gambling with people’s lives - world...

A Report by

Environmental DefenseFriends of the Earth

International Rivers Network

Gambling withPeople’s Lives

What the World Bank’s New “High-Risk/High-Reward” Strategy Means

for the Poor and the Environment

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

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Gambling with People’s Lives — What the World Bank’s New “High-Risk/High-Reward” StrategyMeans for the Poor and the Environment

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

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

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

ISBN: 0-913890-00-6

Design: JML Design

Printing: Peake Printers

Cover photos (left to right):

A farmer woman displaced for the Bujagali Dam in Uganda. TheBujagali Project is one of the World Bank’s latest high-risk projects. It isriddled with controversy and has prolonged the deadlock in Uganda’spower sector. The people who have been displaced pay the highestprice. (Photo: Lori Pottinger, IRN)

Children from a village for internally displaced persons near an oilterminal to be used for the proposed Baku-Tbilisi-Ceyhan pipeline, aproject the World Bank is considering financing at press time. Many ofthe village residents are skeptical of the project’s promised benefits.(Photo: Nino Gujaraidze, Green Alternative)

“We will not move!” Activists of the Protect the Narmada Movementrefuse to leave the villages that are being submerged by the SardarSarovar Dam in India’s Narmada Valley. Sardar Sarovar is one of theWorld Bank’s early high-risk projects. (Photo: Narmada BachaoAndolan)

G A M B L I N G W I T H P E O P L E ’ S L I V E S

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

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

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

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

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

Friends of the Earth International PO Box 19199100 GD Amsterdam, Netherlands Phone 31-20-622-1369, Fax 31-20-639-2181www.foei.org

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

International Rivers Network (IRN) supports localcommunities working to protect their rivers andwatersheds. IRN works to halt destructive waterdevelopment projects, to promote sustainablealternatives, and to change the policies of financialinstitutions, governments, and the dam industry.

International Rivers Network1847 Berkeley Way Berkeley, CA 94703, USAPhone 1-510-848-1155, Fax 1-510-848-1008 [email protected], www.irn.org

Acknowledgements


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

Acronyms and Abbreviations


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

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

“Institutional Amnesia”: The World Bank’s Approach to High-Risk Projects.............................................3

Risky Business: Extractive Industries.............................................................................................................9• Alternatives to the World Bank’s Extractive Industries Investments

The World Bank Risks the World’s Forests .................................................................................................19• Alternatives to a High-Risk Approach to Forests

The World Bank and Large Dams: Failure to Learn from History..............................................................27• Alternatives: Low-Risk/High-Reward Solutions for the Global Water Crisis

Conclusion: The Poor Track Record of the World Bank’s High-Risk Projects.........................................37• Recommendations

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

Boxes:MIGA: An Insurer Against High Risk...................................................................................................................4The Experience with IFC.....................................................................................................................................6Chad-Cameroon: A Risk Mitigation Test Case .................................................................................................11Singrauli: Same Old Story.................................................................................................................................13The Baku-Tbilisi-Ceyhan Pipeline: Lessons Learned? .....................................................................................14Ignoring Communities: The Yanacocha Mine...................................................................................................16Structural Adjustment in Cameroon: Disastrous Consequences for Forests...................................................21Forest Concessions in Cambodia: A Safe Bet? ...............................................................................................22The Chad-Cameroon Pipeline and Forest Destruction ...................................................................................24Tarbela: The Grandfather of High-Risk Projects...............................................................................................28Bujagali: High Risk for Whom?.........................................................................................................................30Sardar Sarovar: Once Again a “High-Reward Investment”? ............................................................................32An Alternative Approach ...................................................................................................................................35The Case for Reparations .................................................................................................................................40

Table of Contents


i

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

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

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

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

• What is the World Bank’s track record in earlier high-risk projects?

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

adequately appraise and implement high-riskprojects?

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

The following report examines these questions at acritical juncture. It analyzes how the World Bank’sapproach to environmental and social risk has changedover time and evaluates the Bank’s track record in high-risk projects in the water, forestry, oil, gas and miningsectors. The report presents examples of alternativedevelopment approaches that are marked by low riskand high rewards and culminates with some generalconclusions and a series of recommendations.

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

Defense

September 2003

1 World Bank (2003) “Water Resources Sector Strategy: Strategic Directions forWorld Bank Engagement,” p. viii.2 The term World Bank in this report generally includes all financing arms of theWorld Bank Group (IBRD, IDA, IFC and MIGA).

Foreword


1

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

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

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

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

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

At this critical juncture, “Gambling with People’s Lives”considers the following questions: What is the World Bank’strack record with high-risk projects in the water, forestry andextractive industries sectors? Has the Bank learned lessons

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

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

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

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

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

Executive Summary


2


3

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

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

Throughout the 1980s, theexperience of people affected byprojects in Brazil’s Amazon region orby transmigration projects inIndonesia exposed PresidentClausen’s claim as wishful thinking.In May 1987, Clausen’s successorBarber Conable admitted that “theWorld Bank has been part of theproblem in the past,” and announceda series of sweeping environmentalreforms. The number ofenvironmental staff was to be greatlyincreased, operational directiveswere going to define policies onissues such as environmental impactassessment and involuntary resettlement, and the WorldBank was going to finance positive environmentalprojects. In 1991, the Bank also adopted a new ForestPolicy Paper that banned further support for commerciallogging in primary tropical moist forests.

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

The Morse Commission’sindependent review was published inJune 1992. It landed like a bombshellon the Bank. “We have discoveredfundamental failures in theimplementation of the Sardar SarovarProjects,” the review found. “Wethink the Sardar Sarovar Projects asthey stand are flawed, thatresettlement and rehabilitation of allthose displaced by the Projects isnot possible under prevailingcircumstances, and that theenvironmental impacts of theProjects have not been properlyconsidered or adequatelyaddressed.”2 The authors concludedthat “the history of the environmentalaspects of Sardar Sarovar is ahistory of non-compliance … TheBank is more concerned toaccommodate the pressuresemanating from its borrowers than toguarantee implementation of itspolicies.”3

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

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

The World Bank’s “approval culture”

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

“Institutional Amnesia”: The World Bank’s Approach to High-Risk Projects

Protective measures in all projects?

“For a decade now, theBank has required, as partof project evaluation, thatevery project it financesbe reviewed by a specialenvironmental unit. I’m

pleased to say that it hasbeen possible to

incorporate protectivemeasures in all the

projects we have financedover the past decade.”

World Bank President A.W. Clausen in a speech

in Washington, DC on November 12, 1981

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

MIGA provides risk insurance toforeign corporations and banks thatwant to invest in developingcountries. The agency underwritesprivate sector loans and equityinvestments for a host of perceivedpolitical risks including expropriation,war, civil disturbance and currencytransfer. Since its establishment in1988, MIGA has provided more than$11 billion in political risk insurancefor projects in over 80 countries. Asthe Bank Group’s principal riskinsurer, it seems that MIGA wouldplay an important role in any newBank strategy involving high-riskprojects.

Although it is a public institution,MIGA rarely discloses information tothe public concerning the impacts ofits projects on the surroundingcommunities. Its environmental anddisclosure policies are the weakestamong the World Bank’s lendingarms. For example, unlike the rest ofthe Bank, MIGA releases no information about Category Bprojects prior to Board approval.4 Strengthening thesepolicies has not been a priority, presumably becauseMIGA is concerned with maintaining good relations withits private sector clients and attracting business.

As part of the World Bank Group, MIGA is supposed tocomply with the Bank’s mandate of poverty alleviation andsustainable development. Yet many MIGA-guaranteedprojects have had significant negative economic, socialand environmental effects on the very communities itpurports to aid in development. MIGA has drawn heavycriticism from many environmental and public interestgroups who claim that the agency’s commitment tosocially responsible development is highly questionable.5

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

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

MIGA-backed projects with extremelyquestionable development benefitsinclude guarantees for car dealershipsin Zambia and Mozambique, a yachtclub and luxury marina in Albania, ahigh-end shopping mall in theDominican Republic, and an oceantherapy “spa” in Senegal. AmongMIGA-insured extractive industryprojects are the Omai gold mine inGuyana where a tailings dam brokeand spilled billions of liters ofcyanide-laced effluent into a localriver; Indonesia’s Grasberg Minewhere rampant human rights abusesby company security forces werealleged; and Papua New Guinea’sLihir mine where millions of tons oftoxic tailings are dumped directly intothe sea.

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

MIGA: An Insurer Against High Risk

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

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

Officials inspect a giant crack at the MIGA-insured Omai gold mine in Guyana. In 1995, atailings dam broke at the mine, spilling billions ofliters of cyanide-laced effluent into a local river.(Photo: Mineral Policy Center)


4


5

The World Bank’s response to the Morse and theWapenhans reports was twofold. Under pressure fromNGOs, reform-minded Executive Directors and the U.S.Congress, the Bank in 1993 agreed to create a semi-independent Inspection Panel as a means of increasingcompliance and accountability. The Panel was aninnovative mechanism to which project-affected peoplecould turn if they were harmed as aresult of Bank policy violations. ThePanel could investigate projects andissue recommendations to theBoard, but was not empowered totake direct corrective action. InAugust 1995, World Bank PresidentJames D. Wolfensohn withdrewsupport for the Arun III hydropowerproject in Nepal in response to thefirst complaint made to theInspection Panel. The Panel went onto investigate many other projects inBrazil, India, China and elsewhere. Itsoon met stiff opposition fromconservative Board members andBank management, but remains oneof the few options available todemand some level of accountabilityfrom an international financialinstitution.

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

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

“All things to all people”

The contradictions between public announcements andactual policy deepened with the arrival of PresidentWolfensohn in 1995. “We have to make a choice,” amember of the Bank’s senior management told the newPresident in March 1996. “Either we treat our

governments as clients and webehave like merchant banks, inwhich case we owe it — again, toourselves, in the first place, and toour counterparts, second — to stoptalking about the environment, aboutwomen in development, aboutpoverty alleviation, and so on, aspriorities. … If the government is notour client … the client is the peopleof the countries we work with, andthe governments are agencies,instruments, with whom we work tomeet our clients’ needs.”10 YetWolfensohn was not prepared tomake such a choice. In high-profileannouncements, he promised tostrengthen participation and improveproject quality on the ground, butalso to shorten loan-processing time,increase the volume of lending andstrengthen cooperation with theprivate sector. The new Presidentwas “trying to be all things to allpeople, and not choosing amongwhat may be fundamentallyirreconcilable priorities,” Bruce Richof Environmental Defenseobserved.11

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

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

The gap between rhetoricand action

“Informal organization isthe way things get done

around here. Formalorganization is where therituals are carried out —the consultations with

NGOs that have no effecton subsequent actions,

the sophisticated regionalenvironmental strategiesthat make no impact on

the choice of projects, theinformation collected andthe meetings between theleaders of the organization

and leaders of worldreligions to discuss

unresolvable problems ….”

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

Bank: Get up, Gulliver!” August 2001

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

In response to the public-relations disasters of theSardar Sarovar and Arun III projects, the World Bankbegan to shy away from controversial dam projects inthe mid-1990s. Most notably, it stayed away from thenotorious Three Gorges Project in China in 1997, afterplaying an active role in preparing the project’s feasibilitystudies. The World Bank Group continued to financecontroversial projects in the mining, oil and gas sectors,as well as projects that had negative impacts on forests.

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

1996, the Bank’s Operations Evaluation Department(OED) concluded in two separate reports thatenvironmental assessments (EAs) and povertyassessments were not effective in actually influencingproject design, and that Bank supervision ofenvironmental project components was often lax or non-existent.14 In 2002, yet another OED report found that“the quality of the EA process [had] deteriorated,” andthat the decentralization that was part of PresidentWolfensohn’s institutional reform had “diminished theBank’s capacity both to mainstream the environment intocountry programs and to implement its safeguardpolicies effectively.”15

Re-emergence of the high-riskapproach

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

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

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

The largest portion of IFC’s investments is in the financialservices sector, followed by infrastructure. Among itscontroversial projects, IFC has provided support for theBujagali Dam, the Yanacocha gold mine and the Chad-Cameroon project (see Boxes on pages 11, 16, and 30).

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

IFC still largely measures its performance andcontribution to development by assessing economicgrowth and revenue generation functions, rather than

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

IFC’s policies, though improved, are still insufficient for apublic development institution. The IFC employs a moresubstantive information disclosure policy than doesMIGA. It states, “[t]here is a presumption in favor ofdisclosure where disclosure would not materially harmthe business and competitive interest of clients.”Nevertheless, business interest concerns allowconsiderable leeway to keep “business confidential”information out of the public domain. IFC also lackspolicies in crucial areas such as security. As oil, miningand gas projects generally involve valuable infrastructureand natural resources deposits, companies often arrangefor security to guard their facilities. These arrangementshave led to volatile relations between local communitiesand the security or police forces, including those of IFC’sprivate sector clients. These policy gaps, as well as IFC’sfailure to thoroughly assess the distribution of costs andbenefits of projects, will become even more damagingunder a strategy that promotes high-risk projects.

The Experience with IFC


6


7

South and some Bank managers complained that theWorld Bank had become “risk averse.” By 2001, thisview had become generally accepted within the Bank’smanagement and the Board of Directors. In July 2001, atask force prepared a report on the cost of the Bank’ssafeguard, procurement and financial policies entitled“The Cost of Doing Business.” According to the report,“[t]he task force does see some risksthat the Bank faces in withdrawing— or being de-facto excluded —from important infrastructure sub-sectors such as energy, transport,and urban… The Bank has becomeso risk-averse, according to someborrowers, that it would rather do noproject than risk criticism.”16

The new report was widely used tojustify a further relaxing of the WorldBank’s safeguard policies. Thedebate largely ignored the fact thataccording to the report, most delaysand costs (for the Bank and theborrowers) were not caused byenvironmental and social safeguardpolicies, but rather by theinstitution’s bureaucraticprocurement and financialaccounting policies. The task forceestimated the incremental cost ofapplying safeguard policies at $36-56 million per year. In comparison, itestimated the incremental cost of the Bank’sprocurement and financial policies to be almost threetimes higher, at $101-153 million per year.17 One of thetask force’s “key recommendations” was to “[i]nitiateassessments of environmental and social impacts at theearliest possible time in project processing.”18

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

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

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

whether or not the World Banksupported them, especially inmiddle-income countries. Withoutquoting any evidence, the authorsclaimed that the performance of damprojects had improved significantly inrecent years, and that it wasimportant for the Bank to be involvedin such projects to acquaint itselfwith “best practice.” The Strategyasserted that “low-cost, oftencommunity based solutions” and“‘easy and cheap’ options” havebeen “mostly exploited,” and as aconsequence “re-positioning theWorld Bank vis-à-vis controversialinfrastructure is a vital, but complexand contentious task.”21 As theBank’s senior water advisorexplained in March 2003, theapproach taken by the new WaterResources Sector Strategy was notonly valid for the water sector, butalso for the forest and miningsectors.22

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

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

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

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

Lessons from the past ignored

“The lessons from pastexperience are wellknown, yet they are

generally ignored in thedesign of new operations.This synthesis concludesthat institutional amnesia

is the corollary ofinstitutional optimism.”

World Bank Quality Assurance Group,“Portfolio Improvement Program” (draft

internal report), April 1997


8

responded too much to the pressure from influentialsegments of the population” rather than to the needsof the poor.24 The report recommended an“[i]ncreased emphasis on implementation ofsafeguard policies during project supervision by theBank and the borrower.”25 An evaluation of theBank’s water strategy in India also concluded that“mov[ing] away from new construction” and“focusing on making existing infrastructure workefficiently” was “most appropriate given the povertyalleviation mission of the Bank.”26

Institutional amnesia

A global poll in May 2003 found that the share of opinionleaders who thought the World Bank was doing a goodjob at “fostering environmental sustainability” haddropped from 27% to 21% since a 1998 poll. (The shareof people who thought it did a poor job increased from29% to 34%.)27 Only 22% thought the Bank did a goodjob in reducing poverty, and only 16% thought the Bankhad been successful in reducing corruption.28 This pollsupports the perception that the Bank is not able tosafeguard the interest of the environment and thecommunities affected by so-called “high-risk/high-reward” projects.

In April 1997, the World Bank’s Quality Assurance Groupnoted in an internal draft report: “The lessons from pastexperience are well known, yet they are generally ignoredin the design of new operations. This synthesisconcludes that institutional amnesia is the corollary ofinstitutional optimism … . [There is a] disconnectbetween the usually accurate assessment of the realprospects for the project by the staff and the generallymore optimistic assessment that appears in the appraisalreport. Many factors are at work: pressure to lend; fear ofoffending the client; … fear that a realistic, and thusmore modest, project would be dismissed as too smalland inadequate in its impact.”29 The observation stillholds true today, and the renewed endorsement of a“high-risk/high-reward” approach can be interpreted as asign of the Bank’s persistent institutional amnesia.

1 A.W. Clausen (1981) “Sustainable Development: The Global Imperative,” 12November. For a concise history of the emerging World Bank environmentalpolicies, see Bruce Rich (1994) Mortgaging the Earth.2 B. Morse and T. R. Berger (1992) “Sardar Sarovar, The Report of theIndependent Review,” p. vii. (Since the World Bank extended both an IBRD loanand an IDA credit for Sardar Sarovar, the Independent Review refers to the damas “Projects.”)3 Ibid., pp. xxi, 36.4 A proposed project is classified as Category B if its potential adverseenvironmental impacts on human populations or environmentally important areasare less adverse than those of Category A projects. Impacts are site-specific, fewif any of them are irreversible, and in most cases mitigation measures can bedesigned more readily than for Category A projects. See World Bank OperationalManual, Operational Policy 4.01 Environmental Assessment.5 See for example Friends of the Earth US, Campagna per la Riforma della BancaMondiale, and Urgewald (2001) “Risky Business: How the World Bank’s InsuranceArm Fails the Poor and Harms the Environment.” Available athttp://www.foe.org/camps/intl/worldbank/miga.html6 Operations Evaluation Department, Operations Evaluation Group, OperationsEvaluation Unit (OED, OEG, OEU) (2003) “Extractive Industries and SustainableDevelopment: An Evaluation of the World Bank Group’s Experience,” Volume IV,World Bank.7 World Bank (1992) “Effective Implementation: Key to Development Impact”(Wapenhans Report), p. 14.8 Ibid., pp. 14, 16.9 World Bank (1996) Office Memorandum from Myrna Alexander, OPRDR, 15March.10 World Bank (1996) Meeting of President Wolfensohn with Senior Management[internal document], 12 March, p. 17.11 Bruce Rich (2003) “The World Bank Under James Wolfensohn,” in: Jonathan R.Pincus, Jeffrey A. Winters (eds.), Reinventing the World Bank, p. 26. 12 Ibid., p. 53.13 Robert Hunter Wade (2001) “The US Role in the Malaise at the World Bank: Getup, Gulliver!,” p. 2.14 See Operations Evaluations Department (1996) “Effectiveness of EnvironmentalAssessments and National Environmental Action Plans: A Process Study” and“Poverty Assessment: A Progress Review, ” World Bank.15 Operations Evaluation Department (2002) “Promoting EnvironmentalSustainability in Development: An Evaluation of the World Bank’s Performance.”World Bank, pp. 21, 23.16 World Bank (2001) “Cost of Doing Business: Fiduciary and Safeguard Policiesand Compliance,” pp. vii., 7.17 Calculated from ibid., pp. 8f.18 Ibid., p. viii.19 World Bank (2002) “A Revised Forest Strategy for the World Bank Group,” p.23.20 World Bank (2003) “Water Resources Sector Strategy: Strategic Directions forWorld Bank Engagement,” p. viii.21 Ibid., pp. 1, 50.22 John Briscoe (2003) “High Risk/High Reward Water Projects.” World Bank,Water Week 2003.23 James Winpenny (2003) “Report of the World Panel on Financing WaterInfrastructure.” World Bank.24 Operations Evaluations Department (2002) “Bridging Troubled Waters,Assessing the World Bank Water Resources Strategy.” World Bank, pp. 13, 32,53.25 Ibid., p. 41.26 Operations Evaluations Department (2002) “INDIA: World Bank Assistance forWater Resources Management, A Country Assistance Evaluation.” World Bank, p.29.27 Princeton Survey Research Associations (2003) “The Global Poll, MultinationalSurvey of Opinion Leaders 2002.” World Bank, p. 53. (Note that half of theinterviewees were selected by the World Bank.)28 Ibid., pp. 42, 55.29 World Bank (1997) “Portfolio Improvement Program” [draft internal report byQuality Assurance Group], p. 15.


9

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

example, from 1993-2001 the WorldBank Group provided more than $11billion for oil, gas and miningprojects.1 The Bank’s strategicapproach to these sectors hasshifted alongside its developmentparadigm, evolving from support forstate-led activities to an increasedrole for the private sector.

In a comprehensive review of theBank’s experience in extractiveindustries, OED classifies the Bank’shistorical involvement with extractiveindustries into several distinctperiods. In the 1960s and 1970s, theBank’s role in natural resourceextraction centered aroundpromoting exploration andproduction, mainly through state-owned enterprises. In the 1980s, theBank began to promotecommercialization and privatizationof state oil and mining companies.The 1980s also saw the rise ofstructural adjustment programs,through which the Bank played amajor role in sector policy reformand liberalization. For example, the Bank promotedchanges to mining codes that facilitated increasedprivate sector investment.

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

financed the closure andrehabilitation of mines andproduction facilities. Since the1990s, the Bank has incorporatedadditional governance-relatedmeasures in extractive projects, suchas capacity building for governmentagencies.2

The Bank’s support for extractiveindustries development does notappear to have reaped many rewardsfor the countries involved. The WorldBank’s own researchers recentlyconceded that “countries withsubstantial incomes from miningperformed less well than countrieswith less income from mining.”3 Inless euphemistic terms, the report’sfindings reveal that the more acountry depends on mining for itsrevenue, the worse its growth in percapita Gross Domestic Product(GDP) is likely to be. Other researchhas found that oil and mineraldependence is strongly associatedwith exceptionally dismal conditionsfor the poor, including lowperformance on a wide array ofhuman development indicators.4 Arecent review by the OperationsEvaluation Group (OEG) — theevaluation department of the IFC —

determines that natural resource-rich countries are lesslikely to achieve all but one 5 of the MillenniumDevelopment Goals.6

High risk and poor governance: arecipe for disaster

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

Risky Business: Extractive Industries

“Again and again, naturalresource windfalls have

financed presidentialplanes and palaces and

entrenched officialcorruption, while

producing very little in theway of lasting economicbenefits. Countries with

the windfall externalfinance provided by

abundant naturalresources, such as Nigeria,

Venezuela, Burma andZambia have failed to

progress economically —indeed, in several cases

have fallen back.”

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

Foreign Relations, March 1999


10

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

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

According to the review, “while theWBG is aware of the underlyingcauses for the underperformance ofmany resource-rich countries … ithas yet to formulate and implementviable approaches to addressthem.”9

Furthermore, OED finds that theBank has no strategy for sequencing governanceinterventions in the extractive sectors or coordinatingthese interventions with work in other sectors. “Workingto establish the prerequisites for good developmentoutcomes from [extractive industry] investments inparallel with, or after supporting expansion of the sectorposes a major challenge and is a high-risk strategy incountries with poor macro and sectoral governance.”10

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

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

Many dimensions of the resourcecurse

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

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

Societies that rely heavily on fossilfuel and mineral exports also do aworse job of addressing the needs ofthe poor. According to an OxfamAmerica study, countries with large

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

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

Another study noted the tendency of rebel movementsand civil war to be linked to the capture of naturalresources. The study found that in countries with a highdependency on primary commodity exports, the risk ofcivil war is 23%, compared to 0.5% risk in a country withno natural resource exports.16

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

“It is the devil’sexcrement. We are

drowning in the devil’sexcrement.”

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

native Venezuela

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

km pipeline to transport the oil fromChad through Cameroon to anoffshore loading facility in theAtlantic. Oil first began to flow in July2003 (almost one year ahead ofschedule), and Chad will start toaccrue revenues from initial oil salesby end 2003 or early 2004. Atmaximum capacity, production willbe 225,000 barrels per day.ExxonMobil is the project’s operator,in partnership with Petronas andChevronTexaco. The project isestimated to cost $3.7 billion.

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

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

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

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

for local communities. The revenuemanagement plan was promoted asa groundbreaking initiative to ensurethat the Chadian government’s oilrevenues would be transparent andlargely spent on social programs topromote poverty alleviation.However, the revenue managementbody is significantly handicapped inits capacity. Legislation and anoperational manual detailing thecommittee’s power and functionshave not yet been finalized, nor hasthe Chadian government shown aclear commitment to sufficientlyempower the committee to carry outits work.

Cameroon has some of the mostbiologically diverse and importantforests in Africa. The pipelinecorridor cuts through Cameroon’sAtlantic coastal forest. Project-related upgrading of seasonal roadshas led to logging and illegalpoaching in otherwise inaccessibleareas. Construction has already

caused oil spills and pollution of the water system.19

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

In Cameroon, thousands of people have had their landsexpropriated, crops and other plants destroyed, andwater sources polluted without adequate compensation.One affected person who summarized his grievancessaid: “The pipeline has a negative impact on our lives.The route crosses a zone in which we practiceagriculture and hunting. And when construction workstarted, our crops and our medicinal plants weredestroyed, without compensation. Game has equallydisappeared.”20

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

Chad-Cameroon: A Risk Mitigation Test Case


11

A "gas station" in Doba, the main oil producingregion in Chad. Despite the region's significant oilresources, it is unclear how and if local peoplewill benefit from the massive Chad-Cameroonproject. (Photo: Korinna Horta, EnvironmentalDefense)


12

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

The Bank contends that it can helpcountries manage the revenues fromextractive industries and ensure abroader distribution of benefits.However, the evaluation groups’review of the Bank’s role in extractiveindustries finds that the Bank fails tomeasure the distribution of costs andbenefits. Interestingly, the reviewnotes that virtually all interestgroups, from industry to affectedcommunities, highlighted theallocation of benefits as a key issue. In fact, interestgroups stated a desire for clear information about thedistribution of benefits, and perceived this information tobe a risk mitigator.23

The OEG review of IFC’s experience notes that the IFC’smeasurement of development outcome “does not takeinto account the distribution of benefits.”24 It furthernotes, “IFC has typically not compared the benefits toother EI projects or stated whether it perceives thedistribution of benefits to be reasonable …[and] IFC hastypically not calculated shares accruing to different levelsof government or accruing directly to localcommunities.”25 Since the extractive industries areassociated with large costs as well as potentially largeprofits, the failure to fully assess the distribution ofrevenues is a particularly acute problem for this sectorand poses unique risks.

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

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

High risk of policy gaps

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

The OED review finds that only 41% of the projectsreviewed had adequate supervision and oversight.27 Notsurprisingly, although most projects complied withsafeguard policies at project approval, compliancedeteriorated during implementation. Only about 30% ofthe projects in the study involved environmental or socialsupervision. Less than 25% of project completion reportshad adequate reporting and discussion of safeguardcompliance.28

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

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

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

“The Chad/Cameroonproject is not the help we

asked for or needed. In theabsence of the rule of law

and respect for humanrights and the

environment, financing oflarge-scale oil

development is destroyingthe environment and us.

Help!”

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

for Accountability,” 2002

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

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

It is estimated that 90% of the local population has beendisplaced, many people multiple times. Large-scaledisplacement was first caused by the Rihand reservoir inthe 1960s, later continued by the coal mines, powerplants, industrial complexes, waste disposal sites andrailroad lines. Displaced people were forced intoresettlement colonies or obliged to move away to findlivelihoods elsewhere.29

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

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

The 1993 loan further threatened residents in the regionwith displacement. Resisting families said that theywould not abandon their lands until they were providedwith a resettlement plan and a rehabilitation package thatwould compensate them for their losses and allow themto recover their standard of living.31 NTPC responded bymoving into the area with a police force and bulldozersto forcibly evict residents. The Bank claimed thatconflicting reports from its clients and the localpopulation prevented it from taking action to halt theevictions.

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

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

The 1993 loan closed on March 31, 1999, but the WorldBank’s policies and procedures continue to apply toprojects until the loans have been repaid. Accordingly,the Bank has an obligation to monitor resettlement andenvironmental issues in Singrauli and to ensure that theproject is brought into compliance.

The Singrauli case is illustrative for several reasons. TheJune 1993 loan was approved just prior to the end of theBank’s financial year on June 30, during the Bank’s“bunching season,” when task managers, under pressureto commit large amounts of lending, rush projectsthrough to the approval process. Though the loan’sprovisions included redress of outstanding resettlementissues, there was no assessment of NTPC’s capacity toimplement this. The Bank also started to promote “self-employment schemes” for displaced people, claimingthat no more land or jobs were available. Selfemployment shifts the risk and burden of rehabilitation tothe affected people, even though they never had inputinto the project’s conception or initiation in the firstplace. Turning peasants with little experience intoentrepreneurs in a cash-based economy was never trulyviable, yet the Bank has replicated this model elsewhere.Not surprisingly, more than 25 years after the Bank’s firstcontroversial involvement in Singrauli, people continue tosuffer impoverishment and upheaval.

As noted by a woman in a resettlement camp: “What wehave lost, we have not regained here. We lost more andreceived less. There is no comparison between lifebefore and now.”34

Singrauli: Same Old Story


13

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

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

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

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

The project is billed by oil industryoperatives as the “project of thecentury.” Proponents argue that it willsignificantly increase the incomes ofthe countries involved, transform thebusiness environment, and deliverjobs and investment programs to localcommunities, all while protecting theenvironment. Supporters of the projectalso argue that the benefits outweighthe costs and the rewards are worththe risks.

Governance risksThe World Bank is taking a hugegamble that this project will reversethe trend of extractive industryprojects in the developing worlddespite the lack of evidence to justifytaking such a risk. Azerbaijan andGeorgia rank 95th and 85th,respectively, out of 102 countries inTransparency International’s Corruption Perception Index.Sectoral capacity is weak. Azerbaijan for example, is theonly Caspian state that does not have an oil spill responseplan. In promoting increased extractive industriesinvestment, the Bank is ignoring the advice of its ownevaluation unit, which recommended against increasedinvestment in the extractive industries in poor governancesituations.

The project poses risks for local governance anddemocratic development as well. The mayor of Borjomi,the center of Georgia’s mineral water and tourismindustries, was recently ousted by the Georgian President’sappointed regional governor. Press reports attributed hisremoval to concerns the mayor raised about the pipeline’srouting.35 In Azerbaijan, the President’s son appeared onnational television and threatened opponents of thepipeline. He has since been named the country’s primeminister in a rubber stamp vote by the parliament. By allaccounts this move was designed to pass the presidencyfrom ailing father to son.

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

Georgia’s mineral water industry, anindustry that comprises 10% of thecountry’s exports and employs morepeople than would the pipeline.Business experts say the pipeline willerode the market prospects and valueof the industry of some of Georgia’sbest-known brands, even if an oil spilldoes not occur. The chairman of theDutch Environmental ImpactAssessment Commission stated thatcrossing a water-producing region“would not be acceptable for WesternEurope … we were astonished.”36 IFChas invested in the largest of themineral water companies, as well as ina glass bottle factory that supplies theindustry. As such, IFC could sabotageits own investment portfolio bysupporting BTC.

Environmental risksWhile BTC’s proponents tout thepipeline’s bypass of the heavilytrafficked Bosphorus Strait, on whichsits Istanbul, as an environmentalboon, the pipeline would by no means

avoid environmental harm. In Azerbaijan the pipeline wouldcross 21 major rivers, impact a sensitive desert ecosystemthat will take at least 10 years to be fully restored, andtraverse unstable land with high seismic activity. InGeorgia, there are six major river crossings in areas withunstable land prone to landslides. In Turkey the pipelinewould traverse major fault lines, cross six watersheds, andcross two sites protected under national legislation,including a wildlife protection area for a globally threatenedspecies.37 The Georgian environment minister even told BPthat the pipeline’s route violates Georgian law.

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

The Baku-Tbilisi-Ceyhan Pipeline: Lessons Learned?


14

On both macro and micro levels, extractiveindustries fail to benefit local communities. InBaku, Azerbaijan, employees of foreign oilcompanies receive discounts at a popular Englishpub. (Photo: Carol Welch, Friends of the Earth)


15

High risk equals high profit?

Given the high risks of extractive industries, why is theBank Group looking for “large investments” in thesesectors? One answer may be that from a financialperspective, the IFC’s extractive industry projects arelucrative. A confidential IFC Annual PortfolioPerformance Review for FY2000noted that the oil, gas and miningsector had “by far the highest equityreturn (26.6%).”38

The OEG review also finds that thefinancial returns and risks forextractive industries are higher thanfor other sectors. The review notesthat though IFC’s equity investmentsin extractive projects have the samechance of success as other sectors,the IFC earns particularly largefinancial returns from a few keyprojects. IFC’s portfolio performanceis carried by “a handful of very bigwinners.”39

If the Bank operated as a profit-making institution,maybe its “high-risk/high-reward” strategy would makesense. Perhaps IFC, as an equity investor in privatesector projects, is motivated to a significant degree byprofit motives. However, the Bank’s mission is to reducepoverty and not to maximize profits; high financialrewards are not indicators of high development impact.Nor is it valid to aggregate a portfolio’s “return onpoverty alleviation,” the way financial returns areaggregated to determine portfolio performance. Thesuccesses and failures in increasing the incomes ofimpoverished individuals do not offset each other. TheBank cannot rely on a strategy of a few “big winners” inpoverty reduction (if those are even likely) and expect toaddress global poverty and sustainable developmentchallenges.

Alternatives to the World Bank’sExtractive Industries Investments

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

better examples of pro-poor development was renewableenergy.

Promote renewable energy

While the Bank often justifies its fossil fuel projects asincreasing energy access for the poor, its energy projects

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

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

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

The Bank needs to redirect its resources away from fossilfuel projects towards renewable energy projects such aswind, solar photovoltaic, biomass and geothermal. TheBank should seek out and identify viable projects tosupport. The European Bank for Reconstruction andDevelopment (EBRD) took an important step inidentifying potential projects by commissioning aRenewable Energy Resource Assessment. Thisassessment profiles renewable energy potential in eachof the EBRD’s countries of operation. The assessmentnotes a tremendous resource base that has the potentialto meet current electricity demand several times over,and finds technical potential to meet a significant portionof electricity demand in the mid-term. The Bank shouldtake similar steps and also set targets and timetables forincreasing the proportion of renewable energy in itsoverall lending portfolio.

Focus on capacity

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

“Badly managed oilresources are a curse, not

a blessing.”

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

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

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

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

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

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

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

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

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

expensive dollar-denominated luxuries.

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

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

Ignoring Communities: The Yanacocha Mine


16

People picking up mercury after a spill in June2000 near the Yanacocha gold mine. Villagers didnot know it was toxic and many became very ill.The response by IFC and Yanacocha was late andinadequate. (Photo: Friends of the EarthInternational)


17

In October 2000, the municipality of Cajamarca issued anintangibility declaration for nearby Mount Quilish,denouncing an expansion of mining to Mount Quilish inorder to protect the city’s water sources. Yanacochadecided to fight the declaration and appealed to theconstitutional court. In April 2003, the court ruled that themunicipality has a right to issue a declaration, but alsoallowed the possibility of mining if it does not affect theenvironment or Cajamarca’s water sources.49 Whatparticularly angers local residents is that despite the city’sdeclaration and Yanacocha’s repeated vows to seek a“social license” of operation from the community, thecompany went to court twice to ensure their right toexpand their mining operations.

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

company BRGM were involved in a major legal disputeconcerning ownership of half of BRGM’s shares inYanacocha. In a videotape, ex-Peruvian PresidentFujimori’s intelligence chief Montesinos is shownpressuring a judge to rule in favor of Newmont.Montesinos informed the judge that officials from the U.S.Embassy and the U.S. Under Secretary for Latin Americawere interested in seeing the case resolved in Newmont’sfavor.50

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

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

outcomes. In poor governancesituations, the Bank should focus noton promoting new investment by theprivate sector in extractive projects,but rather on improving overallgovernance as well as governance inthe sector. Revenue management,environmental monitoring andeffective legal regimes are examplesof areas to be addressed. The reviewalso finds that capacity building forenvironmental and socialmanagement is a relatively low-costand sustainable contribution to thedevelopment of client countries.51

Be more selective immediately

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

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

1 Data taken from World Bank submissions to theExtractive Industries Review. Available atwww.eireview.org2 OED, OEG, OEU “Extractive Industries andSustainable Development,” Volume II, pp. 6-9.3 Monica Weber-Fahr (2002) “Treasure or Trouble?Mining in Developing Countries,” World Bank, p. 7.4 Michael L. Ross (2001) “Extractive Sectors and thePoor,” Oxfam America.5 OED, OEG, OEU “Extractive Industries andSustainable Development,” Volume III, pp. 11.6 The Millennium Development Goals summarize thedevelopment goals agreed on at internationalconferences and world summits during the 1990s. Atthe September 2000 Millennium Summit, worldleaders distilled key development goals and targetsin the Millennium Declaration. Based on thedeclaration, the International Monetary Fund (IMF),the Organization for Economic Co-operation andDevelopment (OECD), the United Nations and the

World Bank devised a set of eight goals, 18 numerical targets and over 40quantifiable indicators to assess progress. The eight goals are: eradicate extremepoverty and hunger; achieve universal primary education; promote genderequality and empower women; reduce child mortality; improve maternal health;combat HIV/AIDS, malaria, and other diseases; ensure environmentalsustainability; and develop a global partnership for development.7 OED, OEG, OEU “Extractive Industries and Sustainable Development,” VolumeI, p. 6.8 Ibid., p. 5.9 Ibid., p. 6.10 OED, OEG, OEU “Extractive Industries and Sustainable Development,” VolumeII, p. 50.11 OED, OEG, OEU “Extractive Industries and Sustainable Development,” VolumeIII, p. vii.

Peru’s Yanacocha gold mine, partly financed andowned by the IFC, is one of the world’s largestgold mines, spanning five mountains. Against theexplicit wish of the local population, Yanacochaintends to expand the mine to a sixth mountainthat contains important water sources for thenearby city of Cajamarca. (Photo: SjoerdPanhuysen)


18

12 Jeffrey D. Sachs and Andrew M. Warner (1997) Natural Resource Abundanceand Economic Growth.13 Ibid., p. 2. 14 Ross “Extractive Sectors and the Poor.” 15 Michael L. Ross (2000) “Does Resource Wealth Impede Democratization?” 21April.16 Paul Collier and Anke Hoeffler (2002) “Greed and Grievance in Civil War,” WorldBank.17 Mark Drajem (2002) “BP’s Azerbaijan Oil Project May Get $500 Million WorldBank Aid.” Bloomberg News, 19 June.18 The World Bank claims that the project presents the best development optionfor Chad and Cameroon since there is no other way of rapidly increasinggovernment revenues. For more information, see Centre pour l’Environnement etle Developpement, Association Tchadienne pour la Promotion et la Defense desDroits del’Homme, and Environmental Defense Fund (1999) “The ChadCameroon Oil and Pipeline Project: Putting People and the Environment at Risk.”Available athttp://www.environmentaldefense.org/documents/728_ChadCameroon%5Fpipeline%2Epdf19 The project’s environmental assessment does not include site-specific Oil SpillResponse Plans, as would be required in the United States. See EnvironmentalDefense Case Study athttp://www.environmentaldefense.org/documents/2449_casestudy%5Fchadcameroon%2Epdf20 Interview contained in Centre pour l’Environnement et le Developpement andFriends of the Earth International (2002) “Traversing People’s Lives.” Available atwww.foei.org 21 For more detailed health information, see Centre pour l’Environnement et leDeveloppement, Association Tchadienne pour la Promotion et la Defense desDroits del’Homme, and Environmental Defense (2002) “The Chad-Cameroon Oiland Pipeline Project: A Call for Accountability,” p. 18. Available athttp://www.environmentaldefense.org/documents/2134_Chad-Cameroon.pdf22 See the U.S. Department of State’s country human rights reports which detailthe human rights situation in the countries. Available athttp://www.state.gov/g/drl/hr/23 OED, OEG, OEU “Extractive Industries and Sustainable Development,” VolumeIII, pp. 4-6.24 Ibid., p. 4.25 Ibid., pp. 5-6.26 Ibid., p. 4.27 OED, OEG, OEU “Extractive Industries and Sustainable Development,” VolumeII, p. 21.28 Ibid, p. 27.29 Dana Clark, Jonathan Fox and Kay Treakle (eds) (2003) DemandingAccountability: Civil Society Claims and the World Bank Inspection Panel(forthcoming).

30 National Thermal Power Corporation (1991) “Environmental Study of SingrauliArea” (performed by Electricité de France [EdF]), p. 52.31 Clark, Fox and Treakle Demanding Accountability.32 Available at www.worldbank.org/inspectionpanel33 Clark, Fox and Treakle Demanding Accountability.34 Ibid., p. 184.35 Georgia Online (2003) “Dismissal of Borjomi Administrator Drew PublicBacklash,” 28 May.36 Natalia Antaleva (2003) “Precious Pipeline.” Forbes Global, 9 June, p. 22.37 Information from project EIAs available atwww.caspiandevelopmentandexport.com38 A scanned portion of the document is available athttp://www.seen.org/pages/ifis/wb_leak2.shtml39 OED, OEG, OEU “Extractive Industries and Sustainable Development,” VolumeIII, p. 8.40 “NGO Platform Calling on the World Bank Group to Phase Out Financing Oil,Gas and Mining Projects,” April 2000. Available at www.foei.org41 See for example http://www.ifc.org/enviro/EMG/Renewable/renewable.htm42 See World Bank. “Rural and Renewable Energy.” Available athttp://www.worldbank.org/html/fpd/energy/e3.htm43 IFC Project Summary Sheet atwww.ifc.org/ogc/eirprojects/docs/Yanacocha.pdf44 According to a study by the Peruvian government’s Technical and ScientificCommission in 2000, levels of aluminum, zinc, copper, iron and manganesesignificantly exceeded World Health Organization (WHO) guidelines at multipleriver and stream sites in the area. At one site, aluminum concentration exceededWHO limits by more than 15 times. “International Right to Know: EmpoweringCommunities Through Corporate Transparency,” p. 9. Available at www.irtk.org45 For more information, see Oxfam America, “Choropampa: The Price of Gold.”Available at http://www.oxfamamerica.org/publications/art2215.html46 The Federation of Rondas Campesinas of Northern Peru (FEROCAFENOP) andProject Underground (2001) “Complaint Concerning Minera Yanacocha, S.A.”Filed with IFC Compliance Advisor and Ombudsman.47 According to statistics by Fondo Comun de Desarrallo (FONCODES), in the1980s, Cajamarca was ranked 4th. Now, ten years after the mine began operating, Cajamarca ranks2nd.48 See Pamela White (2002) “The Real Price of Gold.” Boulder Weekly. Availableat http://www.boulderweekly.com/archive/051602/coverstory.html49 Ruling of the Constitutional Court of Peru, Lima, April 7, 2003.50 More information available at http://www.moles.org orhttp://www.foei.org/ifi/yanacocha.html51 OED, OEG, OEU “Extractive Industries and Sustainable Development,” VolumeII, p. 31.


19

In developing countries fromCameroon to Indonesia,unsustainable logging hasgenerated quick profits forcorporations and government

elites and decimated the resourcesthat a majority of the populationdepends upon. Efforts to promote“sustainable forest management” areoften thwarted by corruption or bygovernment departments that lackthe capacity and resources tomonitor and enforce forest protectionmeasures. In addition, the scientificdebate as to how “sustainable”forestry operations can be orwhether “sustainable forestmanagement” is even possible intropical forests has not beenconclusive to date. Given pastevidence and ongoing uncertainties,a precautionary approach ispreferable to the high-stakes gambleof large-scale logging investments.

Despite these risks, the World Bankis poised to engage in more lendingfor commercial forestry. The revisedWorld Bank Forest Strategy andPolicy of 2002 endorses a high-riskapproach to the forest sector andallows lending for large-scalecommercial logging in rainforests,without proven safeguards. This newapproach was approved in apparentdisregard for prevailing evidence andthe Bank’s negative capacity buildingand environmental performancerecord.

Direct forestry lending, which hastypically accounted for a relativelysmall part of the World Bank’sportfolio, is only one part of theproblem. Perhaps even moreimportant is the damage to the

world’s forests that results indirectlyfrom other World Bank-fundedprojects and programs. The activitiesof the World Bank — from road-building projects to agriculturesupport, and from economic reformprograms to energy sectorrestructuring — often have seriousrepercussions on the world’s forests,on the more than 500 million peopleworldwide that depend on forestresources for their livelihood, andmore broadly, on the world’sbiodiversity and climate. The WorldBank’s high-risk approach to thesector is aggravated by theinstitution’s unwillingness to accountfor the direct and indirect impactsthat Bank structural adjustmentlending and “advice” has on theforest resources of borrowingcountries.

During the 1970s and 1980s, theWorld Bank came under severepublic criticism for the massivedeforestation caused by loans foragriculture, colonization andinfrastructure in Brazil and Indonesia.A local and international outcry overfinancing for logging in West Africa’srapidly dwindling rainforestsfollowed. Fearing serious damage tothe institution’s reputation, the WorldBank’s Board decided that it wastime to adopt a new forest policy tocover all forest-related lending. As aresult, a more participatory andprecautionary Forest Policy wasadopted in the early 1990s. However,in practice this policy was notimplemented. In 2002, instead ofestablishing accountabilitymechanisms and strengtheningimplementation, the World Bankreacted by weakening its Forest

The World Bank Risks the World’s Forests

“The Bank’s performanceon environmental

safeguard policies remainscontentious.

Implementation has beenmixed … [EnvironmentalAssessments] are often

not completed soonenough in the project

cycle to have much impacton project design.”

OED, “Promoting EnvironmentalSustainability in Development”, 2002

Forest destruction and uncontrolled logging inCameroon's southern rainforest. Rapaciouslogging interests, market forces, and weakgovernment capacity converge to createenormous risks for the region's forests and forestpeoples. (Photo: Korinna Horta, EnvironmentalDefense).


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Policy and stripping the existing policy of key safeguardprovisions. In the Bank’s parlance, this new high-riskapproach is euphemistically referred to as moving from a“do no harm” to a “doing good” strategy.

Evolution of the Bank’s approach toforests

From 1949 to 1991, World Bankdirect lending for forestry totaled$2.5 billion, with additional millionsof dollars dedicated to financingforestry components in agriculture,energy and other projects.1 Prior tothe adoption of the World Bank’s firstforestry policy paper in 1978, 95% ofBank forestry lending was directedtowards “industrial projects” such ascommercial plantations andsawmills. According to a 1991 reviewby OED, entitled “ForestryDevelopment: A Review of WorldBank Experience,” this strategy wasconsistent with the prevailingapproach to development of the1960s and 1970s; namely, that idlenatural resources should beexploited.2

The 1978 Forestry Policy seemed tosignify a small shift in the Bank’sapproach to forest lending, with thepromotion of “new style” projectsthat “typically involve[d] very largenumbers of beneficiaries and a muchbroader set of development goals(e.g., economic growth, fairer incomedistribution, enhanced energysupplies, sustainability).”3 OED’s1991 analysis claimed that after1978, “a major effort was made tofinance social and rural developmentand environmental forestryprojects.”4

However, the 1978 Forestry Policydid not prevent the World Bank fromembarking on major projects thatspelled disaster for some of theworld’s most biodiversity-richforests. Better known examplesinclude lending for Indonesia’sTransmigration Program and colonization schemes inBrazil’s northwestern Amazon. This was followed byprojects in West Africa that included major loggingcomponents in the region’s rapidly dwindling rainforests.These loans in support of logging were made at a time

when global deforestation was increasing rapidly andthere was little scientific evidence to indicate thatsustainable management of biodiversity-rich tropicalforests was even feasible. These ill-conceivedinvestments caused an international outcry that turnedthe Bank’s forest-related activities into the mostcontentious area of its lending. The controversy

presented serious risks to the Bank’sreputation while preparations for the1992 Rio Earth Summit focusedworld attention on the need forinternational cooperation to protectthe global environment.

After an intense public debate in theearly 1990s, the World Bank adopteda new Forest Policy Paper in 1991that applied to the entire World BankGroup. The ploicy was translatedinto new operational directives forthe Bank’s public sector lendingactivities (IBRD and IDA) and for theIFC in subsequent years. Indeed, theWorld Bank’s 1991 Forest PolicyPaper represented an innovativeframework emphasizing povertyalleviation, community-baseddevelopment and civil societyparticipation in all lending operationswith potential impacts on forests.The policy also adopted aprecautionary approach to thefinancing of large-scale loggingoperations, proscribing all supportfor logging in primary moist tropicalforests, which are thought to containmost of the earth’s terrestrialbiodiversity.

Bank staff, however, considered thenew policy to be too conservationistand argued that it was imposed onthe Bank by environmental pressuregroups. They perceived the policy tobe an impediment to lending forforestry investments, and labeled thisthe “chilling effect.”4 However,contrary to the “chilling effect”claims, OED reported that forestrylending in the 1992-1999 period wasactually 78% higher in nominal termsthan during the 1984-1991 period.6

In fact, the precautionary 1991 Forest Policy was notimplemented in practice. Despite assertions from WorldBank staff that loans were not funding loggingoperations, forestry sector loans in the early 1990s tocountries such as Cote d’Ivoire and Gabon

“Country and taskmanagers and client

governments perceiveBank involvement in theforest sector as entailinghigher transaction costs

and reputational risks thaninvolvement in otherpoverty-alleviating

sectors.”

OED, “The World Bank Forest Strategy:Striking the Right Balance,” 2000

Loading logs near Dja Wildlife Reserve, aUNESCO World Heritage site, in southeasternCameroon. (Photo: Korinna Horta, EnvironmentalDefense)

In the 1990s, the attention paid to Cameroon’sthreatened forest ecosystems by local andinternational NGOs caused the World Bank to shelvea planned forestry sector loan for the country.Instead, it opted to address Cameroon’s forest

problems in successive structural adjustment loans. Thiswas done by adding specific measures concerning forestmanagement to standard trade liberalization and export-promotion conditionalities. However, the Bank failed toconsider the forest impacts of its economic policyadvice. It also ignored the Cameroonian government’slack of commitment to genuinely reform the forestrysector, and failed to promote meaningful publicparticipation.

The Bank was heavily engaged in promoting currencydevaluation in Cameroon. In January 1994, the FrancCFA was devalued by 50%. Following the devaluation,which reduced the price of Cameroonian products on theworld market, Cameroon’s exports of raw logs increased

by 34%.8 In addition, budget cuts recommended by theBank resulted in the unemployment of large numbers ofvillage extension workers in rural areas who had fewoptions other than illegally cutting trees in forest reservesor hunting to make a living.9 Both measures led toenormous additional pressure on the country’s forests.

As to the specific forest conditionalities, a report by OEDconcluded that the Bank failed to devise animplementation strategy that was compatible with thecountry’s prevailing political conditions. Furthermore,despite its stated intentions to promote the interest oflocal communities, the Bank did “little to gather theirviews and to design mechanisms that would ensure thatthose views were taken into consideration.” Inconclusion, OED states that the Bank’s interventionsinside and outside the forestry sector in Cameroon “wereneither efficacious nor efficient.”10

Structural Adjustment in Cameroon: Disastrous Consequences for Forests


21

systematically encouraged institutional measures tosupport and extend logging. In 1993, the Gabon Forestryand Environment Project was approved for a countrywhose unique tropical rainforests are home to more than8,000 species, 20% of which are endemic. The statedgoal of the project, according to the Staff AppraisalReport, was to “improve the competitiveness of Gabon’stimber exports while safeguardingforest resources.”7 The projectfeatured loan conditions thatencouraged privatization of theforestry sector to increase timberextraction, but failed to conductsurveys of biological diversity or ofaffected communities. Linkingcommercial forestry withenvironmental activities gave theloan the appearance of compliancewith the recently introduced policy.This strong (albeit indirect) supportfor timber exploitation posed aserious threat to the biodiversity-richforests and forest-dependentpeoples of these countries.

Although the 1991 Forest PolicyPaper called for a multisectoral approach, requiring thatthe Bank consider the impact of all of its activities onforests, this provision was often ignored in Bankoperations. Bank-supported infrastructure projects, such

as roads and dams, and agricultural projects that led tothe conversion of forestland, continued to be a means bywhich the Bank indirectly subsidized forest destruction.In a number of cases, environmental assessmentprocesses failed to capture the indirect impacts thatthese projects would have on neighboring forest areasand forest peoples, as well as the capacity of the

government and/or investors tomanage these impacts. Withoutspecific attention paid to thesemultisectoral impacts of Banklending, forests came underadditional threats. For example, in1996 the Bank’s InfrastructureDepartment prepared a $60.7 millionloan for Cameroon’s transport sector.This loan included the maintenanceand rehabilitation of a 13,783 kmroad network, with some of theroads going right into Cameroon’ssoutheastern and coastal rainforestswhich are home to indigenous andforest-dependent peoples. Althoughthese forest areas were alreadyunder logging pressure, this Bankloan failed to require a full

environmental impact assessment.

Another area of Bank lending, World Bank-imposedeconomic reforms known as structural adjustment

“Resources are lacking totrack the progress of

forest operations whetherglobally or locally, while

arrangements forsafeguard policy

compliance are weak.”


“Environmentalists, scouring Cambodia’sjungles for evidence of illegal logging, aska passing farmer where trees are beingcut down. ‘Take any path,’ he replies. Heis right: despite restrictions on felling

trees and a ban on transporting timber, proof of illegallogging is easy to find. Lorries loaded with wood ply theroads in forested areas. Workers at a sawmill readilyadmit that they receive fresh supplies of timber everyweek. And all this is happening three years into a WorldBank project to transform Cambodia’s rapacious loggingconcessionaires into prudent ‘forest managers’.”11

In the mid-1990s, NGOs drew attention to the role thatthe exploitation of Cambodia's forests was playing inthat country’s civil war. While this problem has sincesubsided, illegal logging, environmental degradation andthe resulting impacts on the 85% of Cambodians whodepend on forest resources continue to be issues ofserious concern.

A 1996 report by the World Bank and other internationalagencies detailed the problems present in Cambodia’sforestry sector, including weak regulatory capacity,extensive illegal logging, and environmental concernsemerging from a flawed forest concession system. Inresponse to this assessment, the World Bank called for“market-oriented policy reforms … together withimproved control of forest areas” which “could increasegovernment revenue in the order of over $100 million peryear, while better sustaining these resources and theirvital environmental and social functions.”12

While subsequent technical assistance studies led theWorld Bank to revise these revenue estimates downwardto $40-80 million, the Bank’s support for the concessionsystem prevailed. Despite all evidence that loggingconcessions in Cambodia are not being managed in a

sustainable manner, that the system may be furtherimpoverishing rural Cambodians, that illegal loggingcontinues, and that official logging revenue has rarelyexceeded $10 million, the World Bank approved a $4.8million Forest Concession Management Control PilotProject in 2000. The Forest Concession ManagementProject is complemented by forest-relatedconditionalities in a $30 million structural adjustmentcredit.

The Bank’s “proactive approach to production forestry”intended for these loans to support forest managementand control under the concession system and toestablish forest crime monitoring capability.13 However,the government recently terminated the independentmonitor’s contract, has failed to comply with theadjustment loan’s conditionalities, and in general, hasshown little willingness or ability to control rampantillegal and unsustainable logging under the concessionsystem.

While the World Bank has suspended the second releaseof structural adjustment funds for reasons of governmentnon-compliance, and is currently reviewing theperformance of the Forest Concession ManagementProject, it seems determined to support a failing forestrysystem and a forestry department that shows no interestin reform. “[T]he World Bank’s forestry representative inCambodia, says discussions are underway tocompensate the displaced villagers, close the regulatoryloophole … and hire new monitors to guard againstfurther abuses. But if the pace of past reforms isanything to go by, many more trees will disappear beforethose discussions bear fruit.”14 In the meantime, villagersdecry the abuses of forest policy in Cambodia and theenvironmental and social costs they are forced to bear.

Forest Concessions in Cambodia: A Safe Bet?

programs, contributed to significant forest loss incountries such as Indonesia and Cameroon.15 The OEDforest review identified trade liberalization and exportpromotion as being major causes of deforestation.16

Measures to liberalize trade and to promote exports lie atthe very heart of World Bank structural adjustmentpolicies. For example, structural adjustment loans oftenrequire that governments devalue the local currency inorder to make exports more competitive on the worldmarket. Devaluation without specific safeguard measuresincreases incentives for timber exploitation; foreigncompanies see their local costs fall and their revenues

increase as timber exports become less expensive inhard currency terms. In addition, budget cuts demandedas part of the structural adjustment programs mayreduce the regulatory capacity of the environment andforest departments to manage the country’s resources.

Yet, as the OED found, the Bank has paid little attentionto the impact of structural adjustment lending on forests.According to OED, forest issues were not considered inmost country assistance strategies, nor were they aconsideration in the Bank’s economic and sector


22


23

analyses, even in countries where the forestry sector iseconomically important.

OED’s 2000 report noted: “Bank influence on containingrates of deforestation in tropical moist forests has beennegligible in the 20 countries identified for the Bankfocus.” The study also found that the Bank had failed toaddress key drivers of deforestationsuch as corruption and weakgovernance.17Despite these strongcriticisms, OED came to a stunningconclusion. Heavily influenced byBank staff eager to increase forestrylending, OED concluded thatinvestments in logging might actuallyconserve natural forests — a claimbelied by all available evidence. TheOED review recommended that theBank should counter the “chillingeffect” on lending and the risk-averse behavior by Bank staff.18

This recommendation was used byBank management to condemn strictenvironmental and social safeguards,as well as a “precautionaryapproach” in general. The Bankargued that it must “re-engage” inthe forestry sector and that it couldnot do so effectively with the existingprohibition against financing loggingactivities in tropical forests. Althoughan extensive consultation exercisewith civil society took place duringthe rewriting of the Forest Policy, therecommendations from NGOs werelargely ignored in the policy’srevision. The new Forest Policyremoves the ban on the financing ofcommercial logging in primarytropical moist forests while providingno new protections for forests orforest peoples, except for ill-definedand unproven forest certificationschemes. Despite a global call forthe policy to address the impacts ofthe Bank’s macroeconomicprograms on forests, it also does notapply to structural adjustmentlending. Although environmentalists,development groups, communityorganizations and others who participated in the forestpolicy consultations were extremely critical of the high-risk approach favored by the new forest policy, it wasapproved by the World Bank’s Board of Directors in2002.

High-stakes gamble

The World Bank’s failure to address the risks of itslending operations on forests undermines its self-proclaimed mission of poverty reduction andenvironmentally sustainable development. Forestdegradation and destruction carries significant

environmental and social penalties,especially in the poorest countries ofthe world where the Bank operates.An estimated 500 million peopleworldwide depend directly on forestsfor their livelihoods. The loss of theseresources, from forest products suchas fuel, food, building material andmedicine, to forest services includingwatershed and erosion protection,causes severe hardship for forest-dependent communities. For manyof these communities and inparticular for the close to 60 millionindigenous and tribal people who livein the forests of Latin America,Southeast Asia and West Africa, theforests are intrinsic to their way oflife and to their social and culturalidentity; forest destruction anddegradation threatens their verysurvival.

World Bank lending that contributesto deforestation also poses severeenvironmental risks. The tropicalforests found in many of the Bank’sborrowing countries are some of theworld’s most biodiversity-rich areas.The loss and degradation of theirhabitat threatens species, some ofwhich are endangered or endemic tothat particular forest area. Forestsalso provide critical environmentalservices such as watershedprotection and help guard againstdesertification.

Corruption has long been a majorissue in the forestry sector of someof the Bank’s borrowing countries.The World Bank itself estimates thatdeveloping countries are losing

about $1 billion every year in revenue as a result ofcorruption in the forestry sector.19 Yet attempts by theBank to address corruption and governance issuesthrough forest policy reform and structural adjustmentconditionality have produced mixed results.20 While theWorld Bank acknowledges that the “lack of institutionalcapacity” is the “principal impediment to long-termsustainable forest management”21 in a number of its

“[P]olicies associated witheconomic crisis and

adjustment — such asdevaluation, exportincentives, and the

removal of price controls— tend to boost

production of tradablegoods, including

agricultural and forestproducts. In doing so, ifthere are no mitigatory

measures, they encourageforest conversion.

Moreover, the constrainedfiscal situations associated

with IMF/Bankstabilization adjustment

programs lead to reducedpublic spending on

environmental protectionand reduce the forest and

environment ministries’already weak capacity to

enforce laws andregulations.”


The Operational Policy on Forestry of 1993committed the Bank to a multisectoralapproach. As such, the Forestry Policy shouldhave been applied to the construction of theChad-Cameroon oil pipeline where it

traverses Cameroon’s coastal rainforest — a region richin biodiversity and home to indigenous Bagyeli people.

A central requirement of the policy was to set asidecompensatory funds for preservation forests to protectbiodiversity and safeguard the interests of forestdwellers, specifically their rights of access to and use ofdesignated forest areas.

The pipeline project has indeed ledto the establishment of twobiodiversity offset areas, althoughone of them had previously attainedconservation status and as such hadbenefited from Global Environment

Facility (GEF) funding. However, the project did notinclude adequate resources to fund the management ofthese areas and one of them is now facing increasingthreats from logging.

Worse is the situation of the Bagyeli people who, in largepart, continue to be semi-nomadic hunters andgatherers. The project did not take steps to legallysecure the Bagyeli’s land rights, and failed to ensureadequate compensation for their losses. A foundation setup to address their problems failed to consult with theBagyeli during the development of an Indigenous

Peoples Plan. The Plan thereforedoes not identify or address thedisturbance of wildlife, bushmeathunting by encroachers, populationincreases and deforestation that arehaving severe impacts on the Bagyelias a result of pipeline construction.

Chad-Cameroon Pipeline and Forest Destruction


24

forest-rich borrowing countries, theBank’s general institutionaldevelopment and capacity buildingperformance is notoriously weak.22

Therefore, World Bank lending thatsupports — directly or indirectly —timber exploitation may help fuelunsustainable and often illegallogging that benefits only a fewgovernment elites and private (oftenforeign) corporations, despitepromises of simultaneous capacitybuilding and reform. In countries likeCambodia, plagued by corruptionand cronyism and with inadequatecapacity or political will to reform,World Bank support for productive forestry systems hasproven to be extremely risky. These environmental andsocial risks, as well as the costs of corruption, have beenborne by local populations, especially the mostvulnerable groups in World Bank borrowing countries.

The risks of Bank activities for forests and forest peoplesare exacerbated by a lack of democratic rights foraffected people and a lack of critical land tenure andcommunity property rights. Without the security andauthority that these rights convey, affected people areunable to confront, manage or recover from the loss oftheir forestland and access to forest resources.Furthermore, the lack of accountability of governmentsand the private sector contributes to problems of

corruption and encourages rapid,unsustainable timber extractionwithout regard for its social andenvironmental costs. Regulatoryissues, such as the capacity andfunding of government departmentsand incentives granted to the privatesector, also affect the risks of theBank’s activities for forests.

Risk mitigation?

To address the risks describedabove and uphold its stated povertyreduction mission, the World Bankhas adopted policies that promise

participation of local people in project development, therecognition of rights of indigenous peoples, anenvironmental assessment process, the protection ofcritical habitats and a multisectoral approach toaddressing lending activities’ impacts on forests.However, these policies have been rarely — if ever —implemented in a meaningful way. Even the Bank’s ownOED concluded in a 2002 study that “[o]verall,performance in the area of safeguards has been onlypartially satisfactory. Fundamental reform ofimplementation and accountability processes iscritical.”23

Another “risk-management” tactic has been to renameprojects in an effort to disguise their potentially negative

The Chad-Cameroon pipeline cuts throughCameroon's coastal rainforests, home to Bagyelicommunities. According to one Bagyeli man,"We live by the hunt but we get nothing for thedestruction of the forest. (Photo: Forest PeoplesProgramme)


25

impacts on forests. Traditional forestry loans havebecome “natural resource management andenvironment” projects, but the risks of these projectsremain the same. In addition, some structural adjustmentloans have imposed forest-related conditionalities on theborrower in an effort to encourage sounder forestmanagement. Studies have shown how critical the “rightconditions” are to the success of thisstrategy, and how variable the resultsare in practice.24 In the case ofCambodia and Cameroon, forexample, those conditionalities haveonly met with very limited success inmanaging the risks to the forestrysector (see Boxes on pages 21 and22).

In the early 1990s, the World Bankattempted to manage the forest-related risks of its lending in part byrefusing support for commerciallogging activities in a particularlysensitive forest type. As reflected inthe 2002 Forest Policy, the Bank hasrejected this “risk-averse” provisionand will now attempt to addressforestry sector risks through relianceon untested and unnamed forestcertification schemes, a safeguardpolicy of undetermined effectiveness,and the judgment of Bank taskmanagers.

The World Bank’s own internalevaluators have identified the crux ofthe matter by attributing Bankfailures to “the lack of consistentmanagement commitment to theenvironment coupled with a lack ofconsistent managementaccountability.”25 However,measures to address these fundamental institutionalproblems continue to be lacking.

Alternatives to a High-Risk Approachto Forests

Considering the risks detailed above and the people whobear those risks, the World Bank should ensure theimplementation of real safeguards to protect againstdirect or indirect negative impacts of its activities — andavoid lending where those risks cannot be mitigated.Instead of promoting the high-risk approach enshrined inthe revised Forest Policy, the Bank should, at minimum:

• Examine and account for the impact on forests of alltypes of World Bank lending and non-lendingactivities;

• Refuse to finance activities that can lead to forestloss, especially in primary forests — whether they aretropical humid, dry, temperate or boreal forests;

• Promote the recognition ofcustomary land rights of forest-dependent people and supportsmall-scale projects developedin consultation with local peoplefor alternative incomegeneration;

• Help countries to build thecapacity to combat illegallogging.

At the local level, projects have to bedeveloped in close consultation withthe communities living in and aroundforests and address their priorities.Investments in community forestry aswell as the marketing of non-timberforest products that are sustainablyproduced could benefit localcommunities. Investments in trainingand alternative income-generatingactivities could help build localeconomies. These activities wouldalso add to our knowledge ofsustainable forest management.

At the national level, investments inlong-term capacity and institutionbuilding are often needed to helpgovernments value and carefullymanage their forest resources.Specific training in the fight againstillegal logging and corruption in the

forestry sector, as well as in monitoring the activities ofthe often very powerful transnational logging companies,could bring substantial benefits to a country’s economy.

1 Operations Evaluation Department (1991) “Forestry Development: The WorldBank Experience,” World Bank. Available athttp://lnweb18.worldbank.org/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/5EF3153BDD265CE28525681C00697107?opendocument.2 Ibid.3 Ibid.4 Ibid.5 Operations Evaluation Department (2000) “The World Bank Forest Strategy:Striking the Right Balance.” World Bank, p. 8.6 Ibid., pp. 8-9.7 World Bank (1992) “Staff Appraisal Report: Forestry and Environment Project forGabon,” p. 17.8 Kaimowitz et al. “Forests Under Structural Adjustment in Bolivia, Cameroon andIndonesia.”

“Environmentalists,scouring Cambodia’s

jungles for evidence ofillegal logging, ask a

passing farmer wheretrees are being cut down.‘Take any path,’ he replies.

He is right: despiterestrictions on felling treesand a ban on transporting

timber, proof of illegallogging is easy to find. …And all this is happeningthree years into a World

Bank project to transformCambodia’s rapacious

logging concessionairesinto prudent ‘forest

managers’.”

The Economist, “Just Chopping it Down,”August 7, 2003.


26

9 R. Tschoungi, S. Gartlan, J.A. Mope Simo, F. Sikod, A. Youbi, and M. Ndjatsana(1996) “Case Study for Cameroon,” in David Reed (ed). Structural Adjustment, theEnvironment and Sustainable Development.10 OED “Cameroon — Forest Sector Development in a Difficult PoliticalEconomy,” p. xxii.11 The Economist (2003) “Just Chopping it Down,” August 7.12 World Bank, United Nations Development Program, and Food and AgricultureOrganization (1996) “Cambodia Forest Policy Assessment,” as cited in BruceMcKenney (2002) “Questioning Sustainable Concession Forestry in Cambodia.”Cambodia Development Review, January-March, p. 2.13 World Bank (2000) “Project Appraisal Document: Forest Concession andManagement Project for Cambodia,” p. 11.14 The Economist “Just Chopping it Down.”15 Operations Evaluation Department (2000) “Cameroon — Forest Sector in aDifficult Political Economy,” World Bank.16 OED “The World Bank Forest Strategy: Striking the Right Balance,” p. xxii.17 Ibid., p. xii.

18 Ibid., p. 29.19 World Bank (2001) “A Revised Forest Strategy for the World Bank Group” (Junedraft), Annex 3-16.20 See OED “The World Bank Forest Strategy: Striking the Right Balance,” p. 13and Frances Seymour and Navroz Dubash (2000) “The Right Conditions: TheWorld Bank, Structural Adjustment, and Forest Policy Reform.” World ResourcesInstitute.21 Seymour and Dubash “The Right Conditions,” p. 3.22 See Operations Evaluation Department (2003) “2002 Annual Review ofDevelopment Effectiveness.” World Bank.23 OED “Promoting Environmental Sustainability in Development,” p. 21.24 See Seymour and Dubash “The Right Conditions” and D. Kaimowitz, O.Erwidod Noye, P. Pacheco, and W. Sunderlin (1997) “Forests Under StructuralAdjustment in Bolivia, Cameroon and Indonesia.” Center for International ForestryResearch (CIFOR).25 OED “Promoting Environmental Sustainability in Development,” p. vii.


27

As the 1992 Wapenhansreport documented, theWorld Bank is gearedtowards lending largeamounts of capital for

centralized, top-down projects. Largedams are therefore an attractivefunding option. Until 1993, the Bankmade 527 dam-related loans for atotal of $58 billion (in constant 1993dollars).1 From 1993-2002,hydropower and irrigation accountedfor 8% of all World Bank lending.2

For more than 10 years, large damshave been symbolic of the WorldBank’s approach to high-riskprojects. As the Bank’s senior wateradviser puts it, lending for big damsaccounts for about 10% of theinstitution’s portfolio but 95% of itsheadaches.3 Several public-relationsdisasters generated by large damshelped to catalyze the institution’sshift away from high-risk projects inthe mid-1990s. More recently,however, the World Bank’s return tolarge dams has demonstrated that ithas overcome its earlier scruplesregarding the impacts of high-riskprojects.

Exclusion of human andenvironmental concerns

“It seems clear that engineering and economicimperatives have driven the Projects to the exclusion ofhuman and environmental concerns,” the MorseCommission noted in its independent review of theSardar Sarovar Dam in the Narmada Valley in 1992. “Asa result, benefits tend to be overstated, while social andenvironmental costs are frequently understated.Assertions have been substituted for analysis.”4

Assertions substituted for analysis inmany other World Bank funded damprojects. Shortly after the Bankwithdrew from Sardar Sarovar, theArun III Dam in Nepal provided anew example of the shoddyappraisal process for high-riskprojects. Critics both inside andoutside the institution claimed thatthe economic analysis of the projectwas seriously flawed. Martin Karcher,a World Bank division chief whoresigned in protest over the project,warned that the Bank’s economistsexpected Nepali consumers to payelectricity rates that were seventimes higher than the rates inWashington, D.C. “Obviously, if youuse these kinds of values, then anyproject becomes feasible andjustified,” Karcher said in aninterview with EnvironmentalDefense. “The analysis merely servesto justify the project after the fact.”5

Joe Wood, at the time the WorldBank’s Vice President for South Asia,proclaimed that if the Bank did notpush ahead with Arun III, “the signalwe’d send out is that the Bank canno longer support infrastructureprojects like this.”6 It is noteworthythat the Vice President would tie theBank’s credibility to a project as

questionable as the Arun III Dam. Yet James Wolfensohn,who joined the World Bank in 1995, was not interested ininheriting the problematic projects of earlier presidents.When the Inspection Panel raised serious concernsabout the project, the new president decided to drop thecontroversial Nepal dam.

After the World Bank withdrew from Sardar Sarovar andArun III, additional disturbing reports emerged thatdocumented the negative impacts of many other Bank-

The World Bank and LargeDams: Failure to Learn fromHistory

Involuntary risk bearers

“Traditional practice is torestrict the definition of

risk to the risk of thedeveloper or corporate

investor in terms of capitalinvested and expected

returns. … By contrast, asthe [WCD’s] Global Review

has shown, a far largergroup often have risks

imposed on theminvoluntarily and managedby others. Typically, they

have no say in overallwater and energy policy,

the choice of specificprojects or in their design

and implementation.”

World Commission on Dams, “Dams andDevelopment,” 2000

The Indus Basin Irrigation System serves afarming population of 7-10 million people inPakistan and is the world’s largest contiguousirrigation network. A main pillar of this systemis the Tarbela Dam. Tarbela was built from

1968-76, and is the most massive structure mankind hasever constructed. It provides an average of 9% of theirrigation water in the Indus system, and generates 28%of Pakistan’s electric power.

In March 2003, the Bank’s senior water advisor calledthe Indus irrigation system the “grandfather of all high-risk projects.”7 The Bank and other donors financed theTarbela Dam, one of the system’s central components.The Tarbela Dam is haunted by numerous problems:

• According to IRN’s Patrick McCully, Tarbela is“perhaps the world’s most problem-stricken majordam” in technical terms. When the reservoir was firstfilled, a tunnel collapsed, and a dam break couldonly be prevented by a series of emergency repairs.8

According to a WCD case study, the technicalproblems resulted in cost overruns of 50-81%.9

• 96,000 people were displaced by the Tarbelareservoir. Farmers who did not hold legal land titlesdid not receive compensation, and duringimpoundment, Pakistan’s army had to drive outvillagers who refused to leave their land. Twodecades after displacement, 20,000 dispossessedpeople had still not been resettled. Compensationwas paid with such extensive delays that it lost morethan half its original value to devaluation — a risk

that the World Bank would not expect privateinvestors to bear.10

• Environmental impacts were not assessed when theTarbela project was approved. The dam, togetherwith associated barrages and diversions, has wipedout important fish species in the Indus and had adisastrous impact upon the ecology and economy ofthe huge Indus delta. Because the dams hold backsediments and divert water from the Indus, salt wateris intruding 25 km upstream from the Indus deltaduring the dry season. At least 4,800 square km offarmland have been lost to the sea, the forest coverof Sindh province has been reduced by half due tothe lack of flooding, and the mangrove forests arebeing seriously degraded.11 The 3 million peopleinvolved in fisheries, the pastoralists and othergroups who depend on flood recession agriculturedid not receive any compensation for the damagesthey suffered.

• The Indus irrigation system is experiencing severeproblems of waterlogging and salinity. According toWorld Bank reports, 38% of Pakistan’s irrigated landarea is waterlogged, and soil salinity has caused a25% reduction in the production of Pakistan’s majorcrops. (In Sindh province, the drop reaches 40-60%.)According to the WCD case study, waterlogging andsalinity have “serious environmental and povertyimpacts.”12 While most of the project benefits accruein the politically powerful Punjab, Sindh has to bearthe most negative impacts, which is exacerbating thepolitical tensions within Pakistan.

Tarbela: The Grandfather of High-Risk Projects


28

supported dams. Examples included Yacyretá(Argentina/Paraguay), Pangue (Chile), and Nathpa Jhakri(India). The Bank’s 1994 review of projects involvinginvoluntary displacement presented ample evidenceregarding the institution’s “excessive appraisaloptimism”. At the time of the review, active Bank projectswere displacing 2 million people, and dams (includingirrigation and flood control projects) accounted for 71%of this number.13 The review found that baseline data andresettlement plans were often lacking in such projects,compensation and rehabilitation measures wereinadequate, and negative health impacts were notmitigated.14

In 1996, the Chinese government was looking for foreignfunding to finance the giant Three Gorges Dam on theYangtze River, which would displace between 1.2 and 2

million people. The World Bank had lent credibility to thisproject by coordinating the feasibility reports over anextended period. After the debates over Sardar Sarovarand Arun, neither the World Bank nor the Chinesegovernment was interested in experiencing a similarpublic-relations disaster with the Yangtze dam, and theBank refrained from funding it. Three Gorges waseventually financed by export credit agencies in whatamounted to a social and environmental “race to thebottom.”

The Yangtze dam decision was considered a turningpoint in high-risk water projects for the World Bank. TheBank had approved close to $2 billion for 13 hydropowerprojects in the 1990-95 period. It approved less than$600 million for only six projects from 1999 to 2002.


29

The messenger is shot

In response to growing public criticism, the World Bankand the World Conservation Union (IUCN), incoordination with a range of other interest groups,initiated the creation of the World Commission on Dams(WCD) in April 1997. The WCD was mandated to carryout the first-ever independentanalysis of the development impactsof large dams in a broad-based,participatory process. At severalinstances, President Wolfensohnpraised the body as a model forconflict resolution through so-calledmulti-stakeholder approaches.

The WCD published its consensusreport in November 2000. Based onunprecedented research andconsultation efforts, the reportvindicated many of the concerns ofdam critics. It found that “in toomany cases, an unacceptable andoften unnecessary price” had beenpaid to secure the benefits of largedams.15 Large dams had displacedan estimated 40-80 million people,and had caused widespreadenvironmental destruction. The WCDfound that “the poor, othervulnerable groups and futuregenerations are likely to bear adisproportionate share of the socialand environmental costs of largedam projects,” and that the failuresto account for such impacts and tofulfill the commitments made “haveled to the impoverishment andsuffering of millions.”16

The WCD took a new look at whobears the risks of large dam projects.Its report states: “Traditional practiceis to restrict the definition of risk tothe risk of the developer or corporateinvestor in terms of capital investedand expected returns. … Bycontrast, as the Global Review hasshown, a far larger group often haverisks imposed on them involuntarilyand managed by others. Typically, they have no say inoverall water and energy policy, the choice of specificprojects or in their design and implementation.”17

Based on these findings, the WCD put forward 26recommendations for future water and energy projects. Itproposed that “involuntary risk bearers must have the

legal right to engage with risk takers in a transparentprocess to ensure that risks and benefits are negotiatedon a more equitable basis.”18 More specifically, theCommission recommended that all future large damsshould be based on the principle of “demonstrablepublic acceptance,” that indigenous communitiesaffected by large dams should have the right to free and

prior informed consent, and thatmechanisms for addressing andrepairing the legacy of existing damsbe established.19

The WCD found that financialinstitutions “played a key strategicrole globally” in spreading andlegitimizing large dam technology,and called on multilateraldevelopment banks to “[r]eviewinternal processes and operationalpolicies in relation to theCommission’s recommendations.”20

Yet by the time the WCD report waspublished, the backlash regardingsocial and environmental concernswas in full swing. The Bank agreedto endorse the Commission’s sevenStrategic Priorities, which weresufficiently vague so as not to requireany specific actions. It refused toimplement the specificrecommendations. According toseveral sources, the Bank pressuredother institutions not to support therecommendations of theCommission that it had helped tocreate.

It was again in the water sector thatthe World Bank officially re-embarked on a high-risk coursewhen it embraced “high risk/highreward hydraulic infrastructure” in itsWater Resources Sector Strategy ofFebruary 2003. In launching the newStrategy, Bank management evenfelt emboldened to present thedisastrous Sardar Sarovar Dam as asupposedly successful “high-rewardinvestment” (see Box on page 32).

Where are the high rewards?

It is remarkable that the World Bank leadership hasmanaged to set the institution on a new high-risk coursewithout providing any empirical evidence that high-riskprojects have indeed brought about high rewards. In1996, OED carried out the first and only evaluation of the

Former WCDCommissioners’ critique of

the World Bank’s watersector strategy

“We think that it is unwiseto dismiss without

justification or explanationthe recommendations of

the first-ever global reviewof dams reached throughconsensus and developed

through an extensiveparticipatory process with

support from the WorldBank. … The proposed risk

assessment focusesprimarily on the risks to

the World Bank fromsupporting large dams,

rather than the economicand financial risks, the

environmental risks, or therisks to affected peoples

from dams.”

Letter from former WCD Commissioners toJames D. Wolfensohn regarding the World

Bank’s draft Water Resources SectorStrategy, July 12, 2002

“We now go to bed hungry,” an elderly woman inNaminya says.

Naminya is a settlement of about 30 families who weredisplaced to make way for the Bujagali Dam on theVictoria Nile in Uganda. The resettlers complain that theynever received the full compensation they were due, andthat the land they received is hilly and barren. Drinkingwater is scarce, and toilets tend to overflow. People havelost their access to markets and firewood in the vicinity,and to the Nile for fishing. Breaking earlier promises, theproject authorities have not moved their ancestralgraves. “If we could, we would return to our earliervillages running,” says another resettler.

The World Bank’s showcaseBujagali, a 200-megawatt hydropower project, waspromoted by the U.S.-based AES Corporation. Theprivate investor negotiated a contract with Uganda’sgovernment for the sale of electricity over a 30-yearperiod. AES claims that the project is a “model case” ofsuccessful resettlement for close to 100 families.

In December 2001, the World Bank approved $215million in support for the Bujagali Dam, hoping to makethe project a showcase for private investment in Africa.According to the Board minutes, “[a] number of speakerscommended Bank Group management and staff for theirwillingness to engage in such a complex and high-riskproject at a time when there was a temptation to becomerisk averse because of outside criticism.”21

The supposed showcase is beset by all the problemsthat are typical of the World Bank’s high-risk projects:

• Social and environmental impacts: An investigationby the Inspection Panel found in May 2002 that theBujagali project violated five World Bank policies,including the policies on involuntary resettlement,environmental assessment and disclosure ofinformation.22

• Lack of transparency: When the World Bankapproved the Bujagali project, Uganda wasconsidered the third-most corrupt country inTransparency International’s Corruption PerceptionIndex. In spite of this, the project went ahead withoutfull international competitive bidding. In 2002, theproject’s main civil contractor admitted to havingbribed Uganda’s former energy minister. As aconsequence, the contractor had to withdraw andthe project was suspended.

• Unfair deal: AES, Uganda’s government and theWorld Bank refused to publish the project’s powerpurchase agreement that defines Uganda’s paymentsduring a 30-year period. After the country’s HighCourt ordered its release, a review commissioned byIRN found that the contract was deeplydisadvantageous to Uganda. Under the agreement,the poor country would have to make excesspayments of an average $20 million per year.23 TheWorld Bank had obviously not protected Ugandafrom an unfair deal, and the government requested arenegotiation of the contract.

• Failure to consider alternatives: Uganda has apromising potential of geothermal energy. Across theKenyan border, this potential is exploited at a lowercost and with fewer impacts than the proposedBujagali Dam. In Uganda, the World Bank dismissedthis potential without any in-depth research. In 1997,the Bank promised the government that it wouldsupport the next dam on the Nile, without assessingany other options, in return for a liberalization ofUganda’s power sector.24

The lowest cardsIn July 2002, environmental organizations raised theissue of problems being experienced by Naminya’sfamilies with AES, Uganda’s government and the WorldBank. Each institution responded by shifting the blame tothe others. None of them were prepared to resolve theproblems while the project was held up by the corruptioninvestigation. Meanwhile, the people that have sacrificedtheir homes for the dam go to bed hungry.

At a presentation of the new high-risk water strategy inMarch 2003, the Bank’s senior water advisor complainedthat the institution had become a “risk multiplier” insteadof a “risk mitigator,” and that the Bank’s task managershad to bear the brunt of these risks.25 The interests of theWorld Bank and equipment suppliers in high-risk projectsare always well covered through legal contracts though.In Bujagali, as in other projects, it is the affected peoplewho face the highest risks and hold the lowest cards.

In August 2003, AES decided to pull out of the Bujagaliproject, and the future of the dam looks more uncertainthan ever. The World Bank’s preference for high-riskprojects appears to have set Uganda on a dead-endcourse, while blocking the development of other lesscontentious energy options.

Bujagali: High Risk for Whom?


30


31

Bank’s dam projects. After studying 50 projects, OEDclaimed that “13 of the projects in the review can beregarded as acceptable, 24 as potentially acceptable,and 13 as unacceptable. … The finding that 37 of thelarge dams in this review are acceptable or potentiallyacceptable, suggests that, overall, most large dams werejustified.”26

In a comprehensive critique, PatrickMcCully of International RiversNetwork demonstrated that the OEDreview made a travesty ofevaluation.27 The review did notmeasure the actual benefits of thedam projects in terms of electricity,irrigation, flood control or navigationbenefits achieved, nor did it considerthe actual costs for operation,maintenance and other purposes.Instead, OED simply relied on theBank’s original projections for suchcosts and benefits. To use oneglaring example, the OED reviewadmitted that “it was not possible toarrive at an adequate estimate ofmitigating the habitat losses” (andother impacts of large dams).28 Itinstead assumed a notional cost of$10 million for mitigating habitat loss(and other impacts) — andconcluded on this basis that “[t]hecosts of adequately mitigating forthese impacts rarely affect theeconomic viability of the project.”29

The inadequate methodology of itsreview led OED to conclude that “theBank should continue supporting thedevelopment of large dams providedthat they strictly comply with Bank guidelines and fullyincorporate the lessons of experience.”30

The WCD report noted that “[c]onsidering the vastamounts of capital invested in large dams, substantiveevaluations of project performance are few in number[and] narrow in scope.”31 The Commission analyzed damcosts, and concluded that the eight projects it hadstudied in detail averaged cost overruns of 89%. The 81dams covered in its cross-check survey ran up averagecost overruns of 56% (or 21% in real terms).32 In 1996, aWorld Bank study showed that 66 hydropower projectsthat the Bank had financed suffered (real) average costoverruns of 27%.33 (The four dams with the highestoverruns were excluded from this analysis.) The WCD didnot empirically evaluate the profitability of large dams oraggregate the data on dam economics that wasavailable. The Commission did collect evidence fromother institutions, which showed that many dams werebarely profitable even before social and environmental

costs were integrated.34 The cost overruns and theresulting lack of profitability of large dams contributed tothe unsustainable debt burden of many Southerncountries.

After the WCD report was published, the World Bankannounced that it would incorporate the WCD lessons

into the new Water Resources SectorStrategy. As it turned out, theStrategy proposed a new era ofhigh-risk projects while dismissingthe WCD recommendations on howto better contain the systemicoptimism in appraising large dams,and to empower the groups who areforced to bear the biggest risks insuch projects. In a joint letter toPresident Wolfensohn, the twelve ex-Commissioners of the WCDcommented that it was “unwise todismiss without justification orexplanation the recommendations ofthe first-ever global review of damsreached through consensus anddeveloped through an extensiveparticipatory process with supportfrom the World Bank.” TheCommissioners also pointed out that“[t]he proposed risk assessmentfocuses primarily on the risks to theWorld Bank from supporting largedams rather than the economic andfinancial risks, the environmentalrisks, or the risks to affected peoplesfrom dams.”35 With the new WaterResources Sector Strategy, theWorld Bank has returned to thebeginning of what it has

euphemistically referred to as the “learning curve” onlarge dams.

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

More than a billion people lack access to a decent watersupply. The World Bank promotes big infrastructureprojects as the key to resolving this problem.Conservation and small, decentralized systems invariablyoffer better solutions at lower risk than large dams.

A crisis of management

The main culprit in water mismanagement is irrigation,which accounts for more than two thirds of global waterwithdrawals. Ill-conceived agricultural policies encouragethe growth of water-intensive, wasteful crops like sugarand cotton in dry areas. And more than half of all

An internal evaluation found that World Bankwater projects "responded too much to thepressure from influential segments of thepopulation" rather than to the needs of the poor.The World Bank's Katse Dam, part of the LesothoHighlands Water Project, has been plagued bycorruption. So far, two of the foreign companiesinvolved in the project have been convicted bythe Lesotho High Court on corruption-relatedcharges. (Photo: Korinna Horta, EnvironmentalDefense)

“Perhaps, we can safely say that almost no benefit hascome to the people from [big surface irrigation] projects,”India’s then-Prime Minister Rajiv Gandhi scolded thecountry’s top irrigation officials in 1986. “For 16 years,we have poured out money. The people have got nothingback, no irrigation, no water, no increase in production,no help in their daily life.”36

The Sardar Sarovar Project shows that since 1986,nothing has changed. The dam, located in India’sNarmada Valley, may well be the most contentiousproject that the World Bank has ever financed. Accordingto official claims, it will irrigate an area of about 1.8million hectares, deliver water to 8,000 villages andprovide a power generating capacity of 1,450megawatts.

Numerous reports, including the independent review bythe Morse Commission, documented these claims to bespurious. Efforts by movements like India’s Tarun BharatSangh have demonstrated that the local harvesting ofwater can serve the needs of dry areas better, at lowercost and with much more manageable impacts thanmegaprojects such as Sardar Sarovar.

The World Bank’s half-hearted withdrawalOnce it is completed, the Sardar Sarovar Dam willsubmerge an area of 37,000 hectares. It will affectremote, hilly areas inhabited by adivasi communities aswell as prosperous agricultural lands. When the WorldBank approved the project in 1985, it believed thereservoir would displace 67,000 people. Today, thenumber of people to be dispossessed is estimated at215,000. This figure does not include the people affectedby the irrigation canals, which will take up more thantwice as much land as the reservoir, and the people livingdownstream of the dam.

According to World Bank policies and decisions byIndia’s highest court and tribunal, affected people mustreceive equivalent land in compensation for the land theyare losing to the Sardar Sarovar Project. This is not thecase. Most affected communities have been offeredrelocation to barren land without adequate access towater, other common resources and infrastructure. Theresponsible authorities have frequently refused to evenregister the traditional land rights of the adivasicommunities. Increasingly, affected people are forced toaccept simple cash compensation as the water level isrising. Even people who were displaced for the

construction of housing and offices for project officials in1961 have not yet been properly rehabilitated.

Most people who have accepted resettlement haveexperienced a breakdown of community relations,impoverishment and increasing health problems.37 Manyhave left the resettlement colonies to look for work in thebig cities. Others have returned to their original villagesthat are now threatened by submergence.

Since the late 1980s, the affected communities haveopposed the Sardar Sarovar Project through theNarmada Bachao Andolan (Movement to Save theNarmada). Their peaceful struggle has includeddemonstrations and hunger strikes, popular mobilizationand international media campaigns, court action andadvocacy work at the World Bank and in parliaments.After a series of long delays, the dam wall reached aheight of 100 meters above sea level in the spring of2003, with the final height planned at 139 meters.

A symbol of the new strategyIn 1985, the World Bank approved $450 million in loansfor the Sardar Sarovar Dam. As the Morse Commissionpointed out later, “[t]here was virtually no basis, in 1985,on which to determine what the impacts were that wouldhave to be ameliorated.”38 The Bank never consultedaffected people, and never considered essential issuessuch as the social and environmental impacts of thecanal system or the downstream impacts of the dam. Itapproved financing for the project before India’s Ministryof Environment and Forest had given the necessaryenvironmental clearance. This put considerable pressureon the Ministry to clear the project irrespective of itsmerits or shortcomings.

The Morse Commission in June 1992 documented theWorld Bank’s complete failure to adequately appraise theproject and ensure compliance with its internal policies.It recommended that the Bank “step back from theProjects and consider them afresh.”39 In March 1993,unprecedented international pressure forced the Indiangovernment to ask the Bank to withdraw from SardarSarovar.

While the World Bank did not disburse the remainingfunds for Sardar Sarovar, India has so far not repaid thecredit tranches that have already been disbursed. TheNarmada Bachao Andolan has repeatedly called on theBank to ensure compliance with its operational policiesas long as it formally remains involved in the project. The

Sardar Sarovar: Once Again a “High-Reward” Investment?


32


33

Bank has not fulfilled this obligation. Meanwhile, itcontinues to support the state governments responsiblefor the Sardar Sarovar Projects through other credits.

In March 2003, the World Bank came full circle regardingits position on Sardar Sarovar. It allowed a high-rankingIndian government official to tout the project at its annual“Water Week,” an event celebrating its return to high-riskprojects. “Though large water infrastructure projects areno doubt high risk in terms of investments and socialcosts, but with sound economic, social andenvironmental practice such projects turns up [sic] into

high reward investment,” Radha Singh, AdditionalSecretary in India’s Ministry of Water Resources (and aformer World Bank employee), asserted. “This has beenillustrated by many projects in India. Despite adversemedia publicity one of them is the Sardar SarovarProject. The new sector strategy of the bank rightlyincorporates this concept. Bank should re-engage itselfin such projects with a new approach, drawing the linebetween sustainable development and nodevelopment.”40

irrigation water often does not reach its intended crops.41

Drip irrigation systems can save more than 40% of thewater used, and at the same time increase production.Drinking water supply is also wasteful, with up to 40% ofsupplies being lost to leaks andtheft.42

The key to resolving the global watercrisis is better management. Just0.5% of current water withdrawalswould provide enough water tosupply the basic daily needs of allthe people currently lackingadequate access to water, and to the2 billion people by which worldpopulation is expected to grow by2025.43

Bottom-up solutions

Rainfall is strongly seasonal in manyparts of the world, and water storagehelps balance seasonal disparities.Without any empirical justification,the World Bank equates the need forwater storage with a need for largedams. There is ample evidence toshow that small, decentralizedsystems and ground water are moreefficient and sustainable ways ofstoring water than large dams.

In India’s dry northwestern state ofRajasthan, activists of the TarunBharat Sangh (Indian Youth Movement, TBS) areencouraging villagers to revive traditional ways ofharvesting rainwater through small ponds and check-dams. Since 1985, TBS has helped build or restorenearly 10,000 water harvesting structures.44 The storedwater soaks into the ground and recharges groundwater.As a consequence, three rivers and many rivulets thathad been dead for decades have begun flowing again.

Agriculture has become possible year-round,impoverished villages have become relativelyprosperous, women have been relieved from fetchingwater from faraway sources and laborers have returned

from cities to till their fields.

The TBS only works withcommunities that are prepared toassume full ownership of their water-harvesting structures. The grouplends support once a village hasreached complete consensus, in thatevery single family agrees tocontribute money or labor towardsthe construction of a check-dam orpond. This process can take severalyears. It is the villagers who definethe need, choose the location,design the project, do the work andmaintain the structures oncecompleted. TBS provides modestfunds for labor and materials. Thestrong sense of ownership meansthat the identified solutions areadapted to local conditions and aresustainable.

TBS calculates that the waterharvesting structures it hassupported or encouraged inRajasthan serve around 700,000people. The cost covered by externalcontributions amounted to $1.4million, or $2 per person. In

comparison, supplying water from the notorious SardarSarovar Dam on the Narmada River will cost $2,000 perperson.45 The World Bank’s claim that the “easy andcheap options” of storing water have been “mostlyexploited” is baseless.

In India, as in other countries, since colonial times thecontrol over water resources and the responsibility for

According to the World Commission on Dams,40-80 million people have been displaced tomake way for large dams. The failures to accountfor the social impacts of dams “have led to theimpoverishment and suffering of millions”, theCommission says. A protest in Thailand, wherethe World Bank has underestimated the costs ofmany dam projects. (Photo: Assembly of the Poor,Thailand)

water supply have shifted from communities to the state.As a consequence, many state authorities are notinterested in solutions that empower local communities.The Rajasthan government harassed the TBS anddeclared the local structures illegal for many years, butbegan cooperating with local initiatives in the late 1990s.The World Bank, however, is not geared towardssupporting processes that are efficient and sustainable,but also democratic and inexpensive.

A solution for every region

The potential of rainwater harvesting is not limited topoor countries or to the countryside. Rain can be storedwherever it falls. In the United States, cities such asAustin and Seattle have started rainwater harvestingprograms that are not only conserving water, but havealso reduced flooding and pollution, created jobs andsaved money.

1 Leonard Sklar and Patrick McCully (1994) “Damming the Rivers: The WorldBank’s Lending for Large Dams,” p. 10.2 World Bank “Water Resources Sector Strategy,” p. 33.3 The Economist (2003) “According to Damming Evidence,” 19 July.4 Morse and Berger “Sardar Sarovar, The Report of the Independent Review,” p.xxiv.5 Environmental Defense Fund (1994) “Nepal’s Arun Dam.” Transcript, Interviewwith Martin Karcher, World Bank, 9 September, pp. 5f.6 Joe Wood quoted in Eduardo Lachica (1994) “Environmentalists Are OpposingPlans of the World Bank to Build Dam in Nepal.” Wall Street Journal, 12September.7 Briscoe “High Risk/High Reward Water Projects.”8 See Patrick McCully (1996) Silenced Rivers, p. 123.9 Asianics Agro-Dev. International (2000) “Tarbela Dam and Related Aspects ofthe Indus River Basin, Pakistan,” WCD Case Study, p. viii.10 See ibid., pp. 73ff.11 See ibid., pp. 105ff.12 Ibid., pp. 118f. for a summary of the World Bank reports and quote.13 World Bank (1994) “Resettlement and Development,” chapter 5, p. 14.14 Ibid., p. 7.15 World Commission on Dams (2000) Dams and Development, p. xxviii. 16 Ibid., p. 130.17 Ibid., p. 207.18 Ibid., p. 208.19 Ibid., pp. 213ff.20 Ibid., pp. 171, 316.21 World Bank (2001) “Summary of Discussion of the Joint Meeting of ExecutiveDirectors of the Bank and IDA and the Board of Directors of IFC” 18 December, p.19.

22 See International Rivers Network (2002) “A Review of the World Bank’sInspection Panel Report on the Bujagali Project,” 10 June. Available athttp://www.irn.org/programs/bujagali/IRN_comment.pdf23 See Prayas Energy Group (2002) “The Bujagali Power Purchase Agreement —An Independent Review.” Available athttp://www.irn.org/programs/bujagali/bujagalippa-review.pdf24 For a comprehensive critique of the Bujagali project, see Peter Bosshard (2002)“Pervasive Appraisal Optimism,” 14 May. Available athttp://www.irn.org/programs/bujagali/wb.bujagalipaper.pdf,.25 Briscoe “High Risk/High Reward Water Projects.”26 Operations Evaluation Department (1996) “The World Bank’s Experience WithLarge Dams: A Preliminary Review of Impacts.” World Bank, p. 6.27 See Patrick McCully (1997) “A Critique of ‘The World Bank’s Experience withLarge Dams: A Preliminary Review of Impacts’,” IRN, 11 April.28 OED “The World Bank’s Experience With Large Dams,” p. 33.29 Ibid., p. 8.30 Operations Evaluation Department Precis (1996) “World Bank Lending for LargeDams: A Preliminary Review of Impacts.” World Bank, p. 1.31 WCD Dams and Development, p. 69.32 Ibid., pp. 39f.33 Robert W. Bacon, John E. Besant-Jones and Jamshid Heidarian (1996)“Estimating Construction Costs and Schedules,” World Bank Technical Paper No.325, p. 29.34 WCD Dams and Development, pp. 46ff., 54ff., 58.35 Former Commissioners, World Commission on Dams (2002) Letter to WorldBank President Wolfensohn on Draft Water Sector Strategy, 12 July.36 Rajiv Gandhi, 1986 Address to the Conference of State Irrigation Ministers,quoted in L.C. Jain, (2001) Dams vs Drinking Water, p. 26.37 See Arundhati Roy (1999) “The Greater Common Good” and HabitatInternational Coalition (2002) “The Impact of the 2002 Submergence on Housingand Land Rights in the Narmada Valley” for vivid accounts of the fate of theNarmada dispossessed.38 Morse and Berger “Sardar Sarovar, The Report of the Independent Review,” p.349.39 Ibid., p. xxv.40 Radha Singh (2003) “A Presentation on High Risk, High Reward WaterProjects.” World Bank, Water Week 2003, Session 4: High Risk/High RewardWater Projects, 4 March.41 WCD Dams and Development, pp. 138ff.42 Ibid., p. 158.43 D.C. Sutherland and C.R. Fenn (2000) “Assessment of Water Supply Options,”Thematic Review IV.3. Prepared as an input to the World Commission on Dams,pp. 78f.44 Patrick McCully (2003) “Bankrupt Math: World Water Establishment Continuesto Promote Flawed Solutions to Water Problems.” World Rivers Review, February,pp. 3-5.45 Ibid., p. 5.


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The Bank has promoted large-scale high-riskprojects, correlating risk with potentialreward. While this relationship may hold truefor individual investors buying high-riskshares or bonds, there is no evidence to

suggest this is a valid approach for the promotion ofsustainable development. In fact, there is a significantamount of development literature suggesting that small-scale, locally based projects are more sustainable andbetter targeted to the needs of the poor. These types ofcommunity-based projects provide more appropriateexamples of pro-poor development.

The Bank itself espouses community-driven development(CDD) in its Poverty Reduction Strategy Sourcebook.According to a landmark World Bank study, “Voices ofthe Poor”, in which 60,000 people in 60 countries wereinterviewed, respondents felt that the greatest differenceto their lives could be made through their ownorganizations, to enable them to negotiate withgovernment, traders, and NGOs; direct assistancethrough community-driven programs so they can shapetheir own destinies; and local ownership of funds, sothey can end corruption.

The Bank itself says that community-driven developmentcan make poverty-alleviation programs more responsiveto the demands of the poor and build social capital.Community-developed facilities, such as health clinics,schools, and water supply systems, tend to have higheruse rates and are better maintained than thosegenerated by investment decisions made outside thecommunity. Community management of developmentprojects usually results in lower costs. Studies ofcommunity-organized irrigation systems in Asia foundthat systems constructed and operated by the farmersthemselves yield greater agricultural productivity thanmore modern systems constructed by governmentagencies with external assistance.1 Studies of watermanagement have found that small, decentralizedsystems are more efficient and effective at storing andsaving water.

Community-driven development can be particularlyvaluable for the protection of natural resources. Localcommunities derive significant direct and indirecteconomic benefits from forests, for example. Theseinclude wild fruits, nuts, vegetables, animals, fuelwood,utensils, and other implements, as well as watershedprotection and other environmental services. Thesebenefits are rarely measured, and are difficult to quantify.In large-scale projects, these benefits are oftendiscounted. In community-driven developmentprocesses, there are much greater opportunities toidentify these benefits and develop a plan to ensure theirlong-term preservation through the protection of thenatural resource base. This reality is increasingly drivingforestry management programs which recognize thatwithout community involvement, sustainable forestmanagement is often illusory.

The World Bank seems to be of two minds oncommunity-driven development. In the past severalyears, the Bank has directed more money to suchprograms and devoted considerable rhetorical attentionto participatory processes. However, while admittedly ata relatively early stage, the Bank’s community-baseddevelopment programs have not resulted in significantlymore favorable development outcomes compared to itsother programs. Initial reviews of the Bank’s CDDprograms finds that the Bank has not changed internalprocesses to adapt to the increased complexity of theseprograms and that there is a lack of continuity and long-term commitment. Nor is the Bank’s “time-boundproject approach …conducive to the learning-by-doing”approach of CDD.2 Considering the Bank’s renewedemphasis on high-risk, centralized, large operations, itscommunity-driven development programs may beseverely imperiled.

1 For more information about the World Bank and community-driven developmentseehttp://lnweb18.worldbank.org/ESSD/sdvext.nsf/09ByDocName/BasicConceptsPrinciplesWhyCDD2 Operations Evaluation Department (2003) “Community-Driven Development:Lessons from the Sahel.” World Bank, pp. 33-34.

An Alternative Approach


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The Bank has traditionally claimed that throughits involvement, it can improve the social andenvironmental performance of risky projects.India has often been a laboratory andtrailblazer for the World Bank’s involvement in

such high-risk projects. The Morse Commission and theInspection Panel showed that even in the case of theSardar Sarovar Dam and the Singrauli thermal powerplants — supposedly two of the Bank’s best-studiedprojects — safeguard policies were routinely flouted. In1993, as the World Bank pulled out of Sardar Sarovar, itstopped lending for new thermal and hydropowerprojects in India altogether.

Under James D. Wolfensohn, the World Bank becamemore cautious about its involvement in high-risk projectsacross countries and sectors. In its wake, other financialinstitutions such as export credit agencies and privatebanks began developing or strengthening their ownenvironmental guidelines. The increasing prudence offinancial institutions caused a serious funding shortfallfor large dams. This deadlock led to the creation of theWorld Commission on Dams in 1997. At that time,President Wolfensohn was an avid supporter of so-calledmulti-stakeholder processes. Civil society observerswelcomed the Bank’s growing prudence regarding high-risk projects and its openness to independentassessments as a modest example of progress under theWolfensohn presidency.

The WCD report documented the serious environmentaland social impacts of large dams. It showed thatalternative options were available, and put forward aseries of recommendations for the development of futurewater and power sector projects. When the consensusreport was published in November 2000, it was time forthe World Bank to take a stand. The Bank restricted itsconsultations to the water and energy bureaucracies ofthe main dam-building countries, and used theirpredictably negative reactions to decide against adoptingthe WCD recommendations.

This step was part of a larger policy backlash. In 2001,the Bank launched the “independent” ExtractiveIndustries Review, which soon turned out to be vastlydifferent from the WCD process. The World Bankappointed the only reviewer and provided him with aninsufficient budget, while it continued to finance risky oil,gas, and mining projects. In 2002, the Bank rescinded itsban on financing commercial logging activities in primarytropical moist forests. In early 2003, the Bank officiallyannounced a return to a “high-risk/high-reward” strategyin the water sector.

High-risk projects — back in style

India’s government is planning a megaproject to link 37of the country’s major rivers by 2016. The plan involvesbuilding at least 32 large dams, 74 big reservoirs andabout 10,000 km of canals at an estimated cost of $200billion. It would involuntarily displace about 3 millionpeople. Scientists and civil society organizations quicklydenounced the scheme as an absurd andenvironmentally destructive waste of resources, notingthat these resources would be better spent to makeexisting water infrastructure more efficient, and topromote locally adapted solutions.

The Indian rivers interlinkage scheme was favorablypresented at a session on “high-risk/high-reward”projects at the World Bank’s Water Week in March 2003.Both the main architect of the Bank’s “high-risk/high-reward” strategy and the Bank’s senior water advisorrecently took up new assignments with responsibility forSouth Asia. India’s government is already lobbying theBank to support its rivers interlinkage scheme, whichcould become one of the first prominent test cases ofthe renewed “high-risk/high-reward” strategy.

It is remarkable that Bank management has succeededin re-launching a high-risk strategy without providing anyevidence of the superior rewards of high-risk projects.The World Bank has never evaluated the high-risk

Conclusion: The Poor TrackRecord of the World Bank’sHigh-Risk Projects


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projects that it financed in the past. In fact, OEDevaluates the sustainability and development impacts ofprojects against many variables, but the level ofenvironmental or social risk (for example, as expressedby a project’s environmental impact categorization) is notone of them.

This report has examined the trackrecord of high-risk projects in theforestry, water, and oil, gas andmining sectors. It finds thatinvoluntary displacement hastypically led to the loss of economiclivelihood and the breakdown ofcommunity relations, and hasimpoverished millions. Mining,pipeline and dam projects have oftencreated environmental disasters, andthe World Bank generally has notsucceeded in mitigating negativesocial and environmental impacts.High-risk projects have often beenassociated with the repression oflocal resistance. The increasing roleof private investors has underminedtransparency and other means ofaccountability, by subjecting crucialaspects of project information to“business confidentiality”constraints.

This report asserts that alternativesto such development disasters exist.The World Bank is under pressure toreach lending targets, and has aninstitutional bias towards centralized,top-down, capital-intensive projects.Therefore, it is not well-suited to finance decentralized,participatory and democratic processes that are adaptedto local needs and circumstances.

No lessons learned

The new water sector strategy admits that some of theWorld Bank’s “greatest failures” in the past involved thefinancing of projects that “were planned and built withoutsufficient attention to social and environmentalconsequences.” Yet the document insists that the Bankand developers have learned from past mistakes, andthat environmental and social standards will be met infuture high-risk projects. It claims that “[i]n recentdecades thinking and practice have changeddramatically.”1 This claim is not new. For more than 20years, the Bank has frequently admitted that it madeerrors in the past, but that it has learned from them. Thewater sector strategy document does not offer anyevidence to support this claim. In fact, it directly

contradicts important conclusions of OED’s 2002evaluation of the water sector strategy.2

The people who are being resettled for the Bujagali Damor who are suffering health impacts from the Chad-Cameroon pipeline would probably also dispute theclaim that the World Bank has learned its lesson from

past mistakes.

The analysis in this report and manyinternal evaluations suggest that theBank does not have the instrumentsin place to successfully implementhigh-risk projects:

• The World Bank has failed toeffectively mainstream social andenvironmental concerns into itsdecision-making. “[T]he Bankhas done little institutionally topromote, monitor, or otherwisemake mainstreaming happen,”OED found in 2002.3 The Bankcontinues to have an institutionalbias against processes that areparticipatory, and adapted tolocal circumstances. If itassesses different options at all,it usually prioritizes expensive,large-scale projects for internalreasons — even if they involvehigher risks.

• In 1992, the Bank’s Wapenhanstask force found that projectappraisal reports were considered“marketing devices” by Bank staff. In

1994, the Bank’s resettlement report also criticizedwhat it termed “excessive appraisal optimism.”4

Experience with ongoing projects such as theBujagali Dam demonstrates that the quality ofappraisal is still low. Project benefits are routinelyoverstated, while risks are downplayed. OED’s 2002review of the Bank’s performance on theenvironment found that the quality of environmentalassessment has deteriorated during PresidentWolfensohn’s tenure.

• World Bank safeguard policies are insufficient orlacking altogether in many critical areas. Forexample, the Bank does not have any human rightspolicy, in spite of the repression that is oftenassociated with oil, gas, mining and dam projects,nor does it have an overarching social policy. Itsresettlement policy does not fully recognize cruciallivelihood issues such as traditional land rights oraccess to common resources such as forests, riversand communal lands.

A legacy of environmentaldegradation

“Decades of mineralmining have left a legacy

of environmentaldegradation and uprootedthe social fabric of many

communities in PNG, whilethe revenues have not

been equally redistributed.Human rights violations,alcoholism, prostitution

and AIDS are on the rise atmine sites around the

country.”

Matilda Koma, Environmental WatchGroup, Papua New Guinea, July 2003


39

• The evidence of this report and numerous internalevaluations demonstrate that even where safeguardpolicies exist, the Bank’s project supervision andpolicy compliance are weak. The Inspection Panelhas documented the violation of key operationalpolicies in high-risk projects in India, Chad, Uganda,China, Brazil and other countries. As recently as2002, OED noted: “The Bank’sperformance on safeguardpolicies remains contentious.Implementation has been mixed.… Compliance shortfallshighlighted in highly visibleprojects have cast doubt on theintegrity of quality assuranceprocesses.”5

• In response to policy compliancefailures, the World Bank has notstrengthened its appraisal,monitoring and supervisionprocesses; OED in fact found“no regular program formonitoring the implementationand sustainability forenvironmental measures duringthe subsequent life of theproject.”6 Instead, the Bank hasweakened applicable policiesthrough the conversion ofdetailed operational directivesinto streamlined operationalpolicies. For example, as part ofthe resettlement policy’sconversion, the Bank deniespeople the right to receivecompensation for land that theirfamilies had owned and tilled for centuries if they didnot hold formal land titles.

In conclusion, the World Bank has not demonstrated itsability to analyze, contain and mitigate risks in theproject it finances. In fact, it has actually weakened itscapacity to do so in recent years. The Bank has notlearned lessons from past failures, but instead hasdisregarded the evidence of earlier high-risk projects andthe conclusions of many internal evaluations in devisingits renewed “high-risk/high-reward” strategy.

Who will pay the price?

Who will bear the risks and who is likely to reap therewards of a high-risk strategy? Obviously, the groupsthat are negatively affected by mines, dams or otherlarge infrastructure projects are very different from thegroups that benefit. Typically, such project benefitsaccrue to private investors, equipment suppliers, thestate, and in the case of infrastructure services, to

industrial, urban and rich rural consumers. The costs aretypically borne by poor rural communities, and most ofall by vulnerable groups — women, children, landlesspeoples and indigenous communities. The WCD reportstates that “a dam can effectively take a resource fromone group and allocate it to another,” and if the benefitsare not redistributed, “such outcomes are unacceptable

on equity grounds.”7

Most of the players involved in WorldBank projects are insured againstrisks. This is true for the World Bankitself, Bank staff, equipmentsuppliers and other contractors and(as far as political risk is concerned)private investors. Poor, project-affected people, who are the mostvulnerable group socially andeconomically, do not receive suchguarantees. The Bank’s policy oninvoluntary resettlement for example,does not include any guarantees fordisplaced people to restore theirearlier livelihoods. It only stipulatesthat “[d]isplaced persons should beassisted in their efforts to improvetheir livelihoods and standards ofliving or at least to restore them”.8

The World Bank offered so-calledself-employment schemes, mainlyconsisting of entrepreneurial training,to rehabilitate tens of thousands ofpeople displaced for Bank-fundedcoal mines and thermal power plantsin India throughout the 1990s.Thousands of people who had hardlybeen integrated into the cash

economy and who had always lived off their land wereput into a situation where the livelihood of their familiesdepended on their luck and skills as entrepreneurs. Notsurprisingly, most project-affected people in Singrauliexperienced great misery. The World Bank would notexpect equipment suppliers or private investors to facesimilar risks.

When the positive and negative impacts of projects aredistributed unevenly, local communities face particularlyhigh risks. In spite of this, the World Bank has a poortrack record of analyzing the distributional impacts of itsprojects. An internal evaluation of the World Bank’sinvolvement in extractive industries found that the Bankfails to assess and measure the distribution of costs andbenefits in such projects.9 This is astounding sinceparticularly in mining projects, costs and benefits aredistributed extremely unevenly.

World Bank documents that advocate a return to a high-risk strategy are vague or even silent on the issue of who

A high risk of furtherdeadlock

Since the Bank hasannounced its renewed

high-risk strategy, privateinvestors have pulled outof two of its crown jewels,the Nam Theun 2 dam in

Laos and the Bujagali Damin Uganda. This indicatesthat the new strategy willprolong the deadlock in

important sectors, and willblock more sustainablealternatives from being

developed.

Jacklyn Membup lives near the Lihir gold minein Papua New Guinea. The Lihir mine wasestablished with support from MIGA anddumps millions of tons of toxic tailings directlyinto the sea. “There is only one thing that we

ask,” Membup says. “Our fish are dying, our childrenhave ear problems, the sea comes closer to the land,whales are stranding and our skin is so itchy, but wedon’t know why this is happening. Can the World Bankinvestigate what is going on, clean up and compensateus?”

The principle of reparations is rapidly gaininginternational recognition. The Convention Against Torturewhich entered into force in 1987 stipulates: “Each StateParty shall ensure in its legal system that the victim of anact of torture obtains redress and has an enforceableright to fair and adequate compensation, including themeans for as full rehabilitation as possible.”10 Swiss,German and Austrian banks and companies are payingreparations to Holocaust survivors and slave laborers,and victims of human rights abuses under apartheid aresuing companies that supported the South Africanregime for reparations. The WCD has also accepted theprinciple of reparations for damages caused by damprojects (see below).

The environmental legacy of high-risk projects that isdocumented in this report constitutes an ecological debtowed by the World Bank to borrowing countries. Project-affected communities, peoples movements and NGOsare increasingly calling for environmental restoration aswell as reparations for damages caused by World Bankprojects. In 1997, dam-affected people from around theworld called for action to be taken to restore damagedenvironments in the Curitiba Declaration.11 The OilwatchInternational Network demanded in 2000 that a study onthe impacts of the World Bank’s energy policies becarried out, and a fund for the restoration of affectedzones be created.12 The international campaign onecological debt is also working towards the restoration ofareas degraded and destroyed by unsustainabledevelopment projects.13 And in April 2003, indigenouspeoples’ groups stated in a Declaration on ExtractiveIndustries: “Measures should be taken to rehabilitatedegraded environment, farmlands, forests andlandscapes and to restitute our lands and territoriestaken from us … Appropriate mechanisms must beestablished to address these outstanding problems withthe full participation of the affected peoples andcommunities.”14

The Chixoy Dam in Guatemala is a concrete example ofthe legitimacy of the growing call for reparations. TheWorld Bank financed this dam in 1978 while Guatemala

was ruled by the brutal dictator, General Romeo LucasGarcia, who waged a war against Mayan communities.Many villagers of the Rio Negro region refused torelocate from their ancestral lands. In four differentmassacres, more than 400 Mayan people from Rio Negrowere tortured, raped and killed by the army andparamilitary troops between February and September1982. The World Bank looked away. The Bank kept silentabout the massacre until 1996, when human rightsgroups revealed the horror story to the world. The Bank’sown internal investigation subsequently absolved it ofresponsibility.

The surviving Rio Negro community is currentlydocumenting the damage and suffering caused by theWorld Bank project in an effort to identify and prioritizethe need for reparations. They demand the restoration oftheir quality of life, which includes replacement land ofequivalent quantity and quality, health and educationservices. They also demand that a monument be built tocommemorate the 400 people massacred, and thatthose responsible for the atrocities be brought to justice.The Chixoy experience demonstrates that reparations arenot only a matter of material compensation, but also ofhonoring the victims of development projects andestablishing justice. Reparations are not simply aboutmonetary compensation.

The Chixoy Dam has not only caused horrible sufferingfor the affected people. It has also been plagued byenormous environmental and technical problems andcost overruns due to corruption. According to RafaelBolanos, dean of the School of Civil Engineering atGuatemala’s San Carlos University, “the dam was thebiggest gold mine the crooked generals ever had.”15 Yeteven when projects fail, loans and credits from the Bankmust be repaid. In fact, Guatemala has fully repaid theWorld Bank’s Chixoy loan, which has added aneconomic burden to the social and environmentalimpacts of the project.

To date the World Bank has refused to assumeresponsibility for the damage caused by its lendingoperations. While its loans and credits always need to berepaid, the Bank itself has never been forced to pay forthe destruction its projects caused. The risks of lendingoperations should motivate lenders to be diligent andcautious in appraising projects. However, since it isimmunized from the consequences of its actions, theWorld Bank can afford to deal negligently with suchrisks. Debt cancellation and reparations are not only amatter of justice. These measures would also encouragethe Bank to strengthen its appraisal capacities and toavoid repeating past errors.

The Case for Reparations


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will be affected by higher risks, and how these risks willbe mitigated. The Water Resources Sector Strategysimply states that for high-risk projects, “there will be anagreed-upon corporate strategy for ensuring that theobjectives of the safeguard and otheroperational policies are respected.”18

The Strategy does not identify thesocial groups that will be exposed tohigher risks, and the groups that willreap greater rewards. Similarly, itdoes not suggest mechanisms bywhich the increasing risks can bemitigated and benefits redistributed.The new document provides in factmore details on how to deal with therisks and incentives that World Bankstaff and managers face in high-riskprojects.19 “The proposed riskassessment focuses primarily on therisks to the World Bank fromsupporting large dams,” themembers of the WCD warned afterreading a draft of the Strategy,“rather than the economic andfinancial risks, the environmentalrisks, or the risks to affected peoplesfrom dams.”20

Back to square one

As the final year of the Wolfensohnpresidency begins, the World Bank isback to square one on social andenvironmental matters. It is prepared to put poor people— the people who are supposed to be at the core of itsmandate — and the environment at great risk for projectsthat have a questionable track record of providingcommensurate rewards in the first place. It is prepared todo so without having adequate policies and mechanismsin place to analyze, contain and mitigate the respectiverisks.

The World Bank will find it difficult to actually implementits high-risk strategy. Local communities, socialmovements and non-governmental organizations arebetter organized today than they were 10 years ago. The

global review of the WCD and otherinvestigations have created a largeknowledge base on the impacts ofearlier high-risk projects. Manyexport credit agencies, private banksand investors have strengthenedtheir environmental guidelines evenas the World Bank has weakened itsown policies. As a result, suchinstitutions may become increasinglyreluctant to co-finance questionableBank projects. The most glaringexample of this emerging trend isthat investors pulled out of the NamTheun 2 and Bujagali Dams, the twocrown jewels of the Bank’s high-riskwater sector strategy, within monthsof the endorsement of the new“high-risk/high-reward” approach.

Most importantly, the internationalpublic is not prepared to acceptlarge-scale environmentaldestruction, social deprivation andhuman rights abuses in World Bankprojects any longer. In 2002, OEDwarned: “Unless and until … theenvironment becomes part of theBank’s core objectives and a normalpart of doing quality analysis,

projects, and strategies, the tension between the Bankand its stakeholders that has characterized the pastdecade will continue, and probably intensify.”21

Much thought needs to go into designing reparationsmechanisms. The World Commission on Damsrecommended the appointment of committees of legalexperts, dam owners, affected people and otherstakeholders to develop criteria for assessing claims andenabling joint negotiations.16 The InternationalAccountability Project proposes the creation of a“Development Effectiveness Remedial Team” that wouldmake recommendations to the Bank’s Board of Directorsfor designing and supervising remedial measures toresolve problems associated with existing projects.17

Several suggestions have been made regarding sourcesof reparation funds, including a reparation tax, or part ofthe Bank’s net income. In order to make these fundswork effectively, the Bank should coordinate its approachto reparations with governments and other financialinstitutions. It is imperative that processes andmechanisms are developed and implemented witheffective participation and approval of affectedcommunities.

Many mining, dam and forestry projects havecaused massive human rights abuses. More than400 people were massacred in 1982 when theyopposed the World Bank’s Chixoy Dam inGuatemala. This Mayan priest and other survivorsof the massacre demand compensation for thelosses that they suffered, and a monument tohonor the victims. (Photo credit: Jonathan Moller)


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Recommendations

This report demonstrates that the World Bank’s new“high-risk/high-reward” approach compounds themistakes of the past with high costs to the environmentand to poor communities. Internal evaluations and thereport’s evidence show that the World Bank is not able toadequately manage high risk operations. The Bank’sclaims that its engagement in high-risk projects serves toimprove project outcomes rest on dubious assumptions.

It is in the self-interest of governments and the WorldBank to address these problems head-on. Environmentaldegradation and increasing inequality, which leave largeparts of the world’s population disenfranchised, arefeeding into the growing social disintegration andpolitical instability in many developing countries. A re-engagement in contentious high-risk projects will furtherdamage the World Bank’s battered reputation and callinto question the institution’s legitimacy. Furthermore, thehigh-risk projects that the Bank has recently promotedresulted in stalemate rather than improved servicedelivery for governments and communities.

From the report’s findings a series of recommendationsemerges. They include the strengthening of do-no-harmpolicies and mechanisms, the support of alternatives andthe reparation of the unresolved legacy of past projects.Several recommendations have been presented before,including those from official sources. Some of therecommendations are addressed to the World Bankspecifically, others to the international community atlarge. Many recommendations are also relevant for otherpublic international financial institutions, export creditagencies and development assistance more broadly.

General recommendations

• The World Bank, other financial institutions,governments, industry, legal experts, NGOs andaffected communities should negotiate the creationof participatory mechanisms and criteria to repair thepast damage of development projects;

• The World Bank’s internal incentive system shouldbe restructured to reward management and staff forpolicy compliance and project performance based onenvironmental and social indicators, including thedistribution of costs and benefits, instead of on thebasis of quantitative lending targets;

• Systemic conflict of interest situations where thesame management and staff are responsible forproject execution, monitoring and evaluation shouldbe eliminated;

• Human rights dimensions should be included inWorld Bank policies and projects;

• The distributional implications of the costs andbenefits of Bank operations should be made explicitand project outcomes should be monitored andreported;

• Social and environmental issues should be explicitlyincluded in World Bank loan and credit covenants;

• Project implementation and outcomes should bemonitored and evaluated beyond completion ofdisbursements to cover the entire project cycle andloan repayment period, while project monitoring andcompletion reports should be made public;

• The rule of free, prior and informed consent of locallyaffected communities in decisions that directlyimpact their livelihoods should be institutionalized;

• A systematic, independent evaluation of high-riskWorld Bank projects should be conducted;

• The World Bank is not well placed to supportalternative, participatory, low-risk/high-rewarddevelopment processes and projects. Governmentsshould support such alternatives through appropriatemechanisms.

Sector recommendations

Extractive industries

• The World Bank should establish a plan to phase outinvestments in the extractive sectors;

• The Bank should immediately abstain fromsupporting new oil, gas, and mining projects incountries where inadequate rule of law, weakinstitutions and poor governance undermineenvironmental sustainability and the social equity ofinvestments;

• The Bank should immediately establish “no-go”areas, such as protected areas and areas of armedconflict, where it will not promote extraction, as wellas ban certain technologies, such as riverine andsubmarine tailings disposal;

• The Bank should focus its remaining extractiveindustries investments towards mine closure, jobtransition, environmental restoration, and shouldprioritize renewable energy projects;

• Government and industry should be required todisclose host country and production-sharingagreements and revenues paid into governmentcoffers from extractive industry projects.

Forests

• The World Bank should examine and account for theimpact on forests of all types of Bank lending andnon-lending activities;

• The Bank should refuse to finance activities that canlead to forest loss, especially in primary forests —whether they are tropical humid, dry, temperate orboreal forests;


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• The Bank should promote the recognition ofcustomary land rights of forest-dependent peopleand support small-scale projects developed inconsultation with local people for alternative incomegeneration;

• The Bank should help countries build the capacity tocombat illegal logging.

Water

• Funding for large dams should cease until the WorldBank adopts the relevant recommendations withinthe policy principles and guidelines of the WCDreport into its safeguard policies;

• The Water Resources Sector Strategy should besuspended, and a new sector strategy should bedeveloped based on the findings of the WCD, earlierWorld Bank evaluations and broad-basedconsultations with affected parties.

1 World Bank “Water Resources Sector Strategy,” p. 4.2 See OED “Bridging Troubled Waters.”3 OED “Promoting Environmental Sustainability in Development,” p. 19.4 See World Bank, “Resettlement and Development,” p. 5/14.5 OED, “Promoting Environmental Sustainability in Development,” p. 19.6 Ibid., p. 20.7 WCD Dams and Development, pp. 124, 120.8 World Bank (2001) Operational Policy 4.12, Involuntary Resettlement, paragraph2 (c).9 OED, OEG, OEU “Extractive Industries and Sustainable Development,” VolumeIII, pp. 4f.10 U.N. Convention against Torture and Other Cruel, Inhuman or DegradingTreatment or Punishment, Article 14.11 “Declaration of Curitiba: Affirming the Right to Life and Livelihood of PeopleAffected by Dams,” March 14, 1997. Available athttp://www.irn.org/programs/curitiba.html12 Oilwatch (2000) “International Statement on the Occasion of the World Bankand IMF Meetings,” 15 April.13 The environmental organization Acción Ecológica (Ecuador) and Friends of theEarth International are promoting a campaign to force industrial countries toaccept their enormous environmental liabilities. www.deudaecologica.org 14 “Indigenous Peoples’ Declaration on Extractive Industries,” April 15, 2003.Available at http://forestpeoples.gn.apc.org15 Cronica quoted in Witness for Peace (1990) “A People Dammed, The Impact ofthe World Bank Chixoy Hydroelectric Project in Guatemala,” 4 May, p. 27.16 WCD Dams and Development, p 229.17 Dana Clark (2003) Letter to Carol Brookins, U.S Executive Director to the WorldBank, 23 June. 18 World Bank, “Water Resources Sector Strategy,” p. 54.19 Ibid., pp. 49ff.20 Former Commissioners, WCD Letter to Wolfensohn.21 OED “Promoting Environmental Sustainability in Development,” p. 24.


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Selected Bibliography


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Large dam, forestry, oil, gas and mining projects fundedby the World Bank have displaced and impoverishedmillions of people, devastated ecosystems, andgenerated repression and corruption. Internalinvestigations have found that the Bank routinelyunderestimates the risks and overestimates the benefitsof its projects.

In the face of sustained international criticism, the WorldBank became more cautious in approving projects in the1990s. But the Bank’s caution has now come to an end.Hardliners have taken over. The Bank recently decided to embark on what it calls a “high-risk/high-reward”strategy. Big is beautiful again, and megaprojects areback in style.

This new report examines the World Bank’s track recordof high-risk projects in the dam, oil, gas, mining andforestry sectors. It looks at how the Bank deals with risk,to what extent it has protected the poor and theenvironment from negative impacts, and whether it haslearned from past mistakes. It presents alternatives tohigh-risk projects and puts forward recommendations forchange.

“Gambling with People’s Lives” is a joint report publishedby Environmental Defense, Friends of the Earth andInternational Rivers Network.

Gambling with People’s Lives What the World Bank’s New “High-Risk/High-Reward” Strategy Means for the Poor and the Environment

gambling with people’s lives - world...

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