World Bank Background

Makeup

The World Bank is composed of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The World Bank Group (WBG) incorporates the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID) with the two banks. The five institutions of the World Bank Group have the mission to fight poverty, improve living conditions and encourage economic development.

Roles of the five World Bank Group Institutions

The IBRD provides loans, policy advice, and technical assistance to low and middle-income countries with interest rates lower than rates available from commercial sources. The income that IBRD generates allows funding of developmental activities and ensures its own financial strength. The IBRD was established in 1945 and is composed of 184-member countries. In 2004 the IBRD will loan $11 billion for 87 operations in 33 countries.

The IDA provides grants and interest free loans to poor countries for poverty reduction activities, including measures to encourage accountable governance, improve the private investment climate, boost the education and health services to the poor. IDA was established in 1960 and has 165-member countries. In 2004, the IDA has committed $9 billion to 158 operations in 62 of the world’s poorest countries.

The IFC invests in sustainable private enterprises in countries where access to capital is limited and markets are considered too risky for commercial investors in the absence of IFC participation. The IFC provides equity, long-term loans, structured finance and risk management products, and advisory services to the private sector. Established in 1956, the IFC has 176-member countries. IFC has $4.8 billion committed to 217 projects in 65 countries for 2004.

The MIGA helps encourage foreign investment in developing countries by providing foreign investors with guarantees against losses from non-commercial risks such as expropriation, breach of contract, war and civil disturbances. MIGA also provides technical assistance and advisory services to international businesses looking for investment opportunities in developing countries. MIGA was established in 1988 and is comprised of 164-member countries. $1.1 billion of guarantees will be issued in 2004.

The ICSID encourages foreign investment and mutual confidence between states and private foreign investors by providing a forum for the conciliation and arbitration of international investment disputes between the governments and investors. Established in 1966, the ICSID is composed of 140-member countries. In 2004 the ICSID has registered 30 cases.

The World Bank is run like a cooperative with a president who is a national of the largest shareholder, the Untied States. The ultimate decision-making body is the Board of Governors who meet once a year. The day-to-day decision-making is delegated to the 24 Executive Directors who work onsite at the bank. The bank employs approximately 10,000 people from 160 different countries. The president is responsible for overall management of the bank and is elected on a five-year term. The current president is Mr. James D. Wolfensohn, who has been president since 1995.

Extractive Industries Review Process

Initiation

At the Year 2000 World Bank Annual Meetings in Prague a variety of stakeholders, primarily environmental and human rights organizations, expressed concerns related to the WBG roles and policies in oil, gas, and mining projects, referred to as the extractive industries (EI). The questions and concerns included environmental and social sustainability, revenue sharing, protection of human rights, and the effects of EI projects on local communities. Mr. Wolfensohn replied, “I would be happy to sit down with you to take a look at the actualities of the extractive industries, the pros, the cons, the pluses, the minuses, and see if together we can come up with something that will either lead to an exclusion or to an inclusion on certain terms of what we are doing.”

The Extractive Industries Review began approximately one year later, July 2001, with the WBG appointment of Dr. Elim Salim as Eminent Person to oversee and administer the review process. The review was designed to engage all stakeholders including governments, nongovernmental organizations, indigenous peoples’ organizations, industry, academia, affected communities and community-based organizations, international organizations, the World Bank Group and others. The review included worldwide workshops, six research projects, four project site visits, international conferences, and informal consultations.

Makeup

Dr. Salim is the former State Minister for Population and Environment, Indonesia. As the Eminent Person he was granted a budget of $4.8 million, with full budget authority, and a report delivery date of December 31, 2003. Offices were maintained in Jakarta, Indonesia, and Washington, D.C., with a full and part time secretariat estimated to vary from ten to fifteen personnel assisted by consultants on short-term assignments. An Advisory group composed of ten individuals, supported the report writing process and ensured that the final report was credible and reflected all stakeholder views.

Objective

According to the Executive Summary of the Extractive Industries Review, the process addressed the basic question, “Can extractive industries project be compatible with the World Bank Group’s goals of sustainable development and poverty reduction?” The somewhat more definitive objectives as laid out in the Terms of Reference were:

1. To better obtain and understand the views of stakeholders about the best future role of the World Bank Group in the Extractive industries if it is to promote sustainable development and poverty alleviation.
2. To identify possible areas of consensus on the role of the World Bank Group and the relevant issues, and to identify significant alternatives or dissenting view in this respect.
3. To make recommendations on the basis of such better understandings to focus redesign, or reconsider, as needed, future World Bank Group policies, programs, projects, and processes in the sector.

Findings and Recommendations of the Extractive Industries Review

Preface

The final report of the Extractive Industries review titled “Striking a Better Balance” was delivered to the World Bank Group President January 2004. In the preface of the report Dr. Salim took final responsibility for the content and recommendations. The preface also contained the following introductory remarks.

Although governments are consulted directly and continuously by the WBG and companies are clients of the WBG civil society is left out and has no direct links

But it is civil society – local communities, indigenous people, women, and the poor – who suffer the negative impacts of extractive industrial development, such as pollution, environmental degradation, resettlement, and social dislocation.

I have duly recorded and reflected civil society’s criticisms and aspirations. The WBG needs to know that genuine development requires partnership not only with government and companies, but with civil society as well.

I accepted this task with full confidence that the WBG is genuinely willing to move away from “business as usual” approach into sustainable development means mainstreaming economic, social, and environmental considerations into sustainable development – with the alleviation of poverty as the economic goal, the enhancement of human rights as the social goal, and the conservation of the ecological life-support system as the environmental goal.

This report makes four major recommendations on how to restore that balance (world) in the WBG:

• Promote pro-poor public and corporate governance in the extractive industries;
• strengthen environmental and social components in the extractive industries;
• respect human rights;
• rebalance WBG institutional priorities.

These four recommendations have the ultimate goal(s):

• to lift up civil society so it is balanced in the triangle of partnership between governments, businesses, and civil society;
• to raise social and environmental considerations so they are balanced with economic considerations in efforts at poverty alleviation through sustainable development; and
• to strive for human-rights-based development that balances the material and spiritual goals for life.

Executive Summary

The Executive Summary contained the following comments, findings, recommendations and statements.

the Extractive Industries Review believe that there is a role in the oil, gas, and mining sectors – but only if its interventions allow extractive industries to contribute to poverty alleviation through sustainable development. And that can only happen when

• pro-poor public and corporate governance
• much more effective social and environmental policies;
• respect for human rights.

Pro-poor Governance

The more specific building blocks of governance required for extractive include the following:

• promote transparency in revenue flows,
• promote disclosure of project documents,
• develop capacity to manage fluctuating revenues,
• develop the capacity to manage revenues responsibly,
• help governments develop modern policy and regulatory frameworks,
• integrate the public in decision-making process at local and national levels.

when the IFC and MIGA consider investing in oil, gas, or mining project(s) only support projects when a country’s government is prepared and able to withstand the inherent social, environmental and governance challenges.

WBG to promote partnerships as well as the creation of financial instruments such as performance bonds, mandatory insurance, and fines.

IFC and MIGA should only support projects that benefit all affected communities including vulnerable ethnic minorities, women, and the poorest members of the community. To ensure that local communities receive benefits the WBG should:

• require free prior and informed consent,
• require revenue sharing with local communities,
• mandate the use of poverty indicators,
• encourage the incorporation of public health components,
• urge NGO’s to build the capacities of affected communities,
• help set up grievance mechanisms.

At the country level, in light of the potential of artisanal and small-scale mining (ASM) help governments develop policies that recognize this as a distinct sector and that distinguish between community based and itinerant miners, giving communities clear priority over mining rights.

Social and environmental regulations should go hand in hand with the legalization of the sector (ASM), addressing such issues as gender imbalances, child labor and environmental management.

Government capacity to deal with this sector (ASM) could be improved through (country) exchange programs with where a legalized ASM sector has clearly contributed to poverty alleviation.

Environmental and Social Components of WBG Interventions

The second enabling condition that will allow extractive industries to contribute to poverty alleviation through sustainable development involves strengthening of environmental and social components revision of current WBG policies new requirements or guidelines

• Require integrated environmental and social impact assessments identifying cumulative impacts of project and socioeconomic linkages to environmental issues. Extractive industries should be categorized as Category A project – likely to have significant adverse environmental impact – unless there are compelling reasons to the contrary.
• Update and fully implement the Natural Habitat Policy. The WBG should not finance any activities that might affect current official protected areas or critical natural habitat or areas that officials plan to designate in the future as protected “biological hot spot” must undergo additional development studies. Clear “no-go” zones should be adopted.
• Update and Fully implement the Resettlement Policy free prior and informed consent before resettlement takes place only voluntary resettlements not forced ones. Compensation and project derived benefits should lead to genuine improvements, assessed by independent reputable third parties
• Revise the Disclosure Policy. The WBG Disclosure Policy should be broadened to include a series of documents currently protected. (In the body of the report “The WBG should promote the disclosure of production sharing agreements, economic and financial assessments, environmental and social assessments, monitoring and evaluation results, and information on accident prevention and emergency response.”)
• Develop sector-specific guidance for Tailings Disposal, Waste Management and the Use of Toxic Substances. The WBG should develop a list of criteria for tailings placement for all mining projects no WBG-supported mining project should use riverine tailings disposal. Submarine tailings disposal should not be used until balanced and unbiased research demonstrates its safety. WBG support for mines using toxic materials such as cyanide and mercury should be minimized. The WBG needs to revise its cyanide effluent guidelines to be consistent with the most advanced guidelines in Canada, the Untied States
• Develop guidelines for Integrated Closure Planning. IBRD and IDA should require fund to be built up in the balance sheet for closure from the start of any new development. IFC and MIGA policies should specify the outlines of the integrated closure planning process acid drainage potential that is acceptable and the creation of a fund or guarantee mechanism that will ensure resources are available to pay end-of-life social and environmental costs
• Develop Guidelines on Emergency Prevention and Response encouraged in reforms of national legislation and regulation.
• Address the Legacy of the Past. IBRD and IDA should helping governments tackle the legacy of extractive industry projects. Compensations funds for people affected by past developments the WBG should establish a targeted program aimed at restoring degraded lands, improving the life of the (affected) poor and generating employment and skills training.

Human Rights

IBRD and IDA should clarify and strengthen the legal basis for resource and tenure rights. Their (indigenous peoples) resettlement should only be allowed if the community has given free prior and informed consent

The WBG’s Safeguard Policies should recognize the rights of women social management, community development, and consultation plans and exercises reach out to women and protect them from gender-based human rights violations

Institutional Priorities

The WBG should adjust the skill mix of its staff, including consulting firms, to increase the ratio of people with knowledge of social, environmental, and human rights aspects of development.

WBG priorities within the energy sector need to be rebalanced help governments adopt sustainable energy strategies that address the energy needs of the poor and that minimize climate change. Countries should be helped to remove subsidies from carbon- based fuels.

WBG should phase out investments in oil production by 2008 and devote its scarce resources in renewable energy resource development, emissions reducing projects, clean energy technology, energy efficiency and conservation, and other efforts that delink energy use from greenhouse gas emissions. The WBG for the last few years has not invested in new coal mining development. This should continue.

The WBG should aggressively increase investments in renewable energies by about 20 percent annually

To follow up on the recommendations in this report, a global consultation workshop should be held in 2005 to assess the extent to assess the extent to which the World Bank Group has succeeded in moving the extractive industry sector on to a sustainable path that contributes to poverty alleviation worldwide.

A Synopsis of the Independent Extractive Industries Review

Introduction: The World Bank Group (WBG) is a facilitator to the mining, oil, and gas sectors providing project financial assistance, political risk insurance, and through the establishment of environmental guidelines in countries with developing or deficient regulatory programs. The World Bank Group’s roles and policies concerning the extractive industries (oil, gas, and mining) have been the subject of an independent third party review to determine if the industries’ projects can be compatible with the World Bank Group’s goals of sustainable development and poverty reduction. Part 1 of this article (October 2004) described the makeup and roles of the World Bank Group, how the independent third party Extractive Industries Review (EIR) was initiated; the makeup of the review group; and the objectives, findings, and recommendations contained in the January 2004 final report. This article will provide a condensed version of the extractive industry (EI) comments, World Bank Management’s draft response to the report, comments to the draft response, and World Bank Chairman’s Summary.

Industry Comments to the Extractive Industries Report

The International Council on Mining and Metals agreed with the Extractive Industries Report that the World Bank Group should continue to remain engaged in the mining, oil and gas sectors. They further stated that the WBG is critical to developing countries successful transformation of natural resources to human capital. The Council did not agree with the “diagnosis or prescriptions” of the EIR, finding that the recommendations would be “costly, counterproductive and unrealistic.” Excessive complexity would result in reduced development in poor countries, withdrawal of responsible mining companies, and an increase in socially and environmentally “unconcerned” companies. Growth in poor countries that are dependent upon the Bank resources and assistance for development of emerging markets would be significantly reduced with implementation of the EIR recommendations. Additionally, the Council commented that,

• “The EIR does not take account of all relevant literature on the role of natural resources in development.” The “natural resources curse” theory that mining is bad for development is based on statistically weak correlations and the concept paralyzes action.
• The EIR does not recognize that most current mining projects succeed in their socio-economic development objectives. The report focuses on the negative social and environmental impacts of extractive projects.
• The EIR excludes findings from well-documented operational evidence that most mining projects have had a positive developmental impact with 73% of the projects having satisfactory economic returns.
• “A full and fair use of the EIR’s own consultations would have strengthened the findings of the report.” The report does not provide a balanced account of the regional consultations. Practical examples of success provided by the advisory group were cut or ignored.
• “The EIR would have benefited from balanced representation.” The report assumed that the World Bank Group “is simply not to be trusted; governments of developing countries cannot be trusted and should be excluded from the process; only civil society organizations, or self selected representative, can be truly independent and trustworthy.
• “The proposed ban on new coal mining projects along with other blanket bans, e.g., on activities and technologies, will not support the WBG’s mandate of poverty alleviation.” Implementation of the recommendations would reduce the Bank’s effectiveness assisting developing countries with conversion of natural capital into physical and human capital.
• The EIR recommendations would reduce the WBG’s presence in the sector and inhibit its capacity to raise performance standards.
• “The WBG’s leadership role in promulgating environmental and social safeguard policies in the most needy countries should be strengthened through better implementation.” The WBG policies are appropriate and have been used by industry to improve the environmental and social impacts of mining operations.

In a letter dated December 7, 2003, Sir Mark Moody-Stuart, Chairman of Anglo American, wrote to Dr. Salim (head of the EIR), “ from the outset I have been concerned at the unbalanced nature of the advisory group, the lack of transparency in the selection process and the lack of representation from developing countries with significant extractive industries.” He further comments on the report’s “steadfast focus on the negative”, “complete omission of any reference to success”, non-contribution to cooperation, and “great missed opportunity.”

In a letter dated April 3, 2003 from Mr. Anthony Lea, Finance Director Anglo American Gold, to Dr. Salim, Mr. Lea’s concluded that,

• “The extractive industries have an unrivaled ability to generate wealth rapidly, which is one of the key requirements for poverty alleviation.”
• Mines are able to provide sought-after employment and both physical and human infrastructure in areas where few other sectors would be willing or able to operate.
• The WBG is uniquely placed to influence the activities of governments and to promote good governance via its assistance programmes.
• The IFC (International Finance Corporation) and MIGA (Multilateral Investment Guarantee Agency) are important providers of finance and risk coverage in environments that are not attractive to other players.
• The IFC/WBG environmental and social guidelines are regarded as best practice.
• The WBG can improve the integration of its operations to better ensure good governance.
• Better monitoring and extension can improve the implementation of WBG Safeguard Policies over the life of the mine.

The document went further to provide case studies of Anglo American projects conducted with the World Bank that have provided social and developmental benefits to project areas in Venezuela, Zambia, Chile, and Brazil.

World Bank Draft Response

In June 2004, the World Bank Group issued a draft management response (MR) to the Extractive Industries Review for public comment before issuance of the Bank’s official response. The Bank Group agreed with the majority of the recommendations and the basic objectives of “reducing poverty, protecting the environment, improving peoples lives, and supporting equitable growth.” The Bank’s approach in future investments “will be more selective, with greater focus on the needs of poor people, a stronger emphasis on good governance, promoting environmentally and socially sustainable development.”

The Bank responded that there would be “speedy movement” to promote renewable energy and efficiency to combat climate change; strengthen governance and transparency; ensure that extractive industry benefits reach the poor; mitigate environmental and social risks; protect the rights of people affected by extractive industry investments; improve organization coordination; and an ongoing learning and review process.

The Group recognized that there was not consensus among all stakeholders, particularly on the recommendation that the Bank Group should withdraw investments from coal and oil projects in developing countries. The Bank’s rationale was that 1.6 billion people do not have electricity and 2.3 billion people rely on biomass fuels. Oil, gas, and mining assets in developing countries will have to be utilized to alleviate the “energy poverty” in those countries. The world’s poor will continue to rely upon coal and oil as major fuel sources for the foreseeable future. “By staying engaged on a selective basis,” the Bank can help poor countries build capacity, grow, and alleviate poverty while meeting environmental and social principles.

Comments to the Draft Management Response

Of the three primary categories of stakeholders, industry, government, and non-government organizations (NGO’s), the NGO’s were the most disgruntled group, commenting that the response and proposals were inadequate and without specificity. Government comments and declarations could be considered on the mid-tier level of dissatisfaction. Industry was probably the least aggrieved group, but comments were with reservation and criticism. Following are some of the more relevant comments in brief.

• Apply a moratorium on extractive industry investment until recommendations are implemented. Shift funds to renewables. (NGO’s, Parliamentarian)
• Where the World Bank Group claims there was no consensus, the management response has come down in favor of the views of industry and government, as opposed to those of civil society. (NGO’s)
• Set a minimum level of $1bn by 2010. (investment in renewables) (NGO’s and Parliamentarian)
• Climate change impact of lending should be transparently accounted for, including the cost of CO2 emissions.
• WBG should phase out of oil investments, and maintain its moratorium on financing coal production projects. (NGO’s, Parliamentarian)
• In formulating and requesting governance reforms, the WBG must respect the foreign rights of each state to establish it laws and policies.
• Audits and independent monitoring should be employed to guarantee transparency. (NGO’s)
• Natural resources are the property of the state under the Constitution, and the state must administer these resources, taking into account all the interests involved. (Governments)
• Do not support riverine tailings or submarine tailings disposal. (NGO, Parliamentarian)
• Adopt principles for cyanide and EU standards. (NGO)
• Require fully funded financial guarantees and audits of closure plans. (NGO)
• World Bank extractive industry projects should all be Category A. (NGO’s Parliamentarian)
• WBG activities in social and environmental areas should be subject to independent auditing. (NGO’s)
• The MR (World Bank Management Response) proposal for “prior informed consultation” and “broad community support” are not adequate and the WBG should apply the principle of FPIC (free prior informed consent) for EI projects.
• Transparency and independent monitoring will be needed to ensure that the WBG proposed policies on EI are implemented. (Parliamentarian)

Dr. Salim Comment to World Bank Draft Response

On July 22, 2004 Dr. Salim submitted a ten-page comment document to the World Bank Group Management response. His comments include,

• The World Bank Group Management Group Response says that it agrees with the majority of the recommendations, but makes few commitments to addressing these recommendations or fully to implementing them.
• The Response aims to predominantly pursue economic development in the extractive industry sector while slightly increasing attention to social and environmental development compared to the past.
• The Response ignores the urgent need to begin internalizing environmental and social cost in the EI sector, while they continue to favor the usual predominant focus on economic development.
• The response proposals are business as usual with marginal changes.

WB Chairman’s Summary

On August 3, 2004, the Executive Directors of the World Bank Group met and finalized the Management Response based on the comments received, and the divergent opinions of the various directors and their constituents. Following are some of the final comments of the directors.

• The Directors generally agreed that the Response substantively addressed the recommendations of the Extractive Industry Review.
• The WBG’s strategy in the extractive industries is consistent with its mandate to promote poverty reduction and sustainable growth in developing countries.
• Some of the Directors welcomed the establishment of a working level advisory group. Others cautioned against EIR-type processes and attendant costs.
• The Directors agreed that increased access to affordable energy will continue to be important for poverty reduction and sustainable growth in developing countries. The WBG should remain engaged in financing oil and coal project, while doing more on renewable energy and energy deficiency.
• The Directors agreed with Management’s proposal to constructively respond to what governments are aiming to achieve, and be prepared to provide financial commitment or technical support when there is credible commitment to improve governance.
• They agreed that communities should benefit from EI projects. Some of the directors supported meaningful consultation to ensure broad community support while a few supported free prior informed consent. Many Directors stressed avoiding proposals that created veto rights against projects that were supported by national and local governments, emphasizing the primacy of national sovereign law. The opinion of the Bank General Counsel is that adoption of free prior informed consent would be inconsistent with the Articles of Agreement.
• The Directors agreed with using the IFC Safeguards and revised guidance for certain issues such as the use of toxic chemicals, mine closure, and emergency response for tailings facilities.
• They welcomed the intention to scale up support for wider adoption of renewable energy and increased energy efficiency.
• The Directors recognized that the EIR consultation had presented many important issues, with many ramifications beyond the EI activities.
• Management will report on an annual basis, implementation of the measures set out in the response to the EIR and internal evaluations.

Future

The World Bank will continue to plot a course between what the extractive industries regard as practical and what civil society, NGO’s, considers inadequate. The NGO’s have demonstrated their view of the extractive industries and their diligence and resolve to reform the World Bank Group’s policies. With a few exceptions, the extractive industry group has not demonstrated the same diligence and resolve defending their practices. If the industry effort is not improved, the World Bank Group’s policies and requirements will become increasingly complex and onerous to the detriment of developing countries that have little voice and impact on the Bank when compared to the NGO and their resources. The industries will cope with the additional burden until costs, time, and risks reduce their activities in developing countries.