIGA's mining projects have been level in its developing member countries. Gov- gold mines (12 projects), and another 8 have ernance issues are important for EI-dependent been copper mines. In terms of coverage issued, countries and are addressed by the joint evalu- MIGA mining projects have been concentrated ation at both the sectoral and country levels in in Latin America and the Caribbean (45 per- the OED/OEG/OEU Main report. cent) and Africa (27 percent), followed by the Since FY00,285 MIGA has not supported any transition economies in the former Soviet Union new mining projects, and it has insured only (16 percent). About half of the mining projects three new oil and gas projects. While the rea- in Latin America have been privatizations or sons for this slowdown were not systematically expansions, whereas almost all other projects in assessed by this evaluation, it is likely due to (i) other regions have been greenfield operations. a decline in the number of applications received All mining projects in Africa have been located by MIGA (signaling either a lack of private in IDA-eligible countries. Two more mining investor interest or investment opportunities in operations were located in IDA-eligible countries these sectors given the fall in metal prices and in Europe and Central Asia and Latin America other adverse global developments, or political and the Caribbean. risk insurance not being critical for their invest- The majority of oil and gas projects insured ment, or lack of attractiveness of MIGA instru- by MIGA were new investments in existing pro- ments to investors) and (ii) a need for more duction fields. Regionally, oil and gas projects rigorous project assessments during underwrit- have been fairly evenly distributed, in terms of ing and, thus, delayed decisionmaking. MIGA MIGA's liability, between Latin America, Europe may have been more careful and selective as and Central Asia, Middle East and North Africa, well, given that EI sector projects often mean and Africa, and have been evenly distributed high underwriting costs, increased scrutiny, com- between onshore and offshore fields. plex environmental and social issues, and some MIGA's EI portfolio was concentrated in coun- criticism by stakeholders or nongovernmental tries with a higher risk profile because demand organizations with potential risks and implica- for MIGA coverage originates from investors' tions for MIGA's reputation.286 unfavorable perception of political risk in host A MIGA Contract of Guarantee, the agency's 1 7 8 A N N E X E -- M I G A' S E X P E R I E N C E key legal instrument, is issued for a period of 3 The program consisted of three core activities. to 15 years, subject to the needs of the investor. The objective of the first, capacity-building, was Most contracts have a minimum duration of to improve the effectiveness of the host coun- three years, after which the investor may can- try's mining promotion agencies through strat- cel the guarantee on the premium anniversary egy workshops and policy seminars for date, with 30 days' advance notice to MIGA. government officials. Second, investment facil- itation activities, including six conferences on Cancellations of MIGA EI Projects African Mining Investment, brought together As of December 31, 2002, 299 of the cumulative potential investors and government leaders to total of 619 contracts issued by MIGA (i.e., 48 catalyze projects in Africa. Finally, in informa- percent) remained active. In the extractive indus- tion dissemination, using a predominantly Inter- tries, 21 of the 61 contracts (i.e., 34 percent) were net-based approach (such as the Investment still active. These correspond to 11 projects out Promotion Agency Network288), MIGA provided of a total of 31 extractive industries projects that information on mineral potential, policy and obtained MIGA guarantees since 1990, implying legislation, infrastructure, financial services, basic a high cancellation rate of 66 percent for MIGA country information, investment opportunities EI projects. This is most likely due to the rela- "who's who," new developments, and geologi- tive seniority of extractive industries projects cal maps. Because MIGA's technical assistance (especially mining projects) in MIGA's portfolio and advisory services have not been evaluated, (most contracts have outlasted the three-year OEU is not able to report on the effectiveness minimum contract period). of these activities.289 Those contracts in extractive industries, asso- MIGA has not received or paid any claim ciated with 20 projects in all, that were cancelled related to an EI project. It has mediated two by investors or expired, remained active for a investment disputes involving mines, in Angola median time of 4.0 years, with a range of 0.66 and Ukraine, for investors without MIGA guar- to 7.25 years.287 As of December 2002, the old- antees. est EI project in MIGA's portfolio, a mining proj- ect, had been insured for 11 years. 2. Review of MIGA's EI Projects for Reasons for observed cancellations of guar- Consistency with Safeguard Policies antee contracts for EI projects include, in decreas- This section summarizes the findings of a review ing order of occurrence, the following: (i) to assess the consistency290 of MIGA's extractive self-insurance (investors become comfortable industry projects with current applicable envi- with the host country political risk level, which ronmental and social safeguard policies and the means that the MIGA guarantee has served its adequacy of measures to mitigate adverse envi- useful purpose), (ii) replacement of MIGA insur- ronmental and social impacts.291 This evaluation ance with private or national insurers, (iii) repay- has focused on safeguard policies because the ment of loans, (iv) commercial failure of the project's environmental and social performance project enterprise, (v) transfer of shares by the is one of the most critical aspects of EI projects, guarantee holder to investors who have not and a failure to comply with applicable safe- requested a guarantee from MIGA, and (vi) guards may have negative impacts on commu- financial restructuring, leading to replacements nities and the environment, thus undermining of existing contracts. MIGA's development mandate. The section iden- tifies specific issues emerging from the sample Technical Assistance, Advisory and Mediation of projects reviewed in relation to (i) the appli- Services, and Claims cation of the safeguards to the private sector, (ii) MIGA's technical assistance and advisory serv- MIGA's unique mandate (within the WBG) as an ices have focused on mining and in the past have insurer of political risks, and (iii) the adequacy aimed at assisting countries in formulating strate- of the safeguard oversight framework that has gies and techniques to attract FDI in the sector. been adopted by MIGA management. The review 1 7 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T is based on a comprehensive evaluation method- WBG safeguard policy consistency, as MIGA did ology that was developed and tested in a par- not have its own in-house capacity due to its small allel OED study. It covers a sample of 12 MIGA size.296 Even after MIGA's environmental unit EI projects in the mining and oil and gas sec- was created, IFC experts continued to be called tors292 approved between FY90 and FY01. upon for their advice on certain projects. In MIGA's framework for assessing the compli- some mining projects that were reviewed, IFC ance of its guarantee projects with environ- was also an investor and/or lender, and MIGA mental policies and guidelines has evolved deferred to IFC experts on safeguard compliance significantly over time. Prior to adopting its own matters in such cases. From an evaluation per- policies and guidelines, MIGA applied World spective, including projects for which IFC experts Bank environmental and social policies293 and carried out MIGA's due diligence, and has pro- guidelines to its projects. An internal document vided valuable insights into the functioning of this indicated that MIGA had committed to "ensure earlier arrangement and its efficacy for MIGA, that [its projects] conform to the environmental which could also be useful for future MIGA proj- standards adopted by other members of the ects in which IFC may be involved. World Bank Group" since 1991 and initially did The WBG safeguard policies contain a long so using specialized IFC staff. The creation of an list of requirements. For the purposes of this in-house environmental unit by MIGA in late independent evaluation of consistency of MIGA 1997 was an important milestone for improving projects with safeguard policies and guidelines, the Agency's capacity to address environmental a set of basic criteria was developed reflecting issues. This unit has been responsible for setting key policy requirements and the necessary steps up in-house procedures, formulating and revis- involved in meeting them. These criteria are ing policies, undertaking project assessments, summarized in Attachments 3a and 3b. This and selective monitoring.294 In May 1999, the approach is similar to the one developed and Board approved MIGA's own specific EA and dis- used for a sample of World Bank EI projects by closure policies and procedures that reflect its OED297 in evaluating the compliance with WBG business as an investment insurer for the private safeguards policies. They are based on MIGA's sector. They took effect with all new definitive specific environmental assessment and disclosure applications received after July 1, 2000. In May policies and procedures, as well as the interim 2002, MIGA's Board approved the adoption of issue-specific safeguards,298 as approved by its own interim issue-specific Safeguard Poli- MIGA's Board in 1999 and 2002, respectively, cies. MIGA's Web site295 notes, "In carrying out which differ somewhat from those of the World its review and evaluation, MIGA considers: Bank to reflect MIGA's business model. MIGA's · the project's ability to comply with the appro- 2002 safeguards have adapted World Bank safe- priate guidelines found in the World Bank guards to the private sector. This has involved Group's Pollution Prevention and Abatement some simplifications and clarifications and in no Handbook; case a tightening of World Bank safeguards. · compliance of the project with host country This review was the first of its kind for MIGA environmental requirements; and projects and was undertaken to determine the · consistency of the project with MIGA's safe- status of a representative sample of EI projects guard policies regarding the following specific on environmental and social fronts, using cur- issues: natural habitats; forestry; pest man- rent standards. Using the most recent MIGA agement; dam safety; projects on interna- policies as criteria for consistency, rather than tional waterways; involuntary resettlement; WBG policies and guidelines in effect at the time indigenous peoples; and physical cultural of approval of guarantees, enabled OEU to resources." review the entire sample using the same crite- ria. OEU recognizes that the application of the Until late 1997, IFC environmental and social spe- safeguard policy framework has evolved con- cialists were used to review MIGA projects for siderably in MIGA since issuing the first guar- 1 8 0 A N N E X E -- M I G A' S E X P E R I E N C E antee in 1990 and that not all of the policies had over, safeguard policy consistency showed an the same degree of specificity. Furthermore, the improving trend over the period of 1990­2001 Bank's and MIGA's procedures evolved over for the sampled projects, for both stages--at time as well. MIGA, as a member of the WBG, approval and during project implementation had subjected itself to WB policies and guide- (see Figure E3). lines since the inception of the Agency and more explicitly since 1991, prior to adopting its Safeguard Issues Prior to Board Approval own policies. Therefore, all projects covered by For 82 percent of the projects, the EAs, includ- this review were subject to the WB policies at ing analysis of alternatives and baseline studies, the time of their Board approval. MIGA's Board were well prepared by the time of Board had the expectation that the projects it con- approval.301 However, this has not always trans- curred with were fundamentally consistent with lated into well-prepared EMPs or Environmen- applicable WB policies and guidelines. For rea- tal Management System (EMS) provisions in the sons of methodological soundness, this report sponsor's project organization and contracting does not refer to compliance (in its strict or arrangements during construction, which are legal meaning) across a period of 12 years the principal means for operationalizing the (MIGA's operational history), but rather it protective measures proposed under the EAs. assesses projects' consistency. The intention of The main problems of safeguard consistency this study was to learn about the extent to which identified at approval (see Table E1 and Attach- MIGA EI projects were (and are) consistent with ment 5a) are (i) poor public consultation and dis- current applicable MIGA safeguard policies and closure in approximately half of the projects, (ii) guidelines. This approach also reflects the for- inadequate provisions for safeguard compliance ward-looking nature of this evaluation and can in Contracts of Guarantee in more than two-thirds inform decisions about possible future EI proj- of the projects, and (iii) deficiencies in applica- ects MIGA may be involved in. tion of issue-specific safeguards, where rele- The review focused on consistency with safe- vant, such as involuntary resettlement (two-thirds guards at two phases in the guaranteed invest- of the projects), indigenous peoples (in all proj- ment cycle: ects), natural habitats (in two-thirds of the proj- · Consistency with Safeguards at Board ects), and dam safety (one-quarter of the Approval: To what extent did the guaranteed projects).302 investment comply or agree with the require- The projects reviewed included cases where ments of the current MIGA safeguard policies (i) specific safeguards were not explicitly iden- and guidelines at the time of Board approval? tified in the documents in the files, or were · Consistency with Safeguards under Guaran- identified late in project processing (sometimes tee: To what extent did the project fulfill or even after Board approval); (ii) instructions agree with the conditions and requirements given to clients regarding specific safeguard of the safeguard policies and guidelines (cur- requirements were not clear; (iii) requirements rently in force) during investment imple- were not adequately communicated to consult- mentation and adequately implement the ants preparing EAs; and (iv) internal documents safeguard management/action plans that had and clearances for Board approval were not been identified at approval? sufficiently clear about which safeguard policies or environmental guidelines were applicable. The The review found that 73 percent of the EI proj- more common reasons for these problems iden- ects in the sample were substantially299 consis- tified by the review were (i) MIGA getting tent with current MIGA safeguard policies at involved too late into the process; (ii) lack of the time of MIGA Board approval. This ratio social sector expertise in identifying applicable increased to 88 percent during implementation, safeguards; (iii) underwriters not having the while the project was still under guarantee or at experience or necessary background, leading to the time of cancellation of the guarantee. More- poor initial communications with clients before 1 8 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T S a f e g u a r d C o n s i s t e n c y R a t i n g s F i g u r e E 3 f o r M I G A P r o j e c t s S h o w a n I m p r o v i n g T r e n d 3 0 0 1999 -- Adoption of MIGA's Environmental Policies and Procedures High ngsi atR Substantial stencyi onsC d Modest eguarfaS Negligible Board Date 1989* 1992* 1994* 1995* 1996* 1996* 1997 1997* 1998 1999 2001 Approval Implementation Linear (Implementation) Linear (Approval) * Guarantees for projects noted with an asterisk (*) are no longer active. environmental staff got involved; (iv) institu- The EAs that were reviewed varied in quality tional pressures to meet guarantee volume objec- from relatively mediocre to the highest interna- tives for the fiscal year, which may have tional standard. The scope and comprehensive- prevented some critical environmental verifica- ness of 82 percent of the EAs reviewed met tion (e.g., updating previous clearances if time basic MIGA requirements, as outlined in Attach- elapsed was significant, additional site visits ment 3a. Some were developed over several when needed); and (v) changes in project scope years with many refinements and improvements and design between Board approval and added in the process and included extensive issuance of Contracts of Guarantee without fur- inputs from a variety of independent experts ther safeguard evaluation. The potential value and reviews by competent regulatory authorities, added MIGA could provide tends to be down- as well as project-affected communities and played at the underwriting and marketing stages NGOs. Cases were noted where MIGA (or IFC) of a prospective guarantee. It is unclear why in experts provided important inputs during the some of the projects reviewed safeguard poli- process of EA review, which considerably cies were not triggered early enough--or not at improved their quality. There were other exam- all--in the underwriting process. Reviewed proj- ples where their inputs were too late and had to ects also provide some positive examples, sug- be addressed after project approval. In one case, gesting that when safeguard policy issues are independent consultants hired by the major handled expeditiously and efficiently with clients, lenders identified a long list of deficiencies in the MIGA's intervention provides value added and EA, which was initially prepared by one of the a level of comfort. investors. 1 8 2 A N N E X E -- M I G A' S E X P E R I E N C E S a f e g u a r d C o n s i s t e n c y S u m m a r y f o r T a b l e E 1 M I G A E I P r o j e c t s a t B o a r d A p p r o v a l ( B a s e d o n a R e v i e w o f 1 1 M I G A E I P r o j e c t s ) Applicable to Addressed substantially or higher Criterion (no. of projects) (percent of projects)a Cultural property protection proposed 7 100% Comprehensive environmental 11 82% assessment Comprehensive environmental and 11 82% social baseline survey Comprehensive dam safety measures 4 75% proposed Adequate environmental action plan 11 73% proposed Adequate analysis of feasible 11 73% alternatives Project sponsor's environmental 11 64% management system adequate Public disclosure/consultation 9 56% addressed Comprehensive and implementable resettlement plan/community 9 33% development program prepared Natural habitats protected or offsets 6 33% provided Contract of guarantee for implementation of safeguard 11 27% Policies/guidelines adequate comprehensive and implementable 3 0% indigenous peoples plan prepared Overall safeguard consistency 11 73% Note: Four projects could not be reviewed as no monitoring reports were on file. a. Four rating categories were used: negligible, modest, substantial, and high. See Attachment 3a for more details. Addressing Mine Closure. The main issue in ing project implementation, that MIGA (or IFC) the application of the 1995 Mining and Milling made it clear that the plan was needed. Some Guidelines--Open Pit noted during the review clients argued that it was too early for them to was the requirement for preparation of a Mine prepare such plans at the final feasibility stage Closure and Restoration Plan. It was not clear in and include them in the EA, while others rec- the guideline when such a plan had to be pre- ognized that mine reclamation should be a pro- pared, at what level of detail, and when the gressive process and incorporated into the mine investor needed to start accumulating funds for development plans (and financial plans) to min- mine closure (as required in the 1998 version of imize costs and reduce environmental (and this guideline). In some of the cases reviewed, social) impacts. In these cases, the plans were the plan was required at the time the EA was pre- revised and adjusted during the operational pared, but in others it was not until later, dur- phase as more experience was gained. 1 8 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T Public consultation and disclosure of environ- Action Plans (EAP)/EMPs, (ii) carrying out envi- mental and social impacts was one of the weak- ronmental and social monitoring,305 (iii) operat- est areas of safeguard consistency for the reviewed ing Environmental and Health and Safety projects, with only about half substantially meet- Management Systems, and (iv) generally ing MIGA's requirements.303 In some projects, improved consistency with specific safeguard MIGA and IFC experts took great care to ensure policies, with the exception of the natural habi- that the clients were aware of their EA public dis- tats policy. Public consultation and disclosure, a closure obligations. In other cases, insufficient key area, continued to fall short of good prac- guidance was provided, and, as a result, too lit- tice in one-third of the projects reviewed, in par- tle attention was given to this matter. Some EAs ticular in three Category `A' projects underwritten were deficient in describing the public consulta- before FY00, when MIGA's Environmental tion process, while others were forthcoming and Review Procedures and Disclosure Policies went noted improvements that resulted from the into effect. Reporting on safeguard policy con- process. Cases were noted where project decisions sistency by clients and monitoring and evalua- had already been made and the public disclosure tion by MIGA could also be improved. process was seen as a pro-forma exercise, defeat- The most important factor in ensuring safe- ing the purpose of the MIGA policy. There were guard compliance is a committed investor with no cases where the MIGA disclosure policy the capacity to implement the environmental, delayed guarantee processing. health and safety, and social mitigation and The review found that only one-third of the monitoring programs that are required under the projects had adequate provisions for safeguard project and spelled out in the EAs. enforcement in the Contracts of Guarantee,304 One case illustrated what can go wrong if although even these did not refer to the individual management and organizational structure set up safeguards that applied. In three more recent for project management during the construction cases, the specific applicable Environmental phase become too autonomous and disconnected Guidelines were indicated and attached to the from the environmentally and socially responsi- contracts. The review of clearance memos also ble policies and procedures of the individual indicated a lack of clarity on the specific safeguard investors. The case also showed that a company policies that applied to projects prior to approval. can learn from experience. It was only after In only a few cases has MIGA included any spe- receiving public complaints against the project that cific environmental and social reporting require- MIGA came to realize the seriousness of the sit- ments by its clients in its contracts. uation and fielded a mission to assist the investor OEU did not include ratings for one project in restoring its public image and helping it to act selected for the safeguard review because of a as a responsible corporate citizen. This case also lack of relevant information verifying the ade- clearly illustrates both MIGA's positive contribu- quacy of the project's environmental classifica- tion in this process and the need for MIGA to take tion. MIGA Management has taken action to a more proactive approach in evaluating clients' provide the documentation, and OEU will com- organizational and management arrangements plete the review of this project upon receipt of to satisfy itself that they are adequate for imple- the relevant documents. menting responsible environmental and social policies from the very start of project construc- Safeguard Issues During Project tion. Risks and costs associated with consequences Implementation for inadequately addressed social and environ- As noted above, there was notable improve- mental issues, for both MIGA and the investors, ment in the safeguard performance of the sam- are high and increase throughout the life of the ple of extractive industry projects during their project (see Box E1). implementation (see Table E2 and Attachment 5b). Of particular note is the high level of per- Environmental Management Plans/Envi- formance in (i) implementing Environmental ronmental Action Plans. Environmental and 1 8 4 A N N E X E -- M I G A' S E X P E R I E N C E S a f e g u a r d C o n s i s t e n c y S u m m a r y f o r T a b l e E 2 M I G A E I P r o j e c t s U n d e r G u a r a n t e e ( B a s e d o n a R e v i e w o f 1 1 M I G A E I P r o j e c t s ) Applicable to Addressed substantially or higher Criterion (no. of projects) (percent of projects)a Environmental action plan/environmental management plan 8 100% fully implemented by sponsor Environmental and social monitoring fully implemented by sponsor 8 88% Sponsor's project implementation environmental management system 8 88% effective Resettlement plan/community development program fully 7 86% implemented Full compensation of project affected 6 83% people Cultural property protected 6 83% Dam safety measures implemented 4 75% Indigenous peoples plan fully 3 67% implemented Continuing public disclosure and 8 63% consultation Reporting on safeguard policies by 10 60% sponsor adequate Monitoring and evaluation of safeguard policies by MIGA adequate 10 60% Natural habitats protected or offsets 6 50% provided Overall safeguard consistency 8 88% Note: Four projects could not be reviewed as no monitoring reports were on file. a. Four rating categories were used: negligible, modest, substantial, and high. See Attachment 3b for more details. social action plans are the key outputs from the the projects reviewed, in some cases with per- preparation and approval stages of MIGA proj- sistent prodding by MIGA's (or IFC's) environ- ects. There are good examples among MIGA mental and social experts. Some investors projects reviewed where these action plans have incorporated the EMPs into their EMS monitor- been taken seriously by investors--usually those ing and auditing programs to ensure that they in which the investors were directly involved in were fully implemented. In such cases, vari- their preparation and finalization. There were ances from the plan were noted, as were action other cases where the action plans were pre- plans drawn up to fulfill these requirements. pared by independent consultants without full Land acquisition and resettlement was sub- endorsement by investors. EMP/EAPs were sub- stantially accomplished according to the require- stantially implemented by all of the investors for ments of MIGA's involuntary resettlement policy 1 8 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T A C o m p a n y L e a r n s H o w t o H a n d l e B o x E 1 S o c i a l a n d E n v i r o n m e n t a l I s s u e s The evolution of this project's handling of social and · No appropriate mechanism was implemented to environmental issues, and MIGA's role in the process, ensure timely advice to those communities and per- provides important lessons. During the early con- sons who received substantial amounts of money for struction phase of 1998­99, priority was given to ear- their land in a noncash economy. liest possible project completion and cost efficiency. This situation led to complaint letters to MIGA, The contractor coordinated only with the project man- which sent a mission to the field to investigate the agement side and had no line of communication with matter in May 2000. Reacting to the widespread dis- the company's operations side, which was responsi- satisfaction in neighboring communities, the company ble for the eventual operation of the mining facility, began working on community relations and took cor- including environmental protection and community rective action in early 2000. MIGA's involvement at this relations. As a result, concerns and messages coming precise time appears to have had a positive effect, from the company's operations side during the con- changing the priorities and attitude of project man- struction phase were not addressed by the project agement with respect to community and environmen- management, resulting in a gap between expectations tal issues. However, the management structure was of the local community and actions of the project. It also modified only after project construction was com- generated several social and environmental problems: pleted in mid-2001. In mid-2002, one year after pro- · An accelerated resettlement program of more than duction start-up, the company implemented a new 40 indigenous families carried out inadequately dur- organizational structure more consistent with the social ing March and April 1999, which led to social dis- and environmental concerns of a modern mining com- content, was a clear indication that a culture of pany. Under the new structure, the chief executive social responsibility had not yet permeated project officer is responsible for the operational, financial, management and organization. and environmental aspects, as well as community rela- · In terms of governance, not much effort was devoted tions. This new unified structure facilitates coordina- to strengthening local organizations. tion and teamwork among different departments and the · Economic linkages to the local economy were not articulation of a common objective for operational and activated, as no initiatives were taken to implement social and environmental areas. It should enable the programs of local employment, training, or pro- company to address environmental and social issues curement. more proactively in the future. in 86 percent of the projects reviewed. This was if the objectives of the policy have been met in a great improvement over the situation at proj- the process. This was not carried out. ect approval, when only 33 percent of the proj- In two-thirds of the projects, investors were ects had adequately prepared resettlement plans. active in implementing community develop- It reflects a conscientious effort by MIGA (and ment activities to mitigate the impacts of their IFC) to bring these projects into conformance with operations on local communities. In projects the social safeguard policies during the imple- where IFC was also involved, it promoted these mentation phase. However, there were defi- activities to investors, while MIGA played a ciencies in applying the policies, which should critical catalytic role in one project. The com- be noted for future reference and attention. In munity development programs have focused regard to those projects where land acquisition on improving services such as health, education, and resettlement occurred before MIGA involve- and water supply and sanitation services in ment, the policy requires monitoring and eval- project-affected communities, and they have uation of its implementation and then, upon promoted economic development, including completion, an assessment of the outcomes to see job creation, training, and credit for small-scale 1 8 6 A N N E X E -- M I G A' S E X P E R I E N C E business activities and improved agricultural related incidents leading to claims of violations practices. of individual rights. In those three projects, With regard to other specific safeguards, MIGA did not separately consider issues related closer attention by investors to indigenous peo- to conflict in the context of the projects as part ples' issues during implementation resulted in of its underwriting. However, MIGA's develop- substantial consistency in two of the three proj- ment mandate encompasses a concern for such ects with the requirements of this safeguard potential negative impacts on individuals in host policy. Tailings dam safety has been a concern countries. This is also a political risk issue with that has been highlighted by well-publicized the potential to affect both the project (increased failures, so it is not surprising that most mining conflict) and MIGA (claims brought under war companies are sensitive to this issue and take it and civil disturbance coverage, as well as rep- seriously. Seventy-five percent of the projects utational risk). Another MIGA project entailed a reviewed with dam heights in excess of 10 to 15 dispute with a neighboring country regarding meters were substantially consistent with this ownership of the resource. MIGA treated this safeguard policy at Board approval, as well as issue thoroughly in its political risk assessment.307 during implementation. The most serious con- The variety of reporting mechanisms that cerns during implementation were leaking dams were noted in the projects provide good lessons and sealing problems at abutments, which on the quality and usefulness of the information required pump-back of the leaked tailings water; provided for assessing environmental and social failure in one case to remove trees and tree risks and safeguard consistency of projects under roots from the tailings impoundment, which guarantee. Examples of good reporting were compromised the integrity of the dam founda- provided by (i) independent experts hired by tions; poor construction practices without ade- senior lenders, (ii) independent auditing experts quate supervision; and poor operating practices hired by the investor, (iii) investor head-office that allowed ponding in front of dam walls. auditing teams, (iv) monthly or quarterly report- One of the mining projects previously evaluated ing by clients to lenders and MIGA, and (v) by MIGA experienced a tailings dam failure MIGA and IFC environmental and social spe- while under MIGA guarantee, releasing large cialists in mission reports and internal memos. quantities of cyanide-contaminated water into a MIGA does not require AMRs from its clients. downstream river system. In this case, MIGA was Reporting on social impacts and compliance a reinsurer, and it lacked the legal ability to with social safeguards continues to be weak in apply and monitor its safeguard policies.306 In MIGA's reporting system, although there were another instance, crates of cyanide fell into a river some good examples in the case studies of inde- in a traffic accident while being transported to pendent auditing of involuntary resettlement the mine site. Since these incidents, MIGA has and indigenous peoples plans. paid closer attention to safety matters in the There was a frequent and steady flow of transportation of hazardous substances for EI monitoring reports from clients or independent projects. consultants hired by senior lenders or bilateral The only safeguard for which the consis- investment insurers in 60 percent of projects tency outcomes were not appreciably improved reviewed. In about half of the projects, MIGA during implementation was the natural habitats benefited from an independent review of the policy. Only half of the projects substantially con- project EA by consultants hired by senior lenders formed with this policy during implementation, or bilateral investment insurers. The independ- although one project was taking steps to meet ent review requirements of the senior lenders and the requirements when it was prematurely shut bilateral investment insurers focused only on the down and put on a care and maintenance basis. environmental and health and safety aspects of The review also found that three MIGA-guar- the proposed investments, except in one case anteed projects were vulnerable to social unrest, in which social issues were also addressed. In which may have been exacerbated by security- none of the cases did MIGA hire outside inde- 1 8 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T pendent expertise to carry out its due diligence with OEU's new evaluation methodology, work on the projects reviewed, relying on the whereas the case study applied this new method- investor, or other external agencies, to finance ology for the first time to a project evaluation.308 this work. The downside to this arrangement is All projects, most of them gold mines (and that MIGA does not have any control of the one copper and one cobalt extraction/process- scope of the consultants' work, the quality of the ing), were approved in the early to mid-1990s, consultants hired, or the frequency and timeli- when gold prices were higher than $350 per ness of their reporting. The main deficiencies in ounce. Metals prices, including gold, fell pre- the independent assessments have been on the cipitously in the second half of the 1990s. The social issues, except in a few cases where such price of gold fell to below $300 per ounce expertise has been specifically hired by investors toward the end of the 1990s, greatly reducing, to evaluate their resettlement and social pro- and in some cases totally eliminating, returns to grams. There were no monitoring reports in equity investors. MIGA files for one Category `A' project and one Category `B' project, even though they had been Quality of underwriting and risk assess- under implementation for more than three years. ment: An analysis of the underwriting of the MIGA has limited in-house capacity to ade- seven projects found that MIGA's assessment of quately monitor and influence social safeguard the projects' financial viability was generally outcomes. For the sampled projects where IFC thorough and based on the best information was involved in the financing arrangements, available from the clients at that time, although MIGA delegated monitoring of environmental assumptions on metals prices, volume, and qual- and social aspects to IFC, which carried out a ity proved to be optimistic. All seven project systematic supervision of the projects, including assessments also provided an estimated ERR, but site visits (on behalf of both MIGA and IFC). none of the cases explained the underlying Social specialists have been involved in field vis- assumptions of the ERR calculation, so that it was its from the beginning of project processing in not possible to judge their validity (or calculate only one case. The observed pattern has been a comparable ex-post ERR). Some instances a delayed involvement (including field visits), were noted where backward linkages appeared often after Board approval, resulting in increased somewhat overestimated (e.g., in the purchases project cost and delays and generating dissatis- of fuel or electric power, where value added is faction among project stakeholders. Investors extremely low), as was the case for infrastruc- have benefited considerably from environmen- ture improvements (some deterioration in infra- tal and social specialists' site visits and advice in structure was neglected, whereas other IFC/MIGA projects. Investors have expressed improvements had very little impact due to the their appreciation for these inputs, in particular remoteness of the location). In another case, for dealing with land acquisition, resettlement, credit was claimed for health and educational and community development issues, where the services available only to employees, which is WBG has substantial experience and competi- considered a standard compensation package. tive advantage. On risk assessments, all project analyses went into substantial detail on the three major polit- 3. Development Impacts of MIGA EI ical risks MIGA insured, and most of the prob- Projects lems related to these risks were fully identified The findings on the development impacts of and appraised. However, there was no discus- MIGA EI projects presented in this section are sion of the potential risk from a low financial drawn from six MIGA projects in the EI sector return if the government owned a significant evaluated between FY99 and FY00 and one share of the company (one project). case study conducted in FY02­03. The six have In general, during the underwriting of the been updated and validated through a desk reviewed projects, there was a compartmental- review to arrive at rating categories consistent ized approach defined by the source of the 1 8 8 A N N E X E -- M I G A' S E X P E R I E N C E information. For example, financial analysis tainability, two were rated moderately unsatis- and projections, as well as anticipated eco- factory, and three had an unsatisfactory rating. nomic data, were provided by investors; partial development analysis was carried out by MIGA Revenues to host governments from equity underwriters; environmental and social issues holdings have been disappointing, and lit- were addressed by investors with MIGA inputs; tle is known about their use. Low metals and risk analysis was undertaken by MIGA prices, coupled with significant cost overruns underwriters. EI projects reviewed were com- and/or lower-than-anticipated ore quality in plex, involved large investments and revenues some projects, resulted in low financial returns for the host governments, and had important to equity holders. In cases where governments environmental and social implications, subject- held equity in compensation for providing a ing them to close public and international proven gold reserve, this has had a profound scrutiny. Thus, they required a more up-front impact on their return to equity and expectations and in-depth analysis and a holistic under- of significant revenues were not fulfilled. In at standing of financial, economic, social, and least some cases, governments have been environmental aspects from a developmental aggrieved that they have received little or no ben- perspective. efits from the valuable natural resources that they The Risk Management Committee, established have allowed foreign companies to exploit. as a result of the Guarantees Business Process Clearly, the more a government relies on pro- Review undertaken in 1998, brings together ceeds from equity ownership rather than taxes guarantees, legal, environmental, financial, and and royalties, the greater its dependency on risk aspects during the decision-making stage for good financial outcomes of the mine. Analyses potential guarantees. While it has provided a of the developmental impacts of EI projects by forum for the discussion of many aspects of the MIGA underwriters, in general, have made no newer EI projects covered in this evaluation, attempt to assess the use of EI revenues by gov- these discussions are not adequately informed ernments, focusing mainly on the private invest- by full assessments of the social issues and ment project itself. (The Main Report of this developmental impacts frequently encountered joint OED/OEG/OEU evaluation addresses the in complex projects in the EI sector.309 issue of the use of EI revenues by governments for the World Bank Group.) Business Performance and Financial Sustainability: Low Metals Prices Suppressed Economic Sustainability: Financial Profitability of EI Projects Performance Limits Economic Benefits Overall, economic sustainability was marginally Financial returns in all seven projects were better than financial sustainability for these proj- affected by the fall in metals prices. In assess- ects, with two projects rated moderately satis- ing financial benefits, all projects had assumed factory, three others rated moderately that metals prices would remain stable over the unsatisfactory, and two rated unsatisfactory for project lifetime. The commodity price margins economic sustainability. within which the projects were expected to be Economic sustainability of these projects also profitable widely varied. Only one of the proj- largely depended on the price of the mineral ects was still financially profitable at the gold resource, moving in parallel with financial sus- prices that prevailed during the latter part of the tainability and profitability. This is because the 1990s and through mid-2002. The evaluated profitability of the project not only influences the cobalt project was hit hardest and placed on care amount of resources the project has available for and maintenance in late 2002 until such time as supporting local community initiatives, but, more the metal's price returned to near its pre-proj- importantly, it is a major determinant of the ect level. Two of the evaluated projects had mine life. The volume of economically mineable moderately satisfactory ratings for financial sus- resources (and therefore the number of years that 1 8 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T the mine will operate and provide jobs and All of the projects were consistent with and other benefits to the country/community) is supported the private sector strategies of their highly dependent on the price of these resources. host countries. Most projects under review The most important benefits of these projects were in countries where private investors had to their host countries were in the areas of been hesitant to make large investments, either employment creation, often in remote and because there had been only limited experience depressed areas; training; and government rev- working with new governments, or because enues. The seven projects created, on average, investors' experience in previous projects with 710 jobs, with a range of 0310 to 1,375. Except earlier governments had led to significant for two projects, local employment at the time difficulties. In another case (see Box E2), the of evaluation was higher than initially antici- project was the first and largest mining pated. One of the exceptions is an operation that development in the country, following a was put on care and maintenance due to its comprehensive sector reform, with an impor- unprofitability under current metal prices. All tant demonstration effect for other projects. evaluated projects allocated resources to train- Each investment was expected to generate a ing (an average of US$1,200 per employee per substantial increase in private investment in year). Although aggregated annual government the country's mining sector. revenues fell short of initial expectations by Government relations with project entities more than 50 percent, the contributions to local remained good in all the projects reviewed, and central government budgets were still sig- and, other things being equal, the experience of nificant (averaging between US$5 and US$10 the projects would have supported further invest- million per year) for most projects. Within the ment in the sector. However, this expectation has scope of this evaluation, OEU did not assess the not been fulfilled, probably because of the fall effectiveness of the use of EI revenues by the of metals prices through most of the late 1990s host country governments (nor was there a and the more recent global slowdown, which baseline analysis of these issues in MIGA under- curbed investor interest in this complex sector. writing documents), as it is beyond the reach However, there was evidence that some mining of private sector projects that MIGA guaran- investments guaranteed by MIGA in a particu- tees. All evaluated projects have supported local lar country were viewed as pioneer investments, government financing and local initiatives to thereby changing foreign investors' perceptions varying degrees. In more general terms, proj- about its investment climate and leading to ects with a nearby labor pool and communities increased foreign investments in other sectors in were more successful in generating direct eco- the country. nomic benefits for those communities. There is In addition to demonstration effects and fol- evidence that projects that allocated more funds low-up investments in some cases, the projects to local authorities and affected populations all enhanced private ownership in the host were more favorably viewed and had fewer countries and contributed, to varying degrees, social problems than those where most of the to the development of downstream linkages. funds went to central government activities. Some projects had local business development programs in place to increase the amount of Private Sector Development: Supporting local purchases, as significant backward link- Countries' Private Sector Development ages were rarely automatic, and specific pro- Agendas grams appeared to be needed to maximize The majority of the evaluated projects made such linkages. In addition, evaluated projects positive contributions to private sector devel- supported some infrastructure improvements, opment in their host countries. Five projects some of which benefited adjacent communities were rated moderately satisfactory, and two and regions. were rated moderately unsatisfactory. 1 9 0 A N N E X E -- M I G A' S E X P E R I E N C E D e m o n s t r a t i n g t h e V i a b i l i t y B o x E 2 o f M i n i n g This project, underwritten in the second half of the ore content, and (3) lower-than-expected metals prices. 1990s, is the largest mining project in the host country The estimate for the economic rate of return was sim- involving mining and copper/gold ore processing at the ilarly revised downward, but it is somewhat higher mine site to recover copper and gold in concentrate, as than the financial rate of return because of taxes paid well as gold doré. It was the first mining project following (although these were lower than anticipated) and is a major change in government policy designed to encour- enhanced by wage payments to previously unemployed age development of a mining industry and to diversify the workers and by the training provided. The project's economy and exports. MIGA provided coverage against economic sustainability was rated moderately unsat- losses due to transfer restriction, expropriation, and isfactory. A number of additional benefits arose from war and civil disturbance for a minority equity investor the mine: an electrical connection for a nearby city, and a shareholder loan. The MIGA coverage was part making electricity available at lower prices; rehabil- of a much larger political risk insurance package pro- itation of transport infrastructure linking the region vided by national insurance agencies, covering com- with a port, which is usable by others; and social mercial risks. MIGA's political risk insurance coverage expenditures for education and community programs. supported a loan package on highly favorable terms, The main environmental concerns were related to the which encouraged the equity investors to make large selection of the right-of-way for support infrastructure, investments in a new mining country. MIGA's role in where it was necessary to avoid sensitive and impor- facilitating this investment was thus rated satisfactory. tant natural habitats, as well as cultural heritage sites. The project's objectives were consistent with the The mining operations are well designed for total cap- World Bank's strategy and support for mining sector ture and evaporation in the tailings reservoir of process reform, which helped set up a legal and fiscal frame- tailings water and all-site run-off water. The tailings work--considered best practice--to encourage the dam has been designed and is being operated and development of the mining industry. Development of the inspected to conform to MIGA dam safety standards. The sector, however, was hampered by the economic down- environmental performance of this project was rated turn and declining metals prices, leading to a drop in moderately satisfactory. investment in the sector. However, the ability of the proj- Although the social impact of the mine has been rel- ect to establish and operate a large-scale mine, albeit atively benign, the expectations of the local population at relatively modest financial and economic returns, has for employment opportunities and backward linkages given confidence to other potential investors in the to local businesses have remained unfulfilled. This industry. This has encouraged additional exploration reflects, in part, a failure of national and regional gov- and investment in other mining projects. Overall, the ernments to prepare the local population to take advan- PSD impact of the project was rated moderately sat- tage of opportunities created by the development and isfactory. operation of the mine and the failure of the company The project's financial rate of return is expected to to initiate a dialogue with adjacent communities and be below the rate initially estimated by the investors. the government to build stakeholder support and to This difference is due to (1) cost overruns in con- reach a consensus on human and regional development structing the mine and processing facilities, (2) lower the project could foster. 4. MIGA's Role in EI Projects: at MIGA's contribution and effectiveness. MIGA's Contribution, Effectiveness, and business is distinct from that of the Bank and IFC. Staff Perceptions "MIGA neither invests, grants nor lends money One of the objectives of this evaluation was to to investors, nor does it propose or design proj- assess MIGA's role in EI projects. The safeguard ects. Like any other form of insurance, investors review, update and validation of previously and lenders who want this coverage pay pre- evaluated projects, and case studies all looked miums."311 Clearly, because MIGA offers politi- 1 9 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T cal risk insurance, a primary dimension of its con- role as an insurer, this review has found that tribution is expected to be the facilitation or MIGA plays no direct role in the financial per- enabling of FDI in countries and sectors where formance of EI projects, although the agency perceptions of political risk are high. However, provides a potential safety net against the impact as a member of the WBG, MIGA's potential to of political risks. (While a reduction in political add value is broader than that of a traditional risks may have the potential to lower the cost insurer and encompasses environmental, social, of capital and enhance financial performance and developmental impacts of the projects it indirectly, an analysis of this relationship was insures. In reference to this role, MIGA has also not carried out in the scope of this evaluation.) noted that "in order for investments to provide As an insurer with the primary mandate to facil- development opportunities for local communi- itate investment, MIGA does not participate in ties, the projects must be environmentally and the operational or financial management of the socially sound. Therefore, in carrying out its project, and, thus, its room for action is very lim- mission, it is MIGA's policy that all the foreign ited. Nevertheless, the financial viability of its investments that it insures are carried out in an guarantee projects is highly relevant for MIGA's environmentally and socially responsible man- long-term financial sustainability, as poor finan- ner."312 Against this background, defining the cial performance can lead to early cancellation value MIGA adds, as a member of the WBG, is of guarantees. even more important. With respect to the environmental and social Project development impact/outcome. The dimensions of EI projects, MIGA's role has development impacts of evaluated projects, as evolved over the period covered by this evalu- presented in previous sections, have varied. ation, with a clearly improving trend. More Once a guarantee is issued, MIGA does not nor- recently, the concept of MIGA's role has been mally influence the development impact of the more appropriately articulated as its "value project and has not done so in any of the proj- added" to the projects it guarantees. The find- ects reviewed. (In one project, MIGA had a pos- ings of this evaluation indicate that there are areas itive role in community and environmental issues. where MIGA has added substantial value for See Box E1.) Moreover, no follow-up develop- some projects, while for others, MIGA's role ment information about the reviewed projects has been more that of a traditional insurer (i.e., existed in MIGA's files, except if it had an ex- limited to providing political risk coverage). The post evaluation (i.e., the six validated projects). latter is more likely when guarantee holders are The key role is therefore for MIGA to select proj- lenders or minority partners and less so if they ects with high potential development impact are majority owners or operators. through the underwriting process. MIGA's Contribution and Effectiveness Where Was MIGA's Value Added Highest? This subsection draws on findings from the evaluated projects to assess to what extent and Facilitating foreign investments. The pro- in which ways MIGA had contributed to their vision of political risk insurance is a core tool improvement or success. These findings show for MIGA to facilitate FDI and the basis for the that MIGA's role and the degree and nature of agency's most important value added. Evalu- its contributions varied widely, as the agency ated EI investments were primarily in countries changed its approach over the period covered in which private foreign investors had been by this evaluation. reluctant to make large investments because of either limited experience with new govern- Where Was MIGA's Value Added Lowest? ments or difficulties faced by previous invest- ments in that country or sector. In these cases, Business performance of projects. As MIGA's political risk insurance was important expected from its Operational Regulations and for enabling investment flows into the mining 1 9 2 A N N E X E -- M I G A' S E X P E R I E N C E and oil and gas sectors and in some cases has ners, who took the responsibility for due dili- led the way for other investments in the host gence. These arrangements worked reasonably countries. MIGA has acted as a facilitator of well (and were cost-effective) for MIGA when investments, often with other partners, that the partner adhered to similar environmental and otherwise would have been delayed or social policies and guidelines (e.g., IFC). How- avoided. MIGA insurance was essential for ever, when a partner carrying out due diligence most projects evaluated, given their location in on MIGA's behalf had lower standards than countries with high political risks and low MIGA, it led to unsatisfactory results. This was governance scores, and large sunk costs asso- the case in one project reviewed, where MIGA's ciated with investments in EI projects. In some reinsurance agreement predated the new MIGA cases, investments would not have gone for- practice by which the reinsured project must ward without MIGA's involvement. adhere to MIGA's environmental standards. The results from several projects also Environmental and Social Safeguards. Apart demonstrate that well-designed plans for min- from reducing political risk for investors, the imizing social impacts can greatly reduce social other area where MIGA has added value was in conflicts, thereby reducing the occurrence of the incorporation, and/or enforcement of safe- some of the risks MIGA guarantees. Thus, guards in EI projects and the advice MIGA there is a strong business case for MIGA to add experts (or those performing this function on value by remaining engaged and providing MIGA's behalf) have provided to clients. All EI more proactive social and environmental advice projects reviewed have to some degree benefited to its clients involved in extractive industries from the incorporation of environmental and projects. social safeguards, even though not all of the proj- ects have attained a level of full consistency Staff Perceptions with MIGA safeguard policies. The association with the World Bank Group has been perceived WBG EI staff survey results: Divergence of by most investors both as an umbrella for their Operations Evaluation Unit findings from projects and as a source of knowledge and best MIGA staff perceptions. The WBG EI survey practice on environmental and social aspects. In was administered to relevant Bank, IFC, and some cases, international investors have applied MIGA staff. In MIGA, all current MIGA staff their own high standards consistent with inter- who have been directly involved with EI proj- national best practice. ects (either as underwriters or project man- In one case (a high-profile project with envi- agers) were asked to respond to the survey ronmental and social ramifications), because (the same set of questions was given to World the sponsor requested that MIGA provide cov- Bank and IFC staff involved in EI sector proj- erage that would address land rights disputes, ects).313 MIGA responses to the survey (Box MIGA (with advice from IFC) followed the land E3) show some important differences from OEU negotiations process in great detail and obliged evaluation findings of EI projects. One notable the sponsor to provide detailed information on divergence is in the area of addressing envi- both the consultation process and the results of ronmental and social aspects of EI projects: all the land usage agreement. MIGA then verified (9 out of 9) MIGA staff who responded felt that the validity of the process and results with gov- the issue of mitigating environmental and social ernment and civil society organizations at impacts was highly important and, at the same national, regional, and local levels. In another time, all (9 out of 9 who responded) also felt case, MIGA's value added came during project that these issues had been adequately addressed implementation rather than at the design stage in MIGA-guaranteed EI projects. However, (see Box E1). OEU's safeguards review indicated that about In some projects, MIGA delegated environ- 27 percent of EI projects had substantial gaps mental and social safeguards aspects to its part- and were not fully consistent with environ- 1 9 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T M a i n M e s s a g e s f r o m R e s p o n s e s B o x E 3 b y M I G A S t a f f i n W B G E I S u r v e y The survey was administered to all MIGA staff (12) MIGA respondents felt that the mitigation of negative previously involved in EI projects, with a response rate environmental impacts (same proportion for IFC) and of 83 percent (10 out of 12). While the absolute numbers revenue generation had been adequately addressed in are small (as MIGA itself is small, with a total of 78 Inter- past EI projects. national staff), it represents the statistical population Coordination across WBG for the EI sector: All (8 of of MIGA staff who have worked on the EI sector proj- 8) MIGA respondents considered the coordination across ects. In parallel, the same survey was sent to 51 World the WBG as adequate, while only 48 percent of IFC Bank staff, with 26 responding (51 percent of EI staff), respondents and 52 percent of World Bank respondents and to 33 IFC staff, with 30 responding (91 percent). considered the level of coordination as sufficient. (Because not all respondents provided answers to all Avoidance of EI projects due to safeguards con- questions, the total number of respondents to specific cerns: Among the possible sources of avoidance of questions are noted below.) potential EI projects due to safeguard concerns, MIGA Importance of EI-related issues for EI-dependent respondents identified WBG management (6 out of 6) countries: Almost all MIGA and WBG respondents and EI public agencies/enterprises (3 out of 4) as the agreed with the importance of all EI issues the survey top two leading causes. While all WBG respondents questionnaire had identified. In particular, all (9 out of also cited WBG management as a primary cause, only 9) MIGA respondents agreed with the importance of mit- 21 percent of World Bank respondents and 56 percent igating negative environmental and social impacts. of IFC respondents considered EI public agencies/enter- On the other hand, the investment climate and gover- prises an important factor. nance and transparency were considered highly impor- Factors constraining the ability of WBG staff to assist tant by only one-third (3 out of 9) of MIGA respondents, client countries in EI sector: More than half of MIGA whereas a higher share (two-thirds) of IFC and World respondents (5 out of 9) cited the inadequate linkage Bank respondents felt these were highly important in between EI sector activities and sustainable develop- EI projects. ment as the major factor constraining their ability to Extent to which EI projects address EI-related assist host countries in the EI sector. In addition, less than issues: The majority of MIGA respondents and about one-third of MIGA respondents cited inadequate avail- two-thirds or more of all WBG respondents felt that ability of staff with appropriate skills, inadequate level WBG projects collectively and adequately addressed of support from the Bank's Country Department/Country all major issues, except the improvement of trans- Management Unit, and inadequate level of support from parency and governance. Moreover, all (9 out of 9) the client government. mental and social safeguards.314 One possible of better results in EI projects. However, all (8 explanation for this divergence is the relatively out of 8) MIGA respondents indicated that, in short tenure of the respondents in MIGA. This their view, the level of coordination was ade- could have influenced their views in focusing quate, which may suggest a desire to preserve on the current, rather than historical, perspec- MIGA's operational "autonomy" (i.e., not getting tive. However, 7 out of 10 MIGA respondents too involved with WBG operations/processes). were also directly involved in five projects cov- These results are also likely to be a reflection ered in this review, increasing the relevance of of the differences in products, clientele, and pro- their answers. cedures between the Bank and MIGA, where The joint WBG evaluation (as reflected in the staff see opportunities for coordination as inher- Main Report) identified the lack of adequate ently limited to policy and strategy matters. coordination among the three WBG organiza- Similarly, very few (2 out of 7) MIGA staff felt tions as a problem that constrains the delivery that there was a need for better support from 1 9 4 A N N E X E -- M I G A' S E X P E R I E N C E World Bank country units, in contrast to IFC's Findings staff perceptions. MIGA respondents (6 out of 6) also felt Portfolio that WBG (World Bank, IFC, and MIGA) man- agement is the most likely cause for avoiding Extractive industry projects and guarantees good EI projects due to perceived risks and the constitute a declining share of MIGA's port- time needed to address safeguard concerns. folio. Mining was originally the largest share of These responses indicate that staff find WBG MIGA's guarantees, making up more than half management is overly cautious and also some of its portfolio. Extractive industries now con- (4) believe that public agencies interfere with, stitute about 11 percent (6.6 percent mining rather than facilitate, MIGA's work. On the and 4.3 percent oil and gas), and MIGA contin- other hand, none of the respondents felt that ues to be engaged in the sector. concerns from host countries about safeguards were a source for avoiding good EI projects. Application of Environmental and Social Safeguards 5. Findings and Recommendations MIGA's activities in the extractive industry sec- Consistency of project performance with tors have evolved significantly in the period safeguards has generally been greater dur- under review (in particular since 1997), improv- ing implementation than at approval, and ing its operations at approval and during imple- the trend in safeguard performance has mentation and learning from its experience in been improving over time. On average, the rate underwriting 31 projects. Noteworthy milestones of substantial consistency with MIGA's safe- are its Business Process Review, the creation of guard policies of EI projects improved from 73 an in-house environmental unit, the environ- percent (at Board approval) to 88 percent (dur- mental assessment and disclosure polices, the ing implementation or at guarantee cancella- approval of interim issue-specific safeguard poli- tion). This likely reflects the expansion of MIGA's cies, and the updating of its guarantee contract efforts and of its capacity in safeguard areas language and reinsurance practice. since 1997. MIGA's approach over the years has fol- · At Board approval, the greatest areas of lowed the guidance of its Convention, Article weakness in safeguard performance have 2 of which states that "the objective of the been in consultation and disclosure, inade- Agency shall be to encourage the flow of invest- quate incorporation of safeguard issues in ments for productive purposes." Article 12 contracts of guarantee, and in specific ele- requires the Agency to satisfy itself as to "the ments, including resettlement, indigenous economic soundness of the investment and its peoples, natural habitats, dam safety, and contribution to the development of the host lack of clarity on mine closure provisions. country" and to the "consistency of the invest- · During implementation, the greatest areas ment with the declared development objectives of weakness in safeguard performance and priorities of the host country." These objec- have been in consultation and disclosure, tives also underpin MIGA's need to use envi- final assessment of resettlement implemen- ronmental and social standards for the projects tation, and natural habitats. Reporting on it insures. As standards for successful develop- social impacts and social safeguard compli- ment have become more complex and sophis- ance has also been weak. ticated, MIGA has adapted its safeguard policies and its analyses of the development impact of Insufficient attention paid to consistency projects. MIGA continues to refine and aug- with social safeguards is the most sensitive ment the scope of its selection criteria. The and critical issue in extractive industries findings and recommendations listed in this projects. Only one-third of the sampled proj- section are intended to contribute to this process. ects that involved indigenous peoples and reset- 1 9 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T tlement and community development issues had before establishing its own unit. In 6 of 12 proj- prepared a comprehensive and implementable ects reviewed, independent monitoring and Resettlement Plan (RP) or Community Devel- reporting initiatives were taken by either senior opment Program (CDP). Not a single reviewed lenders or other insurers and not by MIGA. In project (where these safeguards were applica- some earlier projects, there was no explicit con- ble) had a comprehensive and implementable tractual obligation and no recourse to MIGA for IPP at Board approval. the project to comply with safeguard policies. MIGA environmental specialists visited 5 of the None of the contracts issued for the proj- 12 projects reviewed, following the establishment ects under review specified the safeguard of the in-house environmental unit. MIGA could policies that applied, and only a few indi- have had greater impact on improving project cated the WBG's environmental, health, and performance had it taken a more proactive safety guidelines that applied. Although all approach earlier in its history. recent MIGA contracts allow MIGA to terminate the contract if the project does not comply MIGA's due diligence model (and current with MIGA's environmental polices and guide- capacity) is not sufficient to adequately lines and there has been a more consistent address social aspects of extractive indus- effort in reference to this requirement since tries projects. The current MIGA approach of 1999, this may not be sufficient to ensure gearing the processes of monitoring and super- investors' awareness of specific applicable poli- vision, directing its resources and staff selectively cies and guidelines. to projects after problems emerge, is not appro- priate for dealing with complex social issues MIGA has not consistently required envi- often associated with EI sector projects. Sys- ronmental and social monitoring reports tematic and proactive monitoring, including site from its guarantee holders in its contract visits by MIGA experts, to identify the nature of of guarantee. In two-thirds of the reviewed possible gaps in safeguards and potential prob- projects, senior lenders, bilateral agencies, or lems is a critical element of the due diligence the major investors provided regular monitor- process. It is particularly important to assess the ing reports on environmental (and sometimes social risks at critical project cycle milestones, social) issues that allowed MIGA to monitor which cannot be adequately done through desk safeguard compliance. However, in four proj- reviews. ects there were no follow-up monitoring reports from investors, leaving MIGA in a vul- MIGA's delayed involvement in extractive nerable position regarding safeguards imple- industries projects has meant missed mentation. opportunities to add value or to improve projects' environmental and social per- Committed investors with the capacity to formance. One consequence is that projects' implement mitigation and monitoring pro- environmental and social management systems grams have been an important factor in are not in place at the start of project construc- ensuring better safeguard compliance. tion; this can lead to adverse social and envi- ronmental impacts due to the lack of control over Internal Capacity the work of contractors. This is the most criti- cal period for investors in their relationship with Environmental performance was treated project-affected communities, and any good will more thoroughly by MIGA in the second that has been generated during their previous half of the 1990s than in the first half, espe- dealings (and promises) with the community can cially after the creation of an environmental quickly sour, leaving investors with a difficult unit. MIGA relied on environmental and social legacy to overcome when the project becomes experts of IFC or of other parties in the project operational. 1 9 6 A N N E X E -- M I G A' S E X P E R I E N C E Development Impacts and Underwriting and to MIGA itself (reputational risk, as well as claims brought under civil war and disturbance The evaluated extractive industries sector and expropriation coverages). Even though projects generally have produced positive issues related to human rights are part of MIGA's economic impacts in host countries, but due diligence process when they have an investor returns have been disappointing. impact on covered risks, greater awareness Actual financial returns to investors were lower during underwriting by MIGA staff and ensur- than originally anticipated, due to decreasing ing that they are adequately dealt with by metals prices in the late 1990s, as well as cost investors would better address such risks. overruns and lower ore quality than expected. The projects provided jobs, training, revenues to Lack of a systematic and post-contract fol- the government, and funds to community ini- low-up of developmental impacts in extrac- tiatives and had demonstration effects for private tive industry projects. MIGA does not have sector development. Host governments have a system that monitors developmental impacts received less revenue than they expected because to identify shortcomings after contract signing of the poorer-than-expected economic and finan- and to manage risks from the developmental cial performance of extractive industry projects. perspective. MIGA's underwriting for extractive indus- MIGA's Role in Extractive Industries Projects tries projects reviewed was generally thor- ough, and project assessments were based Most of the evaluated projects were in dif- on the information available from the ficult countries with weak governance, as clients at that time, although their compo- well as high perceived political risks, where nents could have been better integrated. MIGA's political risk insurance was deemed Analysis was compartmentalized by the sources essential for investments to go forward. Thus, of the information (e.g., investors, MIGA under- MIGA added value as an insurer by facilitating writers, and environmental specialists). While and enabling foreign direct investment in these most elements are combined when projects are large and complex projects. assessed, economic and social analyses and impacts have not been well integrated. EI proj- Surveyed MIGA staff who have been involved ects reviewed were complex, involved large in underwriting extractive industry projects investments and revenues for the host govern- are supportive of MIGA's environmental ments, and had important environmental and and social standards and feel that MIGA is social implications, subjecting them to close doing a sound job in applying these stan- public and international scrutiny. Thus, they dards to its projects. These staff see no need required a more holistic understanding of finan- for increased coordination with the Bank and IFC cial, economic, social, and environmental on extractive industries projects. aspects from a developmental perspective. In some projects, MIGA delegated environ- Security-related incidents in MIGA-guar- mental and social safeguard due diligence anteed extractive industries projects to its partners. These arrangements worked involving allegations of violations of indi- well when the partners adhered to similar poli- vidual rights can pose particularly high cies and guidelines. But if a partner had lower risks for MIGA. Some reviewed MIGA proj- standards than MIGA (such as in an older rein- ects experienced incidents where alleged vio- sured project), it led to unsatisfactory results lations of individual rights occurred in and left MIGA vulnerable. connection with site security. Such violations can increase risks to MIGA-guaranteed projects MIGA's particular value added as an (increasing conflict and affecting operations) insurer of extractive industries projects is 1 9 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T in the environmental and social standards components in MIGA's work in addition to the it brings with its guarantees. This aspect of environmental component. This calls for a more its insurance is appealing to many investors, as proactive, forward-looking approach to servic- it helps them manage their own nonfinancial ing clients that goes beyond the current practice project risks. Hands-on assistance and advice is of intervening only when events warrant it. possible and desirable in extractive industries Strengthening the upstream involvement of projects, and it is appreciated by clients. environmental and social issues in MIGA's under- writing decisionmaking process. This entails There is a strong business case for MIGA to consistently identifying applicable safeguard add value by providing substantive and policies to clients as early as possible in the continued social and environmental advice underwriting process and using risk assessments to extractive industries clients after contract early on to identify where failures in the safe- signing. The results from several projects guard system may occur to avoid adverse impacts demonstrate that well-designed plans for mini- on the environment and local communities. mizing social impacts can greatly reduce social MIGA needs to make a greater effort to work conflicts, thereby mitigating the political risks with clients to ensure compliance with its envi- MIGA guarantees, whereas their absence can ronmental and social safeguard policies and lead to serious problems. guidelines at the time of Board approval. In addition, MIGA needs to consider how its work Recommendations in assessing, underwriting, and supervising its MIGA's support to EI sector projects has the guarantee projects can go beyond the monitor- potential to generate positive development ing of compliance with safeguards toward pro- results. MIGA should continue underwriting EI moting development effectiveness in its projects. projects while strengthening its value added to Associating with investors committed to sus- meet stakeholders' expectations. MIGA's safe- tainable development and avoiding those who guard policies provide the basis, and an oppor- are unable to provide MIGA with timely envi- tunity, for contributing to the development ronmental and social monitoring reports during effectiveness of EI projects it guarantees. implementation. MIGA should satisfy itself before engaging in new EI projects that the investor Recommendation 1: Strategy and Rules of understands its environmental and social respon- Engagement sibilities and demonstrates ownership at the top MIGA needs to recognize and promote the poten- management level to community development tial benefits it brings to EI projects through its and mitigating environmental and social impacts. internationally recognized and comprehensive The project enterprise's organizational structure, set of safeguard policies and its environmental policies, and stated mission should be consistent and social impact mitigation services. MIGA's with these goals. engagement with EI projects should move beyond compliance with its environmental and social Recommendation 2: Policies, Procedures, and safeguard policies toward the promotion and Enforcement Mechanisms achievement of the development effectiveness of MIGA should strengthen its internal policies and these projects. This requires the following: support them with appropriate procedures and Recognizing that MIGA has the opportunity guidelines for staff to ensure accountability. This to add value to EI projects by adopting an requires the following: explicit business strategy focused on providing Establishing internal requirements for MIGA's proactive environmental and social advice to its timely engagement and systematic monitoring to guarantee clients that brings EI projects closer maximize environmental and social benefits. to best practices in the industry, with the goal This will entail avoiding projects where MIGA of achieving sustainable development. This cannot address environmental or social issues to requires strengthening the economic and social improve the outcome due to its late participa- 1 9 8 A N N E X E -- M I G A' S E X P E R I E N C E tion. Site visits by MIGA's environmental and guidance to operational staff, as well as for the social experts should be required as early as pos- analysis and monitoring of economic, environ- sible in its involvement in Category `A' and other mental, and social issues in an integrated man- high-risk projects to assess which policies are ner. This requires the following: applicable. MIGA should not rely exclusively on Scaling up the analysis of developmental assessments and reports of non-WBG institutions. impacts of prospective projects and integrating Incorporating standards recognizing the rights new concepts in harmony with the rest of the of individuals relating to security arrangements World Bank Group. In so doing, MIGA should at EI projects into its policies and operational reg- closely cooperate with the other members of the ulations. WBG to benefit from synergies, complementar- Making better use of MIGA's Contracts of ities, and expert knowledge, with the objective Guarantee to enable the Agency to facilitate of promoting a holistic approach to EI projects. compliance with its policies and standards. In This will also require building internal capacity addition to the current requirement to comply by both recruiting needed economic skills and with safeguard policies and environmental and providing appropriate training to current staff. health and safety guidelines, for future projects Establishing an internal system that allows a MIGA should ensure that the contracts clearly more integrated and timely monitoring of devel- and explicitly state which environmental and opmental impacts of guaranteed projects. social safeguard policies and guidelines apply to Upgrading and expanding the role of envi- the project under guarantee and establish thresh- ronmental and social specialists and, at the same olds and conditions for timely and effective time, building internal social skills capacity to compliance. When applicable, contracts should effectively enable the application of social safe- also specify requirements for implementation of guards in MIGA projects. Environmental Management Plans, RPs, CDPs, Formalizing the practice of ensuring that and IPPs. As required by the involuntary reset- MIGA environmental staff are involved in proj- tlement and indigenous peoples policies, MIGA ects beyond the submission of clearance memos, should ensure that investors prepare RPs, CDPs, and requiring that MIGA environmental and and IPPs before project approval rather than leav- social staff provide inputs to guarantee and legal ing them to implementation. documentation to incorporate any environmental Establishing necessary mechanisms to ensure and social concerns. In addition, MIGA under- systematic, timely, and regular monitoring and writing staff should be required to keep envi- supervision of safeguard compliance of MIGA EI ronmental and social specialists appraised of guarantee projects (e.g., MIGA should require in all relevant changes beyond Board approval its Contracts of Guarantee timely environmen- and contract signing. tal and social monitoring reports from its guar- antee holders during the project implementation Recommendation 4: Legacy of Active EI phase). MIGA should also require sponsors to Projects set up environmental and social project man- MIGA needs to review its portfolio of active EI proj- agement systems at a sufficiently early stage to ects to identify potential or actual deficiencies in effectively monitor impacts, including during the application of safeguard policies and to the construction stage. swiftly take appropriate remedial actions. This should involve the following: Recommendation 3: Internal Organization Identifying projects that may not be consistent MIGA should update its business model by clearly with safeguard policies. In particular, where assigning the locus of responsibility for better resettlement and land acquisition has taken place integration of economic, environmental, and without follow-up audits to determine compliance social issues in MIGA operations. This is needed with WBG policies regarding resettlement, third- in order to support other departments in the party audits should be required. Similarly, where achievement of these objectives and to provide indigenous peoples have been affected without 1 9 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T the provision for Indigenous Peoples Plans to mit- Making every effort to encourage consis- igate the impacts, sponsors should be asked to tency with MIGA's safeguard policies in active prepare and implement such plans. Providing extractive industries projects with reinsurance briefings on potential problems with sensitive agreements predating the new MIGA practice. projects, a system currently used by MIGA, is use- New agreements require that environmental ful but not sufficient. MIGA should take appro- and social standards applied by partners are con- priate remedial actions to address existing sistent with MIGA's own safeguard policies and safeguard deficiencies in extractive industry proj- guidelines. ects that are still active in MIGA's portfolio. 2 0 0 A N N E X E -- M I G A' S E X P E R I E N C E M I G A G u a r a n t e e P r o j e c t s i n t h e E x t r a c t i v e I n d u s t r i e s , A t t a c h m e n t 1 F Y 1 9 9 0 ­ 2 0 0 3 ( a s o f D e c e m b e r 3 1 , 2 0 0 2 ) Maximum Host Fiscal aggregate Project enterprise Guarantee holder country Sector year liability (US$) Status FDI (US$) 1. Freeport Indonesia, Inc. Freeport-McMoRan Copper Indonesia Mining 90 50,000,000 Cancelled 499,813,000 & Gold, Inc. 2. Compania Minera Mantos Placer Dome, Inc. (Export Chile Mining 90 49,770,000 Cancelled 335,000,000 de Oro Development Corporation [EDC]) 3. Compania Minera Cerro Rio Algom Limited Chile Mining 91 5,000,000 Cancelled 310,000,000 Colorado S.A. OPIC (Citibank/Credit Suisse) 92 22,500,000 4. Omai Gold Mines Ltd. Cambior Inc. (EDC) Guyana Mining 92 36,720,000 Active 162,000,000 Cambior Inc. (EDC) 92 13,158,000 5. Alumina Partners of Jamaica Hydro Aluminum Jamaica a.s. Jamaica Mining 93 20,223,000 Cancelled 336,974,000 6. Kasese Cobalt Company Limited La Source Compagnie Uganda Mining 93 5,000,000 Cancelled 95,400,000 Minière SAS. La Source/Mine Or S.A./ 93 5,000,000 Barclays Metals Ltd. La Source 96 3,600,000 Banff Resources Ltd. 98 1,908,020 Banff Resources Ltd. & 98 47,480,000 La Source SAS 7. Ghanaian-Australian Mines GSM Gold Limited Ghana Mining 93 9,850,000 Cancelled 71,600,000 Limited 8. Minera Yanacocha Compagnie Minière Peru Mining 94 1,404,000 Cancelled 82,081,387 Internationale Or Newmont Mining Corporation 94 2,160,000 Newmont Mining Corporation 94 5,616,000 Compagnie Minière 94 5,040,000 Internationale Or 94 18,961,000 Union Bank of Switzerland Union Bank of Switzerland 95 5,700,000 Newmont Mining Corporation 95 14,408,387 Mine Or S.A. 95 6,404,000 9. Compania Contractual Sumitomo Corporation Chile Mining 94 19,800,000 Cancelled 527,400,000 Minera Candelaria 10. Newmont-Zarafshan Newmont Gold Company Uzbekistan Mining 94 40,000,000 Cancelled 110,000,000 Joint Venture Newmont Gold Company 95 10,000,000 2 0 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Maximum Host Fiscal aggregate Project enterprise Guarantee holder country Sector year liability (US$) Status FDI (US$) 11. Sociedad Minera Cyprus Climax Metals Peru Mining 95 50,000,000 Cancelled 141,000,000 Cerro Verde, S.A. Company 12. British Gas Overseas Holdings British Gas plc Tunisia Oil & Gas 95 65,000,000 Cancelled 627,000,000 (British Gas Tunisia) 13. Magma Tintaya S.A. BHP Copper Inc. Peru Mining 95 24,000,000 Cancelled 328,000,000 14. Southern Gold (Bahamas) R.T.Z. Overseas Holdings Papua New Mining 96 10,000,000 Cancelled 892,000,000 Limited, Lihir Gold Limited Limited (Rio Tinto Zinc--RTZ) Guinea Union Bank of Switzerland 96 66,600,000 15. Kumtor Gold Company Cameco Corporation (EDC) Kyrgyzstan Mining 96 45,000,000 Active 335,000,000 Cameco Corporation (EDC) 2001 39,330,000 16. Societe d'Exploitation des AngloGold Mali Mining 96 50,000,000 Cancelled 267,000,000 Mines d'Or de Sadiola S.A. 17. Drummond Limited Drummond Company, Inc. Colombia Mining 97 35,000,000 Cancelled 235,000,000 18. Minera Alumbrera Limited Minera Alumbrera Ltd. (Export Argentina Mining 97 12,000,000 Active 1,033,000,000 Finance Insurance Corporation [EFIC]) Rio Algom Limited 97 2,000,000 19. Hydrocarbon Research Block Compañia Española de Seguros Algeria Oil & Gas 97 10,000,000 Cancelled 240,000,000 Rhourde Yacoub de Crédito a la Exportación S.A. 20. Zafiro Offshore Field UMC Equatorial Guinea Equatorial Oil & Gas 98 24,000,000 Cancelled 995,500,000 Corporation Guinea 21. Cerro Vanguardia S.A. Minorco S.A. Argentina Mining 98 5,000,000 Cancelled 202,600,000 22. Minera Los Pelambres Marubeni LP Holding B.V. Chile Mining 98 31,263,750 Cancelled 1,114,000,000 23. Companias Asociadas El Paso Energy International Argentina Oil & Gas 98 22,580,000 Active 538,000,000 Petroleras S.A. Company El Paso Energy International 98 17,617,500 Company 24. ICV-Inertes de Cabo Verde, Ltda. Secil-Companhia Geral De Cal Cape Verde Mining 98 540,000 Active 1,709,000 e Cimento, S.A Secil-Companhia Geral De Cal 98 660,000 e Cimento, S.A Sociedade de Empreitadas 98 540,000 Adriano S.A. Sociedade de Empreitadas 98 660,000 Adriano S.A. 25. Compania Minera Citicorp Peru Mining 99 60,702,000 Active 2,106,000,000 Antamina S.A. Noranda Inc. 99 2,550,000 Rio Algom Limited 99 2,550,000 Teck Corporation 99 1,700,000 Mitsubishi Corporation 2000 16,250,047 Mitsubishi Corporation 2000 23,709,953 2 0 2 A N N E X E -- M I G A' S E X P E R I E N C E Maximum Host Fiscal aggregate Project enterprise Guarantee holder country Sector year liability (US$) Status FDI (US$) 26. Omolon Gold Mining Inc. Kinam Gold, Inc. Russia Mining 2000 27,420,000 Cancelled 226,900,000 27. Kahama Mining Societe Generale Tanzania Mining 2000 115,830,000 Active 505,300,000 Corporation Limited Barrick Gold Corporation 2001 56,250,000 28. Omsukchansk Mining & New Arian Resources Russia Mining 2000 2,250,000 Active 96,000,000 Geological Company Corporation New Arian Resources Russia Mining 2000 2,250,000 Active 96,000,000 Corporation Standard Bank London Limited 2000 14,900,000 29. Barracuda & Caratinga Itochu Corporation, Brazil Oil & Gas 2001 12,000,000 Active 1,740,000,000 Leasing Company, B.V. Mitsubishi Corporation Deutsche Bank AG 2001 60,000,000 New York Branch 30. ZAO Stimul Victory Oil B.V. Russia Oil & Gas 2001 100,000,000 Active 71,201,160 31. ROMPCO Sasol Gas Holdings (Pty) Ltd. Mozambique Oil & Gas 2003 45,000,000 Active 857,000,000 Sasol Petroleum International (Pty) Ltd. 2003 27,000,000 Total 1,479,605,657 15,082,478,547 Extractive industries projects: Active projects: 11 Cancelled projects: 20 Oil & gas projects: Oil & gas projects: 7 Active oil & gas projects: 4 Mining projects: Mining projects: 24 Active mining projects: 7 2 0 3 A N N E X E -- M I G A' S E X P E R I E N C E M I G A E x t r a c t i v e I n d u s t r i e s A t t a c h m e n t 2 P r o j e c t s E v a l u a t e d b y O E U Evaluation of Environmental Safeguards developmental FY category review impact Case study 1. 1990 A 2. 1992 A 3. 1993, 1996, 1998 A 4. 1993 (A)a 5. 1994 A 6. 1996 A 7. 1996 A 8. 1996 A 9. 1997 A 10. 1997 A 11. 1998 B 12. 1999 A 13. 2000 A 14. 2001 B 15. 2001 B a. No formal category was assigned. The project was assumed to have been Category `A.' Number of active projects: 7 Number of cancelled projects: 8 2 0 5 A N N E X E -- M I G A' S E X P E R I E N C E M I G A S a f e g u a r d P o l i c i e s -- C r i t e r i a A t t a c h m e n t 3 A f o r C o n s i s t e n c y a t A p p r o v a l Criterion Requirements Comprehensive Applies to both majority and minority owners and lenders (designated herein as "sponsors") Environmental Assessment --required for all `As' and for `Bs' if host country legislation require or any of the environmental issues identified in the screening process warrant special attention. Comprehensive EA includes: (i) natural environment, social aspects, human health and safety, major hazards, transboundary/global and cumulative/induced impacts; (ii) prevent, minimize, mitigate or compensate for adverse environmental and social impacts and enhance positive impacts; (iii) potential for independent environmental advisory panel in case of highly risky or contentious project; (iv) properly defined area(s) of project impact; (v) for expansion or modernization projects the entire plant is subject to an EA (usually including an environmental audit); (vi) privatization projects require environmental audits; (vii) EAs (including environmental audits) to be carried out or reviewed by independent consultants; and (viii) compliance with more stringent of host country or MIGA environmental and health and safety standards or guidelines. Adequate analysis of feasible Proper analysis of project alternatives including: (i) without project alternative; (ii) where alternatives appropriate other sector alternatives; (iii) alternative sitings for facilities and routings of infrastructure corridors; (iv) alternative technologies and mitigation arrangements; and (v) analysis of feasible alternatives. Comprehensive Environmental Full description (with adequate support data) of the climatic, geological, topographical, and Social (E&S) baseline physical, chemical, biological and socio-cultural-economic environment of the area of project survey impact as a basis for an adequate analysis of project impacts and future monitoring of the efficacy of the mitigation measures incorporated into the project. Adequate EAP or A detailed plan of the set of mitigation, monitoring and reporting measures proposed to be EMP proposed taken during project implementation to eliminate adverse environmental or social impacts, offset them, or reduce them to acceptable levels--required for all `As' and `Bs.' Project sponsor's EMS adequate Comprehensiveness of environmental, social and safety management system proposed by the sponsor (including contractors) to fully implement the EAP or EMP, as well as appropriateness of proposed measures to strengthen these arrangements. Public disclosure/consultation (i) consultation with local affected parties and local interest groups during EA process; addressed (ii) disclosure of information in a timely manner and in a language and form understandable and accessible to local groups; (iii) for `A' projects final EA reports disclosed locally and through the World Bank Info-shop at least 60 days before MIGA Board approval. Comprehensive and (i) avoid or minimize involuntary physical resettlement or economic displacement; (ii) directly implementable RP/CDP affected and displaced persons should be: (a) informed of their options and rights regarding prepared land acquisition and resettlement as well as alternatives that are available; (b) compensated for their losses at full replacement cost prior to the actual move; (c) assisted with the move and supported during the transition period in the resettlement site; and (d) assisted in their efforts to improve their former living standards, income earning capacity, and production levels, or at least to restore them. Particular attention should be paid to the needs of the poorest groups to be resettled; (iii) Land, housing, infrastructure, and other compensation should be provided to the adversely affected population, indigenous groups, ethnic minorities, and pastoralists who may have usufruct or customary rights to the land or other 2 0 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Criterion Requirements resources taken for the project. The absence of legal title to land by such groups should not be a bar to compensation; (iv) alternative or similar resources provided to compensate for the loss of access to community resources; (v) in new resettlement sites or host communities improve, restore or maintain accessibility and levels of service for the displaced persons and host communities; (vi) minimize impacts on host communities including consultation with these communities; (vii) consult and involve affected people in planning, and implementation; (viii) community level impacts require preparation of community development programs to improve the economic and social well-being of the affected communities as well as the affected households; (ix) preparation of a resettlement plan (RP), or other resettlement instrument (e.g., resettlement framework) as agreed with MIGA; and (x) disclosure of RPs involving more than 50 households or 250 people. Comprehensive and Appropriate identification of indigenous groups in project area, namely those having: implementable IPP prepared (a) close attachment to ancestral territories and the natural resources in them; (b) self- identification and identification by others as members of a distinct cultural group; (c) presence of customary social and political institutions; (d) economic systems primarily orientated to subsistence production; and (e) indigenous language. Ensure: (i) avoidance and mitigation of adverse impacts; (ii) informed participation of the indigenous peoples themselves; (iii) culturally appropriate compensatory measures or social and economic benefits; and (iv) in consultation with indigenous peoples preparation of an Indigenous Peoples Plan. Natural habitats protected or (i) Project does not significantly convert/degrade a critical habitat; (ii) natural habitats are offsets provided correctly identified; (iii) alternative analysis examines alternatives to significant conversion; (iv) if conversion can- not be avoided, impact are minimized, mitigated and offset requirements are examined. Comprehensive dam safety New Dams: measures proposed Safety measures from design to operation for dam and associated works, including for: (i) dams >15 meters in final height; (ii) for special case (flood prone, seismic area, difficult foundations, toxic materials, etc.) dams between 10 and 15 m; and (iii) for dams initially under 10 m if expected to become large dams during construction, require the following: (a) reviews by independent expertise throughout design and construction of dam and for start of operations; (b) plan for construction, supervision and quality assurance, plan for instrumentation, an Operation and Maintenance (O&M) plan, and an emergency preparedness plan; (c) construction by fully qualified companies under proper supervision; (d) periodic safety inspections after completion of construction; Existing Dams: (i) independent dam specialist(s) to evaluate safety status, performance history and owner's operation/maintenance procedures; and (ii) specify remedial works or safety-related measures to upgrade dam to an acceptable standard of safety. Tailings Dams and Ash Lagoons: (i) this policy applies to such dams in excess of 10 m if: (a) the impoundment is cross-valley structure; or (b) after construction of a starter dam, the impoundment structure is made of whole tailings; or (c) standard testing methods indicate net acid generating potential of tailings or ash. However generic safety measures designed by qualified engineers are adequate for such dams less than 10 m in height, if tailings or ash have no net acid generating potential and impoundment is: (a) located in relatively flat terrain, highly arid areas or in permafrost zones; and (b) not subject to inflow from streams or rivers: (ii) stream 2 0 8 A N N E X E -- M I G A' S E X P E R I E N C E Criterion Requirements diversions and spillways to be designed for 100 yr. flood; and (iii) preparation of closure and abandonment plans. Cultural Property protection (i) avoid harm to significant, non-replicable cultural property or with the help of qualified proposed experts mitigate such impacts if loss is judged to be minor or otherwise acceptable; (ii) sponsor addresses protection/management of cultural property in project area including "chance finds"; (iii) sponsor meets host country regulations/laws (or adheres to best practice in the absence of host country laws); and (iv) sponsor consults with relevant stakeholders in documenting presence and significance of physical cultural resources. The set of requirements for each criterion of safeguard policy compliance were rated according to the following scale: · High: the set of requirements were fully met, or expected to be fully met, with no shortcomings · Substantial: the set of requirements generally were met, or expected to be met, with only minor shortcomings · Modest: the set of requirements were met, or expected to be met, but with significant shortcomings · Negligible: the set of requirements were not met, or expected not to be met, due to major shortcomings 2 0 9 A N N E X E -- M I G A' S E X P E R I E N C E M I G A S a f e g u a r d P o l i c i e s -- C r i t e r i a A t t a c h m e n t 3 B f o r P r o j e c t s u n d e r G u a r a n t e e Criterion Requirements EAP or EMP fully implemented Assess how effectively the EAP or EMP has been implemented by the sponsor and note any gaps and deficiencies. Note how well EAP or EMP implementation progress has been documented and reported in a timely manner. Note any deviations from the original plan and if these were appropriate considering the circumstances. E&S monitoring implemented Assess if the EAP's or EMP's E&S monitoring plan has been implemented according to the timing proposed. Assess if the monitoring results are substantiating the effectiveness of the E&S mitigation measures or not. Note if the results are being used to take corrective measures if needed. Sponsor's project Determine if the sponsor has implemented the environmental, social and safety management implementation EMS effective system proposed in the EAP or EMP. Assess the effectiveness of the proposed institutional strengthening measures to improve this system and whether the system has active sponsor management support. Assess its sustainability in the longer term. Continuing public disclosure Determine the extent to which project affected groups and other stakeholders continue to be and consultation consulted and involved during the implementation phase of the project. Assess if there have been any complaints by project affected people and how these complaints were dealt with by the Borrower. Full compensation of project Assess if displaced persons have been: (a) compensated for their losses at full replacement affected people (PAPs) cost prior to the actual move; (b) assisted with the move and supported during the transition period in the resettlement site; and (c) assisted in their efforts to improve their former living standards, income earning capacity, and production levels, or at least to restore them. RP/CDP fully implemented Determine if the RP/CDP has been fully implemented by the sponsor. Assess if the sponsor has adequately monitored and evaluated the activities set forth in the RP/CDP. If upon termination of the contract of guarantee the RP/CDP has not been fully implemented assess what follow-up actions the sponsor proposes to meet the objectives of the plan and if these are adequate. IPP fully implemented Determine if the IPP has been fully implemented by the sponsor. Assess if the sponsor has adequately monitored and evaluated the activities set forth in the IPAP. If upon termination of the contract of guarantee the IPAP has not been fully implemented, assess what follow-up actions the sponsor proposes to meet the objectives of the plan and if these are adequate. Natural habitats protected or Assess if sponsor has taken all necessary measures to limit any significant conversion/ offsets provided degradation of critical natural habitat and/or provide offset requirements as proposed in the EA. Assess the sustainability of these measures once the project has been implemented. Dam safety measures For new dams covered by the policy, assess if the safety measures recommended by the implemented independent dam expert(s) throughout investigation, design and construction of dam and start-up of operations were implemented. Evaluate effectiveness of plans for construction, supervision and quality assurance, as well as for instrumentation, O&M and emergency preparedness. Assess the results of periodic safety inspections after completion of construction. For existing dams, assess if the safety measures proposed by the independent dam specialist(s) have been implemented as proposed and note any deviations. 2 1 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T (continued) Criterion Requirements Cultural property protected Assess if appropriate measures were taken by the sponsor to avoid harm to significant, non- replicable cultural property and provide protection/management of cultural property in project area including "chance finds" according to best practice or host country regulations/laws. Reporting on safeguard Determine if MIGA has specified a comprehensive set of safeguard policy performance policies by sponsor adequate indicators that are appropriate for the project under implementation. Assess the timeliness and effectiveness of the reporting of indicators and their evaluation by the sponsor and MIGA, noting any deficiencies. Assess if the following requirements have been met: (i) MIGA ensures that contract of guarantee includes an obligation to carry out the EAP/EMP and includes as additional conditions specific measures under the EAP/EMP, as appropriate for facilitating effective monitoring on EMP implementation; and (ii) the sponsor's obligations to carry out the RP/CDP and/or IPP (or other instrument agreed with MIGA) and to keep MIGA informed of implementation progress are provided for in the contract of guarantee. Monitoring and evaluation MIGA reviews regular monitoring reports on safeguard compliance provided by the sponsor (M&E) of safeguard policies and notes any areas of concern for follow-up with sponsor. MIGA bases supervision of the by MIGA adequate projects environmental/social/safety aspects on the findings and recommendations of the EA, including measures set out in the legal agreements, any EMP and other project documents, and ensures that supervision missions contain adequate environmental and social expertise. During supervision MIGA reviews sponsor's implementation progress (incl. progress reports) and assesses Borrower's compliance with agreed environmental actions, particularly the implementation of environmental and social mitigation, monitoring and management measures. If compliance is unsatisfactory, MIGA discusses with sponsor actions necessary to correct non-compliance and follows-up on the implementation of such actions. The set of requirements for each criterion of safeguard policy compliance were rated according to the following scale: · High: the set of requirements were fully met, or expected to be fully met, with no shortcomings · Substantial: the set of requirements generally were met, or expected to be met, with only minor shortcomings · Modest: the set of requirements were met, or expected to be met, but with significant shortcomings · Negligible: the set of requirements were not met, or expected not to be met, due to major shortcomings 2 1 2 A N N E X E -- M I G A' S E X P E R I E N C E A t t a c h m e n t 4 M I G A S a f e g u a r d P o l i c y T r i g g e r s Safeguard Policy Trigger Environmental Assessment-- Adverse environmental and social impacts that are sensitive, diverse or unprecedented and Category `A' (May 1999) likely to be significant beyond the project fenceline. Environmental Assessment-- Projects whose impacts are limited in number, less adverse than those of Category `A,' and Category `B' (May 1999) can be addressed by compliance with MIGA's environmental guidelines or through application of recognized pollution prevention and abatement measures (or recognized best management practices). Natural Habitats Significant conversion or degradation of natural habitats, or loss or modification of habitat (Interim 2002 policy) in protected areas. Involuntary Resettlement Involuntary taking of land resulting in (i) relocation or loss of shelter; (ii) loss of assets or (Interim 2002 policy) access to assets; or (iii) loss of income source or means of livelihood. Indigenous Peoples Conflicts with or adverse impacts on indigenous peoples, tribes or ethnic minorities whose (Interim 2002 policy) social and economic state restricts their capacity to assert their interests and rights in land and other productive resources. Dam Safety Safety of new or existing dams, including tailings dams > 10 meters in height. (Interim 2002 policy) Forestry (Interim 2002 policy) Sustainable forestry practices. Cultural Property Adverse, irreversible impacts on cultural or natural sites having archeological, (Interim 2002 policy) paleontological, historical, religious or unique natural aesthetic value. Pest Management Significant use of pesticides. (Interim 2002 policy) Projects on International Notification of projects with significant and adverse impacts on international waterways in Waterways (Interim 2002 policy) respect to the quantity and quality of water flows to other riparian states, or will significantly and adversely affect present or likely future water use by other riparian states. 2 1 3 A N N E X E -- M I G A' S E X P E R I E N C E S a f e g u a r d P o l i c y C o n s i s t e n c y A t t a c h m e n t 5 A R a t i n g s o f M I G A E I P r o j e c t s a t A p p r o v a l Project Name Description M O A F J D H L C I K EA Category1 A B A A A A A A A A B MIGA Client Category Maj Maj Maj Maj Min Maj Maj Maj Maj Maj Min Comprehensive environmental assessment2 S S M H H S S H M S S Adequate analysis of feasible alternatives H H N H S M S H M S H Comprehensive E&S baseline survey S S N H S S S S M S S Adequate EAP proposed H S N H H M S H M S S Project investor's EMS adequate S M M H S M S H H M S Public disclosure/consultation addressed S M S M M S H M S Contract of guarantee for implementation of safeguard policies/guidelines adequate H S N M M M M S M M M Comprehensive and implementable RP/CDP prepared S M S M M M M N H Comprehensive and implementable IPP prepared M M N Natural habitats protected or offsets provided M S M M H M Comprehensive dam safety measures proposed H S H N Cultural property protection proposed H S H H S H H Average score3 3.4 2.9 1.7 3.3 3.1 2.3 2.9 3.4 2.0 2.9 3.0 Overall rating S S M S S M S S M S S High (H); Substantial (S); Modest (M); and Negligible (N) 1. An EA may include an environmental impact assessment, environmental audit, and hazard or environmental risk assessment or a combination of these instruments. 2. MIGA's guarantee holders identified as Maj = Major project investor; Min = Minor project investor. 3. Scoring system used: H=4; S=3; M=2; N=1. If average score is > or = 2.5, then "S"; if < 2.5, then "M." 2 1 5 A N N E X E -- M I G A' S E X P E R I E N C E S a f e g u a r d P o l i c y C o n s i s t e n c y A t t a c h m e n t 5 B R a t i n g s o f M I G A E I P r o j e c t s u n d e r G u a r a n t e e Project Name Description M O A F J D H L C I K EA Category A B A A A A A A A A B MIGA Client Categorya Maj Maj Maj Maj Min Maj Maj Maj Maj Maj Min EAP/EMP fully implemented by investor S S H H S S S S E&S monitoring fully implemented by investor H S H H M S H S Investor's project implementation EMS effective S S H S M S H H Continuing public disclosure and consultation H M H M M S S S Full compensation of PAPs S H M S S S RP/CDP fully implemented H H H M S S S IPP fully implemented M S S Natural habitats protected or offsets provided M H S M H M Dam safety measures implemented H S H M Cultural property protected H H H M S H Reporting on safeguard policies by investor adequate H M S M S S H S N N M&E of safeguard policies by MIGA adequate S M S S M H S S N N Average score 3.6 2.6 3.7 3.2 2.2 3.1 3.5 2.9 Overall rating S S S S M S S S a. MIGA's guarantee holders identified as Maj = Major project investor; Min = Minor project investor. 2 1 7 ENDNOTES Foreword 9. Seminal papers by Richard Auty (ed., 2001), 1. Climate change has been covered in other Gelb (1988), Isham (2002), Sachs and Warner WBG publications and evaluations. See (1997), have discussed the evolution of think- www.worldbank.org/climate change and ing on the subject in recent years. See References www.ifc.org/test/sustainability/docs/Climate_ in Annex C, Attachment 5. Change_IFC.pdf. The WBG's environmental strat- 10. Analysis in the 1960s focused on how to egy for the energy sector--Fuel for Thought manage the macroeconomic impacts of resource (www.worldbank.org/html/fpd/energy/ export income, which raised domestic prices eee/FuelforThought.htm)--aims to mitigate the and made other exports less competitive inter- effects of and vulnerability to climate change. nationally (the so-called Dutch disease). More 2. For more information on the EIR, see recent analysis emphasizes poor use of fiscal rev- www.eireview.org. enues from resources. 3. Concurrently, the CAO has been examin- ing the extent to which IFC and MIGA have Chapter 2 addressed sustainability concerns in recent 11. The portfolio of projects chosen for review extractive industries projects. See www.cao- consists of all EI projects approved during or after ombudsman.org. fiscal year1993, the first full financial year after 4. The Approach Paper and other supporting the WBG adopted revised safeguard policies. documents for this evaluation study are available OED reviewed 76 Bank projects, comprising 48 on the Internet (www.ifc.org/oeg/EIEvalua- closed (24 oil and gas, 24 mining) and 28 active tion/eievaluation.html). projects (15 oil and gas, 13 mining). 12. The Bank's project completion reports Chapter 1 are usually expected to assess economic bene- 5. This evaluation focuses on the impacts of fits by calculating an economic rate of return or extractive industries on developing countries. It using a cost-effectiveness criterion to determine does not address issues of downstream con- whether the project represented the expected sumption, including important global impacts least-cost solution to attain the identified bene- such as climate change, except for climate fits, but only 35 percent of the completion change impacts related to production, such as reports did so. Another 27 percent contained gas flaring. some quantification and valuation of benefits but 6. This phenomenon--resource-rich coun- no analysis of their cost effectiveness. tries falling far short of their developmental 13. See Annex C, Chapter 3. potential and even being worse off than 14. OEG's review is based on in-depth eval- resource-poor countries--has been termed "the uations of a random, representative sample of paradox of plenty." 22 projects approved in calendar years 1991­96 7. This relationship, which is statistically sig- (12 oil and gas, 10 mining), supplemented by nificant at the 95 percent confidence level (t-sta- "mini" desk-evaluations of all other projects tistic = ­2.39), illustrates a conclusion that is either approved after fiscal year1993 or still in widely accepted in the literature. No claim is IFC's portfolio. In total, OEG studied 45 projects made that EI dependence is the sole determinant or companies (23 oil and gas, 22 mining). Imma- of a country's economic growth. ture projects and projects with insufficient infor- 8. "Borrower" includes all countries eligible for mation (usually where IFC had exited early) are borrowing from the WBG with a population not included in these numbers, but OEG used greater than one million as of 2000, for which data them also to draw lessons and highlight issues. is available. When nonborrower countries are 15. See, for example, WBG Work in Low- included, the slope is also statistically significant Income Countries Under Stress: A Task Force (t-statistic = ­2.82), and steeper (­0.038 vs. ­0.032). Report, World Bank (2002). 2 1 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T 16. See also Annex D, Attachment 4 for the with safeguards policy requirements, the eval- perceptions of stakeholders outside and inside uation has synthesized the policy requirements the WBG. into a set of basic criteria and used it for the sub- 17. OEU reviewed six previously evaluated ject review. The criteria for consistency have projects, all in mining (five gold, one cobalt) and been benchmarked against those used by the conducted two additional in-field case studies of Inspection Panel reports on EI projects and dis- mining projects. Most of the projects were under- cussed with the Quality Assurance and Com- written by MIGA in the early to mid-1990s. OEU pliance Unit (QACU) and the Legal Department. also reviewed the consistency with safeguard See Annex C, Chapter 4. policies of 12 projects (3 oil and gas, 9 mining). 27. See Annex C, Chapter 4. In total, OEU reviews covered 15 MIGA projects 28. See Annex D, Chapter 4, "IFC's Results in with active or cancelled contracts of guarantee (out Mitigating Negative and Enhancing Positive of a total of 31 that MIGA guaranteed since 1990). Impacts," which also explains the difficulties 18. See Annex C, Chapter 5. comparing the two data sets. 19. The CAS is the central vehicle for Board 29. The review of safeguard policy compli- review of the WBG's assistance strategy for its ance for MIGA EI projects covered 12 out of 30 borrower countries. The CAS is expected to (a) MIGA projects with active and cancelled guar- describe the WBG's strategy based on an assess- antees issued since MIGA's inception. The review ment of the priorities in the country, and (b) indi- was commissioned from an external expert and cate the level and composition of assistance is the first of its kind for MIGA. based on the strategy and the performance of 30. The project was rated "consistent" when the country's project portfolio. the policy requirements were generally met, or 20. See Annex D, Attachment 4c for complete expected to be met, with only minor short- results of the staff survey. comings. 21. See Annex C, Figure C10. However, fol- 31. See Annex D, Chapter 4, "IFC Helping to lowing the launch of the WBG's Low-Income Generate Sustainable Benefits." Countries Under Stress (LICUS) program in 2002, 32. Halting or reversing the spread of AIDS additional budget for activities designed to is one of the Millennium Development Goals. Ini- improve the policy and institutional framework tiatives in the WBG address HIV/AIDS, but ad- has been allocated to many of these countries. dressing the issue in specific EI-projects is not 22. See Annex C, Chapter 5. mandatory. See also Annex D, Chapter 4 and Box 23. See Annex D, Chapter 6. D2. 24. The sample of 38 projects was purposely 33. See Annex C, Chapter 4, and Annex D, chosen from the EI portfolio of 76 projects to Chapter 3 and Box D1. include projects that were likely to have adverse 34. For example, the May 15, 2002, Toronto environmental or social impacts and included 19 Declaration of the International Council oil and gas and 19 mining projects. See Annex of Mining and Metals (ICMM) states (on behalf C, Chapter 4. of the mining industry): "orphan site legacy 25. The policy on Environmental Assessment issues are important and complex. However, (OP 4.01) defines project categories as follows: they are beyond the capacity of ICMM to `A': likely to have significant adverse environ- resolve. Governments and international agen- mental impacts that are sensitive, diverse, or cies should assume the lead role in address- unprecedented ing them." `B': potential environmental impacts are less adverse than for `A' Chapter 3 `C': likely to have minimal or no adverse envi- 35. Here again, this relationship is statisti- ronmental impacts cally significant at the 95 percent confidence level 26 In the absence of an established approach (t-statistic = 2.44) and illustrates a conclusion that for assessing a project's degree of consistency is widely accepted in the literature. No claim is 2 2 0 E N D N O T E S made that EI dependence is the sole determinant the World Bank, in making the investment code of a country's quality of governance. more attractive, for example. A possible miti- 36. In Figure 2, Chile and Botswana are gating measure could be "ring-fencing" of fiscal shown at the top of the graph, near the center revenues from EI projects for development pur- and toward the right, respectively. poses. MIGA should consider adopting a posi- 37. For a definition of macro and sectoral gov- tion on revenue management and distribution ernance, see Annex C, Chapter 6. similar to IFC's. 38. See Annex C, Chapter 6. 46. For example, the Bank should help 39. Corruption, one particular public financial countries establish appropriate laws and reg- management shortcoming, is a possible proxy ulations to mitigate negative environmental measure. and social effects and build capacity to enforce 40. That is, the use of public power in accor- them. Private sector projects supported by IFC dance with the law. and MIGA could serve as role models for envi- 41. At this point, the position paper (www.- ronmental and social performance, trans- ifc.org/test/sustainability/docs/Revenue_Distri_ parency, and disclosure, and thus raise sector Mgmt.pdf) focuses only on projects generating performance. substantial revenues compared with the country's 47. This recommendation also applies to overall fiscal revenues, and the suggested steps countries that are expected to become resource- are optional, not mandatory. rich, through a large, WBG-supported project, 42. For all EA Category `A' projects, the bor- for example. In all resource-rich countries, the rower is expected to consult project-affected WBG should also encourage client countries to groups, local NGOs, and so forth and disclose include EI in their Poverty Reduction Strategy relevant material in a timely and culturally appro- Papers. priate manner. The requirements are somewhat 48. In line with the Bank's performance- more rigorous for `A' than for `B' projects, and based allocation of IDA credits. IFC requires public consultation only for some 49. This recommendation is consistent with the Category `B' projects. LICUS approach mentioned in notes 11 and 17. 43. The "Extractive Industries Transparency 50. For example, for sectoral adjustment and Initiative" and an NGO campaign--"Publish technical assistance. What You Pay"--advocate disclosure. 51. Such as, for example, advisory work funded by trust funds. Chapter 4 52. For example, in project completion reports 44. Given the size and complexity of the for the Bank and in project supervision reports WBG, and the diversity of issues that needs to for IFC. be addressed, it is expected that the responsi- 53. See Annex D, Chapter 4, "IFC Helping to bility for following up on these recommenda- General Sustainable Benefits" for more details. tions will not rest exclusively with the sector 54. Several stakeholders have already sought specialists; that is, the Energy and Mining Sec- IMF and WBG assistance in advocating or requir- tor Board and the Oil, Gas, Mining and Chem- ing disclosure and in developing a reporting icals Global Product Group. The Management framework. Response is expected to identify the unit(s) 55. Such indicators could include, for exam- responsible for following up each recommen- ple, health and safety statistics, gas flaring (or dation. greenhouse gas emissions), adequacy of mine 45. "Significant" should be considered both closure preparations (including funding) and in absolute terms and in relation to total sector oil transportation arrangements, hazardous mate- production, based on analysis of past experience, rials management and emergency response and may vary by country. Supporting increased plans, availability of infrastructure and services investment could be either through investments (e.g., health and education), and revenues gen- by IFC, guarantees by MIGA, or assistance from erated for governments. 2 2 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T Annex A remains unresolved, there is widespread agree- 56. Volume I is the overall summary of a joint ment that rich mineral deposits provide devel- OED/OEG/OEU sector review of the World oping countries with opportunities, which in Bank Group's activities; Volume II is OED's some instances have been used wisely to pro- review of the Bank's activities; Volume III is mote development, and in other instances have OEG's review of IFC's activities; and Volume IV been misused, hurting development." Davis and is OEU's review of MIGA's activities. Tilton (2001). 57. See Background Paper--World Bank 61. Letter from Friends of the Earth Interna- Group Activities in Extractive Industries, Oil, tional to Mr. James D. Wolfensohn, President of Gas, Mining and Chemicals Department, World the World Bank Group (October 30, 2000). Bank/IFC, August 2001. This paper and other 62. The OED of the World Bank (IBRD and documents relevant to the WBG strategy are IDA), the OEG of the IFC, and the OEU of MIGA. available at www.worldbank.org/ogmc. 63. The EIR is headed by Dr. Emil Salim, for- 58. Resource-rich countries are those in which mer Minister of Environment for Indonesia. EIs account for, or are expected soon to account Additional information on the EIR can be found for, more than 50 percent of government rev- at www.eireview.org. enues and potentially include, for example: 64. Seminal papers by Auty (2000), Gelb Algeria, Angola, Azerbaijan, Botswana, Chad, (1988), Isham (2002), and Sachs and Warner Congo (R), Congo (DRC), Equatorial Guinea, (1995), have discussed the evolution of think- Gabon, Iran, Iraq, Kazakhstan, Libya, Nigeria, ing on the subject in recent years. Oman, Syria, Sao Tome, Sudan, Timor-Leste, 65. See Attachment 3 for an explanation of Turkmenistan, Venezuela, and Yemen. Coun- OED's project ratings scale. tries with substantial resources are those in 66. The Approach Paper and other support- which extractive industries account for, or are ing documents for this evaluation study are expected soon to account for, 30 to 50 percent available on the Internet (www.ifc.org/oeg/ of fiscal revenues or exports and include poten- EIEvaluation/eievaluation.html). tially, for example: Bolivia, Cameroon, Central 67. The portfolio of projects chosen for review African Republic, Chile, Colombia, Ecuador, by this study consists of all extractive industries Egypt, Ghana, Guinea, Guyana, Indonesia, projects approved during or after FY93, the first Jamaica, Jordan, Kyrgyz Republic, Mali, Malaysia, full financial year after the WBG adopted revised Mauritania, Mexico, Mongolia, Mozambique, safeguard policies. A total of 76 projects were Namibia, Niger, Papua New Guinea, Peru, Rus- reviewed, comprising 48 completed (24 oil and sia, Sierra Leone, South Africa, Suriname, Tan- gas, 24 mining) and 28 active projects (15 oil and zania, Togo, Trinidad and Tobago, Ukraine, gas, 13 mining). Detailed discussion and statis- Uzbekistan, and Zambia. The usefulness of the tical tables on the main characteristics of the proj- two-tier approach and relevance of the specific ect portfolio are provided in the background thresholds will be reviewed in light of imple- paper "Review of the Portfolio of World Bank mentation experience; the corresponding coun- Extractive Industry Projects." try groupings will be periodically updated as 68. See Attachment 4 for the complete list of necessary. background papers. 59. See A Review of IFC's Safeguard Policies, 69. The five countries were chosen based on CAO, January 2003, Insuring Responsible Invest- the relative importance of extractive industries ment?, CAO, December 2002, and other reports in their economies, the intensity of Bank assis- accessible at: www.cao-ombudsman.org tance they received, and for regional diversity. 70. The staff survey questionnaire was sent Annex C to 95 WBG staff involved in extractive industries 60. Ross (2001). However, it is important to projects and countries (WB: 51, IFC: 33, MIGA: note that while the issue of "whether or not min- 12) and responses were received from 69 per- ing usually promotes economic development cent (WB: 51%, IFC: 91%, MIGA: 83%). 2 2 2 E N D N O T E S 71. The stakeholder survey questionnaire Bank's classification system but nevertheless was distributed to 292 participants of the EIR's contain significant EI-related components. LAC, ECA, and AFR regional stakeholder work- 82. A more detailed discussion on the Bank's shops, and the response rate has been 26 per- changing role, portfolio objectives, and quality cent (Rio: 25%, Budapest: 30%, Maputo: 24%). of lending for the extractive industries is the The EIR designed the regional workshops to be "Review of the Portfolio of World Bank Extrac- representative of WBG stakeholders. The par- tive Industry Projects." ticipants represented governments: 25 percent, 83. Under WB's OP 4.01 for Environmental industry: 21 percent, civil society: 30 percent, Assessment, Category `A' projects are those that the WBG: 11 percent, and others (academia, are likely to have adverse environmental and other multilateral organizations, etc.): 13 per- social impacts that are sensitive, diverse, or cent. Survey respondents represented govern- unprecedented; Category `B' projects are those ment: 41 percent, industry: 21 percent, civil with adverse impacts on human populations or society: 25 percent, the WBG: 4 percent, and environmentally important areas; Category `C' is others: 9 percent. a residual category. 72. World Bank (1984). 84. See Attachment 3 for an explanation of 73. World Bank (1992). OED's project ratings scale. 74. The Bank has 10 safeguard policies: 8 deal 85. That is, whether the project creates more with environmental and social concerns (OP/BP net benefits to the economy than other mutu- 4.01, Environmental Assessment; OP/BP 4.04, ally exclusive options. See OP 10.04: Economic Natural Habitats; OP 4.09, Pest Management; Analysis of Investment Operations, World Bank OP/BP 4.12, Involuntary Resettlement; OD 4.20, (September 1994). Indigenous Peoples; OP 4.36, Forestry; OP/BP 86. See OP 13.55: Implementation Completion 4.37, Safety of Dams; and OPN 11.03, Cultural Reporting, World Bank (July 1999). Property) and 2 deal with legal matters (OP/BP 87. The four completed structural adjustment 7.50, Projects on International Waterways and loans in the sample were excluded from this OP/BP 7.60, Projects in Disputed Areas). analysis given the Bank's practice of not esti- 75. Fox, Onorato, and Strongman (1998). mating ERRs or quantifying benefits for such 76. Van der Veen et al. (1996). projects. 77. The outcome rating denotes the extent to 88. Guidelines for Preparing Implementation which the project's major relevant objectives Completion Reports, World Bank (1999). The were achieved, or are expected to be achieved, earlier Bank policy on Project Completion efficiently. Reports also required the preparation of an ex- 78. The institutional development impact post economic analysis. denotes the extent to which a project improved 89. This figure includes one Emergency the ability of a country or region to make more Recovery Loan. efficient, equitable, and sustainable use of its 90. That is, a proxy for the opportunity cost human, financial, and natural resources. of capital. 79. For projects completed during 1980­86, 91. The fourth remaining SIL, Ethiopia's Calub only 53 percent were rated for institutional Energy Project, was closed prematurely, preclud- development impact under the older perform- ing any meaningful ex-post economic analysis. ance ratings. They are therefore excluded from 92. This figure includes one GEF grant. this comparison. 93. The ERR for the Guinea Mining Sector 80. The sustainability rating denotes the Investment Promotion Project was estimated for resilience to risk of the project's net benefit the appraisal and re-estimated for the ICR. flows over time. 94. This figure includes one Rehabilitation 81. For this review, the EI portfolio includes Investment Loan. projects that are not primarily classified under 95. There is no reason to believe that the per- the oil and gas or mining sector headings of the formance of extractive industries projects in this 2 2 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T regard is different than that of projects in other of TA and SECAL projects, whose classification sectors. has been subject to differing interpretation. 96. The May 15, 2002, Toronto Declaration of 103. Given the small size of the sample, it was the International Council of Mining and Metals not feasible to evaluate any impact from the states (on behalf of the mining industry): "orphan Bank's enhanced safeguards compliance sys- site legacy issues are important and complex. tem established in 1999. However, they are beyond the capacity of ICMM 104. See note 13 for additional information to resolve. Governments and international agen- about the survey. The complete results are pro- cies should assume the lead role in addressing vided in Annex D, Attachment 6b. them." 105. The adequacy of the initial project screen- 97. Since the start of fiscal year 1993, the ing and of Bank supervision were not themselves World Bank has approved 76 projects in the criteria for evaluating the adequacy of safe- extractive industries or with significant compo- guards compliance at the project approval or nents relating to extractive industries. As of June implementation stage but factors that were 30, 2002, 48 projects have been completed (24 tracked and assessed in parallel as part of the oil and gas, 24 mining) and 28 projects are still safeguards review. active (15 oil and gas, 13 mining). 106. That is, the process by which the EA cat- 98. The purposive selection of projects that egory is assigned, the nature and extent of the were likely to have significant adverse environ- EA or environmental analysis is decided, and the mental or social impacts is consistent with the applicable safeguard policies are identified. objective of the Safeguards Review, as the WBG's Responsibility for the initial project screening safeguard policies are applicable only to such resides with the project's task team, under the projects. As a result, the validity of the findings supervision of regional management, subject is limited to such projects and should not be to clearance by the regional safeguards coor- extended to those Category `C' projects that were dinator, under the oversight of the central QACU. likely to have minimal or no adverse impacts or Before 2000, responsibility for initial project SALs, which are not covered by the safeguard screening was shared between the project's policies. task team and the Bank's regional environment 99. As stated in the Bank's policy on Envi- divisions. ronmental Assessment (OP 4.01), to fall under 107. Of the 11 projects, 6 were `B' projects that Category `A,' a project is deemed to be likely to should have been more appropriately catego- have significant adverse environmental impacts rized as `A,' and 5 were `C' projects that should that are sensitive, diverse, or unprecedented. Cat- have been more appropriately categorized as `B.' egory `B' is assigned to projects whose poten- 108. The Bank's Operational Manual lists tial environmental impacts are less adverse than seven investment lending instruments: SIL, Learn- those for Category `A.' Category `C' is for proj- ing and Innovation Loan, TAL, Emergency Recov- ects that are likely to have minimal or no adverse ery Loan, Financial Intermediary Loan, Sector environmental impacts. SECALs have been cov- Investment and Maintenance Loan, and Adapt- ered by the policy only since 1999. Earlier able Program Loan. The manual lists the fol- SECALs were uncategorized. lowing six adjustment lending instruments: 100. These requirements are recorded in Programmatic Structural Adjustment Loan, Annex 1-A and 1-B of the Safeguards Review. Poverty Reduction Support Credit, SECAL, SAL, The list is based on the latest version of the poli- Special Structural Adjustment Loan, and Reha- cies (as of June 30, 2002). bilitation Loan. 101. The individual project review work- 109. EIA, Sectoral EA, Regional EA, Environ- sheets were sent to the relevant project managers mental Audit, Hazard/Risk Assessment. for fact checking. 110. The five SECALs in Russia, Poland, and 102. It should also be noted that the extrac- Ukraine were subject to careful environmental tive industries portfolio includes a higher share and social review. The remaining one is the 2 2 4 E N D N O T E S Madagascar Sector Reform Project, which should 122. World Bank (2001d). also have been categorized as an `A' because of 123. However, some allowance needs to be proposed new port facilities. made for the evolving more rigorous interpre- 111. The mine closures supported by these tation of these policies, in a world that is ever SECALs were unprecedented in scale, diversity more concerned about sustainable develop- of environmental conditions, and the complex- ment, as noted in Chapter 2. ity of environmental, safety, and social issues. 124. Here again, there is no reason to believe The past environmental and social neglect of that the performance of extractive industries these mining operations further aggravated the projects in this regard is different than that of problems involved in their closure. projects in other sectors. 112. World Bank (1991). 125. Other potential economic benefits include 113. As indicated earlier, there is no implica- financial flows accruing to private investors, tion that the treatment of extractive industries proj- employees, local communities, and so forth, ects in this regard is different from the Bank's which represent compensation for risk capital, practice in other sectors at the time, which was labor, and social and environmental services. to interpret the EA Source Book with great flex- 126. Beyond the allocation of fiscal revenues ibility. In recent years, management, the Inspec- in line with national development priorities, an tion Panel, and the Bank's legal department have assessment of the efficacy of public expenditure clarified that the EA Source Book is to be fol- for achieving sustainable development and lowed. The Safeguards Review is in line with this poverty reduction was outside the scope of this position. evaluation. Such assessments are regularly 114. However, Poland's Ministry of the Envi- included in OED's Country Assistance Evaluations. ronment has not endorsed this conclusion. 127. As stated in BP 2.11, "The Country Assis- 115. Environmental Assessment Sourcebook tance Strategy (CAS) is the central vehicle for Update No. 2: Environmental Screening, Envi- Board review of the World Bank Group's assis- ronmental Department, World Bank, Washing- tance strategy for IDA and IBRD borrowers. The ton, D.C. (April 1993). CAS document (a) describes the World Bank 116. Thailand: Second Gas Transmission Group's strategy based on an assessment of pri- Project. orities in the country, and (b) indicates the level 117.The issue was settled amicably, but it and composition of assistance to be provided took some time. based on the strategy and the country's portfo- 118. Cameroon: Chad-Cameroon Pipeline lio performance." Project; Chad: Petroleum Sector Capacity Man- 128. That is, those with negative GDP/capita agement Project. growth during the 1990s. 119. As mentioned in Chapter 4, this may be 129. The percentage was higher for better per- related to the fact that many of the projects had forming EI-dependent countries at 80 percent been assigned to lower EA categories or appli- and lower for non-EI dependent countries. cable safeguards were not triggered at the ini- 130. Many of these countries fit the descrip- tial project screening. tion of LICUS. As stated in the LICUS Task Force 120. The PSR for the India Coal Sector Reha- Report (World Bank 2002): "Low-income coun- bilitation Project dated March 28, 2001, records tries under stress are characterized by very weak a "Highly Unsatisfactory" rating in respect to policies, institutions, and governance. Aid does compliance with the safeguard policy for Invol- not work well in these environments...Yet neg- untary Resettlement (OD 4.30), prior to receipt lect of such countries (by the development com- of a complaint by the Inspection Panel (RQ01/2) munity) perpetuates poverty and may contribute on June 21, 2001. to the collapse of the state, with adverse regional 121. The Bank's EA policy requires compre- and even global consequences." hensive environmental and social baseline sur- 131. The five countries were chosen based veys only for Category `A' projects. on the relative importance of extractive in- 2 2 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T dustries in their economies, the intensity of ments for project sites, has been alleged in con- Bank assistance they received, and for regional nection with some EI projects--albeit none in diversity. connection with projects in the Bank portfolio 132. Of the 60 CASs that were reviewed, 26 under review--the Bank needs to consider its covered EI-dependent countries, and 4 of these position on these issues. While extractive indus- were joint Bank-IFC-MIGA CASs. try leaders and some governments subscribe to 133. Since 2002, the Bank's LICUS program Voluntary Principles on Security and Human (see note 72) has led to the allocation of addi- Rights, the Bank has no comparable guidance. tional budget to eligible countries for activities 141. In recent years, the Bank's governance- designed to improve the institutional and pol- related public expenditure and financial account- icy framework. ability sector work has rapidly evolved. Public 134. This relationship, which is statistically sig- Expenditure Reviews, Country Financial nificant at the 95 percent confidence level (t-sta- Accountability Assessments, and Country Pro- tistic = 2.44), illustrates a conclusion that is curement Assessment Reviews are now part of widely accepted in the literature. No claim is core economic and sector work in all borrow- made that EI dependence is the sole determi- ing countries. Follow-up to these core diag- nant of a country's quality of governance. The nostics in terms of policies and institutions and figure includes all countries eligible for bor- capacity-building is part of regular CAS prepa- rowing from the WBG with a population greater ration discussions. than one million as of 2000, for which data is 142. The Mining TA project includes, among available. others, components for (a) policy and regulatory 135. In Figure C11, Chile and Botswana are institutional strengthening of the Department of shown at the top, near center and to the right Mining and (b) institutional strengthening and hand side, respectively. capacity-building for the Internal Revenue Com- 136. Governance and Development, World mission. The Gas TA project includes, among oth- Bank, Washington, D.C. (1992). ers, components to (a) enhance the monitoring 137. For example, the Bank has set up a and regulatory capacity of the Department of project Web site with a comprehensive set of Petroleum and (b) facilitate the participation of documents including (i) the Project Appraisal local communities. Documents for the three projects, (ii) the full set 143. Notably a weak legislature and civil soci- of Environmental Assessments and Environ- ety, lack of freedom for the media, and lack of mental Management Plan documents, (iii) the transparency of public accounts. Loan and Credit Agreements, (iv) Environmen- 144. That is, the use of public power in accor- tal Compliance Monitoring Group and Interna- dance with law. tional Advisory Group reports, and (v) up-to-date 145. For example, through AAA, technical progress reports on project implementation. assistance projects, and other instruments that are Many of these reports are in English and French primarily aimed at strengthening governance and to make them more broadly accessible. See management of environmental and social risks. http:www.worldbank.org/afr/ccproj/project/pro_ 146. Given the Bank's very modest record document.htm. with fiscal revenue management in EI-depend- 139. The six countries were chosen for vari- ent countries (see Chapter 5) the number of ation in region, size and importance of the EI such "test cases" is expected to be small. sector, quality of governance, and intensity of 147. The Management Response is expected Bank intervention in the sector. to identify the unit(s) responsible for following 139. For additional information on GRICS, up each recommendation. see http://www.worldbank.org/wbi/governance/ 148. Aspects to be addressed should include, data.html#dataset2001. inter alia, key policy issues, the Bank's role, 140. Because abuse of individual rights, and business implications (including resource mostly in connection with site security arrange- issues and WBG coordination). 2 2 6 E N D N O T E S 149. Management accepts the need to factor 160. IFC does not have a Board-approved sec- governance into its support for extractive tor strategy for EI, but its investment departments industry activities and will work to improve its discuss their strategies annually with IFC man- approaches, based on country circumstances. agement. While these sector strategies are not However, it does not feel that mandating for normally disclosed, IFC has started to publish an entire set of countries a specific program to regional strategies for mining (www.ifc.org/ ensure that fiscal revenues are used for mining/region/region.html). IFC ceased to invest development priorities would be a practical in oil and gas exploration in fiscal year 1992, but solution. this was due to poor results and the difficulties of 150. "Significant" should be considered both assessing exploration risks. Exploration projects in in absolute terms and in relation to total sector mining are very rare, but IFC has invested at very production, based on analysis of past experience, early stages (exploration or pre-feasibility study). and may vary by country. 161. See, for example, The oil and gas indus- 151. In resource-rich countries, the WBG try from Rio to Johannesburg and beyond--con- should also encourage client countries to include tributing to sustainable development (2002), by EI in the Poverty Reduction Strategy Papers. the International Association of Oil and Gas 152. In line with the Bank's performance- Producers (OGP) and the International Petroleum based allocation of IDA credits. Industry Environmental Conservation Association 153. This recommendation is consistent with (IPIECA). Other initiatives in the mining sector, the LICUS approach mentioned in Chapter 5. for example, the Mining, Minerals and Sustain- 154. Such as on mine closure, safety of dams, able Development Project (MMSD), came to forced and child labor. similar conclusions. 155. Such as those related to consultation 162. For example, the ICMM is working and disclosure, community development, secu- with the Global Reporting Initiative (GRI) to rity, hazardous materials management, acid rock develop sustainability indicators for the min- drainage, gas flaring, and transportation of oil, ing industry. Ultimately, this is expected to for which the good practice guidelines that have result in a consistent and coherent module for been issued need to be complemented by sup- reporting on sustainable development for min- porting language in the policies. ing companies. 156. Several stakeholders have already sought 163. Mining and Minerals Sustainability Sur- IMF and WBG assistance in advocating or requir- vey (2001). ing disclosure and in developing a reporting 164. This and other comparisons of "evalu- framework. ated" projects relate to a random, representative 157. Such indicators could include, for exam- sample of 22 IFC projects (12 oil and gas, 10 min- ple, health and safety statistics, gas flaring (or ing) approved 1991­96 and evaluated 1996­2001 greenhouse gas emissions), adequacy of mine (results in Attachment 4b) using IFC's standard closure preparations (including funding) and evaluation framework. For desk reviews of all oil transportation arrangements, hazardous mate- 45 "studied" projects--22 oil and gas and 23 min- rials management and emergency response ing projects approved since fiscal year 1993 or plans, availability of infrastructure and services still in IFC's portfolio--a similar but simplified (e.g., health and education), and revenues gen- ratings framework was used (Attachment 4e, erated for governments. results in Attachments 4c and 4d). 165. The results of all studied projects are Annex D not strictly comparable, as they have a different 158. As in IFC's guidelines, "environmental" maturity profile--older and younger--than the aspects include worker health and safety. evaluated projects. Also, there are no compara- 159. Environmental effects could be local (e.g., tors in IFC's portfolio, as IFC does not track and impacts on water quality) or global (e.g., contri- rate development results on a portfolio basis. The bution to greenhouse gases through gas flaring). number of projects is too small to analyze trends. 2 2 7 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T 166. See, for example, World Bank Group ableness of the agreement had been independ- Work in Low-Income Countries Under Stress: A ently studied, and that it had made certain Chad Task Force Report (2002), http://www1.world- received independent expert advice. bank.org/operations/licus. 175. This appears to be changing. IFC has 167. "Significantly" used in this report implies started to track development results in supervi- statistically significant using a 90 percent confi- sion, and some recent Board Reports for EI proj- dence interval. ects identify government revenues as one of 168. Until 1996, IFC effectively valued the indicators to be tracked. resources at zero. Since then, IFC has started to 176. See, for example, Breaking the Conflict deduct the net present value of the economic Trap: Civil War and Development Policy, draft benefits generated from the resource over the WBG Policy Research Report (2003), http:// projected life as depletion premium. This may econ.worldbank.org/prr/CivilWarPRR. differ substantially from how governments or 177. Review of Legal and Fiscal Frameworks investors might value the resource, which will for Exploration and Mining (Koh Naito, Felix depend on many factors, such as country and Remy, John P. Williams, 2001) compares the fis- resource risk. cal regimes of 23 countries. Global Mining Tax- 169. Adequate economic returns do not ation Comparative Study, Institute for Global always mean large government revenues. See Resources Policy and Management and Col- below on distribution. orado School of Mines (second edition, March 170. There are many different taxation 2000, James Otto et al.) compares the effects of regimes. For an excellent overview, see Global taxation on "model" copper and gold mines. An Mining Taxation Comparative Study (J. Otto, unofficial note on the WBG's Web site, "Best 2000) or Review of Legal and Fiscal Frameworks Practices in Dealing with the Social Impacts of for Exploration and Mining (Koh Naito, Felix Oil and Gas Operations," on management of gov- Remy, John P. Williams, 2001). On oil and gas, ernment revenues, cites numerous reference see www.ifc.org/ogmc/pdfs/DanielJohnston.pdf. documents and concludes that international 171. Oil features higher royalties--and other practice of the government's "take" in oil and gas forms of "rents"--than mining. Royalties in mining is about 45 percent to 50 percent at the low end affect the cutoff grade and can thus easily make oth- and 80 percent to 85 percent at the high end. erwise attractive deposits unviable; in oil this is less 178. For example, a host government has likely, as marginal costs are low compared with the requested an independent "fairness" assessment resource value. Rents are the excess of pre-tax of an existing contract with an IFC client com- benefits over cost, including the minimum return pany. Routinely providing a resolution mecha- on capital required to attract investment. nism where conflicts between governments and 172. We surveyed over 50 people at the EIR investors arise may help settle disputes, and is Planning Workshop, and about half responded now often incorporated in agreements between (Attachment 6a). Broad and balanced repre- investors and governments. However, years after sentation of stakeholders was one of the work- the contract was signed, it is even more difficult shop's goals. to assess how reasonable a distribution is, and 173. Examples include questioning the appro- renegotiating contracts later will also discourage priateness of favorable tax exemptions and swap potential future investors. Annex C (Chapter 5 and arrangements. Box C11) discusses issues related to the accept- 174. The Inspection Panel for the Chad- ability of benefit distribution. Cameroon pipeline claimed "it was unable to find 179. The WBG hosted a workshop on petro- any analysis justifying the allocation of revenues leum revenue management (www.ifc.org/ogmc/ between Chad and the Consortium [of investors]." petroleum.htm) in October 2002; the IMF hosted World Bank management stated that it was not a similar conference in June 2002. a party to the confidential agreement between 180. Chad (2000), Chile (1957), Gabon (1982), Chad and the Consortium, but that the reason- Ghana (1984), Guinea (1982), Guinea-Bissau 2 2 8 E N D N O T E S (1989), Kyrgyz Republic (1995), Mauritania Environment and Social Development Depart- (1968), Russian Federation (1993), Tajikistan ment conceded that consistent categorization (1996), Uzbekistan (1994), Zimbabwe (1981). EI was difficult. This suggests a need for better guid- projects have been among the first investments ance, transparency, and peer review. in several other countries. 189. For a more detailed description of the 181. The benchmark for a satisfactory business Millennium Development Goals, see success is whether the real (inflation-adjusted), www.developmentgoals.org. We did not have after-tax financial rate of return exceeds a com- sufficient data to analyze performance for the pany's estimated weighted average cost of capital. important goal of poverty reduction. Also, 182. Attachment 3 contains more information OEG's analysis did not control for other factors on IFC's EI investment activities. that may affect achievement of Millennium 183. Before that, the World Bank reviewed the Development Goals, such as, for example, environmental aspects of IFC's projects, using income per capita. guidelines initially published in 1984 and revised 190. Twenty-two projects were approved in 1988. 1991­96 and evaluated 1996­2001, 10 in mining 184. Available online at http://www.ifc.org/ and 12 in oil and gas. enviro/EnvSoc/childlabor/childsafeguard.htm. 191. There was insufficient information to 185. Available online at http://www.ifc.org/ rate the twelfth project, as IFC had exited from enviro/enviro/pollution/guidelines.htm. the investment. 186. Ibid. 192. The portfolio analysis is mainly based on 187. Category `A' projects are "likely to have desk reviews, even though some of the results significant adverse environmental impacts that were verified through OEG's 13 field visits. It are sensitive, diverse, or unprecedented." They excludes 14 projects that were considered imma- require EIAs that normally cover (a) environ- ture and 5 projects from which IFC had exited mental and social baseline conditions; (b) poten- and insufficient information for an overall assess- tial environmental and social impacts (direct ment was available. It also summarizes ratings and indirect), including opportunities for for multiple projects in the same company and enhancement, cumulative impact, and other takes into account longer-term developments anticipated developments; (c) systematic com- than the typical five-year span of the more parison of feasible alternatives, sites, technolo- detailed evaluations. See Attachments 4e and 4f. gies, and designs; (d) preventive, mitigating, and 193. Ratings for the sample of evaluated proj- compensatory measures; (e) capacity for envi- ects were not updated to incorporate new infor- ronmental and social management and training mation, to remain comparable with those of programs; (f) detailed results of the public con- non-EI projects in the same sample and allow for sultation and disclosure program; and (g) mon- meaningful statistical analysis. For the studied itoring. They usually quantify capital and projects, such new information was incorporated. recurrent costs, environmental and social For example, in several cases, material problems staffing, training, monitoring requirements, and had later been corrected and OEG considered that the benefits of proposed alternatives and miti- the earlier shortfalls were not material enough to gation measures. See www.ifc.org/enviro/ warrant a rating less than satisfactory. Also, the EnvSoc/ESRP/esrp.htm. evaluated sample included 1991­92 projects, 188. For example, a feasibility study for a proj- some with environmental problems, that were no ect that would--if implemented--be catego- longer considered in the studied portfolio rized as `A' was categorized as `C' (no impact); (approvals since 1993 and current portfolio). an exploration project potentially affecting a 194. For example, some companies have nature reserve and indigenous people was cat- established a zero flaring goal. Shell's and BP's egorized as `B.' The CAO's safeguard policy sustainability reporting is considered among the review found that decisions about categorizations best in the oil industry. See www.sustainabil- "may be inconsistent and non-transparent." IFC's ity.com for the Top 50 corporate reports. 2 2 9 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T 195. IFC's 2001 offshore guidelines require the 203. The Environmental and Social Chal- following: minimize low pressure and eliminate lenges of Private Sector Projects: IFC's Experience high pressure flaring (or justify where this is not (2002), http://www.ifc.org/publications/pubs/ possible), eliminate continuous venting and min- loe/loe8/loe8.html. imize emergency venting, and calculate GHG 204. This can put IFC in a difficult position, emissions annually. The World Bank's 1998 because it does not disclose the environmental onshore guidelines simply state, "minimize flar- performance of projects. For example, one client ing" but "flaring is preferable to venting." claimed compliance even though an evaluation 196. See www.worldbank.org/ogmc/global_ had just established material noncompliance. gas.htm. Clearly, IFC cannot verify claims of nonclients. 197. The code can be found at www.cyanide- 205. Available online at http://ifchq14.ifc.org/ code.org/thecode/thecode.PDF. A p p s / O S D / I O To o l k i t . n s f / R e s o u r c e ? 198. IFC's policy requires that "all its opera- OpenFrameSet. tions are carried out in an environmentally and 206. See, for example, the guidance notes at socially responsible manner." www.ifc.org/enviro/EnvSoc/ESRP/Guidance/ 199. Community Development Resource Guide guidance.htm. for Private Companies, IFC (2000), http:// 207. Banks adopting the so-called "Equator www.ifc.org/enviro/Publications/Community/IFC Principles"--a voluntary set of guidelines based _CDR_Guide.pdf. Also, the World Bank Mining on the social and environmental policies of IFC Department hosted a conference on Local Man- and the World Bank--are ABN AMRO Bank, agement of Mineral Wealth, June 2002. N.V.; Barclays PLC; Citigroup, Inc.; Credit Lyon- 200. Examples of SME linkage programs in EI nais; Credit Suisse Group; HVB Group; include Chad-Cameroon Pipeline; Kyrgyz Repub- Rabobank; Royal Bank of Scotland; WestLB AG; lic--Kumtor Gold Mine; Mozambique--Mozal and Westpac Banking Corporation. Aluminum Smelter; Nigeria--Niger Delta Con- 208. IFC did not update safeguard policies tractor Credit Facility. during the CAO review of these policies. 201. An IFC specialist for social development 209. Interestingly, many of these issues are expressed some frustration that investment staff covered in the best practices for oil and gas com- sometimes resist community development plans piled with input from different stakeholder because they are not mandatory (unless the groups and hosted on the World Bank's Web site. project involves resettlement). However, these best practices (www.world- 202. A UNEP study, The Role of Financial bank.org/ogsimpact) are unofficial and not even Institutions in Sustainable Mineral Development well known within IFC. (2002), recommended benchmarking projects 210. www.hrw.org/corporations. against international standards, such as the WBG 211. www.state.gov/www/global/human_ guidelines (www.mineralresourcesforum.org/ rights/001220_fsdrl_principles.html. docs/pdfs/zemek.pdf). A 2001 study for Japan's 212. The World Bank's Operational Policy Ministry of the Environment considered WBG 7.60 (OP 7.60, June 2001), Projects in Disputed guidelines to be the highest among international Areas, relates to disputes among countries, not financial institutions (http://www.env.go.jp/ within a country. en/jeq/v006-04.pdf). Industry associations 213. No assessment of the environmental (OGP/IPIECA's 2002 study, Key questions in man- effects of eight projects was possible: in five, IFC aging social issues in oil & gas projects, no longer had an investment and had insufficient www.ipieca.org/downloads/social/impact_assess- information before exiting; in one, the sponsor ment.pdf) recognize that WBG policies and guide- does not have the contractual obligation to lines set de-facto standards where others do not report because IFC has only an equity invest- exist--for example on resettlement. These posi- ment; in two, projects had not begun commer- tive views were confirmed by OEG's own eval- cial operations. Even for newer equity uations, research, and interviews. investments, IFC is not always able to contrac- 2 3 0 E N D N O T E S tually require compliance with its environmen- ground mining guidelines, another example tal policies and guidelines--but IFC's review illustrating the need to update IFC's guidelines. procedures do not distinguish between invest- These are the guidelines relevant for precious ment instruments. metal mining, the largest share of IFC's mining 214. For example, OEG's Annual Review of portfolio. IFC's Evaluation Findings: FY2001, in OEG 222. For example, in one portfolio project it Findings (April 2003) (http://www.ifc.org/oeg/ was doubtful whether and how funding for OEG_Findings_042103.pdf). mine closure could be secured, and in another 215. An exception is one project where IFC had IFC did not know whether a mine had been put in place funds for mine closure before exit- closed in line with IFC requirements. Supervi- ing and controlled their use even after the exit. sion documents do not consistently address IFC is now handing over the responsibility to over- whether mine closure plans and funding are in see use of the funds to the local regulatory agency. place. 216. For example, World Bank sector adjust- 223. In It's not over when it's over: Mine clo- ment loans in Ghana and Peru helped support sure around the world (2002), the mining pol- capacity-building for proper environmental gov- icy group of the WBG's global product group has ernance in EI. But due to insufficient funds, it suggested several options for dealing with this is unclear whether the monitoring regimes will problem, such as "closure bonds," warranties, be sustainable. securities, and insurance. 217. For example, by securing International 224. Ibid. The publication recognizes that Standards Organizations (ISO) 14001, BS8800, many aspects of mine closure are beyond the pri- and/or National Occupational Safety Association vate sector's control but recommends several (NOSA) ratings. steps that mining companies should undertake. 218. For example, one IFC client did not 225. IFC asked the client to redress the prob- complete a baseline study and thus experienced lem, but the client chose to prepay IFC's loan major difficulties when faced with claims of pol- instead. lution, and land and agriculture degradation; 226. In another project, the reputation of an another client reportedly completed a baseline IFC client suffered because of a tailings dam study but was subsequently unable to locate it. break at an adjacent mine. 219. For example, villagers claimed a company 227. For example, while IFC has strongly had not compensated for the destruction of a advocated the Business Case for Sustainable long-standing village, but photographic evidence Development, IFC's guidance for nominees to cor- showed the village did not exist before mining porate boards does not specify whether they are activities were announced; numerous claims of expected to promote the sustainability concept. stream and drinking water pollution could be dis- 228. For example, ASM is a major issue in sev- proved by evidence of prior conditions. eral mining projects in Africa. 220. NGOs have criticized IFC, saying that it 229. See Annex C on what the World Bank cannot demonstrate that EI projects reduce has done and can do with respect to ASM, the poverty and improve living standards. In the past, collaborative group on ASM (http://wbln1018. IFC has not consistently tracked changes in envi- worldbank.org/IFCEXT/casmsite.nsf) in which ronmental and, particularly, socioeconomic indi- the WBG participates, and the MMSD working cators. OEG observed negative impacts in some paper on ASM (www.iied.org/mmsd/activi- projects it visited--but clear improvements in ties/small_scale_mining.html). others. 230. For IFC's current disclosure policy, see 221. While these guidelines apply in princi- www.ifc.org/enviro/enviro/Disclosure_Pol- ple only to coal, iron ore, and base metal proj- icy/disclosure.htm. ects, IFC has in practice also applied them to 231. IFC's disclosure policy is ambiguous: it other mining projects. Reserving money is not requires that the summary of project information required in the general 1995 open pit and under- and environmental review summary be updated 2 3 1 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T when there are material changes, but it does not pany millions of dollars, and created major and specify whether this also applies after Board costly problems; it may result in preventing them approval. In practice, IFC did not always update from developing an important deposit on the con- these documents where later changes occurred. cession. The company started an active social 232. In its current form, the AMR is highly assistance program, but it came late. technical, sometimes running into hundreds of 241. IFC has prepared a checklist for improved pages and would not necessarily lend itself for public consultation, "Doing Better Business publication. A less technical summary of key indi- through Effective Publish Consultation and Dis- cators of environmental, social, health, and safety closure: A Check Sheet" (Attachment 6). performance (standardized to the extent possi- 242. This is particularly the case where gov- ble) may be preferable. ernments get revenues based on production or 233. Trust and validity can be increased when revenue (e.g., royalties), not on profitability. In the community participates in the monitoring addition, in several projects, notably in Europe activities and in the design of the baseline data and Central Asia and Africa, the government collection, gets trained in sampling and analyt- retroactively changed fiscal rules or contractual ical techniques, and participates in the record- arrangements. ing and archiving of the data. Such measures 243. OEG used the 2001GRICS published by could proactively increase trust or may be nec- the World Bank Institute. It measures perceptions essary once trust is lost. of a large number of respondents, and, as with 234. Examples include an updated environ- any such indicator, individual country rankings mental action plan for La Colorada (Mexico) are subject to large margins of error. Countries and an updated environmental management were sorted using a composite of the average rat- plan for Konkola Copper Mine (Zambia). ings for voice and accountability, political stability, 235. This is true not only for EI, but for IFC's government effectiveness, regulatory quality, entire portfolio. rule of law, and control of corruption, and then 236. For example, Kumtor in the Kyrgyz were divided into quartiles. Results are similar Republic (www.cameco.com/operations/gold/ using Transparency International's 2002 Cor- kumtor/index.php) or MBR, a Brazilian com- ruption Perceptions Index. However, IFC staff pany: (www.mbr.com.br/eng/meioambiente/ attested that IFC had not invested in several meioambiente.asp). projects due to country governance concerns. 237. Disclosure of financial information, 244. For example: IMF Economic Issue 6: Why including revenues generated for governments, worry about corruption. (Paolo Mauro, 1997). is covered in the next section. Also: IMF Economic Issue 12: Roads to nowhere: 238. Available from the WBG bookstore or How corruption in public investment hurts growth online at www.ifc.org/enviro/Publications/Prac- (Hamid Davoodi and Vito Tanzi, 1998). tice/practice.htm. 245. Transparency International ranks them 239. For Category `A' projects, IFC's 1998 in the top third on corruption, ahead of several procedures require that "The project sponsor industrialized countries. continues to consult with relevant stakeholders 246. "Good" control of corruption--govern- throughout project construction and operation, ment effectiveness, voice and accountability, as necessary, to address environmental assess- political stability, and rule of law--was defined ment related and other issues that affect them. as the top half of the World Bank Institute's IFC requires the project sponsor to report on "GRICS-II" data. Too few (4 of 45 studied proj- ongoing consultation as part of its annual report- ects) of IFC's EI investments were in countries ing requirements" (emphasis added). with good control of corruption to conduct 240. For example, one IFC client did not effec- meaningful statistical analysis. tively consult the community and key players at 247. Ranking in terms of "successful" was the outset. An accident with hazardous material based on returns (in NPV terms). "Highest cor- spill soured community relations, cost the com- ruption" countries were those in the bottom 2 3 2 E N D N O T E S quartile of Transparency International's 2002 it bluntly: "The World Bank Management is Corruption Perception Index. extremely sensitive to developed country social 248. Rankings for control of corruption by and environmental NGOs." quartile of the World Bank Institute's "GRICS-II" 260. This recommendation also applies to data. countries expected to become resource-rich, 249. Bribery in business sectors: www.trans- through a large IFC-supported project, for exam- parency.org/cpi/2002/bpi2002.en.html#sectors. ple, and where IFC intends to make investments 250. See www.oecd.org and the section on more generally. corruption. 261. One form of public-private partnerships, 251. For example, the United States with the as recommended in the WBG's Private Sector Foreign Corrupt Practices Act of 1977. Development Strategy (2002) is "output-based 252. For more details, see www.worldbank. aid" (OBA). OBA would use public funding, at org/afr/ccproj. least in part, but feature private provision of serv- 253. Revenue distribution and management ices. Some taxation schemes allowing tax cred- in IFC projects: www.ifc.org/test/sustainabil- its for community development expenditures ity/docs/Revenue_Distri_Mgmt.pdf. are similar to OBA. 254. See http://www.ifc.org/ogmc/socialan- 262. For example, IFC should encourage dis- deconomicimpact.htm. closure of production-sharing agreements, con- 255. The "extractive industries transparency cession, and privatization terms, as well as initiative" (www.dfid.gov.uk/News/News/files/ payments made to governments at different lev- eiti_guide.htm) and "publish what you pay" els. Given that providing this information is (www.publishwhatyoupay.org) advocate dis- even illegal in some countries and investors closure. may have justified concerns about unilateral 256. See, for example, IFC's publication, The disclosure, the WBG should encourage country- Business Case for Sustainability (www.ifc.org/ or industrywide disclosure. test/sustainability/docs/TheBusinessCase.pdf) 263. "Significant" should be considered both and its 2002 Sustainability Review (http:// in absolute terms and in relation to total sector www.ifc.org/ar2002/review/sustainability.html). production, based on analysis of past experience, See also the work of the Natural Resources Clus- and may vary by country. ter of Business Partners for Development 264. IFC should continue to appraise projects (www.bpd-naturalresources.org). by comparing their global competitiveness and 257. Over 90 percent of 33 staff responded. review in-depth geological and metallurgical We did not survey managers and directors but characteristics. IFC should also diligently check interviewed them individually. the background of sponsors and how conces- 258. Fifty-two percent of IFC respondents saw sions were awarded. this as a problem. Their comments included, 265. Current supervision of EI projects is sig- "The big issue is that the WB country departments nificantly better than average, and these rec- rarely give adequate priority to mining issues." ommendations build on this strength. "IFC/WB coordination happens only on an indi- 266. This requirement should apply to all vidual basis at staff level and on the director level, portfolio companies. For example, IFC should but the former is not very consistent." routinely ask clients for Annual Monitoring 259. Eighty-eight percent of 34 WBG respon- Reports, even where they are not required. dents stated that the WBG avoided good EI 267. The requirements should encompass projects due to safeguard concerns. This confirms environmental and social risks, as well as finan- the 2001 Fourth Quality-At-Entry Assessment by cial risks (e.g., from hedging) and parallel what the WBG's Quality Assurance Group, which IFC normally addresses in its loan covenants. found that risk aversion resulted in dropping 268. IFC should encourage its clients to environmental components of projects. An improve their practices in line with evolving anonymous World Bank survey respondent put good industry practices. Where clients do not 2 3 3 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T correct important shortfalls, IFC should call the 274. From 1983 until 1991, IFC also financed loan, raise the issue at shareholders' meetings, oil and gas exploration, but the amounts involved or inform the local regulatory agency, or the were small ($60 million). It ceased to do so, press. IFC should consider developing guidelines mainly because of disappointing initial results. on how active it should be as a shareholder. 275. Institutional Investor country credit rat- 269. Together with the World Bank and other ings below 30 or without a rating. In this report stakeholders. such countries are referred to as "risky" countries. 270. The policies and guidelines need to be 276. Chad (2000), Chile (1957), Gabon (1982), comprehensive enough to capture all important Ghana (1984), Guinea (1982), Guinea-Bissau environmental and social effects, local, regional, (1989), Kyrgyz Republic (1995), Mauritania and global, as well as short- and long-term. Yet, (1968), Russian Federation (1993), Tajikistan they also need to be practical and reflect IFC's (1996), Uzbekistan (1994), Zimbabwe (1981). industry experience: they need to be realistic 277. http://www.ifc.org/enviro/enviro/ (achievable at reasonable cost), client-driven Disclosure_Policy/disclosure.htm. (adaptable to the client's other reporting require- ments), and monitorable (sufficiently specific). To Annex E be practicable, the policies and guidelines should 278. The first guarantee issued by MIGA meet the business case for sustainability, that is, (1990) was in mining. implementing them should be in a company's 279. OED for the Bank, OEG for IFC, and long-term commercial interest. OEU for MIGA. 271. IFC could build on existing industry ini- 280. See Joint OED/OEG Evaluation of WBG tiatives. Information on industry-specific indi- Activities in the Extractive Industries Sector-- cators should include, for example, fiscal Approach Paper, p. 4 ff. revenue generation, health and safety statistics 281. "MIGA project" refers to a MIGA-insured (including HIV/AIDS prevention), gas flaring (or investment project. A single project may have sev- greenhouse gas emissions), adequacy of mine eral contracts of guarantee, depending on the closure preparations (including funding) and oil number of investors/lenders requesting coverage, transportation arrangements, hazardous mate- the type of investment insured (equity, debt), and rials management, and emergency response the risks insured (expropriation, war and civil dis- plans. It could also include data to capture pri- turbance, transfer restriction, breach of contract, vate sector contributions beyond compliance, or a combination thereof). Because contracts of such as infrastructure, health, and education guarantee have a limited lifespan, the term "MIGA services. The reporting requirements should project" in this report also refers to a project that also include relevant sustainable development was insured by MIGA but for which coverage was indicators, such as water quality, access to either cancelled or has expired. potable water or schooling, and income levels. 282. All 31 projects conform to the definition Other documentation, such as aerial photogra- of EI sector projects in the context of this joint phy and videotaping of the site and surround- WBG evaluation, which is consistent with the ing areas, could help to later document classification used by MIGA. improvements or deteriorations, and potentially 283. For one project selected for the review, reduce later disputes. only a partial evaluation could be made. 272. Such an assessment should be conducted 284. In total, MIGA issued 51 Contracts of as early as possible, and IFC should prepare guid- Guarantee in support of 24 mining projects and ance on what IFC and its clients should do 10 contracts for 7 oil and gas projects. when early consultations were not carried out 285. Contracts of guarantee issued in FY01 in or were insufficient. mining were for existing MIGA projects. 373. For example, IFC could review the mine 286. Also see results of MIGA staff survey. closure plans of all existing clients and share best 287. The mean was 3.9 years and the standard practices among them. deviation 1.55 years. 2 3 4 E N D N O T E S 288. Accessible at www.ipanet.net or gories: negligible, modest, substantial, and high, www.miga.org. as defined in Attachments 3a and 3b. Projects 289. MIGA's early work in this respect was were substantially consistent when the "set of cited in the Mining Journal (January 1997) as an requirements generally was met, or expected to important factor leading to the resurgence in min- be met, with only minor shortcomings." eral exploration and mining project planning in 300. While one guarantee project was approved Africa in the mid-1990s. by MIGA's Board in 1992 to cover the initial 290. Because MIGA had not officially adopted stages of project development, OEU's assessment its own safeguard policies from its inception, it of the consistency with safeguard policies was is more appropriate to evaluate the "consis- based on documents available when the project tency" of its projects with these polices rather was approved by IFC's Board in 1996, as the scope than "compliance." and design of the project changed appreciably 291. Based on a review of MIGA EI projects' between 1992 and 1996. Assessment ratings were consistency with safeguard policies undertaken based on the full feasibility study and compre- in conjunction with this evaluation. hensive EA, which were completed in 1995. 292. Nine mining and three oil and gas proj- MIGA Management notes that if this unique ects, with one project undergoing incomplete case was excluded from the scoring in Table 1, review. Therefore, graphs in this section pres- the ratings would have been significantly higher ent the results for 11 projects. in many categories. 293. The World Bank has 10 safeguard poli- OEU notes that it has selected a representa- cies, of which 7 are covered in the present tive sample covering 39 percent of MIGA guar- review: (OP/BP 4.01, Environmental Assess- anteed projects and including various types of ment; OP 4.30, Involuntary Resettlement; OD partnerships and arrangements for MIGA guar- 4.20, Indigenous Peoples; OP 4.04, Natural Habi- antees. tats; OP 4.37, Safety of Dams; OPN 11.03, Cul- 301. Assignment of environmental categories tural Property; and OP/BP 7.50, Projects on (`A' or `B') was appropriate for all sampled proj- International Waterways. The following three ects, with the possible exception of one project policies are not covered in the present review: `N' for which documentation was incomplete. OP 4.09, Pest Management; OP 4.36, Forestry; 302. MIGA Management notes that there is and OP/BP 7.60, Projects in Disputed Areas. clear documentation in the files that shows 294. Shortly after MIGA obtained its in-house that all the key concerns of the Indigenous environmental expertise, a review of the port- Peoples Policy and the Involuntary Resettlement folio was conducted to identify high-risk proj- Policy were addressed at the planning level, at ects from an environmental and social the minimum, in well over half of the applica- standpoint, as well as priorities for potential ble projects. monitoring site visits. 303. MIGA's EA disclosure policy requires 295. In its description of Framework for Safe- that, "For all Category `A' projects during the guard Policies at MIGA. environmental assessment process, MIGA will 296. IFC or WB environmental and social require the project investor to consult, or to have specialists reviewed 10 out of 12 projects cov- consulted, project-affected groups and local non- ered in this safeguards review. governmental organizations about the project's 297. Roger J. Batstone, Review of Implemen- environmental impacts, and to take their views tation of Safeguard Policies of World Bank into account. The project investor should initi- Extractive Industries Projects, OED Background ate such consultations as early as possible, and Paper World Bank (2003). consult with such groups throughout project 298. A list of MIGA safeguard policy triggers implementation, as necessary, to address project- is shown in Attachment 4. related environmental and social issues that affect 299. OEU rated consistency with safeguard them." There is no requirement for public con- policies using a scoring system with four cate- sultation in MIGA-approved Category `B' projects. 2 3 5 E X T R A C T I V E I N D U S T R I E S A N D S U S TA I N A B L E D E V E L O P M E N T 304. MIGA's General Conditions of Guaran- ability, Environmental and Social Impact, and tee have been revised over the course of the Impact on Private Sector Development. OEU period that MIGA has been in existence and, uses the following rating scale: Satisfactory, hence, over the period that is covered by the Moderately Satisfactory, Moderately Unsatisfac- projects under review. For all guarantee issued tory, and Unsatisfactory. since 1999, MIGA has the right to terminate the 309. Internal MIGA staff workshops under- contract if the project does not comply with taken in 2003 have identified similar shortcom- MIGA's environmental policies and guidelines. ings of the RMC process and other MIGA 305. Due mainly to monitoring requirements decisionmaking committees. of senior lenders and other bilateral insurance 310. For a recently closed down project, OEU agencies. assumed a net job creation of zero. 306. The reinsurance agreement covering this 311. From Framework for Safeguard Policies at project pre-dates the current reinsurance prac- MIGA. MIGA's external Web site: www.miga.org. tice by which MIGA's environmental and safe- 312. Op. cit. Ibid. guard policies must be adhered to if MIGA is to 313. It should be noted that given the size of act as an reinsurer. In particular, MIGA will the Agency, the survey was administered to the require that the primary insurer change its con- entire population of current MIGA underwriters tract wording, if necessary, to meet MIGA's stan- and project managers involved in EI projects. dards. All current MIGA reinsurance contracts Thus, it was sent to 12 MIGA active staff, with include MIGA's right to terminate the reinsurance a response rate of 83 percent (10 staff). contract if the investor is not in compliance 314. The CAO report Insuring Responsible with MIGA's environmental and social policies Investments? A Review of the Application of and guidelines. MIGA's Environmental and Social Review Pro- 307. Unlike the World Bank, MIGA does not cedures (CAO03/07/2003, accessible at have a Projects in Disputed Areas safeguard www.cao-ombudsman.org) also deals with the policy. treatment of environmental issues but addresses 308. The new evaluation framework approved procedural compliance rather than the more in- by CODE in 2002 introduces systematic cost-ben- depth examination of compliance with individ- efit analysis to the evaluation of individual guar- ual safeguard policies, which OEU considered. antee projects and harmonizes evaluation Thus, it is not directly comparable with this staff standards with those used by OEG. The devel- survey, which specifically asked about the treat- opment outcome of guarantee projects is eval- ment and application of environmental issues in uated in four different categories: Business EI projects. Performance of the project, Economic Sustain- 2 3 6 OED PUBLICATIONS Study Series 2003 Annual Review of Development Effectiveness: The Effectiveness of Bank Support for Policy Reform Agricultural Extension: The Kenya Experience Assisting Russia's Transition: An Unprecedented Challenge Bangladesh: Progress Through Partnership Bridging Troubled Waters: Assessing the World Bank Water Resources Strategy The CGIAR: An Independent Meta-Evaluation of the Consultative Group on International Agricultural Research Debt Relief for the Poorest: An OED Review of the HIPC Initiative Developing Towns and Cities: Lessons from Brazil and the Philippines The Drive to Partnership: Aid Coordination and the World Bank Financial Sector Reform: A Review of World Bank Assistance Financing the Global Benefits of Forests: The Bank's GEF Portfolio and the 1991 Forest Strategy and Its Implementation Fiscal Management in Adjustment Lending IDA's Partnership for Poverty Reduction Improving the Lives of the Poor Through Investment in Cities India: The Dairy Revolution Information Infrastructure: The World Bank Group's Experience Investing in Health: Development Effectiveness in the Health, Nutrition, and Population Sector Jordan: Supporting Stable Development in a Challenging Region Lesotho: Development in a Challenging Environment Mainstreaming Gender in World Bank Lending: An Update The Next Ascent: An Evaluation of the Aga Khan Rural Support Program, Pakistan Nongovernmental Organizations in World Bank­Supported Projects: A Review Poland Country Assistance Review: Partnership in a Transition Economy Poverty Reduction in the 1990s: An Evaluation of Strategy and Performance Power for Development: A Review of the World Bank Group's Experience with Private Participation in the Electricity Sector Promoting Environmental Sustainability in Development Reforming Agriculture: The World Bank Goes to Market Sharing Knowledge: Innovations and Remaining Challenges Social Funds: Assessing Effectiveness Uganda: Policy, Participation, People The World Bank's Experience with Post-Conflict Reconstruction The World Bank's Forest Strategy: Striking the Right Balance Zambia Country Assistance Review: Turning an Economy Around Evaluation Country Case Series Bosnia and Herzegovina: Post-Conflict Reconstruction Brazil: Forests in the Balance: Challenges of Conservation with Development Cameroon: Forest Sector Development in a Difficult Political Economy China: From Afforestation to Poverty Alleviation and Natural Forest Management Costa Rica: Forest Strategy and the Evolution of Land Use El Salvador: Post-Conflict Reconstruction India: Alleviating Poverty through Forest Development Indonesia: The Challenges of World Bank Involvement in Forests Uganda: Post-Conflict Reconstruction Proceedings Global Public Policies and Programs: Implications for Financing and Evaluation Lessons of Fiscal Adjustment Lesson from Urban Transport Evaluating the Gender Impact of World Bank Assistance Evaluation and Development: The Institutional Dimension (Transaction Publishers) Evaluation and Poverty Reduction Monitoring & Evaluation Capacity Development in Africa Public Sector Performance--The Critical Role of Evaluation Multilingual Editions Allègement de la dette pour les plus pauvres : Examen OED de l'initiative PPTE Appréciation de l'efficacité du développement : L'évaluation à la Banque mondiale et à la Société financière internationale Determinar la eficacia de las actividades de desarrollo : La evaluación en el Banco Mundial y la Corporación Financiera Internacional Côte d'Ivoire : Revue de l'aide de la Banque mondiale au pays Filipinas: Crisis y oportunidades Reconstruir a Economia de Moçambique http://www.worldbank.org/oed THE WORLD BANK I N N O T E IT A INTERNATIONAL R R AN T O IO P R FINANCE CORPORATION N O A C L FIN A NCE MULTILATERAL INVESTMENT GUARANTEE AGENCY ISBN 0-8213-5710-7