MAC: Mines and Communities

World Bank must reform on extractive industries

Published by MAC on 2004-07-18

The following is a comment piece in the Financial Times by the EIR's 'Eminant Person'. In it he draws attention to the forthcoming decision on the EIR, which will be the Board's decision on the Bank's Management response. Further down is a Reuters article about this - the Management response to the EIR can be viewed here - all comments should be made to the bank before 18th July 2004.

World Bank must reform on extractive industries

By Emil Salim

Financial Times Comment

June 16 2004

The two-year review I led on behalf of the World Bank to examine the impact on the developing world of investment in extractive industries was inspired by the moving address by James Wolfensohn, the bank's president, to its governors in September 2003. He told them: "The demographics of the future speak to a growing imbalance of people, resources and the environment. If we act together now, we can change the world for the better. If we do not, we shall leave greater and more intractable problems for our children . . . This is a time for courage and action for a new vision of the future."

Next week, the bank's executive directors will make important decisions on the recommendations of the Extractive Industries Review report - based on the most comprehensive review yet on the impact of investment in oil, gas and mining on developing economies.

Having overseen the review, I came to the conclusion that the World Bank must radically alter its approach to supporting extractive projects - and even stop supporting some altogether.

The reason for this conclusion was clear. The bank is a publicly supported institution whose mandate is poverty alleviation. Not only have the oil, gas and mining industries not helped the poorest people in developing countries, they have often made them worse off. Scores of recent academic studies and many of the bank's own studies confirmed our findings that countries which rely primarily on extractive industries tend to have higher levels of poverty, child morbidity and mortality, civil war, corruption and totalitarianism than those with more diversified economies.

Does this mean extractive industries can never play a positive role in a nation's economy? No, it simply means that the only evidence of such a positive role we could find took place after a country's democratic governance had developed to such a degree that the poorest could see some of the benefits. Before the fundamental building blocks of good governance - a free press, a functioning judiciary, respect for human rights, free and fair elections and so on - are put in place, the development of these industries only aggravates the situation for the poorest.

Moreover, large multinational oil, gas and mining corporations, most of which are wealthier than resource-dependent developing nations, do not need the World Bank to assume part of their financial risk. As a development institution, the bank should use scarce international public funds to build up the preconditions of good governance and transparent institutions to ensure that private investment benefits poor countries, rather than disappearing in corruption and mismanagement. Based on our review, the bank is not giving these governance issues enough priority - they cannot be addressed while large sums of money are simultaneously lent to countries with poor governance.

The other action required is for the World Bank Group to strengthen environmental and social requirements for investment in extractive industries. The failures of the market to incorporate environmental and social impact into the industries' cost structures have shifted the burden to the public and it is usually the poor who bear the brunt of degradation in these areas.

With poverty alleviation as its core mission, the World Bank should require high standards for delivering social and environmental protections and benefits. The development of extractive industries should go beyond resource depletion to ensure sustainable livelihoods and address cleaning up after extractive investments and restoration of the land. The bank should require clean technologies and champion investments in renewable energy technologies. Its decisions must also be informed by the indigenous people directly affected by projects, ensuring they have all the information and the ability to negotiate a fair deal.

All this requires a will to elevate the position of the poor and vulnerable to strike a better balance with that of the strong and privileged. Next week, the bank's executive directors will make important decisions on the acceptance of the EIR report. I do not expect them to strive for a compromise among all stakeholders over the review's recommendations. Rather, I expect a firm commitment to represent the interests of the world's poor and to inspire and lead governments, industries and civil organisations to pave the path for sustainable development.

This is exactly the kind of challenge that Mr Wolfensohn spoke of in his speech and one that requires a new vision for the future.

The writer is a former Indonesian environment minister and led the World Bank Extractive Industries Review

World Bank to be more selective in oil, gas loans

Friday June 18 2004

By Lesley Wroughton, Reuters

Washington - The World Bank will continue funding oil, coal and mining projects, but will be more selective, it said on Friday in response to a review that recommended it phase out support for such projects.

"Our future investments in extractive industries will be more selective, with greater focus on the needs of poor people and a stronger emphasis on good governance and on promoting environmentally and socially sustainable development," the bank said in an executive summary of its response obtained by Reuters.

World Bank President James Wolfensohn commissioned the independent review of the bank's activities in oil, gas and mining projects in 2000, following concerns by environmental and human rights groups that its participation in the sector contributed to poverty instead of alleviated it.

Led by Emil Salim, Indonesia's former environment minister, the review recommended the bank radically change its approach to funding such projects and even stop supporting some.

In the past year, World Bank affiliates have helped fund two major private sector oil projects in developing countries -- the Chad-Cameroon and the Baku-Tblisi-Ceyhan pipelines -- which both help carry crude thousands of kilometers overland to the coast.

Bank directors met earlier this week to discuss its official response to the review following three months of consultations with governments, industry and non-governmental groups.

The bank said it would dramatically increase its support for more environmentally friendly renewable energies and clean energy sources.

It said its participation in oil, gas and mining projects is expected to remain relatively small at less than 5 percent of its total lending per year.

Environmental Gatekeepers

The bank said the impact of its involvement in such projects would mean greater environmental and social standards.

"By staying engaged on a selective basis, we can have an influential role in ensuring that the best environmental and social practices are followed and that the goal of sustainable poverty reduction is achieved," it said.

The institution said oil, gas and mining for many developing countries were important assets that will have to play a role if their governments are to reach global poverty targets.

Salim said in comments published earlier this week he expected the bank's response to represent the interests of the world's poor and "to inspire governments, industry and civil organizations to pave the path for sustainable development".

Based on the review, he said the bank was not paying enough attention to good governance and transparent institutions in resource-rich countries to ensure private investments benefited the poor.

Environmental groups said the bank's response lacked clarity and ignored the recommendation to get out of oil and coal.

"The World Bank's response is fuzzy and lacks clarity," said Jon Sohn, campaign director for Friends of the Earth.

"Judging from past bank behavior, unless implementation is absolute, binding and subject to public input, a historic opportunity to alleviate poverty will be missed," he added.

Extracting value

Editorial, Financial Times

June 22 2004

The World Bank's governing board will shortly have to decide whether oil, gas and mining industries in poor countries do more harm than good. The bank's independent Extractive Industries Review says it should pull out of oil and mining. The bank's management, predictably, disagrees. But it needs to do more to make its case that such industries can be made to work effectively and durably for the poor.

The conduct of the review itself was unimpressive. The idea of placing ultimate power in the hands of an "eminent person" - in this case Emil Salim, former Indonesian environment minister under the dictatorial President Suharto - is flawed. It encourages damaging battles for that person's ear rather than constructive consensus among different views. Mr Salim's habit of making sweeping criticisms of the bank well beyond his brief hurt the credibility of his conclusions.

But those conclusions, that the bank pull out of oil and mining altogether, deserve to be taken seriously. As a broad spread of non-governmental organisations - not just the usual anti-bank suspects - argued, quite aside from the environmental considerations, it is hard to show that extractives have systematically helped relieve poverty in countries that do not already have somewhat successful economies and the rule of law.

It is difficult to find an example, perhaps with the exception of diamond-rich Botswana, of a country that has levered itself out of dire poverty principally using oil, gas or mining. More often, extractive industries distort the political as well as the economic life of poor
nations, encouraging the growth of a predatory elite fighting over revenues rather than the healthy competition of a diversified market economy. It is hard to look at corruption-racked countries such as Nigeria without concluding they might be better off never having discovered oil.

The World Bank needs to be cautious in getting involved. While projects in relatively well-run economies that would go ahead anyway are improved by its environmental and governance rules, it should be very careful about corruption-riddled countries where its involvement is the tipping factor making the project viable.

The bank argues that it can make projects in such countries worthwhile by imposing environmental safeguards and constructing transparent mechanisms for sharing revenues broadly in the country. But its capacity to do this is still being tested in high-profile projects such as the Chad-Cameroon oil pipeline, about which respectable critics such as the anti-corruption campaign Transparency International continue to harbour reservations.

On balance, for the bank to pull out of oil entirely at this stage looks like an overreaction. Blanket sector-wide bans are in any case clumsy instruments. But it must do better to show that its involvement can make a real difference if it is to justify a continued role in this most controversial area.

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